The Necessity Of Emergency Funds

Commentary

A spring survey released by the National Endowment for Financial Education (NEFE) found that 88% of Americans said the pandemic is causing stress on their personal finances. Chief among those stressors was not having enough saved for emergencies.

That's not surprising, considering that before COVID-19, an alarming number of people lived perilously close to the financial edge. A Federal Reserve report found that 4 in 10 adults would have difficulty covering a $400 unexpected expense.

The sudden onslaught of the pandemic and its ripple effect throughout the economy have underscored fragilities in our financial lives. Chief among those is the inability for many Americans to adequately fund an emergency reserve account. While some live paycheck to paycheck, others have the wherewithal to save but for some reason, the boring old rainy day fund never gets the love that it deserves. Considering that the saving rate surged to 33% in April, the highest on record, perhaps now is an ideal time to start, augment or replenish that fund.

I have heard from many of you, wondering if my advice has changed regarding the emergency reserve funds - the answer is no. I recommend that workers keep six to 12 months of living expenses (1-2 years if you are already retired) in a liquid, accessible cash-equivalent account, like a savings, checking, money market or a short-term (less than a year) certificate of deposit. I do not consider access to a home equity line of credit or loan as an emergency fund, nor do I believe that a taxable brokerage account that is fully invested in stocks, bonds or other financial assets can serve this purpose. I am talking about plain vanilla, folks!

Early in the crisis, many of you wrote to ask whether emergency reserve funds at various financial institutions were safe. Now that your rational brain is ready, here's a primer/reminder about the Federal Deposit Insurance Corporation ("FDIC"), every saver's favorite backstop. The FDIC is an independent agency of the government that protects assets, including savings, checking, money market deposit accounts and CDs, up to $250,000 per depositor, per insured bank, in the unlikely event of a failure. The agency proudly boasts: "Since the FDIC began operations in 1934, no depositor has ever lost a penny of FDIC-insured deposits."

For more on how FDIC coverage is applied to individual, joint, retirement and business accounts, go to fdic.gov, and to determine if your bank is FDIC-insured, use the FDIC's BankFind tool, which provides detailed information about all FDIC-insured institutions, including branch locations, the bank's official website address, the current operating status of your bank, and the regulator to contact for additional information and assistance. One important note: The FDIC does not cover investments or life insurance products, even if they are sold through an arm of an FDIC insured bank.

Credit unions provide similar FDIC-like coverage through the National Credit Union Share Insurance Fund, but a different entity backs up money in a brokerage account: the Securities Investor Protection Corporation (SIPC) provides limited coverage in the event that the firm goes broke. SIPC covers up to $500,000, including up to $250,000 for cash equivalents. However, SIPC does not cover unregistered investment contracts, unregistered limited partnerships, fixed annuity contracts, currency and interests in gold, silver or other commodity futures contracts or commodity options.

I love my emergency reserve fund and want you to love yours, too, even when the economy is seemingly strong and it feels like a "waste" to have the money earning rotten interest. When the next crisis comes, either systemic or personal, you will be happy to reacquaint yourself with the beauty of cash.

Jill Schlesinger, CFP, is a CBS News business analyst. A former options trader and CIO of an investment advisory firm, she welcomes comments and questions at [email protected]. Check her website at www.jillonmoney.com.