Ep. 18: Why You Need An Emergency Fund

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Welcome back to Money Matters where I help guide you in becoming a better and more confident investor. In this week’s episode I want to touch on Emergency Funds. What are they, who needs one, and how to go about starting one? With that said, let’s get into it…

Creating an emergence fund for yourself, might just be the difference in having good investment returns vs. poor investment returns over time. An Emergency Fund is simply a fund that you have liquid money, meaning money that you can get within 24 hours that is set aside for real emergencies. Uses being – Money to keep you afloat between jobs, unforeseen medical expenses, unexpected home maintenance, things such as that. You needing a break from your family or coworkers that are driving you insane, while that might seem like an emergency, is not an emergency. This fund is not for expected expenses. Hence Emergency! Your emergency fund should be 3-12 months of your living expense. Groceries, Rent, Fixed costs… depending on your comfort level, and how much risk you’re taking on in the market.

It’s this emergency fund that can make the difference in allowing you to stick to your financial plan when times get tough, and could help you avoid having to sell when you don’t want to. For an example, say you come sit down in my office, we have a lovely conversation about you, your life, and your expectations and decide we want to start a financial partnership. We create a plan, get you invested and off we go… Hypothetically speaking - things are going great! Your investments are increasing, your personal and professional life are good etc. Then say a pandemic happens, and they named this virus similar to a beer whose mantra is find your beach. A huge economic slowdown ensues, and you lose your job! What are your options now? And how can this drastically affect your returns? Let’s talk about that…

When investing – You come to the stock market for one thing. Financial Returns or Rewards. No one comes to work with me to lose money! And with that, this growth typically comes from years of compounding and being able to sell your appreciated assets when we choose to sell! Not when we have to! And this is where this emergency fund can save the day.

So going back to our hypothetical example. Say I have two client relationships in very similar positions who have both lost their jobs due to this economic slowdown.

The client who has the emergency fund, they don’t need to sell their depreciating assets because they have 3-12 months of living expenses in cash on the sideline that they can tap into, leaving their invested assets alone, giving their investments time to appreciate from their lows, keeping the same number of shares, which should continue to compound in their plan.

The other client isn’t so fortunate. While I’ve been advocating for an emergency fund, they never created one! So now that they are out of a job and lost that income stream, we are forced to sell the investments into weakness, or when they’re depreciated on top of the crummy news of losing their job and locking in those loses, and resulting in having less shares. You can see how detrimental this could be to your plan and over time wreak havoc on your portfolio’s returns.

Creating an emergency fund isn’t complicated. And the best way to do so is a little at a time making it automatic! Set up an automatic contribution from your primary checking account into a separate emergency fund account every time you get paid. Even if it’s $50 a pay period, that’s $600 a year! And overtime increase that $60 to $70 $100 etc until you get to a level of having 3-12 months of living expense. Then any extra over that, I would encourage you to invest that money, on an automatic basis! And yea there will be times when one of life’s emergencies happens and you will use some of these funds. No problem. Then let that amount build back up to your comfortable level, and then with the extra money go back to investing it. Don’t make this more complicated than it needs to be. I would be more than happy to help set this idea of making everything automatic and get you on track!

Lastly, where do you do create an emergency fund? In my opinion, the best and most affordable place will be an online bank. For client the work with us, we have a few options – we either set up an account through our partnership and Raymond James bank, we can open an individual taxable account, or we create this in their plan leveraging accounts such as their Roth IRA knowing we can always get at the money that they put in without any penalty. All great options. And we’ll typically hold these fund in lower risk investments that will earn little interest rates.

If you’re watching this video and have an Emergency fund, fantastic! If you don’t, my goal with this video is to get you to start thinking about starting one. Believe me your future self with thank you for it. I do appreciate you watching, and as always thank you for giving your finance the attention that they deserve.