The biggest financial lesson we can learn from the COVID-19 pandemic is the importance of an emergency fund.
What’s an emergency fund?
An emergency fund is 6 months worth of living expenses set aside in a high-yield savings account. If you get laid off, it pays your mortgage and utility bills and buys your groceries for 6 months.
It also pays for large unexpected expenses like a new roof, but covering living expenses is it’s most important job.
Families with a 6-month emergency fund are not worried about losing their job right now. (Or worried much, much less anyways.)
Should you invest it/borrow it/charge it?
No. No. And no.
Your emergency fund should not be held in your investment portfolio. If it was, right now your 6-month emergency fund only be 3 months.
The cash value in your life insurance also doesn’t count (no matter what your insurance salesperson says). Taking a loan from your insurance policy is not a fast transaction.
Your credit cards are also disqualified. It’s best to avoid 20% interest charges if you’re unemployed, ya know?
Where should you keep it?
It should be held in a high-yield savings account.
You’ll know exactly how much you have because it’s not at risk in the market. And you can access it within 3 days at most (or however long the online transfer takes). And you’ll get paid interest instead of paying interest.
Which bank should you use?
For over 12 years, we’ve recommended our Financial Zen members keep their emergency fund in an Ally Bank savings account. Ally consistently pays the most interest of any bank out there.
Feel free to shop around, but beware of high introductory rates that drop after introductory period.
The importance of an emergency fund
Just imagine if every business and every family on the planet had a 6-month emergency fund.
Businesses wouldn’t have to lay anyone off for 6 months and even then you’d have 6 more months before you really had to start worrying.
There’d be no $1T bailouts from Congress and we’d probably avoid a recession.
Since that fairy tale will never come true, it’s critical to protect you and your family with 6 months of cash set aside. I’m sure there are a lot of lessons we’ll learn from all of this, but I think the biggest financial lesson will be the importance of an emergency fund.