The Personal Finance Podcast - Emergency Funds: The Ultimate Guide to Saving Money

Episode Date: May 27, 2020

Got questions? Ask me on Instagram Here. @mastermoneyco This is the fastest way to get a response from me.  Episode 3: Emergency Funds: The Ultimate Guide to Saving Money  In this episode we cover:  The 7 Steps to an Emergency Fund  What your emergency fund is used for  How much money do you need to save for an emergency fund Where to park your emergency fund  Why those who are Financially Independent or Retired Early may not need an emergency fund. Resources in this episode:  M1 Finance ROTH IRA or Brokerage Personal Capital Free Budget App YNAB Paid Budget App  Capital One 360 Learn more about your ad choices. Visit megaphone.fm/adchoices

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What is up, everybody, and welcome for the personal finance podcast. I'm your host, Andrew, founder of dollar after dollar.com. And today, we're going to give you the ultimate guide to saving for your emergency fund. because the emergency fund is one of the most important things that you can do financially to protect yourself. The reason being is that life's going to happen. And it's not a matter of if you're going to need your emergency fund, but it is a matter of when you're going to need your emergency fund. And when everything hits the fan, you're going to need to be ready financially.

Because having this cash cushion is not about restriction. It's about having freedom and peace of mind. And you just want to remove that burden from your brain to be able to make good decisions. financially, no matter the circumstances, you can prepare for any storm that's ahead of you. And what a lot of people do is they lie to themselves and say that they're going to have the funds ready if something comes up, but they don't actively pursue saving up cash to be able to save for those storms that are ahead. But if you put a bulletproof emergency fund together, the emergency fund will allow you to take on any headwind that comes your way. Lose your job, no big deal. You have

the cash to keep you afloat until you find another one. If your car engine fries on the high highway, you'll have cash to pay right away the mechanic. If your water heater goes out, you're going to have a new one the next day because you're going to have the cash ready to go to just go over to Home Depot, pick one up, and have a plumber install it. It's that easy. Stop allowing your money to run your life. Your emergency fund allows you to take control of your money so that no financial storm can ruin you. And you'll be able to take on anything that comes your way. Before you build an emergency fund, you have to lay out the ground rules of what an emergency fund is for. And let's get this out of the way right from the beginning. Your emergency fund is only for emergencies.

And I mean pants on fire burn into the ground emergencies. It's not used to redo some slick pavers into the middle of your driveway or to take a vacation in Tahiti with that couple that you met at bingo night the other day. And for the love of God, it is not to be used so that you can get some new rims on that whip or car for you old folks. That's what that means. Whip means car. You need to reserve your emergency fund for truly unexpected expenses. And it's always these expenses that you cannot cover. That's why you have this emergency fund in place. It's not to save up for big purchases or to save up for things that you want. It's to protect you when the storms of life come upon you. This can be a bunch of different things. It doesn't have to be just one thing. And the main thing that it can be

is for your job loss. Now, that's what it kind of centers around if you lose your job or if your spouse loses your job or something like that. Now, if you have a spouse who makes a high income and you as well make a high income and you think you can live off of one income for a little while, if somebody does lose a job, then you may say to yourself, I don't need as big of an emergency fund or you may not even need an emergency fund. Another thing that people use it for is unexpected medical bills. So someone and your family gets sick, they don't have ample insurance because you obviously want to have the cash reserves on hand to be able to fund a family member's medical emergencies if they need it because if you can't then that becomes a huge problem for all involved

and you don't want to run into that so that's why it is actually important to have an emergency fund no matter what just because of reasons like that that can come up if you have aging parents another reason is car trouble so a lot of times if your engine blows or you need a new transmission or sometimes you need new tires out of nowhere or um you need to break pads or things like that you don't want those to surprise you and wreck your uh financial rhythm so you know making sure that you have the ample funds ready when those car issues come up because it's not a matter of if they're going to come up. It's a matter of when they're going to come up. The same thing with your home. So, you know, there's going to be necessary home repairs that come up. Sometimes roofs begin to leak out

nowhere and all of a sudden you need a whole new roof because there's been, you know, water seepage through the shingles or something like that. And you're going to get a brand new roof right away. So you're going to need to come up with, you know, seven to 15 grand right off the bat. So that's where the emergency fund comes in is to fund that unexpected expense. And then there's also people, if you own a business, you definitely should have an emergency fund because if you have, you know, a business loss or, you know, a storm comes across your business, which happens to everyone and you have some heavy trials, sometimes the only way to save your business is to have an emergency fund. So your business should have one and you yourself should have one because you're not going to

be able to pay yourself during that time when your business is going through trials and tribulations. And then there's also debt. And yes, debt is an emergency. Debt is a pants on fire emergency. and it's something that if you're carrying debt, then I would recommend making sure you pay off that debt before you build this emergency fund. You want to have a small emergency fund, maybe a small cushion. A lot of times you build up a couple thousand dollars,

maybe three months of expenses instead of nine months of expenses, something in that range. Make sure you have ample funds to be able to pay down debt. You don't want to be saving up this huge hoard of cash while you're paying an interest rate on your debt, especially if you have a student loan that has a six, seven, eight percent interest rate.

Make yourself enough of an emergency fund is a runway in case you lose your job or something else like that, and then go ahead and start paying down that debt. And then any other problem that can arise, but those are just a couple of examples to put in your brain. But there's other problems that can arise that life always throws at you and it's going to come up. So these emergencies are going to happen. So the next question we need to ask ourselves is, what does the emergency fund need to cover? And to answer this question, you really got to think through exactly what your goals are and exactly how you can operate if you lost a job or if a big expense came up. So there's two camps that fall under this

question. And it's those who want to save for the bare necessities. So these are the people who just want to save their emergency fund up for their rent or mortgage, for their food, for their transportation, and for their utilities. So they just want the four walls is what a lot of people will call this. And it's just the bare necessities, the simple bare necessities, forget about your worries. And they want just the basics. And that's it. And the pros to this option is you don't have to hoard as much cash. You can use your additional cash to go ahead and invest for your future or anything else that you want to put your money towards. And a lot of people don't like to save an emergency fund with a huge wad of cash because they're not reaping the benefits of compound

interest. They're not receiving interest from their investments. And those folks would fall into this category many a times because they want that interest and they want their money to be working for them. Then there's the other camp. It's those who want to to maintain their lifestyle. And those who fall into this camp want to ensure that their lifestyle is exactly the same. And sometimes you just want to maintain your lifestyle. There's no problem with that at all. You know, Kimmy doesn't want to give up her weekly brunch with their friends where they can pop bottles and cheers with mimosa's. Then, you know, Kimmy doesn't have to do that. Or Johnny wants to be able to buy the latest video game. Then Johnny can do that. Or Clyde wants to

drink Fiji water because it tastes a little different, okay? Well, then Clyde can do that. There's no judgment here. You do your thing. You do what you're comfortable with. You do what makes you happy. But prepare for it. You have to have enough cash to be able to do that. So in order to maintain your lifestyle, you just need more money. And you're going to take a little more time and save a little more cash to be able to get to that point. You just have to save more funds. The next step is you need to figure out how much you spend each month. And if you don't already have a budget, then you can pool all your accounts together in an app called Personal Capital. And what Personal Capital does is it links all your bank accounts, and then it can put your spending into category. So if you want to maintain

just the four walls, and like I said, that's your food, your transportation, your utilities, and your rent or mortgage, then you can pool together those four categories out of personal capital and see how much you spend each month. But it won't just do last month. It'll do historically, you know, the past few years or however old your account is, it'll actually pull that data for you from the beginning of time, which is really cool thing about personal capital. So you can get a really accurate number. And then after that, if you want to go beyond the four walls and you want to just maintain your lifestyle, then you figure out the expenses for each category. So how much do you spend on clothes or alcohol or eating out or manicures or shoes or whatever else you buy or your next

target run, then you can go ahead and pull all those things together. And that's the cool thing. It's going to have all the data you need right there in personal capital. Finally, you got to think about how much runway you need. So say you lost your job, Do you think you could find another job in three months? Do you think you could find another job in six months, probably? And if not, do you think you could find another job in nine months? And if you really can't decide, then follow these next steps. And I'll show you exactly how to build an emergency fund until you feel comfortable. I remember when I needed to hire someone fast, but finding the right person quickly felt impossible. And if you've ever been there, you know how stressful this can be. That's where Indeed comes in. When it comes to hiring, Indeed is all you need.

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well, guess what, partner? I got your back because I created the phases of an emergency fund. And what it is is it's seven steps, seven phases of savings rates that you can save for your emergency fund. and as you go through each phase, you get to a point where you're going to start to feel comfortable. And this is exactly what I did at the beginning, because I was unsure how much I needed to save because so many gurus out there were saying, oh, you'll need to save three months. Some other ones were saying you need to save six months. Others were saying, no, nine months will cover all your expenses.

And others were saying, you know, one year, two, year, three year. It didn't matter because everyone was all over the place. So you have to figure out what's right for you and what's right for your conscience and your emergency situations because the emergency fund is there to relieve anxiety and it's there to relieve stress and it's going to significantly help you emotionally with your finances you're actually going to make better decisions financially because you have this pile of cash backed up behind you that's going to cover you in case anything happens so let's lay these things out so phase one if you're first starting out getting your finances together and you know you you figure out

that you need to pay down debt or you want to save up for investing or do all these other things. The first thing you need to do is just get your first chunk of change together so that you will be able to move forward and be able to make great decisions with your finances. So the first thing I recommend to do is save up your first $1,000. And a lot of people starting out, that's a big milestone for them because, you know, this will cover a lot of simple repairs or things that can happen to you. So $1,000 can cover, you know, a lot of car repairs or if you need new brakes or a couple new tires blow or anything like that. And that, you know, you'll be able to cover them with this first thousand dollars and it just gives you a little buffer

and helps you through situations that can come up so that is phase one so get together your first thousand dollars and do whatever you need to do to get there if you need to go ahead and take on a couple of hours if you're an hourly employee then go ahead and do that just to get your first thousand dollars so you have a cushion and you have a small safety net to be able to cover you in phase two we're going to look to try to try to get together one month of expenses and this is why at the beginning, we want to figure out how much we're spending each month in personal capital. Because we need to get together this one month of expenses. Everyone's going to need at least one month of expenses because if you lose your job, you have to have some sort of safety net put into

place. And a lot of times this one month of expenses becomes, you know, the four walls, which is, like we said before, your mortgage and rent, your electricity, your food, and your utilities. You know, one month of expenses could cover those or it needs to cover your lifestyle. So you need to figure out, like we said, which direction you're going to go in, and then ensure that that one month of expenses is going to cover all of your goals. Now, phase three is to save up three months of expenses. And three months of expenses is where a lot of personal finance gurus will say you need to start out with at least three months of expenses. That's a real emergency fund. Now, if one month of expenses makes you feel comfortable, you think you can find a job in less than four weeks,

By all means, go for it. But I would lean towards recommending at least getting to this three-month point. Reason being is it usually takes at least three months to go and find a job if you lose your job, especially in current environments. It's a little bit more difficult to find a job quickly. So that's where this safety net comes into play. And saving three months of expenses also helps you if you have dual incomes. Because if one of you loses your job, you can use the other person's income to be able to

to live off, you know, half of your expenses or your bills, and then you can use the emergency fund or the three months of expenses and maybe stretch that out for six months. So sometimes you've got to think that way. If you have dual incomes, you don't have to save as much money if you don't want to. If you feel more comfortable saving more money and moving on to the next phases, then by all means, please do it because we're trying to reduce your anxiety up front so that you can make fantastic decisions going forward. Now, phase four is six months of expenses. Now we're getting to the point at phase four where you're really protecting yourself from a job loss. In phase four, you'll be able to pretty much handle any type of job loss that comes across

because you most likely will be able to find a job in six months. And if you don't, you'll at least be able to come up with a plan where you can build up a part-time job until you find a full-time job. So six months of expenses is a nice little sweet spot to target if you have no idea how much you need to save up for your emergency fund. That's where I like like to tell people to start with first. And then once you get to that six months of expenses, then go ahead and evaluate and say, hey, do I feel stressed about this? Do I need to save more money? Or am I okay here? Am I okay with this chunk of change? Am I okay with this backing me up if anything happens? Am I okay with this safety net? And that's how you got to think through it. But I would say to

go ahead and target six months of expenses, you know, get to three months of expenses and maybe you're like, you know, this feels fine. There's two incomes. My spouse makes a great income. We'll be able to live up 50 or 75% of that, and then the other 25% is the three months of expenses, and that'll be able to extend it on. Or you might get there and say, oh, man, this is a little tight. I think I want to go to six months. So that's what phase four is, is six months of expenses. If you can get to six months of expenses, you're in good shape. Now, phase five is nine months of expenses. And phase five is for people who are a little more risk-averse. If you have a very specific job or you have a very high-level job, a lot of times that can take longer as well if you don't have people head-hunting and

seeking you out right away. So the nine months of expenses is a perfect place for people who really think that their job is going to be, it's going to take a lot longer to find a job. That is where I would look to try to target, or it's also a stepping stone for these next two phases. And these next two phases are at a different level and they're for different purposes than for job loss. And those two phases would be perfect, this would be a perfect stepping stone to get there. Now phase six is, you guessed it, one year of expenses. Now, here, Here is where phase six rocks, because phase six allows you to maybe try out a small side business and see if it works for a year or you could leave a job that really is not fulfilling for you

and you just, it's just sucking the life out of you, then maybe phase six will allow you to actually have that option so that you can find out what you're actually fulfilled with and what type of job you really want to do or a career path you want to go towards. And phase six, one year of expenses, will allow you a little more freedom than maybe six, months or three months of emergency fund expenses will allow you. So phase six is a great spot to be in. And that's something you really need to build up because a year of expenses is obviously going to take a long time for you to build up. And it's not an easy point to get to. So this is a long run goal. It's not a short term goal to try to save up and hoard this cash because you still need to be investing. You still need to be

paying off your debt. And you still need to be focusing on increasing your income. So as you get income increases, then go ahead and start targeting maybe towards phase six if you want to start a business or something like that because I never recommend just cutting off your job and going straight out and starting a business. You need to have some sort of backup plan and you need to have something backing you up. And phase six is the starting point to that. Now phase seven is two years of expenses and this is the final phase. Phase seven is for folks who definitely want to start a business. If you want to start a business, then you need to have enough runway. In the first, year to live off of and the second year you need to start to try to make some money.

So a lot of times it takes over a year for business to take off, which is why I recommend side hustling and trying to make a little bit of money on your nights and your weekends in your business instead of just cutting out your job completely, cutting out your paycheck completely and then going out there and trying to make it. But if you absolutely have to do it, if you have the fire in your gut and the fire in your belly, then go ahead and at least save up a couple years' expenses so that you have enough runway because at the beginning you're going to fail. I mean, most likely you're going to fail. Most businesses fail within the first five years.

And a lot of them need extra one way to be able to go ahead and execute the business correctly because if you're going to be failing in the first couple of years, then you have to have a plan in order to take that on. So phase seven allows you to do that with two years of expenses. And maybe if you want to go beyond that, that's part of phase seven. But that's two years or beyond. and that's what most people use phase seven for. Now, there's another camp that uses a couple years of expenses when they're about to retire.

So some people will actually work a year or two longer than after than they need to because they're about to retire. So they want that extra little cushion just so they feel good. There's nothing wrong with that at all. I think it's actually a great strategy right before you retire. So just grab a couple years of expenses extra just in case something happens. And it's going to allow you in case, you know, a medical emergency comes up or your kids lose their job and your kids really need some way to make money and you can help them out. If you don't use the money, who cares?

You're going to end up using it or giving it to someone else anyway. But it's a great strategy to have right before you retire as well as to have a couple years' expenses saved us. Now, I'm going to get into my emergency fund categories. Listen, I'm a little bit crazy when it comes to these categories, and I'm going to explain a couple of things as we go on on why this strategy may be overkill. But I just wanted to lay these out just so you guys had a handle on how I actually do this and how I created my emergency fund.

You know, and at first I saved my first $1,000 and then I started to make a cash cushion. But I want to make sure that you also have other options on how you can do this. So I actually break this out into YNAB, which is one of my budgeting apps. And I also, at the beginning, did it in personal capital as well. But I set up categories inside YNAB, and then I throw chunks of money into each of these categories. But you need to do what feels right for you. So if this feels like way overkill, you do.

you. Don't copy exactly what I do. Taylor this towards your life and your situation. So here are my categories. The first one is job loss. I have a category just in case one of us loses a job. And I use this category specifically for one of us. So I'm married myself and my wife, both work still. We use it specifically for one individual losing our job. So I don't save up for both of us losing our jobs at the same time, mainly because we're in completely different industries. And the job that I'm in now is very recession-proof. The job that she's in is less recession-proof, but it's fairly secure. So we are just planning for one of us to lose our job. If we both lost our job, I think we would be okay with some of these other categories, which I'll explain. But that is our personal

preference. So if we figured it out, we did the math and said, hey, we're going to be okay. If only one of us loses our job, we can utilize this category. Now, the next category I have is for car repairs. So I split up job loss of car repairs and these other categories. as well. And car repairs, I just threw a couple hundred bucks a month and cars are going to break down. They always break down. They're depreciating assets. They get older. Things happen all the stinking time, it feels like. You got to prepare for your car to break down. And that is why we have the car repair category category. We threw a couple hundred bucks, like I said, in there a month. And that's also for general maintenance and oil changes and tire rotations and things like that as well. I used to have a car maintenance category as well, but it was just complete overkill. So I compiled them all into car repair. and that takes care of all maintenance and repairs for the car. Now, that has come in handy a couple of times because recently I had a old car that ended up needing a whole new oil pan and some other additional issues inside the engine and it ended up being like $4,000 or $5,000.

And we didn't even have to think twice about it. We already had the cash ready, just went ahead and put it in the car. The car lasted a long time and went ahead about our day. We didn't even have to stress about it. So that's the great thing about having these categories is you don't have to dig into you're a big pile of emergency fund. I be like, should I use this for this? But that's the nice thing about breaking them out.

The next category we have is medical. And this is for anything that comes up that is completely unexpected, up to our deductible per year. So once I hit the deductible each year, then I stop saving in this category as much. I might put a little extra in because I also have a health savings account, an HSA.

And that's just an account that you can go ahead and put funds in for, medical purposes, and you can also invest those funds in a little brokerage account. So that is my backup medical plan, and then I just put enough funds into my medical emergency funds up to my deductible. So I know the max I'm going to pay out is my max deductible. And then if I need to somehow pull even more, then I can pull from the HSA that's growing within investments. The next category is home repair. And home repair gets used all the time. I think in 2019, 2018 and 2017, I was constantly repairing my house.

It was built in the 80s and stuff is just all breaking down at the same time now. So thousands and thousands and thousands and thousands and thousands and millions and millions of dollars, not really millions. But so much money comes out of this category and I have to keep throwing money at it because it's protecting my house essentially. All sorts of things are exploding and breaking and dying. and so we are always having to fix things in the house. Home repair gets used a lot. And if you own a home, this is a great category to have. Now, if you don't own a home, guess what?

You don't need it. You don't need a home repair category because your landlord should be doing it. Now, some leases you've got to double check because sometimes landlords will write into their leases that the tenant needs to fix certain things up to a certain dollar amount, which I've seen a lot of landlords do. And if your landlord does that, then you may need this up to a certain dollar amount each month. So that is one thing to consider if you're renting, but most renters will not need this category. But if you own a house, you definitely need this category because stuff always happens. Even if you build a

brand new house within five years, things start to depreciate and deteriorate. And that is where this fund will come in handy. And then the last category is the silliest of all, because it's called emergency fund, and I literally never touch it. So I'm actually considering taking this category out. I'm not sure exactly how I feel about it yet. I like to have this as like a comfort and a crutch. But because I broke out all these other categories, I never touched the emergency fund category. So it builds up over time, but I keep looking at it and saying, well, there's a chunk of cash in there. I could be using this for other things. I've literally never touched it once. That is something that I am considering. Because I break it out this way, I actually don't need an actual

emergency fund because I cover all my car issues. I cover all my house issues. I cover my job. job loss issues, and the emergency fund just sits there. Definitely, definitely, definitely consider just having a big pile emergency fund if you need it, if you don't want to deal with breaking out all these categories. But I wanted to present to you guys how I do it just so you can see, you know, the max that you would ever need to do. And maybe that emergency fund is going to be used later on for a business or something else like that. But as it stands right now, it's my emotional crutch and it sits there as something that I just have and I'm not exactly sure what I'm going to do with it. I might just keep it where it is and not add any more to it.

Now, the next question I always get is where the heck do I keep my emergency fund? Should you keep it invested in stocks? Should you keep it under your mattress? Is Bitcoin a good place for your emergency fund? Well, the answer to all of these is a heck no. Because you want your emergency fund to be easy to access. And if emergency arises, you don't want to have to sell stocks to be able to get your money or you don't want to sell Bitcoin, which is the most volatile thing in the world to be able to get your money.

You want your emergency fund to drip too hard. That means you want it to be liquid. I was just trying to make it cool for all you hip folks out there. But there are a few places that I would recommend keeping your emergency fund. And the first place that I recommend is obviously a good old-fashioned savings account. You betcha. The good old-fashioned savings account is a great place to keep your emergency fund

because guess what? You can access it extremely quick. The second place I would recommend is a high-interest online savings account. So what's the difference between a good old-fashioned savings account? at your bank and a high interest online savings account. Well, the good old-fashioned savings account is going to pay you nothing. The high interest savings account is going to pay you, you know, 1% to maybe even up to 2% if you find a really good one. I've seen them out there. That just allows you like, say if you have 10,000 bucks in a fund that's paying you right around 2%, maybe a little

over 2%, then you're going to make, you know, $40, $50 a month on that savings account. So it's just free money and always take the free money, especially if your emergency fund is a big pile of cash sitting there. The next one I would recommend, which has a little bit higher interest than the online savings account, is the money market account. And the money market account is a little less liquid than the online savings account is. It may take a day or two to get your money out. So what I would recommend is either if you're going to use this option to make sure you just have a little bit of a buffer in a savings account and then put the rest of it in the money market account. I think I have one at Capital One right now. I think it pays 2.2%. So in that money market

account, it's definitely a great spot to keep your money because it's still a savings account and it grows for you and it has a little bit of interest that you can kind of collect. It's free money. Why not? Or the last place you can keep is cash. Now, I don't recommend keeping a ton of cash under your mattress or anything like that. But if you want to store some cash, if it makes you feel better to have cash in the house, you can go ahead and do that, maybe invest in a safe. Just realize that the risk with cash is if some, like say for example, your house burns down. Now that's a drastic thing to say. But say, for example, it does. Then all the sudden your cash is gone and the emergency fund that you had saved up for house repairs is now gone.

And that's the, that's some of the risks that that cash holds. Or if you have a flood or a tornado or any natural disaster, cash can also get stolen. And if someone knows that you have cash in your house, you're going to have another issue at hand. So cash just increases external risks that you really don't need. All you have to do is just put it in a bank account. Your money will make a little money as well. It's just a better spot to keep your money.

But if you want a cash buffer, you know, $1,000 or $2,000 or whatever makes you feel comfortable and you have a safe in the house, go ahead and do it. That's fine. Just make sure that you understand those risks. Now, one question I get all the time is should I keep my emergency fund in stocks? And the reason people ask that question is because they want to maximize the return their money gets. So a lot of times when you keep cash, large chunks of cash like an emergency fund can hold, you're not going to maximize your return on that money. But emergency fund is not to maximize your returns. It's to help you sleep at night. It's to help you be able to be stress-free and to reduce your anxiety with money. Stocks are a fantastic place to keep your money if you're going to keep them

into those investments for 5, 10, 15, 20 years. But it's not a great place to keep your money if you need to use your money within five years. I would never recommend putting cash into stocks that you're going to use, say, for a down payment or cash into stocks for something like buying a car because you need that money to be consistent. And if something happens within the market, there could be a dip and now your money has been reduced for the next couple of years exactly when you need it. Stocks are not good for short-term savings. Anything like vacations, emergencies, anything like that, stocks are not a good place to park your money. So let's say you invested your emergency fund in stocks because you wanted the best return. So you throw

say, I don't know, $25,000 into a brokerage account, and you invest in something diversified like an index fund. But then one day the market takes a dive and the economy enters into a recession, which causes your company to cut jobs and you get fired. Now that $25,000 emergency fund is somewhere in the ballpark of $12,500 because the stock market got cut in half, and you have much less time to find a job because of that. See, the reduction in your emergency fund, your emergency fund is supposed to back you up when you lose your job. And now the reduction in your emergency fund all of a sudden accelerates the timeline that you have to find a job. And at the same time, you're sitting in the middle of a recession. And it's much harder to find a job in the middle of a

recession. So you can see how this becomes a problem. And this example may be somewhat drastic, but it's very real. And it's very real. It happened in 2008 to a lot of people where they stuck their emergency fund into stocks and then their emergency fund got cut in half. And listen, if it's a long-term time horizon, you'll be fine because the stock market always goes up in the long run. But in the short term, it is not a good place to keep your money. You don't want volatility when you need your money in the short term. Now, there is a small group of people who may be able to choose to not have an emergency fund. And these are the folks who are financially independent or a lot of people call them buy or the fire movement, which just stands for financially independent, retire early.

this group of people are folks who have had a large savings rate and been able to save up enough money to retire early or just go into retirement. There's a couple of reasons why people who fit this category may not need an emergency fund. And I'm going to go through all of them here and just lay out the case. If I was financially independent or I had retired early, I would still have an emergency fund because I am more risk-averse with my cash. But there's still a case to be made that you may not have to. And the first reason is because they already don't have a paycheck so they don't need to hedge against losing their job. They already have a sustainable lifestyle and they live off of their investments. Typically, it's index funds.

And that cash produces enough income for their lifestyle. So they don't need to protect themselves against a loss of a paycheck because they don't have one. The next option they have is if something actually did happen, they have what's called a credit card float, which gives you a 30-day cushion. So what a credit card float is, is you will be able to use your credit card to be able to take care of any small emergency that may come up and then have 30 days to come up with that cash

to be able to pay off the credit card. Now, I do not recommend this for anybody who is not financially independent because if you're financially independent, you are most likely very good with your money. If you're not responsible with credit cards, don't even consider this as an option. But if you are responsible with your credit card,

cards, this is a fantastic option to hedge you for short-term losses and anything that comes up that may be small enough that you think you can recover with cash later on. Because sometimes people don't want to draw down on their brokerages. And so this will give you that opportunity to be able to have a 30-day float if something comes up. The next thing they have backing them up is their brokerage account. So they have amassed a large pile of wealth. So if something major came up, they would be able to use and sell some of their investments and be able to cover whatever in the short run. And this allows them the flexibility and the freedom to not have to hoard as much cash because they already have a large pile of money that's invested in the market currently.

They can sell off part of their investments to be able to cover that issue. And the last option they have is if they own a home, you can do a home equity line of credit or a helock, which is a low interest loan. Worst case scenario, you can pull out a line of credit on your house and pay off something major and then go ahead and pay that back down with an interest rate. It may not be part of your plan, but it's an option that you have if an emergency came about. Like I said, if I was financially independent, I would still have an emergency fund, maybe a year or two years of expenses. Reason being is I'm much more risk-averse, but if you do the math, you really don't have to have one if you're financially independent because you've

already accounted for any issues that could come up when you did the math to be able to retire. And that is a really cool option for people who are financially independent, but like I said, I wouldn't do it. Finally, for most of us, an emergency fund is necessary to hedge against the risks of life. An emergency fund is not there to pay for your vacation or to upgrade items on your house. It is there to protect you when emergencies arise. And it reduces your stress and it reduces your financial anxiety so you have a clear mind to make good, sound decisions with your money. And that is so so incredibly important because money is extremely emotional and people tie their emotions up into their money and a lot of times they make poor decisions because their emotions are kicking in.

The emergency fund will solve that problem and give you a large pile of cash to back you up no matter what life throws at you. And that is the amazing thing about the emergency fund. Thank you guys so much for listening. And if this is our first time meeting, consider subscribing so you never miss an episode. And hey, we're giving you. We're giving you. We're giving away a free one-on-one money coaching session with me, all you have to do to enter is subscribe to this podcast and leave a rating or review on Apple Podcasts, then send it over to Andrew at dollar after dollar.com, and you'll be instantly entered to win the one-on-one, one-hour coaching session with me. Again, thank you guys so much for listening. We truly appreciate

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