Inflation and your emergency fund.

During the past year, inflation has taken us on a ride we haven’t experienced in quite a long time. At one point this year, we even hit historic highs not seen since the early 1980s. Things have started to tick down a little toward rates that are more historically normal, but no one can predict with certainty what the impact of inflation will be in the future. If you’re like many others who are nearing retirement or recently retired, you may be wondering what to do if inflation’s climb continues and how it may affect the health of your long-term savings. You may have even been tempted to tap into your emergency fund to cover shorter-term shortfalls.

According to a nationwide poll from Bankrate, more than half (58%) of the 1,025 adults surveyed said they were concerned about the amount they have in emergency savings. That’s an increase from 48% in 2021, and 44% in 2020. So, increased inflation has everyone sweating a bit more than usual. Even if you didn’t access your emergency fund to cover increased costs brought on through the inflationary environment, you may be asking, “Do I have enough cash on hand in my emergency fund now? And, is it a good idea to use my emergency fund to help cover these shorter-term costs?”

Emergency funds: back to the basics.

First off, let’s talk about an “emergency fund” and what it is.

An emergency fund is money stashed away that people can use in times of financial distress. Everyone should have one — including retirees and individuals nearing retirement. Many financial experts would agree that paying down debt and setting money aside for unexpected, emergency events are foundational steps toward building a healthy relationship with your finances. Your emergency fund should serve as a safety net for when the unexpected occurs, such as maintenance or improvement repairs to aging homes, loss of critical transportation, or an unexpected illness resulting in costly medical bills that may not be covered by Medicare. A general rule of thumb is that an emergency generally poses an immediate threat to life, health, property or environment. While you can’t predict or avoid the unexpected, your emergency fund is meant to help you prepare when unexpected emergencies arise.

As a rule of thumb, we recommend keeping six months’ worth of expenses in an emergency fund. This is cash that you want to remain liquid (easily converted to or available as cash) and easily accessible. We recommend that you keep your emergency fund in the form of a money market, checking or savings account. Importantly, we recommend that your emergency fund should be kept separate from your other investments, so that you can monitor it and understand what’s happening with it.

But while six month’s worth of expenses is the recommendation, Mark Potter, executive vice president of Commerce Financial Advisors, adds the caveat that the ultimate amount, “should take place within the context of your financial plan and conversations you’ve had with your financial advisor. And, that applies to not only your emergency savings and what you have access to (because of its liquidity), but also to your broader financial picture. It’s important to keep in mind your diversification and your risk tolerance as an investor.”

While there’s a risk of not having enough in your emergency fund, there’s also a risk of having too much cash on the sidelines. This risk of not investing is known as “opportunity risk,” and it refers to the potential impact of inflation over time. Inflation can deplete purchasing power. And while no one can predict what inflation will do in the future, it’s accurate to say that if inflation outpaces how much your money is earning (whether sitting in a savings account, invested in the market, or elsewhere), your buying power is decreasing. $1,000,000 in a retirement account 2 years ago is worth about $120k less today when adjusted for inflation. That’s why it’s important to balance liquidity risk (the risk of not being able to immediately access your money when you need it) with opportunity risk.

So, back to (one of) the original questions: “Is it a good idea to use my emergency fund to help cover these shorter-term costs?” The general thought is, “no.”

But if your fund is coming up a bit short, Potter recommends, “You’ve got to look at your budget and find opportunities to save a fixed amount each month. In other words, replenish.”

Inflation is unpredictable, but you can prepare.

Even though inflation is unpredictable, it’s not really unexpected. Similar to taxes, it’s much more a question of how you prepare rather than how you predict.

This is where a CommercePremier Banker and your team at Commerce Bank become an important part of the puzzle.

As Potter points out, “If you have concerns about whether or not you've saved enough money for an emergency fund and what is the right amount, have a conversation with your CommercePremier Banker. They are your relationship manager for the Commerce Bank and Investment universe and can connect you with the right solutions within the bank for any kind of tools you would use in an emergency fund.”

Tap into your Commerce Bank team.

While there’s no one exact amount for everyone to keep in an emergency fund, there are highly individualized strategies that may be right for you. And, as your situation changes over time, your CommercePremier Banker can help connect you to tools, resources and a network of other financial professionals (including Commerce Financial Advisors, Commerce Trust and/or Commerce Business Banking) to help you as your journey progresses. Together, they can help you prepare for the unexpected, position for inflation, and balance the risks you’ll encounter along the way.

Contact your CommercePremier Banker today and they can help get you the tools you need to find that balance, or connect you with professionals who can look at your individual situation to help you make smart, sound decisions.