In Emergency Break Glass…
The whoopsie fund. The rainy-day stash. The lifeline when all else is lost.
Part of what makes life so exciting is that anything can happen! A promotion at work, an unexpected pregnancy, inheriting a mansion from an unknown relative, winning the lottery, or losing it for 40 years straight (more likely). Good, bad, and everything in between happens to us every day and we have no way of knowing what will come next. Today we talk about something that makes your heart beat a little faster, but not in a good way.
While you were out to eat at your favorite restaurant, a small storm rolled through your town. The winds weren’t too strong and it couldn’t have lasted more than a half hour, but when you pull into your driveway you see that it definitely did some damage. The mighty oak that was the centerpiece of your backyard has toppled over and come crashing down on your home’s only bathroom. Your homeowner’s insurance has a sneaky clause in the fine print that excludes damage from oak trees specifically, so the cost of repairs is totally and completely on you. That kind of ruins your day, doesn’t it?
There are technically three scenarios for how life can move forward now, but really only two. The first and least likely is to leave the tree where it is and step over the branches to brush your teeth, but we’re going to push that option to the side. The second is to call up family and friends to see if they are willing to spot you some cash for the repairs, maybe open up some of those credit card offers you got in the mail, or find a mob boss willing to give you a loan with a ridiculous interest rate. The third is to let out a disappointed sigh and withdraw the cash from your emergency fund which you saved specifically for situations just like this.
None of the options are good, but I think it’s safe to say there’s a clear winner.
The example was extreme, but I think you get my point. An emergency fund isn’t an option, it’s a necessity. I know the next question: “How much is enough?”. After all, every dollar I have available is a dollar that’s not earning interest or generating returns in the market. Here are some generally accepted guidelines, class is in session.
3 Months of Living Expenses if:
You are a single wage earner with a side gig / trust fund / rental property income.
You are married and both of you are working.
You are married with only one “bread winner”, but for some reason or other you have money coming in from a second source.
6 Months of Living Expenses if:
You are a single wage earner.
You are married and only one spouse is employed.
Also, it is very important that this amount is in the right place. Available credit card balances or a home equity line of credit don’t count, since these options just put you into debt (option 2 in the story). Basically, if you have already earned it and can get it into your pocket quickly then your money is in the right place. That doesn’t mean it has to be in the form of cold, hard, cash in your iron safe! Here are some other options that actually earn a bit of interest.
Checking accounts
Savings accounts
Money market deposit accounts
Money market mutual fund accounts
Certificate of deposits (CD’s) that are close to maturity (90 days or less)
It’s amazing how many people just take life as it comes, like jumping out of an airplane hoping to find a parachute on the way down. It’s more than that though. Not only does the emergency fund pad the ground for when life takes a swing, it also gives you an advantage in the fight. It allows you to continue to invest even in the face of financial setbacks, which is the “secret ingredient” in successful investing. You might have to cut back a bit to replace your emergency fund, but it’s much better than stopping altogether.
Ok, class is over.
Questions? Feedback? Topic request for future articles?
brett@centennialsec.com or use the “Contact” tab above for feedback and questions.
