emergency funds and why YOU need one

Call it an emergency fund, a rainy day fund, or an “Oh crap I just got laid off and now the world is ending fund.” It all handles the same problem. When something unexpected comes up in your life that airs on the unfortunate side, an emergency fund is used to soften the blow to your financial well being. I say “on the unfortunate side” because it is used to cover bad things that happen like car repairs, appliance break downs, or broken pipes (and NOT happy impulse things like a new puppy or flat screen TV).

An emergency fund is just that, a cash cushion that takes care of small to mid-level emergencies so as not to totally destroy your finances. Gallup did a survey about a decade ago and found that 40% of Americans didn’t have any kind of emergency savings. A more recent survey (2016) found that number has climbed to 47%; THAT’S THE LEARNING CURVE!  They defined an “emergency” as an unexpected expense of $400. That means in today’s America, nearly half of the country would be financially destroyed by a $400 expense. It means payments become late, mortgages get behind, and the financial hole continues to deepen all because we didn’t have the hindsight to save a little more.

I write this post for two specific reasons. The first is user feedback and their questions about emergency funds. The second is I’ve seen this issue happen more times than I care to among my own friends. I’ve seen people get destroyed and go into a downward financial spiral because of a flat tire, and it breaks my heart to know it could have all been avoided.

Virtually all financial figureheads, planners, and speculators agree that EVERYONE needs to have an emergency fund. The notion of an emergency fund makes sense, but the disagreement is in the amount to save. Depending on which book you read, you’ll probably find an answer between three and six months’ worth of your personal expenses. That means if you spend $2,000 per month to keep your household running, you should save somewhere between $6,000 and $12,000. Now I’m fully aware that’s a lot of cash to just allocate to nothing but sitting in a savings account, but let me explain how I handle mine, and maybe that will help set you at ease.

First, I don’t think you need to save it all at once. I side with Dave Ramsey on the option where you should stop spending on everything discretionary (movies, eating out, the coffee shop) and save $1,000. Just as a place to start, stop spending, and save that first $1,000. Your not having an emergency fund is a BIG EMERGENCY. It will only take a short time to save it up if you focus. If you have trouble, try to sell a few things on Craigslist you no longer use (like many of the things we own, unfortunately). As we come upon tax day, I highly recommend setting aside your entire refund (if you get one) to your emergency fund.

Everyone should have at least $1,000 set aside for emergencies. This simple step can cover you for a large majority of emergencies. Some big emergencies that $1,000 won’t cover are losing your job or a car accident totaling your mode of transportation. I hope you never experience either, but don’t think it can’t happen to you. Just last week I watched my sizable and stable employer dismiss 15% of its staff without warning regardless of their longevity.

One of the biggest complaints, aside from the difficulty in amassing such a large sum of money, is that the money is sitting stagnate and doing nothing. I take a number of issues with this statement. First, I often notice those making this statement don’t actually invest their money and are just angry they can’t spend it on something they don’t actually need. Second, the money can be put into a number of places where it is safe and can still grow. Finally, the money isn’t “doing nothing”; it is serving a greater purpose bringing you peace of mind and helping you sleep at night.

To make this more palatable, I’ll walk you through what I do for my emergency funds. I used to have multiple savings accounts across various platforms to hold money. I had some money in a personal savings account (easily accessible), a digit savings account (internet bank, still easily accessible but more cumbersome to get at) and in a money market account (still easily accessible in my opinion but earning better interest). I have since modified my approach and combined the funds into a single account but still think of them separately in my mind.

  • First, I keep $1,500 for quick emergencies. This is to handle any repair-related expenses that come up unexpectedly.
  • Second, I have a fund of $8,500 in case of something more major like suddenly needing a new car or being laid off.
  • Finally, I own rental property, and for my own sake, I keep another $10,000 of my personal money stored in this fund to cover things like broken pipes, a new roof, and other unfortunate repairs in the real estate world.
  • My grand total is a hefty $20,000 safety net. This comes with a side note that the money for my rental property is being returned to me at some point. I treat the property as its own business entity with its own money. As the coffers of the house increase to where it has its own emergency fund, I will then swap my money out, freeing up a nice $10,000 paycheck for myself for my stewardship. I also don’t plan to take a dime out of my rental property until this threshold is met; after that point I will begin to collect a paycheck from that as well.

Being the investor type that I am, I don’t like leaving $20,000 just sitting in the bank earning me .01% interest – I’m looking at you Wells Fargo.  I did originally have the bulk of this in a money market account or in a bond index fund to grow a little more, but that earned around 4-5% interest and wasn’t really jiving with my thoughts on keeping it safe. Remember the market could take and wipe it all away!

Enter the Kasasa savings account and Frontier Bank! A friend of mine turned me to this bank, and I left my prior bank, moving all my personal funds over for one simple reason: Checking accounts earn 3% interest. Yep, you read that right, and I know what you’re thinking: Ka-Ching! There are a few simple rules to follow like maintaining a balance (the easy part since it doesn’t get low) and having a certain number of transactions in a month. I meet this by putting my personal checking account in the same account and using it as normal. Now this is where it takes a great deal of discipline. When you look at your checking account and notice you have $20,500, you have to be able to block that out and change it to read $500.  This is how I view it, that way I get the maximum return for my money without the volatility of the markets without any extra effort on my part. The best part is I now have exemplary customer service on top of earning $50 of free money each month for doing nothing different in my life!

If you happen to be interested in an account like this, let them know I’ve sent you! (My name is Peter Krentz.) Sometimes they give you free money when you get referred by a friend.

Learn more about Kasasa Personal Accounts.

5 simple remedies for your personal finances

Finances are tricky, but with a few simple tips, you can get a better hold on them!

#1: Track Your Spending

Sounds simple enough, right? That’s because it is! So very few people actually do this initial step, and it’s a recipe for a rough financial life. I help friends with finances all the time, and when I ask how much they spend in various categories, they almost never know! Do this single simple task for me for just one month. Track any money that goes in or out of your life. EVERY. SINGLE. PENNY. I mean it; it’s really not complicated. Use a notepad or your phone to track it. My personal finances are more or less 100% digital, so I just log into my bank website and then transfer that data to an Excel sheet to see it all laid out. Feel free to use websites like Mint to do the work for you; just make sure you actually do it!

I put people through this exercise for two major reasons. First, you need a baseline to establish your spending habits. How can you budget or plan for any purchases if you don’t know how much money comes in or out of your life? The second reason is to send a wake-up message. Most people who do this are floored at not only how much they spend on things but on what they actually spend it. I’ve seen friends save over $300/month by just doing this and shoring up any cracks they had that were just seeping cash right from their wallets!

#2: Make a Budget

The tried and true method to all financial advice is to make a budget. It’s a broken record and for good reason. IT WORKS! I don’t want to hear any sort of complaints about how much time it takes, or you don’t know how, or you are bad at math so you can’t make one. Frankly, those excuses are just that – excuses. You can always adjust the budget as time goes on and your life situation changes.

The world of financial nerds has done you a major favor by creating tools like Mint, Personal Capital, or YNAB (You Need A Budget). I personally use the first two as well as a spreadsheet I’ve crafted over the years to pinpoint any and all money in/out of my life. The best part of all – it doesn’t take any time at all. Websites like Mint look at your bank account (read only access so it’s secure!) and track and categorize anything that moves through it. You can setup a budget range on each category, and it will email you if you’re too close for comfort or over. At the end of the month, you can look at nice graphs to show you the data to understand trends and (best of all) which categories are weighing you down.

The bottom line is you need a budget. No ifs, ands, or buts about it. GET. IT. DONE.

#3: Stop the Debt

Debt is a tough subject for many people. Gurus like Dave Ramsey say it’s evil and will destroy your life while others like Robert Kiyosaki will encourage you to utilize it to build your wealth. There are many kinds of debt, but for the most part, debt is never a good thing. The worst type I want to hit is personal debt like credit card debt, car loans, or the worst…payday loans. Debt is a warrant out for your financial arrest. It is an EMERGENCY. Your head is on fire, and it should be treated as such. If you do have large amounts of debt, read a book like Dave Ramsey’s The Total Money Makeover. It’s not gospel by any means, but that man has helped a lot of people get out of debt. I personally not his biggest fan, but I’d be remiss if I didn’t acknowledge what he has done for consumers in debt.

Now how to fix your debt problem? Easy – STOP BUYING THINGS YOU CAN’T AFFORD! By definition, financing is using someone else’s money to get something for yourself. This means you yourself CANNOT AFFORD IT! If you can’t afford it, DON’T BUY IT! Moreover, if you have consumer debt, you should stop buying EVERYTHING outside of things to keep your body alive and your house habitable. That means no more Amazon Prime, Netflix, cable, gym memberships, trips to the store, or coffee breaks at Starbucks. It’s not forever – only until your debt is gone. I promise! Debt is an emergency; I’ll say it until you get it. Every single penny should be thrown at your debt until it’s gone. When one payment is finished, roll every penny from that payment and again anything extra into the next until it’s gone and you’re debt free. It’s been dubbed the “Debt Snowball” as it gains momentum as each debt is knocked out.

#4: Build an Emergency Fund

If you don’t have an emergency fund, you need to get one. Most recommend between 3-6 months’ worth of expenses held in cash or cash equivalents (like a money market account) that is easily accessible for such an issue. If your expenses add up to $2,000/month, you should have somewhere in the neighborhood of $6,000-$12,000 saved in cash based on conventional wisdom. This is really personal preference as I know some folks who have 3 months and others who have more than 12. If a large fund helps them sleep at night and they are okay sacrificing some financial return for peace of mind, it’s a trade worth considering.

I personally operate with multiple. I have a small $1,500 fund for emergencies like a car breakdown or appliance repair and 3 months’ worth of expenses for an unforeseen layoff from work or other personal disaster.

#5: Invest in the Market

Investing scares far too many people, but it’s really not as complicated as the “experts” will lead you to believe. You could read a handful of books and pull down better returns than 95% of Wall Street. In case you don’t believe me, I’ll elaborate. Fidelity did a study a while back of all their investors and compared their returns to see who was performing the best and what they invested in. Who came out on top? It wasn’t a hedge fund manager or an investment firm; it was the investors that were DEAD. You read that right – those that had passed away had better returns than those actively participating in the market because they weren’t actively trading and let their money sit.

Now bare with me while I get into the nitty gritty here (of skip ahead if you’re not interested). Investment managers have one goal – to make money. With that comes the need to keep their clients happy by making them money. Investment managers buy and sell stock on a daily basis in an attempt to get their funds to produce higher returns. The problem is they often buy at inopportune times and charge fees to manage the fund itself costing you even more money. The market on average has historically returned around 7.75% depending on who you ask, so I’ll keep this general. Investment managers on average pull down about 5.75% (or worse) due to the amount of trading and “market timing.” You’d be better off investing in an index fund that tracks the market than going with an investment firm. Not only do they earn you less money but they charge you a portion of your assets for the privilege!

My advice? Go to a site like Vanguard and open an account; it’s free. They have many of the lowest fee-charging funds in the country and perform better than most advisers ever will. I personally put a large amount of my net worth into the index fund VTSAX. It’s a fund that tracks the US S&P 500. The fund itself literally owns a portion of every company in the index. The fund also charges an incredibly low fee of .05% vs. many fund managers that charge over 1%. It may seem trivial, but that amount compounded over your working years up to retirement adds up to hundreds of thousands of dollars. It’s highway robbery!

Bottom line…make a few simple fixes, and you’ll be on your way to financial freedom!

*Note: I’m not a licensed financial adviser, and you should take this advice accordingly. These are my thoughts and my personal practices and cannot be guaranteed. Read a book, and you can do this on your own too!