Why Do Young Lawyers Need an Emergency Fund?

In order to take advantage of financial opportunities, you must have financial protection. Life is filled with unexpected and sudden financial events, and roughly half of Americans are unprepared for one. For young lawyers just beginning their financial lives, a financial emergency can permanently affect long-term outcomes. An emergency fund of 3-6 months of essential expenses provides a buffer against surprise bills or job loss — and empowers you to take on opportunities you couldn't otherwise pursue.

Tommy Lawyer has been working at a Big Law firm for a few years. He's halfway through paying off his student loans, manages his expensive apartment, car payments, and contributes to his 401(k) every paycheck. It appears he has his financial life in order.

Then one day Tommy is called into his boss's office and told he's losing his job. He checks his bank balance: $2,000. That won't cover rent, utilities, car payment, food, credit card bill, and student loans for more than one month. Even if he lands a job soon, receiving a paycheck in under a month is unlikely.

Tommy could have protected himself by establishing an emergency fund.

Uncertainty is one of the few certainties in life

Sometimes life brings unexpected positive events like promotions. Other times it hits you with a major car repair or a job loss. We need to protect ourselves from unfortunate situations so we can benefit from the positive ones.

People do not save for emergencies

According to a July 2021 survey, more than 50% of Americans have less than three months of emergency savings — and roughly half of those (25% of all Americans) have none at all. Lawyers earn a well-deserved high salary, and don't have to be part of this statistic.

Emergencies and their expenses

Common emergencies include natural disasters, losing a job, a major car repair, a medical emergency, or a family emergency. When they strike, expenses still need to be paid: rent or mortgage, utilities, groceries, transportation, student loans, insurance, medication, and pet supplies.

Opportunities of an emergency fund

An emergency fund protects you from unexpected expenses, but it also supports you in taking on unforeseen opportunities — moving cities for a new job, starting a firm, or affording an unexpected trip.

Emergency funds create flexibility. When you live paycheck to paycheck, an unexpected $700 car repair means declining the trip your friends invited you on. With an emergency fund, you can absorb the unexpected without changing your lifestyle.

Emergency funds cover essential expenses and reduce costs. If you've privately refinanced student loans, missing a payment can trigger an acceleration clause. An emergency fund also lets you self-insure longer — comfortably choosing health insurance with a higher deductible or disability insurance with a longer elimination period, both of which carry lower monthly premiums.

An emergency fund supports you to take risks. If you've ever wanted to start a law firm, an emergency fund is critical. If it takes 12 months before the business can pay you a salary, you need a 12-month emergency fund — and probably more, since new businesses almost always cost more than expected.

How do I set up an emergency fund?

An emergency fund is not an investment. Its purpose is not to make money — it's to protect you. It should be:

• Easy to access, withdrawable in minutes rather than days
• Held in cash, not investments
• Safe, ideally in an FDIC-insured bank (federally protected up to $250,000)

How much should I save?

The rule of thumb is 3-6 months of essential expenses — rent or mortgage, utilities, groceries, transportation, insurance, student loans, medication, and pet supplies. It's always better to have an overfunded emergency fund than an underfunded one.

The right number varies by household. A two-income household may be fine with three months; a single-income household typically needs six or more. The number of kids also affects the target.

Make the emergency fund a top priority

One of the best ways to succeed financially is to avoid financial disaster. Even common advice like "invest enough to get your employer match" shouldn't come before the emergency fund — money in a 401(k) can't pay an unexpected $500 bill tomorrow without penalties and delays.

If you want to invest sooner, consider saving into the emergency fund until it holds three months of expenses, then split contributions 80/20 toward savings until you reach six months, then flip to 20/80 toward investing.