An emergency fund is 3 to 6 months of living expenses in cash to help weather life's big storms. In my years of doing this show I've never had one listener say having money when they really needed it was a bad idea. Having an emergency fund is self insurance. You already have health insurance, hopefully car insurance, hopefully home insurance, required things we all hate paying for and hope we never have to use, but when we do it's a huge relief. That's the emergency fund. Think of it as a cash cushion. It's like the giant net if you're walking across an acrobatic tightrope and you fall it's like laying in a 20-foot pile of cotton balls.
Get the full episode here, which includes the following topics and listener questions:
Topics & Listener Questions:
- Half of people would end up living in a van down by the bridge because of a financial disaster. Here’s why you should think about your future.
- Travel hack to save on food (Valeria)
- What is the best time to buy a used car (Ariana)
- Converting 401(k) to a Roth while still employed (Josh)
- We're slowing down our debt payoff to prepare for a new baby (Ann)
- Is a 401(k), Roth 403(b) or 457 better to put bonds in (Matt)
- How much you know (or don’t know) about long-term care, Social Security, IRAs, investments, and life insurance?
- What is the best option between mutual funds and index funds (Matt)
- Should I slow down my retirement savings to build my emergency fund (Mike, Marina Bay Richmond CA)
- These are not the cookies you're looking for.
- Can you pass this retirement income quiz?
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ABOUT SCOTT
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Scott Alan Turner is the new and true voice on money in America. Scott is a former money moron, living the paycheck-to-paycheck lifestyle, losing $40k by following bad investing advice, and racking up a load of credit card debt. But by age 35, he turned it all around and became a self-made millionaire.
In a world of get-rich-quick schemes, biased advice, and financial pied pipers, Scott’s authentic, no-holds-bared approach makes it possible for anyone to absolutely rock their personal finances.
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==IN THIS VIDEO==
Emergency Fund vs Debt
If you're paying off debts right now, that's a priority. The emergency fund comes later in the plan. I want you to give your rainy day fund a name even if there's nothing in it. Get that account set up for when you can't put money in it.
Don't use your retirement fund as an emergency fund
Raiding a retirement fund has a 10% penalty. That's peanuts compared to the long term impact of pulling $10,000 out of a retirement account for something, costs about a year's worth of living expenses during retirement. Someone could have retired 365 days earlier.
If someone is thinking it's a good idea to use a retirement account to cover a big emergency, they could be working an extra year to recover. Clearly not having cash on hand that leads to a big domino effect of bad things happening one after the other. There's a loss of money coming in, then the rent or mortgage can't be paid, the retirement accounts get raided, the nest egg gets scrambled which is why building this rainy day fund is so important.
How much emergency funds do you need?
3 to 6 months worth of living expenses in cash
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