The Doctor’s Guide to Emergency Funds: How Much Cash Should You Keep in Savings?

Did you know that one of the most crucial investments you can make actually loses value over time? Yet, it's something everyone needs in their portfolio — cash. While exciting investments capture our imaginations, cash holds a foundational role in financial security.

Having cash provides liquidity and purchasing power. It’s super important to protect you from unexpected large expenses and the risk of interruptions to your income. You can also use cash to build up assets for a significant investment in a more growth-oriented asset in the future. 

Why is it a good thing to keep some cash? 

The principal risks that having a fully funded emergency fund protect you against are:

• Layoff: Job loss can happen suddenly, resulting in unexpected interruptions to your income. 
• Medical events: Even with insurance, out-of-pocket medical bills can be high (some of this risk can be mitigated with disability insurance).
• Car repairs: Unforeseen breakdowns can be costly.
• Home repairs: Home repairs can strain your budget.
• Other unexpected expenses: Such as travel necessary to support a loved one.
• Opportunities for joy: Like attending a friend’s wedding or getting tickets to a playoff sporting event.

For money that you know you’re going to spend in the short-term, you trade appreciation potential for stability and access by keeping it in cash. 

Why is this consideration different for a Physician?

After many, many years of education, training and experience, highly skilled professionals in medicine are in high demand. Employers want to keep the talented physicians they have on staff. Medical care is an inelastic good, meaning that in good times and bad, consumers will always need high-quality medical care. 

While layoffs in the healthcare industry have been on the rise since 2023, Becker’s Hospital Review reports that “the majority of laid-off workers are in non-patient-facing administrative or support roles.”

The stability of your job is quite steadfast, as layoffs of physicians are exceedingly rare. There is a robust market demand for your skills in the event of a layoff or other job loss. As a result, one of the principal risks to your monthly cash flow — losing your job due to a layoff — is significantly lower than for the average American employee. 

How much should you have in your emergency fund?

Our general recommendation is to reserve three to six months’ worth of living expenses in cash. But personal finance is personal, and a few factors that might allow you to take a riskier position of three months of expenses include:

• Dual income household
• Low incidence of layoffs, high demand for replacement employment
• Proper disability insurance coverage (have enough cash to cover expenses for your elimination period) 
• Adequate medical, home, auto and umbrella insurance to protect you from large, unexpected expenses  

Allocating cash to an emergency fund vs. saving for short-mid term goals 

If you’re working to save money for a big expense in the next one to three years, your cash balance may reflect different ‘buckets’ working towards various goals. 

You have your emergency savings that you anticipate will remain in cash following significant expenses, but when you’re saving up for something like buying a home, investing in real estate, starting a business or purchasing a car, you know that the funds will be spent in short order. In that case, you don’t want to subject those funds to market volatility or risk. So, your balance at the bank may not reflect how much you have dedicated to your emergency fund. 

However, separating the funds can be very helpful in staying organized; some banks allow you to open sub-accounts earmarked for specific purchases or open up a second or third account to bucket your emergency fund separately from your savings for upcoming expenses.

Where should I keep my emergency fund?

Cash is an investment. Is it a good investment? Well, looking at performance, no, not really. But the principal value of investing in cash is stability, protection from risk (as discussed earlier) and predictability. That being said, all cash ‘investments’ are not created equally. 

Big banks pay nearly nothing in interest for holding your funds there, with annual percentage yields (APYs) falling between 0.01% and 0.60% among the five largest banks in the U.S. As we find ourselves in a high interest rate market, there are lots of opportunities to shift your idle cash into a high-yield savings account, which is paying between 4.25% and 5.10% as of July 2024. 

Look for FDIC-insured institutions

You want to be sure that the bank you’re working with is FDIC insured. FDIC insurance protects depositors against the loss of their insured deposits up to $250,000 per depositor per insured bank. If you’re saving for a big purchase and have over $250,000 in a bank account, you can open an account at another bank to ensure your aggregate balances are covered. 

When to skip the high yield savings account (and what to do instead)

Even earning higher interest rates in a high yield savings account isn’t a strong long-term investment. You’ll pay federal and state income tax on the interest you earn, and if you have student loan debt and are on an income-driven repayment plan, that income is factored into your student loan payment as well. 

When compared to investing long-term into a diversified portfolio of equities, the performance of high yield savings accounts won’t deliver the same level of growth. This is why it’s important to assess WHY you’re keeping this cash invested as cash — for stability and predictability, not for long-term growth.

High-earning physicians in the highest federal tax brackets may want to consider whether a municipal bond money market fund may deliver more yield net of taxes than their high yield savings account. 

Related: Best Investment for Doctors: From Retirement Plans to Real Estate

Why do doctors tend to have so much cash on hand? 

Medicine has a very linear career trajectory compared to many other professions. From the pre-med curriculum, the MCAT to med school, residency match and a prescribed duration of training based on what specialty you’d like to pursue. 

Physicians are incredibly smart. They have some predictability about what their next few years will look like until they are attending physicians and pursue private practice rather than hospital employment. Of course, there is uncertainty and some difficult crossroads when it comes to match day, and things don’t always go as planned.

Having enough money on hand provides stability and predictability. It’s as close to a ‘risk-free’ asset as you can get. 

For an investor who likes to know what’s next, cash, money market accounts and high yield savings accounts provide that peace of mind. However, as highly skilled physicians in patient-facing roles, your jobs are very secure, and you can reasonably anticipate a low likelihood that your cash flow is interrupted.

The stability in your paycheck lets you take on more financial risk in your existing assets as you’re unlikely to need to withdraw from existing accounts to support your living expenses. Therefore, you should invest more of your assets for long-term appreciation. If you can tolerate the risk associated with a three-month emergency fund and earmark any short-term expenses upcoming, you can invest the remainder of your funds for long-term appreciation. 

It comes down to your risk tolerance

This is where each individual’s risk tolerance comes into play. If investing in stocks and bonds is not something you’re comfortable with, if seeing a 20% decline in the stock market over the course of a year would make you more likely to sell your investments and seek alternatives, you may not have the risk tolerance to take this investing approach. 

In financial planning, we differentiate your risk capacity from your risk tolerance. 

• Risk capacity: The financial ability of an individual to withstand losses from investments or other financial decisions. 
• Risk tolerance: The willingness or psychological ability of an individual to handle the uncertainties or potential losses associated with an investment or financial decision. 

A qualified financial planner can help you assess your risk capacity within the context of your career, family, priorities, assets, cash flow, insurance coverage, etc. But if you’re nervous to take that level of risk, that’s where your risk tolerance and risk capacity may not fully align, and that is okay. Some physicians' risk tolerance may limit them from taking the financial risks that their financial plan could tolerate. 

I have too much cash — what should I do with it? 

Okay, so you’ve determined that you’ve met your savings goals — your emergency savings is fully funded, the vacation you’re planning next year is fully funded, and otherwise, you don’t anticipate major expenses upcoming. You’ve been stacking cash in your high yield savings account and see that you have a lot of money that you don’t need to be holding in cash. 

This is a huge opportunity to shift your thinking from short-term protection to long-term financial planning and investing. 

Evaluate where those dollars would make the largest impact on your net worth, tax liability and overall life satisfaction. It could be paying down debts, making sure you max every tax-advantaged account this year, spending some of it on travel to celebrate your success or investing a chunk of it into your taxable brokerage account. 

Too much cash can be a bad investment, and you can lose over time with the opportunities you’re missing elsewhere with those funds. If you’d like to evaluate your finances and determine what your emergency fund should look like, where to allocate that excess cash and how to invest those funds in your 401k, IRA, or brokerage account, SLP Wealth is here to help. Learn more and schedule your onboarding meeting today.