The “black swan” as referring to an unforeseeable or rare occurrence was first noted by the 2nd-century Roman poet, Juvenal, seeing as black swans were believed not to exist. Of course, that was until the Dutch explorer, Willem de Vlamingh, discovered black swans in Australia one fine day in 1697. Even black swans are black swans. The question really is: who is prepared for a black swan event?

The mass shutdowns resulting from the COVID-19 pandemic scare have led, as expected, to an economic decline of an unforeseeable duration and gravity as millions file for unemployment. There are some, however, who have been able to weather the storm better than others, those who had a portion of their money allocated into what can only be described as “Emergency Funds,” the subject of this post. After all, how much should one save? How much does it have to rain for the rainy-day dollar to be worth putting under the mattress versus being put in the market or the business in order to make other dollars?  

To begin with, the emergency fund is about finding that balance between security and growth. Too much of an emergency fund can stilt the investment growth that will be useful for attaining other goals such as education, travel, or the all-important retirement account, which is usually the main focus of investment services. Too small a fund, however, will leave clients pulling second jobs or, in the case of unemployment, unsure of what to do as payments pile up and savings dwindle. That can lead to credit card debt, a chain of its own, and dig the already burdened hole deeper. Naturally, getting that balance right is a matter of practicality and training. Fortunately, since financial planning has been around long enough to see quite a few black swans, there is a go-to starting point!

Generally speaking, the standard assumption for a single-income household, single or married, is six-months’ worth of non-discretionary expenses. The first step, then, in determining how much one should hold on to for the emergency fund, is what their non-discretionary expenses are. It’s easier than it sounds, actually. Non-discretionary simply refers to the necessities of daily living, the things you need to purchase to survive: food, utilities, gas to go to work. Discretionary expenses are life’s pleasures: movies, clothing that isn’t necessary for daily living and work, restaurants, the things you wouldn’t buy during an emergency. Once you have a rough idea of your monthly spending, you can then calculate about six months of necessities and voila! That will be your target emergency fund number.

There are exceptions to this general guideline, however, such as the two-income household where both spouses are working, where the “guidelines” are less stringent. It’s generally recommended that with a two-income household, three months of emergency funding may suffice. The key is that this emergency pot is built up over time, while at the same time continuing to contribute to other areas of your financial life.

The last and one of the most essential points of this post, however, is that the emergency fund is not, and I repeat, NOT, a replacement for adequate insurance coverage or retirement planning! Emergency funds are in addition to those other safety measures. No competent financial planner or advisor would recommend that a client forgo proper insurance coverage in exchange for a six-month reserve. Those cash reserves are for those events when there isn’t enough coverage or the client is not in a position to afford or secure coverage! One other important point to remember is to discuss your financial goals with your advisor and to occasionally keep track of how much you are spending on non-discretionary items. The more prepared you are, the less an emergency will have a negative impact on your life.

If all this still seems a little overwhelming, don’t worry. That’s what financial planners like Emergent Financial Services are for.


Nickolas Urpi