The emergency fund.
Matt Trask • August 13, 2019
Read Time: 9 minslife personal finance
A tweet was surfaced today where someone mentioned being sick and a freelancer. As someone who hates working on contracts for this reason, it was still a fresh reminder of what I am currently going through... funemployment. The topic of needing an emergency fund came up, but was immediately met with responses saying they weren't sure if it was possible to create one. I'm here to say it abso-fucking-lutely is, and I want to offer some tips.
What is an emergency fund?
At it's core, the emergency fund is there for emergencies. For this, you have to define what is an emergency. My definition is any expense I can't reasonable cover out of pocket. Things like car repairs usually fall into this lot. Medical bills for sure, even though I do have health insurance, we all know in America that the system is designed to work against us. Other emergencies might include a massive vet bill for 15/10 best friend Molly. This is all dependent upon yourself and your life. To the person who spurred on this post, taking a sick day as a freelancer could be considered an emergency. You have to decide for yourself.
The next question is how much? This is again, up to you. I know people who go with a 3 month emergency fund, some go for the 6 month emergency fund and others shoot for a year, 2 years or more. Its all about what makes you feel comfortable. I personally am aiming for a year's long emergency fund. This means that at my current expenditure level, I can live life for a year without a job or handle a massive purchase such as a new car or something similar without blinking or getting a credit card involved. With my past, avoiding credit cards is crucial to my current life strategy.
To break it down to illustrate the point, my rent is currently $1,400 a month. $1450 if we want to include the water and fees. Now, at 12 months means I need to have $17,400 on hand just to cover rent for a year. Obviously, I can stash this away and break it down to a 6 month fund and be perfectly fine. Or I can keep stashing and saving and keep growing it. With my electric bill being between $40 to $90 a month (it's hot af in the summer so that AC is working hard), lets just budget for $90 a month for a year. Thats $1,080. Now I need $18,480 to cover these both. I require medicine to stay alive, but I buy that every three months. at $50 for both, thats an addition $200 I need to put away. My usual grocery bill is around $100 a month (thanks Aldi for being so awesome and cheap). That comes to $1200, so now I need $19,580 to cover rent, electricity, food and medicine. These are the core basics. I didn't add my cell phone, but that is about $100 for right now, so do the math there. I didn't add internet either. Now that we have this number, roughly $19,000, how in the world can we possibly save for it?!
How to create a meaningful emergency fund.
This question is a two part answer. First, lets look at how to start moving money around.
To this point though, I've talked about the why but not the how. This is the hard part of the conversation to have. Because it forces you to be introspective, look at your spending and come to terms with some spending you may not want to talk about. I can attest this is never fun and I have to justify my eating out. Eating out is really my biggest expense. It's huge though. Eating out is social, it's freeing and it costs more than you think. Unfortunately, eating out is never just the cost of the meal you just paid for. Its the gas you spent to get there and back, the wear and tear on your car, the time you spent getting there. These all add eventually and will all turn into debts you will have to pay. Gas is not cheap, car repairs even more so. There is also the mark up on food at restaurants.
Now you are probably reading this and thinking "good lord dude, I just wanna have some fun!", and I'm right there with you! But when push comes to shove, it is a lot more fun to go out to eat when you know if shit hits the fan tomorrow, you won't be in a bad place. It's a lot more fun to be laid off and know you have the money to get by without having to rush to a job, versus having to crush your soul being whiteboarded/code challenged and end up discouraged and downtrodden.
So take a look at where your money is going. Are you really using all 3 of those streaming services? I cancelled HBONow and Hulu for the time being. I don't need them plus Netflix. Sure they have different content, but I'm a creature of habit. I like the same 6 shows which are all on Netflix. Good enough. Do you need a meal delivery service? Or could you take a few minutes on Saturday to do some meal planning and buy in bulk? The point here is once you start identifying where your money is going (it is going somewhere, I promise), make tweaks. Little ones at first. You will see you wont miss what you cut out. And then automate the shit out of this. What I did to build up the first $1,000 in my emergency fund was just $10 a dollar was automatically transferred from my checking account to my savings account. I did it in a slow drip fashion because it was easier not to care. When you remove $70 at once it can be a small shock. Moving $10, the average cost of lunch, brings much less of a shock. Give it a few weeks and you will be surprised how much you have saved. If you get $500 in your emergency fund account, go out and treat yourself! We want to have a fun life of course.
One tool to really help here is YNAB, or You Need a Budget. This is a zero dollar budgeting system that has a ton of raving users. The idea is you give every single dollar you have a job, and build up your accounts through smartly looking at where your money is needed most.
Another tool is Mint.com, which is an aggregation site, that brings all of my accounts to one page so I can monitor my bank, my credit cards, my investments all in one place.
Ok, Im saving. Now what?
This is where people go a few different ways. If you look at one financial guru who I won't name but is synonymous with personal finance, he says grow a fund up to $1000, and then pay down your debt. I agree with this approach. Others say build up a few months of emergency fund and then attack your debt. That is a perfectly valid approach to savings as well. The thought there is that anything could happen at any time that could cost more than $1000. Completely believable! I know I am one car hitting me on my bike away from being up to my eyeballs in medical debt. Please don't hit cyclists.
Here is my advice, save up the $1000, and then immediately pay down your debt. Your debt is an emergency. Every dollar you can use, put it towards that debt. Once it is gone, or more manageable, fund anotehr $1000 in your emergency fund. Create a cycle. Once the debt is gone, take those payments and put them right into the emergency fund til you hit the level you want it to be at.
As a whole, we probably won't be laid off too many times unless we have terrible luck. We won't have to buy a new car every where unless you have the world's worst mechanic. Emergencies are few and far between. However, there is very little notice prior to one, thats why we want to be prepared. But what should we do with the money? To be honest, keeping most of it in a savings account is worthless. Why? Because the money will just sit there, and not build on interest. Savings account are great for quick access, but terrible long term storage. If this money is going to sit, we want it to at least be doing something. My thoughts, and what I've done with moderate success is that $1000 is in my savings account, which has easy access to my checking. Should I need some money fast, I can do a transfer and have the money in mere minutes. That is a good cushion. The rest of my money sits in an investment account that is 60% bonds and 40% stocks. Why? Well, I want this money to generate some more money. This will aid the growth of our emergency fund. The allocation of 60% bonds and 40% stocks is considered conservative, which is ideal here. We don't want to bet this money on the market, we just want it to grow a little. Bonds are great for long term, slow growth. Throw in some stocks just for variety, but the bonds will sheild us from loses in the market. This money can be liquidated in a few days if need be. This means I will probabyl use a credit card to cover the actual spending, but I will get the money around the same time the payment is posted on the account and I can pay it right off.
I automate all of this. I have it set up on various days and amounts. I don't look at it much, I just let it grow and grow. Will I ever stop contributing to an emergency fund? Probably not, but once I hit my goals I will taper it off, and grow other accounts and buy all the VTSAX I can.
Find the money.
The whole point of this post is that while money is finite, and you may not make the same as me, you can always find money hiding in plain site you don't think about. Take a Saturday morning with a cup of coffee and just look at your accounts for the past month and scrutinize it like you would code in a coworkers pull request. Do you need to keep eveyr subscription you have? Can you cut back eating out a little, maybe don't go to happy hour every day for a few months and instead save. Don't be apart of the 60% of Americans who would struggle to find $1000 in a time of emergency. Be prepared. Your future self will thank you.
Questions? Comments? Tweet me and lemme know!