Big Law 101: Emergency Fund & Safety Net

Now that we have covered a brief overview of the big law salary pay scale, understanding how to correctly read your paystub, and a general sense of how income taxes work – let’s move on to creating an emergency fund and what that entails.

Before we can begin to discuss investments and what I’ll refer to as the “offensive” side of financial planning (which we will cover in a later chapter), we need to understand the “defensive” side of the ball and why it’s important to first create an emergency fund.

What is an Emergency or a “Rainy Day” Fund?

An emergency or rainy day fund is typically described as a pool of money that is set aside in case of unexpected emergencies, expenses such as medical bills, major home/car repairs, etc. An emergency fund can also help you weather a loss of income from job loss or extended illness.

This pool of money should serve as a financial cushion and safety net, should an unplanned major life event occur. The goal is to help calm your mind and help you sleep better at night knowing you can handle life’s curveballs without going into unnecessary debt. It also reduces the need to rely on high-interest credit cards or costly personal loans to pay for sudden expenses.

It’s not only just about the financial security, it also helps with your mental state so that you are not constantly worrying about paying for setbacks.

While it may seem obvious to most people, according to Bankrate’s most recent emergency fund report, only 44 percent of Americans could afford to cover an expense of $1,000 or more from their savings!

Why is an Emergency Fund so Important?

An emergency fund is an essential part of a solid financial plan- it's the baseline, or foundation. Before you can begin to think about investments, real estate purchases, etc. you should first and foremost have an emergency fund saved up. It can help you pay unexpected expenses and avoid taking on more debt from high-interest credit cards or loans. Not having enough emergency savings can also cause a sense of financial anxiety.

According to a recent study published by BankRate:

• More than half (57 percent) of Americans are uncomfortable with their level of emergency savings.
• Two-thirds of Americans are worried that they wouldn’t be able to cover a months’ worth of expenses if they lost their job tomorrow.

How Much should you Save in your Emergency Fund?

This answer is going to vary person to person. What I’ve learned in my near decade of experience being a financial advisor is that people think about money in very different ways. What works for someone might be completely different from someone else.

The “financial advisory textbook” would say that having 3-6 months of living expense is an appropriate amount to keep as an emergency/safety net fund. Given that for example, if your all-in monthly expenses are $5,000, then it would be wise to set aside $15,000 - $30,000 as your emergency fund.

This should be enough cushion so that in case of a job loss and complete loss of income, you would be able to cover expenses for at least 3-6 months and the hopes is that you would find a job within that timeframe.

To my point above, this varies from person to person. From my experience, I’ve had clients that are comfortable and okay with having 2-3 months of expenses as a safety net, while others may have some arbitrary number that makes them feel comfortable sleeping at night.

That being said, 3-6 months of expenses is a solid rule of thumb.

How do you Get Started on your Emergency Fund?

As noted above, an emergency fund should cover 3-6 months’ worth of expenses, but saving that amount can sometimes take time. One of the luxuries of working in Big Law is that it comes with an attractive salary – so putting together an emergency fund, especially if you are in your first few years of BL and your career (when expenses should be relatively lower) shouldn’t take an extensive period.

If you are starting from scratch, then I would suggest focus on putting aside $500-$1,000 month at a minimum into a separate account that will be earmarked for emergencies. The quicker you can save and reach your emergency fund goal the better.

Where should you Keep your Emergency Fund?

As of 2024, one of the best places you can keep your emergency fund is in a high-yield savings account, which offers easy access and pays a competitive yield. This has been one of the biggest pro’s of higher interest rates over the last few years. There are many online HYS accounts that currently offer over 5%, are FDIC insured, require no minimum deposit, have no fees, and are completely liquid. 

Recap & Steps to Creating your Emergency Fund: 

1. Determine your emergency fund goal (3-6 months of expenses is a good rule of thumb)
2. Determine how much you can budget towards saving towards this goal each month (The quicker you can reach your emergency fund goal the better)
3. Open up a high-yield savings account (many offer 5% today)
4. Setup a direct deposit or automatic bi-weekly/monthly contribution to the HYS account
5. Gradually increase your savings here until you have reached your Emergency fund goal

Having an emergency fund is crucial for financial stability and peace of mind. It can help cover unexpected expenses and prevent the need for high-interest credit cards or loans.

Aim to save three to six months’ worth of living expenses and consider automating your savings through direct deposit or savings apps. Start small and make it a priority to build your emergency fund, as it can make all the difference in times of financial uncertainty.

 For Educational Purposes Only- Not to be relied upon as financial, tax, or legal advice. 6610380RG_May26