How Much of an Emergency Fund do You Need?

How Much of an Emergency
Fund do You Need?

You can have the best power
of attorney and living trust deal with emergencies, but if there is no cash
available, your planning will be for naught. How much ready green do you need?

■ Emergency funds are not
just cash in bank but can be satisfied from lines of credit, home equity lines,
and other sources. It’s important to think in very broad terms. But be
practical. What hoops do you have to go through to tap a home equity line? Will
the lender let your agent under a power tap into it? Many won’t (but if you
have a check book the agent may be able to simply use those checks).

■ When evaluating emergency
funds the scope of insurance coverage needs to be considered. If you have a good
disability policy with say a 60-day waiting period, your needs for emergency
funds are different then if you have no disability coverage. Similarly, if you
have a good long term care policy, versus none, your emergency fund in your retirement
years will differ.

■ How risky your investment
policy is, and how long term your investment horizon is, all affect your need
for emergency money. If you’re focused on more short term and liquid
investments say 40% equity 60% bonds/near cash, your need for emergency cash
and funds will be less than if you’re 70% equity and 30% bonds. You’ll need the
cushion to ride you through market ups and downs.

■ Your benefits at work are
another significant consideration. What type of support system is there? How
secure is your job and those benefits?

■ You don’t need “cash” for
an emergency fund. An emergency fund means readily available cash, not actual
cash. Increase the lines on your credit cards, take out a home equity line,
create a margin account for your securities. These all give emergency cash
quickly in case an emergency creates a cash need while you’re building up your
investment reserves. This is common for post-divorce and young people starting
out.

2007 Tax Returns: Have your accountant
email a PDF of all your tax returns to your estate and financial planner. This
will enable them to access vital information if needed. The cost is negligible
but the benefits potentially substantial.