Balance an emergency fund with other living expenses

Find out how to balance an emergency fund with your other living expenses from Kevin E. Miller, CFP®, of Vanguard Personal Advisor Services®, and Michael DiJoseph, CFA, of Vanguard Investment Strategy Group.

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Amy Chain: What is a good amount to have in your emergency fund?

Kevin Miller: I can tackle that one. So Vanguard, we don’t have any sort of set amounts, just because it’s so different investor to investor. So you want to take a look at if someone that’s in retirement, how much are you spending on any given year? Sometimes people have multiple years’ worth of money in cash because that helps them sleep at night. Also, taking a look at what other large expenses, are you going to buy a car, the home purchase, do you have a wedding to pay for, all those things could be reasons to have larger cash positions. You know, anything that you’re going to need, even within a few years, I think you could make the argument of having that in cash just to eliminate any sort of market risk that’s attached to it.

Amy Chain: Do you recommend that people think about an emergency fund as something different than just their savings account?

Kevin Miller: It depends. Some people use sort of just one account for simplicity. Other people will break it up and say this is my spending fund or my emergency fund, and then something else that’s for a separate goal that they have if that helps them from sort of the mental accounting aspect of it. But it’s really up to them.

Amy Chain: This is a great question for the sort of midcareer savers with so many priorities and not quite sure what to do about it. Andrea says, “Should I pay off my debt before investing for retirement or should I invest in an emergency fund or leave a low interest saving account?” Kevin?

Kevin Miller: Yes, it’s a question I get a lot, and sometimes you can work out the math and see, okay, if I’m investing and I’m making X percent and my mortgage is Y, and one’s greater than the other, you can sort of figure out what’s better off. There’s always that emotional component to it as well. So for someone not having that debt and saying, “If I have this mortgage paid off, it gives me extra cash flow and it gives me more flexibility in life, so that’s what I’m going to focus on.”

So there’s generally not, I think, a right or wrong answer there. It’s what’s more important to you. And, again, what’s the rate that you’re paying on the debt that you have?

Michael DiJoseph: I would say probably focus on the emergency fund first though, given that it is for emergencies, right. If an emergency were to arise, you’d rather have that there than maybe a little bit lower balance on some of the debt.

Important information

All investing is subject to risk, including the possible loss of the money you invest. Diversification does not ensure a profit or protect against a loss. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Advice services are provided by Vanguard Advisers, Inc., a registered investment advisor, or by Vanguard National Trust Company, a federally chartered, limited-purpose trust company.

This webcast is for educational purposes only. We recommend that you consult a tax or financial advisor about your individual situation.