Money Rehab with Nicole Lapin - How to Create an Emergency ("Oh F*#k") Fund

Episode Date: May 17, 2021

Nicole covers how much emergency fund you need based on your lifestyle and your job description, why one size doesn’t fit all, where to stash your cash.. and whether you need a doomsday bunker. Learn more about your ad-choices at https://www.iheartpodcastnetwork.comSee omnystudio.com/listener for privacy information.

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money is working as hard as you do. So why overcomplicate your money? Keep it simple with Bank of America, your one-stop shop for everything you need today and the goals you're working toward tomorrow. To get started, visit bofa.com slash newprosmedia. That's b-o-f-a dot com slash n-e-w pros p-r-o-s media. bfa.com slash newprosmedia. Hey guys, are you ready for some money rehab? Wall Street has been completely upended by an unlikely player, GameStop. And should I have a 401k? You don't do it? No, I never do it. You think the whole world revolves around you and your money.

Well, it doesn't. Charge for wasting our time. I will take a check. Like an old school check. You recognize her from anchoring on CNN, CNBC, and Bloomberg. The only financial expert you don't need a dictionary to understand. Nicole Lappin. Way back in week two, I told you all about how to make a freaking budget.

I gave you my recipe for a successful spending plan. 70% going to the essentials, 15% going to the extras, and 15% going to the end game, which includes your emergency fund. And yes, Nicole Lappin really likes alliteration. Not surprisingly, very few people question the 15% for extras. I just think we're all so sick and tired of so-called financial experts telling us we can't spend any money on extras like a latte. So money rehabbers, take that 15% and run with it. As you should, that's what you work so hard for. But I do get questions about the 15% for the end game, including your emergency fund. The first question is always, what's it for? Well, think about it. If you lose your job or,

hey, I don't know, maybe there's a global pandemic or recession, you're going to find that even though you don't have any income, you still have expenses and you can't pay for your groceries with an asset. And by asset, I mean something tangible that you own that you could sell if you needed to bring in some extra money, but you haven't yet. Like a car, a house, a boat. Although a boat would be worth cold hard cash if you sold it, it's not cash now, right? You can't go to the grocery store and at the checkout lane when the cashier says, cash, credit, debit, you can't be like, boat? Am I right? So then you would have to sell your boat for cash. And if you're in a fire sale situation, it's probably not going to go for very much because you're thirsty or desperate. It will

more likely take way too long to sell. Plus, I mean, how many people are looking to buy boats right now? So you need some cash squirreled away. A doomsday fund, a treasure chest, an oh shit fund, a break in case of emergency fund, whatever you want to call it, you need one. Do it now. And how should you do it? Well, Ben wants to know the same thing. Hey, Nicole, I listened to your episode about how to make a budget and it helped me figure out my own spending plan. I went through the steps and I know how much of my income I should be putting towards an emergency fund. But do I actually need an emergency fund right now? I'm 28, healthy. I've been in the same job for four years. Employer has no plans to fire me that I know of.

Do I need that emergency fund? And if so, where should I put that money? Yay, Ben, for putting together your spending plan. I totally understand, though, not knowing where to start. If you've never thought about building an emergency fund, you may be wondering, where should you keep it? You might be picturing some sort of doomsday bunker, and we'll get to that bunker shortly. But before I tell you where to put the emergency fund, you need an emergency fund. And this should be financial priority

numero uno for you and your family. Before the fancy stuff like we talked about in the index funds and chill episode, or even before putting money into a retirement account, you need an emergency fund. Again, ask yourself, if you lose your job, can you pay for groceries with a 401k? I don't think so. Not while you're still in your pre-Betty White life. You're probably wondering, you're still in your pre-Betty White life. You're probably wondering, so how much are we talking here, Lapin? Well, a good rule of thumb is to have three to six months of living expenses readily accessible. So how much are living expenses? Well, Ben, you can easily figure out your living expenses now that you've worked through your spending plan here on Money Rehab. There are some exceptions. you've worked through your spending plan here on Money Rehab. There are some exceptions. I say three months only if you have a steady job and a steady paycheck, say a tech gig or in a trade

industry, basically somewhere where you feel confident that you'll be able to secure a job quickly if, God forbid, shit happens. If your work is less than consistent, like you were a bartender or a model or a freelancer, I'm going to strongly suggest that you tuck away at least six months of whatever money you need to live on. If you work mostly on commission, like real estate brokers or sales people, you're probably going to need more reserves. A year is probably a better number for you. Again, we're just talking about the basics here, like enough to cover bills to live, eat, and transport yourself from A to B. Just the basics. I call it the brown rice and beans budget. Now you should be able to figure out how much of a nest egg you need for your emergency fund

and how long it's going to take you to reach that dollar amount if you put 15% of what you're making every month toward the fund. Once you've figured that out, we can chat about the doomsday bunker. Hold on to your wallets, boys and girls. Money rehab will be right back. Now for some more money rehab. Where do we store our emergency fund? Well, it's pop quiz time. For easy math, let's say you're bringing in $5,000 clean every month. You've made a commitment that you're going to save 15% of that, which is $750 a month.

But where do you put it? Is it A, under your mattress in actual dollar dollar bills? B, in a savings account? C, in a CD? Or D, all of the above? If you guessed D, you are correctamundo. It's a combination. It's a little mix and match of all of them. Well, okay, I was kidding about literally stashing the cash under the mattress, but I'm serious about having a little bit of cash around. Famous economists might revolt in the streets when I say this, but I am still a fan of having some green cash in your house. Why?

Because at the end of the day, you can't get more liquid than cold, hard cash. No matter what happens to the banks, the stock markets, you can always rely on cash being cash. No matter what happens to the banks, the stock markets, you can always rely on cash being cash. I'd say a couple hundred bucks is a good amount to keep on hand. It's not so much that it's a major liability if it's stolen, but it feels like just enough to cover emergency situations like having your car towed before work or getting by for a week after losing your debit card. But the hero of the emergency fund is the savings account. So let's break it down. I'll level with you. You're not going to

get rich by putting your money in a savings account. And that's because interest rates on savings accounts are super low. Again, this is my favorite concept to talk about. It's compound interest. The concept of your interest making interest, your money working for you. When it comes to borrowing money, we hate this concept. When it comes to making money, we love it. When you're making money on the glorious force that is compounding interest, it's called APY, or annual percentage yield. Let's say you put $10,000 in the bank at 2% APY. After one year, you make $200 in interest for a new total of $10,000 plus $200 or $10,200. Well, after year two, you make another 2%, but now you have $10,200, right? So your 2% is $204. And now you have

$10,200 plus $204 for a total of $10,404. And the next year, you make 2% of $10,404 and so on. And as the numbers get bigger on the percentage and the deposit side, so does your money. But I'll always be honest with you, you're not going to find a 2% APY right now. The rates are insanely low, around 0.25%. I mean, although if you dig hard enough, there are still some 1% high yield accounts out there. But don't expect to make bank, yes, the pun is intended, here. So the money you put in a savings account isn't going to work that hard for you, but it will be there and it will be accessible. That accessibility piece is key because obviously we can't plan an emergency around a date, right? You need to have your emergency fund accessible

to you when you need it. So where do we put our beautiful emergency fund? And how do we make this dream a reality? Here are three steps I would take. Number one, look at the different places you can get a savings account and see which one you feel comfortable with. The biggies are credit unions, regular banks, and online banks. I'd bet that the option you're looking for is insured, but just double check. In case something happens to the bank, you want to make sure your money is safe. The Federal Deposit Insurance Corporation, or FDIC, insures banks, and the National Credit Union Share Insurance Fund, the NCUSIF, insures credit unions. Quick side note on this point, if you have a checking account at a bank that you love, look into what savings accounts that bank offers.

You may be able to get perks from the bank by keeping both checking and savings accounts with them. Plus, you'll be more likely to transfer money from checking to savings for free. Even if both of your accounts are through the same bank, I find that the physical separation of your checking account is often enough to keep your savings in savings. Number two, open the account. Duh, no surprises there. But this may surprise you. Don't sign up for overdraft protection. That's number three. By law, you now have to opt in if you want to have the bank cover an overdraft fee when you don't have money in your account to pay for your purchase.

And then, of course, they charge you a fee. Don't do this. If you don't have the money, you'll likely not have enough money to pay the fee. Even if you do, the principle of overdraft protection does not sit well with me. It's basically a quickie loan to you in exchange for an exorbitant fee. It might be embarrassing in line for coffee, I get it, when your card doesn't go through, but a $35 fee for a $2 Danish just isn't right. If you're spending $37 on a Danish, it better be for several dozen of them. I know all this saving for a rainy day stuff can be a drag, and I don't want to be

Debbie Downer. None of us wants to plan for an emergency because we all want to live in a world where shit never goes wrong. But let's say you look outside, see the sun shining, and decide, to heck with being safe. I'm leaving my umbrella at home. You risk getting caught in the rain. And you know, when it rains, it pours. I'll give you a personal example of when I needed my emergency fund and a lot of it was operator error. It wasn't soon after I got my driver's license, but it kind of sounds like it was. It was after I didn't drive for a long time. I was in school and I was walking or whatever. And then I finally got a car in a house that I lived in. And one week I got into a fight with the side of the garage and I busted off the side mirror of the right side. Cool. That sucks, right? Then I think it was a week later,

I got into a fight with the left side of the garage. This is not a joke. I wish it was. My boyfriend at the time was like, are you fucking kidding me? And then I had to actually take the car to the shop, which is, of course, a lot of money to replace not one, but two side mirrors. But then I had to rent a car and I was staying at a friend's house before going to the airport one super, super early morning. I think it was like four or five in the morning. And I went down to go get the car because I was going to give it back and on my merry way. And there was no car. I parked in like a tow away zone. I thought the car because I was going to give it back and run my merry way. And there was no car. I parked in like a tow away zone. I thought the car was stolen. You know, if you've ever had your car

towed, by the way, you automatically think the car was stolen. You're like, oh my God, somebody broke into my car. But no, there was a no parking overnight sign that I didn't see. Or maybe I did see it, but I was like, nobody's going to do anything about it. That's never happened to me. It's not going to happen again. I've already had a lot of shitty luck. See what I mean about emergencies? When it rains, it pours. So for today's tip, you can take straight to the bank when you're building an emergency fund. Automate the process as much as possible. In your handy-dandy new savings account, you can auto-deposit from your checking account into your savings account every time you get paid.

Then you'll have the emergency fund there when you actually need it. Money Rehab is a production of iHeartMedia. I'm your host, Nicole Lappin. Our producers are Morgan Lavoie and Catherine Law. Money Rehab is edited and engineered by Brandon Dickert with help from Josh Fisher. Executive producers are Mangesh Hatikader and Will Pearson. Huge thanks to the OG Money Rehab supervising producer, Michelle Lanz, for her pre-production and development work. And as always, thanks to you for finally investing in yourself so that you can get it together and get it all.