The Emergency Fund: Your 1st Financial To-Do
I’m typing these words with my 1.5 year old daughter in the room with me, and as is typically the case, she’s trying to climb on top of something that, absent our baby-proofing, would likely cause her some sort of damage. How is this relevant to your personal finances, you might ask? Well it is one of the many reasons why the first thing you should shore up in your financial life once you have a kid is your emergency fund (trips to the urgent care are not cheap).
But even if you don’t have a kid, this is still the number one question to ask before you start investing.
Sadly, over 50% of Americans could not afford a surprise $1,000 bill with their current savings. In today’s economy, the odds of you facing a $1,000 bill at some point are…quite high. You don’t want to be scrambling when that happens.
You probably have a sense of what an emergency fund is, but in this article I’ll explain a few things you may not be thinking about:
What should I use that fund for, how do I even define “emergency”?
What’s the right amount to have in your emergency fund?
Where should I keep my emergency fund?
How does this turbocharge my investing approach?
Let’s jump in.
What should I use that fund for, how do I define “emergency”?
An emergency fund is an account established separate from your checking account that, as the name suggests, is used for emergencies. This can mean different things for different people, but I like to define an “emergency” in this context as something that, should it occur, you cannot afford to pay for it from your normal income. A few common examples include surprise medical bills or major repairs on your car / home.
A key word here is surprise. Pulling money from this fund should be very rare, and it should be from things that you don’t expect to happen. If you are pulling money out of this account more than a few times a year, then it is no longer an emergency fund, it’s a bank account that funds your lifestyle, and you may need to rethink your budget.
In an ideal world, an emergency fund is there for something like losing your job, and could even stay untouched for surprise expenses that come up. If you use it in this way, then ideally you don’t have to withdraw funds often if ever.
What’s the right amount to have in your emergency fund?
This is the big question, and the one that most people understandably get wrong because it varies based on a large number of factors. This is the stage where talking to a professional can be helpful. But I’ll do my best to narrow it down for you.
As mentioned above, ideally this is reserved for true emergencies like losing your job. It’s this example where the common rule of thumb comes into play: your emergency fund should be something like ~3-6 months of your expenses (including your mortgage / rent). This would allow you to lose your job and still have a good bit of time to find work without worrying about making ends meet. Some advisors even suggest a full 12 months, but personally from working clients, it’s extremely rare I find anything over 6-months to be necessary.
There is a lot of variance based on personal situations. Here are some of the critical factors that would influence where you fall on the spectrum:
Do you have dependents? It’s much easier to keep a lower emergency fund without kids, as kids tend to create a lot of fixed expenses.
Are you a single income household? Even if your single income is as much as some households’ dual income, being a single income household increases your risk because it only takes one of you getting fired to lose your entire income.
Do you have a strong support network? This can be difficult to know until it happens, but if the worst were to occur, do you have a family / friends network that could help support you (e.g., could you move back in with your parents)? If so, then you could probably feel more comfortable with a lower amount.
What is the composition of your net worth? You do not want to have to sell investments to fund an emergency, but the family that has a $500K taxable brokerage account is going to feel much more comfortable with a low emergency fund than the family that has all of their assets tied up in 401k plans that will be penalized for a withdrawal.
Bonus content: what’s the cost of messing this up?
It’s fairly obvious what could go wrong if you don’t have this set up; if an emergency were to occur, you are going to need to go into debt or empty out your other assets. But what about the flip-side, what’s the downside of overfunding this?
Let’s look at a simple example:
Couple with dual income, 2 kids, ~$10K/month in costs, and a taxable brokerage account of ~$200K
No major upcoming events that will require selling investments in their taxable brokerage
In this hypothetical scenario, I would suggest somewhere between $30-35K in an emergency fund, so the low end of the 3-6 months range
However, one can easily imagine that couple deciding on 6 months, so $60K, and you may be thinking, who cares? Let’s look at the potential difference:
A good high yield savings account as of July 2026 would yield ~3.25%/yr in interest
Historically, the S&P 500 has returned ~10%/yr (albeit with a number of risks that do not exist with a savings account)
Let’s compare the difference in outcomes assuming the above returns over a 30-year period:
$60K in savings: Final account balance after 30-years = ~$156K
$30K in savings & $30K in S&P 500: Final account balance after 30-years = ~$600K
Yes, you read that right. Assuming today’s interest rates and historical S&P return numbers, all else being equal, the scenario where this family right sized their emergency fund based on their situation is nearly a $450K decision. For many people, that is the difference between retiring early vs. working into your 60s.
To cover my bases here: NO, I am not saying you should drain your emergency fund and yolo it in stocks. This article is literally the exact opposite message! But you need to be thoughtful about what the right number is, and don’t just automatically keep adding to it as time goes on.
Where should I keep my emergency fund?
This one will be quick. You need to find somewhere that meets the following criteria:
Pays you a highly competitive rate
As of July 2026, anything below 3% could probably be shopped around, anything below 2%, drop them. Clients at LKL Advisors receive competitive rates through our preferred custodian, Altruist.
If you use your bank’s generic savings account, CHECK THE INTEREST RATE. Big banks are known to market this as a “better” savings rate, but “better” can often mean going from 0% to 0.1% (still garbage). I actually have a hard time even figuring out what the rate on my Chase Savings account is, and if that is ever the case, please do not use them.
You may have noticed in the example above that the family that kept their $60K of emergency funds all in a high yield savings account still made a hefty return over 30 years…finding a platform that actually pays you interest does matter over time.
Is FDIC insured.
Is convenient for you.
If the difference between the platform you already use and opening up a new account at a new bank is 0.2%, then it’s probably worth thinking about whether that difference is really worth the hassle of changing accounts.
Rates change all of the time and companies offer promotions, so what’s best today may not be best tomorrow. The key is finding somewhere that is consistently giving you a good rate and not ripping you off.
How does this turbocharge your investing approach
In the previous section we showed the power of keeping money in the market long-term, but there’s a separate benefit to having a consistent Emergency Fund that’s right for you: peace of mind and the freedom to know where your next dollar should be.
I often work with clients who are unsure where an annual bonus should go, whether that extra left over at the end of month should be invested, etc. There is absolutely complexity in deciding what accounts and actual investments new money should go into, but the emergency fund does clarify one thing for you: the excess should likely go to investments of some kind.
Your emergency fund is the security buffer. Anything that reaches above that level is likely an excess amount of cash for your situation, and it should be invested with a long-term time horizon instead. This is an important mindset shift. You’re moving into a “set it and forget it” mentality with excess cash flow, which is critical for long-term investing habits.
Conclusion
There are a ton of benefits to getting this account funded, most important of which is having peace of mind that if things were to go wrong, you’d be okay. But the emergency fund is also a critical tool in the broader investment picture, giving you the freedom to take more risks in the rest of your financial life.
Getting a strong plan around the right number for you, and making sure you get the account funded, should be step 1 in your financial checklist once you start investing and especially once you have a family.
This content is for informational purposes only and does not constitute legal or tax advice. Any numbers and estimates are hypothetical. Please consult your advisor before making any financial decisions. All investing comes with the risk of loss.
