This should be your first financial step. Having a determined amount of money set aside for a rainy day, because that rainy day will come.
The rain has come pouring down multiple times in my life. Several events happened at my worst moment: my last grandparent died, my boyfriend broke up with me and I lost my job. And because I was living in a small house with my boyfriend I had to move out because I could no longer afford the rent. I felt horrible. No job, no home, no future. But I really did have all those things, I just had to dig deep and find them and put my life back on track.
Things would have been a little bit different if I had an emergency fund with a few months worth of expenses saved up. I did’t. I was only making enough money to cover my monthly expenses or so I thought. I was living on the financial edge and then got pushed off the cliff.
Learn from my mistakes. There has never been a more important time to have an emergency fund. The world has gone crazy. COVID-19, Black Lives Matter, Trump. The world is unpredictable. The virus and the economic shutdown have effect the entire world and shown just how fragile the economic system can be.
The best entrepreneurs take risk, but they take calculated risk and try to eliminate as much risk as possible.
You can never do enough planning. And it is never a bad thing to have a stack of cash waiting for you.
I admire Warren Buffett for many reasons. Everyone knows him for his stock picking ability and his billionaire status. But I think everyday Americans can learn more from his business than some of things he says.
How does this relate to the Emergency fund? Give me a moment and we will get there.
Berkshire Hathaway did not start with Buffett, he just took it over and made it his own. What is the magic that makes Berkshire Hathaway and Buffet special? Insurance. In order to invest you need cash. You need cash that you can then go purchase stock shares with. Buffet started buying Insurance companies. Insurance companies create what is called ‘float’. This is the money that is paid into the insurance company by policy holders, but the insurance company needs to keep in the bank in case they ever need to make insurance payouts. This case can be invested. The better the invested the larger the amount of float grows.
So Buffett uses insurance money to purchase stocks and then the magic begins. The shares the purchase have value and hopefully increase in value, but they also pay dividends. One of his largest holdings Coca Cola has paid quarterly dividends for decades. Those dividends go into a bank account and he uses them to purchase more shares or entire businesses. But he always maintains a certain amount of cash needed for his businesses in case of emergency.
Insurance is all about managing risk. Thinking about the worst case disasters.
Your life is crafted one day at a time. One choice at a time.
You need transportation, college, investments, children, healthcare, retirement. It all costs money.
Everyday is a beginning.
You need an emergency fund. It is the beginning of your financial life, even if you do not have one yet. It is your foundation.
I have 2 “Emergency funds” in my own life.
I keep 3 months worth of expenses in my checking account and 1 years worth of expenses in my savings account. The rest goes into investments.
You can adjust your numbers accordingly. How much cash will make you fee comfortable? 3months, 6months, 12months, 24 months? You have to determine how much will make you feel comfortable.
Your emergency fund should be created before you pay off debt, buy a new house, new car, or invest.
Your emergency fund is your piggy bank. And just like a piggy bank it is funded slowly with small amounts till one day you go into the bank and found out you have a stack of money saved up.
Choose a high yield savings and checking account for your emergency fund. So your money is slowly growing, but not nearly as much as investments. Do not try and get the best interest rate possible. Interest rates are nothing right now, but more importantly they change on the whim of the federal reserve so you will always be chasing rates if you try and get the best. Pick one that is good enough and forget about it. Online savings accounts usually pay a little bit more than traditional big banks.
ROTH IRA – investments
You can also look at your stock and ROTH IRA as forms of an emergency fund. In both accounts you can keep a level of cash and invest some of the assets. The money can be withdrawn anytime for your use. But if the money is invested in equities the value will fluctuate and it will take time to sell equities and get your money out of the account. So if you need a liquid emergency fund this is not the best option.
Investments are great. But cash is life.
Start with whatever amount you can and then consistently add money to the account.
$100 x 12 months = $1200
$100 x $24 paychecks = $2400
Create savings accounts for different life events: wedding, honeymoon, vacation, new car, children, college, house. It makes life easier. It all counts.
Create your foundation first and then you can take more risks and reap bigger rewards. There has never been a more important time to have an emergency fund.