MONEY: Changing my position on “emergency funds”

From time to time, folks ask me for advice and “help”. I try hard to give them the best I can in both areas. Interesting that they don’t follow the advice and ignore the help. Yet, will return for more.

Guess I’m getting cynical.

Part of any financial plan, job search, or almost any kind of advice that I give is about having an “emergency fund”.

A financial plan starts with an emergency fund and then proceeds on to savings and later investments. (For the truly wealthy, after investments come speculation. I only know two people in that category. And they don’t need my advice.)

In the past, I advised an “emergency fund” in a demand deposit account, preferably in a Credit Union, equal to some multiple of the individual’s “burn rate” (i.e., how much you spend every month; what goes out). The multiplier was at least 6 but could be as high as 60 depending upon how secure your employment was, how hot your field was, how hot your industry was, and how old you were. IF you had a large savings and investments portfolio, THEN you could “sanity check” the multiplier.

Now, I’m getting older and wiser. I think that you need an “emergency fund” that’s the equivalent of a 5 year MONTHLY CD ladder. Yes, 60 cds. SIXTY. Each one equal to your burn rate.

It’s a tough world out there.

You could be locked out of your savings and investments. You need more security. You have to build up to this advice and it’s not easy. But we have hard times coming. And, six months of burn rate in nickels stored at home.

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