As financial planners, we enjoy discussing future retirement goals, long-term investments, and strategies for building wealth over time. But there’s a key piece of planning that applies no matter where you are in life: having emergency reserves.
Whether you’re just starting your career, in your peak earning years, or enjoying retirement, an emergency fund provides a critical safety net. We’ve all faced unexpected financial surprises, whether that is car repairs, medical expenses, earthquake damage, or even a sudden loss of income. And they always seem to happen at the worst possible time.
Having a dedicated emergency fund in place can mean the difference between a temporary setback and a long-term financial challenge.
What Is an Emergency Fund?
Simply put, an emergency fund is money set aside to cover unexpected expenses that could otherwise derail your financial stability. It’s a safety net that allows you to manage emergencies without turning to high-interest debt or dipping into long-term investments. Because its purpose is immediate support, your reserves should be kept somewhere easily accessible when you need them most.
How to Get Started
- Assess Your Current Spending
The first step is to understand your cash flow, meaning how much is coming in and how much is going out. Track your expenses and separate them into needs versus wants. Once you know what’s essential, you’ll have a clearer idea of what you can realistically save toward reserves. A budgeting spreadsheet, app, or even a simple notebook can work. The goal is visibility and intentional allocation toward your financial priorities. - Set a Goal
Once you have an idea of what your monthly spending is, you can set a savings goal. Having a target keeps you motivated. A common benchmark is three to six months of living expenses. This gives you a cushion for unexpected events while keeping you on track toward other goals. Suppose you’re saving for something specific, like a planned medical procedure, new car, or a large home repair. In that case, you can increase the amount to cover that cost and still maintain your baseline reserves afterward. - Make Consistent Contributions
Decide on a contribution schedule: whether daily, weekly, or with each paycheck, and stick to it. Automating these contributions helps ensure you don’t forget or spend the money elsewhere. If you can occasionally add more, you’ll reach your goal faster. - Monitor Your Progress
Find a way to track your growing funds. This could be through account alerts, monthly check-ins, or a running total in your budget. Seeing your progress builds momentum and reinforces the habit. - Reward Your Milestones
When you hit key savings milestones, acknowledge your progress. This could mean a small, planned treat or simply enjoying the peace of mind that comes with being financially prepared.
Where to Keep Your Emergency Fund
Accessibility is key. Your emergency fund should be easy to withdraw when needed, which makes traditional savings or checking accounts, high-yield savings accounts, or brokerage accounts with access to a money market fund strong options. The latter two can offer higher interest earnings than a standard savings account (though rates may change over time). A good tip is to keep this money in a separate, dedicated account, distinct from your everyday spending, so you’re not tempted to dip into it.
If your goal has a specific timeline, a Certificate of Deposit (CD) could allow you to lock in a rate for the longer term; just remember, it may limit immediate access to your funds and could incur early withdrawal fees. Finally, ensure your savings are held at FDIC-insured banks or NCUA-insured credit unions, which protect deposits up to $250,000 per depositor, per institution.
When to Use It
Before dipping into your emergency savings, ask yourself: Is this truly an emergency?
It should be reserved for unexpected, necessary expenses—like major home repairs, medical bills, or sudden income loss—not for upgrades or purchases deemed as wants.
If you do use it, replenish the fund as quickly as possible to maintain your safety net.
Why It Matters
Life is unpredictable. An emergency fund isn’t just about money; it’s about peace of mind. It helps you avoid high-interest debt, protects your long-term investments, and gives you flexibility when the unexpected happens.
Just like retirement planning, building your reserves is about preparing for the unknown. And if you’re not sure how to balance saving for emergencies with paying down debt or other goals, your advisor can help you find the right strategy for your situation.
Final Thought
The best time to start your emergency fund was yesterday! And the second-best time is today. Start small, stay consistent, and you’ll thank yourself the next time life throws you a curveball.
Derek Stone
Associate Financial Advisor
The opinions expressed are those of Alaska Wealth Advisors, LLC as of the date of publication and subject to change without notice. Alaska Wealth Advisors, LLC is an investment adviser registered with the U.S. Securities and Exchange Commission. Registration does not imply a certain level of skill or training. More information about Alaska Wealth Advisors’ investment advisory services can be found in its Form ADV Part 2 and/or Form CRS, both of which are available upon request.
