LO 3.2.2: Recommend strategies for accumulating the appropriate level of emergency funds.

Question 1

Emergency Fund

Answer 1

An emergency fund is a cash or cash equivalents set aside to offset the expenses of unexpected events
* e.g. job loss, medical crisis, major home repair

Question 2

Two fundamental questions with respect to emergency fund planning

Answer 2

• 1. How much cash, or cash equivalents, should be kept in this fund?
• 2. Which assets should this fund be invested in for easy access?

Question 3

How much should be saved in an emergency fund

Answer 3

An amount equal to three to six months of fixed and variable monthly expenses is considered adequate.

Question 4

Three months of expenses should be set aside if your client is

Answer 4

Dual-income scenario

• Single wage earners and has additional source of sizable income, e.g.:
  
  • beneficiary of a trust fund,
  • recipient of rental income, or
  • as an heir who wisely invested the inherited money;
• Married and both spouses are gainfully employed;
• Married and one spouse gainfully employed, but second source of considerable income available

Question 5

Six months of expenses should be set aside if your client is

Answer 5

Single wage earners

* Married and one spouse gainfully employed

Question 6

What should emergency funds be kept in

Answer 6

Liquid assets

Question 7

What are liquid assets

Answer 7

May be quickly accessed by client w/o risk of significant loss to principal

• Cash or cash equivalents
  
  • checking accounts
  • savings accounts
  • money market deposit accounts
  • money market mutual fund accounts
  • time deposits or CDs

Question 8

What about unsecured lines of credit or home equity lines of credit for emergency fund purposes

Answer 8

• Rationale is this is protection if job loss, can have funds available for living expenses
• But avoided as this practice is taking on debt (secured by home) when income is reduced
• Not a substitute for liquid assets