Are Your Clients Prepared for the Unexpected? Here’s What to Know About Emergency Funds

We all need a margin of safety in our financial plans—room for error, the unexpected, and eventualities we never imagined. This means savings.

We put aside cash for what-ifs and just-in-cases. It might be a series of “what’s” on top of each other, like a dread diagnosis, the need to help family, and the loss of a job, all at once.

The underlying question my clients ask is: How much should they keep in cash in the bank compared to other assets like investment accounts?

What I’m Telling My CLients

How Much Should You Put In An Emergency Fund

An emergency fund should be composed of:

• Enough to cover 4-6 months of living expenses in case of a disruption in income (like a layoff, an illness, or an injury that prevents us from working) or unexpected costs.
• Enough for any planned large expenditures in the next couple of years, for example, a vacation, a new car purchase, or a move.

Then we discuss whether they have looming uncertainties requiring more in the bank, such as:

• If they’re self-employed and/or have irregular income (think of a realtor who earns nothing until she sells a house).
• If their job feels somewhat insecure, like if there have been layoffs at their company or industry.
• If they have a transition coming up, like they’re moving, because unexpected costs always pop up.

Where to Put An Emergency Fund

I often recommend holding their emergency fund at a bank that is different from the regular checking account they use for daily expenses. There are two reasons for this:

1.) It makes dipping into the fund harder. Sometimes it takes a day or two to transfer money between banks, and that lag or “friction” could helpfully dissuade them from using that cash for things that are not an emergency.

2.) It’s great to find a high-interest savings account for the emergency fund, which is often not at local brick-and-mortar banks but from online or other institutions.

The Bottom Line 

An emergency fund provides more than just financial security—it offers peace of mind. By setting aside 4–6 months of living expenses, accounting for any other additional uncertainties, and keeping the fund in a separate, less accessible account, clients can create a reliable safety net for life’s unexpected events.