Last Friday the partial shutdown of the federal government ended, as Congress passed and the president signed a temporary spending measure which will keep the government open until the middle of February.

The longest shutdown in history hit many of the 800,000 furloughed government workers very hard. Many of these workers lacked any meaningful savings and, missing at least one paycheck, were forced to turn to local food banks for groceries, plead with landlords for abeyance of rent payments (or a grace period from their lenders on their mortgage payments) and even stop driving to work, because they could not afford to put gasoline in their vehicles.

During the shutdown we read many articles in major print newspapers, on personal finance websites and on social media reminding us of the need to have an emergency fund in order to weather unexpected events like the shutdown. The whole sad affair got us thinking about the idea of an emergency fund and why it’s important.

Let’s start by recognizing the purpose of an emergency fund. We’re consumers of housing (whether we rent or own it), food, utilities (power, heat, water, cable and cell phone), fuel (for our vehicles) and health care. We have to pay for these core living expenses, and the providers of these essential goods and services are generally not willing to wait for payment.

If our ability to pay is reduced or eliminated completely, we have a problem. We can ask for help from family or friends. We can apply for aid from community service organizations or government social support agencies. But few people find such options attractive. Indeed, such desperate actions can be embarrassing and demoralizing.

To avoid this prospect, we’re well-advised to set aside money in a safe place that we can access, should an emergency occur which reduces or eliminates our regular source of funds. The “emergency” might be a government shutdown. But it could also be the loss of a job for a variety of other reasons, including the closure of the business, termination, quitting, or becoming injured or sick and unable to work.

There are also emergencies which can impact those who are no longer working. If you are retired and you rely on rental income as a major source of funds to pay your living expenses, the loss of those payments can be a major problem. This could happen if the renter fails to pay the rent or renew the rental agreement (leaving the property unoccupied), or the property is rendered unrentable for some reason (e.g. fire, flooding, earthquake, etc.). Similarly, if you are taking systematic distributions from your investment portfolio (like your IRA and/or brokerage accounts), what happens if the stock market crashes and your portfolio drops by 20% (or more) in value? You will still have funds, but how will you feel about taking distributions?

In all of these cases, the solution is to access your emergency fund. Doing so will allow you to continue to pay for your basic needs.

How much should you have in your emergency fund? For workers, the general advice from financial planners is 3 to 6 months of living expenses. For those owning and relying on rental property income, 3 to 6 months of the rent and other expenses related to the property. For those taking distributions from a portfolio of investments, they should have in enough reserves to meet their needs for the next 2 to 3 years. That should be enough time for the market to recover and alleviate the need for a forced liquidation of stocks when prices are down.

Where should you put your emergency funds? You should cordon off the reserves in a safe place that will remain untouched unless a true emergency occurs. In cash (i.e. a savings or interest-bearing checking account), cash-equivalents (i.e. CDs, money market accounts), short-term bond funds or the cash value in a permanent life insurance policy. Probably not in a coffee can buried in the backyard, though…

If you have questions or concerns about your emergency fund, we would be happy to discuss it with you.

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