The Personal Finance Podcast - The 1-3-6 Method For Building & Managing Your Emergency Fund

Episode Date: August 7, 2024

In this episode of the Personal Finance Podcast, we're going to talk about the 1-3-6 method for building your emergency fund.  How Andrew Can Help You:  Don't let another year pass by without making significant strides toward your dreams. "Master Your Money Goals" is your pathway to a future where your aspirations are not just wishes but realities. Enroll now and make this year count! Join The Master Money Newsletter where you will become smarter with your money in 5 minutes or less per week Here! Learn to invest by joining  Index Fund Pro! This is Andrew’s course teaching you how to invest!  Watch The Master Money Youtube Channel! , Ask Andrew a question on Instagram or TikTok.  Learn how to get out of Debt by joining our Free Course  Leave Feedback or Episode Requests here.  Thanks to Our Amazing Sponsors for supporting The Personal Finance Podcast. Shopify: Shopify makes it so easy to sell. Sign up for a one-dollar-per-month trial period at  shopify.com/pfp Monarch Money: Get an extended 30 day free trial at monarchmoney/pfp Thanks to Fundrise for Sponsoring the show! Invest in real estate going to fundrise.com/pfp Indeed: Start hiring NOW with a SEVENTY-FIVE DOLLAR SPONSORED JOB CREDIT to upgrade your job post at Indeed.com/personalfinance Thanks to Policy Genius for Sponsoring the show! Go to policygenius.com to get your free life insurance quote. Delete Me: Use Promo Code PFP for 20% off!   Links Mentioned in This Episode:  The 10 Commandments of Salary Negotiation (Increase Your Income!) Why You Should Negotiate Every Bill With Nicole Lapin How to Negotiate Your Salary and Get a Raise (The Step-By-Step System!) How to Negotiate Your Salary Like a Pro How to Open an HSA (and Why You Should Consider it!) - Money Q&A Should You Max Out Your Roth IRA or HSA? (Money Q&A) The Super Retirement Account (HSA) Where To Put Your Short Term Cash (Emergency Fund and House Down Payments!) Connect With Andrew on Social Media:  Instagram  TikTok Twitter  Master Money Website  Master Money Youtube Channel   Free Guides:   The Stairway to Wealth: The Order of Operations for your Money  How to Negotiate Your Salary  The 75 Day Money Challenge  Get out Of Debt Fast  Take the Money Personality Quiz Learn more about your ad choices. Visit megaphone.fm/adchoices

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this episode of the Personal Finance Podcast, the 136 method for building and managing your emergency fund. I am pumped about this one. Let's dive in. What's up, everybody, and welcome to the personal finance podcast. I'm your host, Andrew, founder of MasterMoney.com. And today on the Personal Finance Podcast, we're going to be diving into the 136 method for building your emergency fund. If you guys have any questions, sure to hit us up on Instagram, TikTok, Twitter, at MasterMoney Co, and follow us on Spotify, Apple Podcasts, or whatever podcast player you love listening to this podcast on. And if you want to help out this show, consider leaving that five-star rating and review on Apple Podcast, Spotify,

or your favorite podcast player. And if you want to get your questions answered on a Money Q&A episode or any of our episodes, the best way to reach me is by joining the Master Money newsletter and responding to any of those newsletters that come out every single week. typically the newsletters come out usually on Friday. So we have those come out every single week and really, really excited for you guys to join that master money newsletter as well as we share a bunch of insights and fun stuff that we are doing each and every week. Now today, I'm going to be diving into a brand new framework for the emergency fund. And I am super excited to dive into this today because I have been spending a lot of time over the course of the last year beefing up my emergency

fund. We have a lot of life changes going into our lives at the JNCola household. and so I have been spending a lot more time getting more comfortable with how much cash I want to have on hand. And so because I've been doing this, I've been working really hard on developing the perfect framework to, A, build your emergency fund, but this is also the framework to help you manage and maintain your emergency fund. Because as we're going to talk about in this episode, your emergency fund is something that needs to be used. And I think a lot of people hoard cash in their emergency fund without utilizing it. So we'll talk through how you can rebuild it if you have to use it. going to go into how to actually build one out the proper way. And we're going to say how much

cash you have to have on hand based on your life experiences. Now, we've talked a ton about emergency funds in the past. This is going to be the main framework that we go by. So if you ever hear me talking in the future about the 136 method, this is going to be the method that we've developed and the one that we want to make sure that you were following going forward if you are interested in, you know, building wealth, generational wealth and mastering your money and you follow all the other stuff that we do. So this is something I am really, really excited about. And one thing I alluded to you is we will talk about bi-financial situation. And so we're going to talk through if you are a nine to five worker. We're going to talk through if you're an entrepreneur and you own your own

business, how much you should have on hand if you're a retiree. And so it's really important to make sure that we look at these life stages in our lives to make sure we have enough financial protection going forward. Now, first I'm going to dive into why we need an emergency fund. So if you know what emergency fund is and you know why you need to have one, you could skip ahead if you need to. but I'm first going to dive into why we need one. Number one is if you don't know what emergency fund is, it's a bunch of cash that you set aside on hand when emergencies happen. Now, it's not if an emergency is going to happen,

but when will an emergency happen? Emergencies happen in life every single day. Your car is going to break down. You may lose a job. You may have an emergency medical bill. A pet may get sick. Your kids may get sick. There are so many different life scenarios on when you're going to need cash on hand.

And it's the folks who actually have cash. on hand are the ones that are always able to build wealth because they can protect their finances. This is why it is the number one thing that we want you to be doing with your money first is to start to build up the emergency fund and we'll get into that as we go through this. So secondly, it protects you against job loss. The number one real reason why we build our emergency fund is if we get laid off or we lose our job, we are going to be able to protect ourselves and protect our finances. It's a protection plan surrounding your finances so that you don't go backwards. Number three is your emergency fund allows you to continue to pursue financial

independence. One of the most important things that you can do is go after financial independence and it can interrupt financial independence if you have an emergency that happens and you don't have the funds to take care of it. So I want every single person listening to this podcast. My entire goal for all of you is to achieve financial independence. I want you to get to a point in time one day where you can either choose to work if you want to or not. And so financial independence is in the cards for you 100%, but you need to ensure that you have an emergency fund. That's why it's one of the biggest steps up front. Number four is it gives you peace of mind. You are going to sleep so much better at night knowing you have cash on hand in case an emergency happens. I remember

prior to having an emergency phone, I would stress out about little different transactions that would come up or things that would just surprise me all the time. After, your boy, sleeps like a baby when you have that emergency fund. So really important to have that for peace of mind. Next, you avoid high interest debt. See, what a lot of people do is that they get themselves into a paycheck to paycheck situation, which the emergency fund gets you out of, by the way. But they get themselves into a paycheck to paycheck situation, and then the emergency arises and what do they utilize?

They only have one option left, and that's to swipe that credit card to fix the situation. Well, what happens when you do that? All of a sudden, you go into high interest debt. That's any debt above a 6% interest rate means you have high interest debt. This, my friends, is a payment. on fire emergency. The last thing you want to do is go into high interest debt. So we need to make sure we avoid that at all costs and protect ourselves with emergency funds. This also, number six, protects our investments. Because if you do not have an emergency fund, what are you going to rely on? You can't figure out where you're going to pull this money from. So all of a sudden, you start to interrupt compound interest unnecessarily by pulling from your 401k or your raw fire. We want to make sure we are protecting our investments. It is really, really powerful to allow compound interest. to work for us so that one day we can become financially free and not have to work another day in our lives. That's my goal for each and every single one of you. Number seven, it helps you

maintain your lifestyle. If you get laid off or something happens in life, you don't want your kids to feel that stress. You don't want your family to feel that stress. It's going to help you maintain your lifestyle so that you can move forward and figure out what the next action plan is. Also, it helps you plan for life changes. Say, for example, you are going to have your first kid or maybe your second kid and daycare costs, as we all know as parents right now, are absolutely out of control. And so maybe you've decided, hey, I'm actually going to be the spouse that stays home. Maybe it's the husband. Maybe it's the wife. And you are going to be the spouse that stays home with your kids. Well, guess what? You can make those family decisions and they're a lot easier to make

if you have an emergency fund in place. Maybe you just want to test it out for a couple of months to see if you can actually get by. Well, the emergency fund is going to cover those additional expenses if you cannot get by and your little experiment fails. And so this is, going to be something I definitely would consider as you go through this. Also, it helps you for other life changes, like moving across the country for a better job. Most people can't take advantage of opportunities like that because they don't have cash on hand. And I think it's really important to have this cash on hand. It saves you and actually allows you to make more money in the future. Another one is health and well-being. So financial stress can negatively

impact your health, your well-being. The emergency fund helps you sleep better. It helps you reduce that stress and anxiety. And that's what I want for each and every person listening to this podcast. It's so amped up about that because I'm so excited what money can help you do. And so if you can figure that out, it's going to help your health and well being as well. Also, it's going to help you against any economic downturns. It's going to help you when you need emergency travel. Maybe a family member across the country gets sick or you have to go to a funeral. There's so many different things that the emergency fund helps with.

I can list off benefits for days if you want me to. And so the point of this is you need to do this first. It is the most important thing that you should be doing outside of getting that 401k match because it's 100% rate of return. it's 100% free money, but you need to have a cushion. I'm going to show you how to get that cushion in today's episode. So if you're ready for it, let's get into it. All right. So we are going to be diving into the 136 method when it comes to our emergency funds and handling and managing this cash on hand. Now, this is going to come into play where you're going to see it across where you

need to be utilizing and putting your dollars first. And you're going to see me talk about number one in the 136 first. Number one stands for one month of expenses. Now, there are some things that are going to be factored into one month of expenses here, and there's some things you need to be doing. And so this process is phase one, is you want to try to get to one month of your monthly expenses that you spend in cash saved. Now, the question may be, you know, where am I going to save this money? Where am I going to put it? You're going to put it in a high yield savings account. We'll talk more about high yield savings accounts here in a second, but you're going to want to put it in a high yield savings account because you earn a piece of interest when you start to do that. So if you are on phase one, you are starting off early here. I want you to get to one month of expenses.

Now, what should this number come out to? This number should come out to a few thousand dollars. Usually for most people, it's going to be somewhere around five, six, seven thousand dollars, depending on where you live, it might even be higher. But you want to get to that one month of expenses. You know, if you have a family or something, something else along those lines, you're spending 10, 15, $16,000 a month possibly, depending on where your income is. And so having those one month expenses in play is going to be really, really important. Now, there are a lot of people out there who have said save $1,000 in an emergency fund. And that is where you can get started. That'll get you to cover, you know, little expenses. Sure, that's a great first phase goal. But for most people, the average emergency comes out to

$2,500. And so that's really not going to cover most emergencies and you're still going to have to reach for that credit card or tap into those investment accounts. I don't want that for you whatsoever. So you try to get to one month expenses as fast as you possibly can is the number one thing. Now, you should not be doing anything else. I'm talking about investing. I'm talking about doing anything else with your financial situation until you can get to this one month expense number. Really, really important to get to this point in time. Now, for those of you who are listening, who live paycheck to paycheck. And I know there are some folks, out there. We've done episodes and talked about this. I've helped some of you solve some of your

paycheck to paycheck problems. If you're living paycheck to paycheck and you're listening to me right now and you're saying, I don't even know how I can get to that one month expenses. Every time I just start to save a little bit of cash, it disappears because these emergencies do not stop coming up. They come up all the time and I need cash on hand. A lot of times, the reason why you're having more emergencies than most is because we need to figure out a way to solve another side of the problem. And you can only cut back, if you don't make a lot of money, you can only cut back on so much expenses. Now, if you make a lot of money, if you're making six figures or more and you can't get ahead, saving up for that emergency funding, you live in normal places that aren't like New York City or something like that, then we need

to have another conversation where you need to look at cutting back expenses. But the majority of people who do not earn enough income, the income side of the equation is going to be the biggest problem for them. And so we need to figure out a way to increase your income so that you can start to get ahead with your money and save up that one month of expenses in phase one here. And so it's really, really important. We got to get that financial footing, got to get that financial foundation. In fact, I want you to spend a lot of time focusing on how can I set up myself to earn more income by developing specific skills, getting a better job, getting a promotion. All of these are so important to your financial journey and if you can figure out how to start there, you will,

I promise you be able to get ahead by starting to increase your income. Why? Because now you can take those income increases and put them towards the one month of expenses that you are trying to save up for here to getting your number one goal going. There is power in having money saved on the side. You know why? Because if your roof starts to leak, there's money just there saved to take care of that. If your spouse loses their job, there's money just there to take care of that. If you are worried about your car breaking down or you need to replace a big thing in your car, maybe you need new brake pads, you need new tires, the money's just there to take care of it. Stress melts away. And if you're living paycheck to paycheck, listen, I know how you feel. I was there. I understand

that feeling and how terrible it feels. And the only thing I was able to do to solve that problem was to increase my income. You're going to hear people left and right say, you got to cut back on your expenses, you can only cut back so much. You can't cut back when you are barely getting by as it is. And so you have to make sure that you find a way to earn more. Unfortunately, in this world, we all start at a different level. Some people have more privilege than others. And so our starting line in this race that we call life is going to be in different locations. You may be starting way farther back than everybody else. Privilege is real, but I know you can do this. And I know you can make a change in your life. And that is my goal for every single

person listening to this show is I know you can make that change. I know you can get to that next level, but it's up to you to make the decision. You could be the deciding factor in your family's life. You could change your family's tree. But the only way that you can do that is by first learning how to earn more. And so if you are trying to struggle to get to that one month expense, I know you can do it, but we got to find ways so that you can earn more money. Because once you start to get that one month saved, we can really start to crank it out and now we can go attack other things. So things like high interest debt, for example,

we want to make sure that we are starting to attack high interest debt once we get this one month saved up. Because we want to attack after that high interest debt, it's really, really important to get one month first, and then we can go after things like credit cards or student loans or all those different things. So if you're asking yourself, hey, should I be paying high interest debt or should I get this one month saved up first?

one month should get saved up first, okay? So you have one month of expenses there. Why? Because otherwise you're going to try to pay down debt and you're going to get off track and then you're going to increase the amount that you have in debt. And so this is just going to be a cycle that happens over and over and over again. One month, make the minimum payments, okay, on that high interest debt. Then what we're going to do is after we get that one month saved up, now we're going to attack that high interest debt and we are going to get after that high interest debt.

And we want that high interest debt paid off as fast as we possibly can. Still starting to contribute a little bit to this emergency fund because we want this to grow to the next phase, but we really want to be attacking that high interest debt because that is compounding against you. And I want to make sure that you are taking that down because you can get financially derailed without having any emergency fund whatsoever and trying to pay down high interest debt. So you got to make sure that you take care of the one month. Then you go to the high interest debt and we're going to go to that next level after we start this. So this is phase one is one month of expenses. You heard that right. If you can't get to one month of expenses, we got to focus on

increasing our income. We have a lot of episodes talking about. increases and we're going to be talking about it a lot more because it is the most important thing in your personal finance journey is to increase your income and then we'll learn how to keep that income once you start to increase it so developing your skills becoming a person of utility unfortunately in this life we are all just making whatever our utility is and so we got to make sure that we are increasing that utility by focusing on ourselves and learning skills to increase that income reading books doing all these different things are going to help us in that process so that we can get better at sales and communicating and all these

different things that will help us earn more money. Now let's get to the next phase, which is three. All right. So now that we have our first one month of expenses saved up, and if you have your high interest debt paid off, those are the two things I want you to be doing first at these first one month level is one month save first, high interest debt paid off, meaning any debt above a six percent interest rate outside of your mortgage or any of those loans, then what we want to do is we want to go to three. And three is three months expenses. Now, at three months expenses, this is the phase that you want to get to at a minimum. It is there to protect you against anything in life, and especially as you are starting to build wealth.

Three months get you part of the way safe. And this is going to be something that a lot of people will argue with me with. I don't think three months is enough to just stop at. I don't ever think it will be, and I'll explain exactly why later. But three months will help give you some flexibility here. It'll give you way more flexibility in life than one month will. and it'll start to be something that you can really, really take to start to build wealth. Now, once you hit this three-month level, I also want you to start investing.

This is the point in time where you definitely want to start investing so that you can get your money to start working for you and compounding. Really, really important. Now, I know how difficult this can be. It is not an easy thing to just save up three months of expenses. It's a lot easier to say than it is to put into practice because if you're spending five, ten, fifteen grand a month, all of a sudden now you have to say 15, $30, $45,000 in cash before you can start to get to the next level. But you got to have three months

of expenses in place. Otherwise, you could go backwards financially, and I don't want that for you. So we got to make sure that we are getting to the three month point in time. Then we start investing. And once you hit this level, when you start investing, you can start investing in A, your HSA is what I would look at first, B, your Roth IRA or your Roth 401K as well, those post tax accounts because they grow tax-free and I absolutely love him for that. And then your 401k or your pre-tax accounts also. So those three are the ones that I would look at past once you get to this level. And if you have questions about those, we have tons of episodes on the HSA, the Roth IRA, the 401K. So we won't dive into that on this episode. But this is something I think that you definitely want to make sure

that you are looking into more so as you start to develop this. And so you want to start working towards the next phase, but also I want you start investing because you can't wait too long before you start to allow your money to compound. You can't get those years back in the Roth IRA or the 401 case. I really wanted you to get those dollars working at the three-month level before you actually complete your final emergency fund, which we're going to be talking about here as we go through this. So let's review here. Each section I'm going to re-reviewing. You want to get your one month of emergency fund expenses saved up. Boom. That is the first thing. Then you want to pay off high interest debt once you have that one month saved up in addition to continuing small amounts of money

towards your emergency fund to continue to build towards three months. Once you hit three months of expenses in your emergency fund, now we are going to be putting dollars and allocating dollars towards investments. You can go 50-50 if you want. You're trying to think through percentages. I want you to take a percentage of your income and start to invest those dollars in these accounts. And I want you to plan it out and make sure you understand that you are now working towards

that retirement number. So put as much money as you possibly can working towards that retirement number while still continuously saving and trying to grow this emergency fund over. time. Now listen, I'm saying this, you know, put some in this emergency fund, put some in this investment account. And a lot of you are probably looking at yourselves or thinking to yourselves, oh, that's a lot of money. I got to be saving up here. Well, I want you to allocate percentages. So when you think about how much you should be saving, when I say you need to be saving 20% of your income, I mean emergency fund and investments. That's the two things I'm talking about when

I say that. And so I want you as a minimum to be saving 20% of your income and moving to 25, 30% if you can. And then growing it from there as you're in. income starts to increase. The beautiful thing about increasing your income is that all of a sudden, you can increase the amount that you're putting towards these things and you're going to hit those goals so much faster. That's why we increase our income in order to put them towards wealth-building activities and putting them towards our money values. So between those two things, you can allocate some of these dollars, you know, if you need to put 15% towards investments and 5% towards your emergency fund after you hit three months because that's the executive decision that you as a

family or you as your individual are making, that is more power to you. But making sure you're contributing to each one so that you can start to grow each one is going to be really, really important. And you also got to make sure that you run your investments through something like a compound interest calculator. There's a bunch of them out there. And those are going to help tell you, hey, if I just keep contributing this amount of money, this 15% or 20%, whatever it is, if I continue to contribute this amount, I will have X amount of dollars by the time I want to retire. You need to run those simulations. If you want a full episode on that, please email me and I will do that to show you exactly how that works. But this is something where as you

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Get financial advice that puts you at the center. Find your advisor at IGPrivatewealth.com. All right, so the next level is going to be six months of expenses. Now, getting to six months of expenses in your savings account, in your high yield savings account at that is the goal. That's goals right there, is we want to get you six months of expenses. And I do not think, I do not think whatsoever that saving up three months of expenses will protect you against life in the long run.

And I'm going to explain exactly why in an example here, because I think it's really important for a lot of people to think through this because most people actually haven't thought through the entire process of why it's three or six months of expenses. Most financial gurus out there will say three months is fine. That's the minimum. That's how much you can have. I could not agree less. I do not agree with that notion whatsoever. What I think is that I'm going to give you an example, and this is why I think this way. So let's say, for example, that you are laid off unexpectedly from a job. Life just smacked you right smack in the face, and now you're trying to think through, well, I got to take a couple of days to assess what I need to do next. Sometimes,

that choice is super easy. You go through that process and you're like, hey, I know exactly what I want to do next. In fact, I've been networking for a long time. Let me go talk to a few individuals that I've been networking with. But other times, what to do next after you get laid off is a much more difficult process. Do you want to make a career change? Do you need to go out and start finding and sending out your resumes? You never thought this day was coming. And so now you have to think through what am I going to do next. So you start to begin to polish off your resume and you start to update your LinkedIn profile and do whatever else you need to be doing to start. your job hunt. And before you know it, you're doing all these things, you're updating these forms, you're just getting over the fact that you just got laid off unexpectedly, all of a sudden, like 10 days have passed. And so now you're sitting at this point in time where you're doing

this all this setup work, but in addition, 10 days have passed since you've been laid off, and you are starting to have to utilize some of your emergency fund cash. Now, maybe you got lucky. Maybe you got a severance. Maybe they gave you some cash when you left. That is absolutely amazing. That is not guaranteed. And we need to focus on the things that we can control. And so you've started to get everything set up, but you really haven't made any progress towards actually finding your next place of employment. And so it's really important to do that. Now, if you're someone like a server or you're a bartender, you know, one of those industries,

it may be a little easier to get back up on your feet and go find another job because there's a lot of those jobs available out there. But if you're someone who is working in the corporate world or maybe you're an executive or you're a high level person, this is going to take some time to find your next job because you've got to find the right fit for your lifestyle. And so now 10 days have passed, a little pain. might have set in. And so you start your job search. And now let's do a little math here. Let's say, for example, you send out one resume and one cover letter, you know, every single hour.

So that's about five to eight that you're sending out every single day. Cover letters take some time to get right. And so it's really not realistic to be sending out a ton of different resumes unless you are just tweaking some of them. Now, AI is helping with a lot of people write their cover letters where they can do it much faster. So I would look into that if you are doing a high volume of sending out some of these resumes. But you need to spend the rest of your day trying to network as well. So you need to spend some time applying for jobs and some time networking for some of these jobs. And so one of the things I really want you to think about here is, yeah, you can try to apply to a small pool, but if you haven't done the networking work up front, you're going to have to cast a

wide net first. And then once you land your next job, then you're going to be able to go back and start to really tailor down your pool for the next time if this ever happened again. And so you're starting to send your resumes out. You're spending time networking with people. And this process alone can take months before you actually land an interview. And the higher level of the job, the longer this can actually take, all while not getting paid. And so we have all this time coming and we have not gotten paid yet. And now we could be months into this without getting paid. Do you think three months is still enough? Let's keep going. Once you start to do this, then you land interviews. Now, interviews are not the thing where you walk into somebody's office

anymore and you have an interview for 10 minutes. Unless you have a non-corporate job, corporate jobs, for the most part, are going to take you a couple rounds of interviews before you even get through the entire process. And then you could get to the end and have no idea you didn't get there. And so once you start landing interviews, you have to go through multiple rounds of interviews and this can take days. This can take weeks. And then all while prepping and sending out more resumes and trying to network in case this doesn't land because it would be a fool's errand to go through an entire interview process and not continue to send out your resume other places, just crossing your fingers and hoping you land this job. because that would take even more time.

This is a race against time a lot of times, but also trying to find the right fit. And so you want to make sure that you are working this process over and over and over again. And this is why once this process goes through here, maybe you land an interview and you finally land your job four to five to six months in. This is why I'm not comfortable with three months because it can put you in a very risky situation once you start to go through interview process and try to land your next job. Now, you may be in an industry with very, very high demand. We've talked about this in the past.

If you know your industry is in very high demand, that demand can shift overnight. And so I think you just need that added protection so that you can have the additional months in place in order to figure out what the heck you're going to do next. And so it's very important to think that through. What if you get laid off in a recession? What if your car breaks down while your job hunting or additional emergencies in life happen while your job hunting and trying to live off this money? Three months is just not enough.

I do not believe it's enough. I don't think you can get there because there are so many things that we have no control over. What we do have control over is having cash on hand. In fact, my emergency fund is much more than six months now because that is what I am more comfortable with and I'll even talk more about that here in a second because that's my next point. So you get from one month, you get to three months, you get to six months. Okay, six months is the ultimate goal. But now it's going to come down to each individual.

Once you achieve six months and beyond, you're going to save until you're slightly uncomfortable as one of my favorite quotes because you want to figure out how much cash do I need on hand to really be able to have my swan number. Now, what is the swan number? The swan number is a number that I like to call the sleep well at night number. And I want you to think about this. I want you to ingrain this in your brain. What is my swan number? Is it six months expenses? Is it eight months expenses to have a little extra cushion? Is it nine months expenses? Is it ten months expenses? You need to figure out what you want to save going forward. And most people who want to derrisk their lives have more cash on hand.

Ramit Sati, who is the author of I Will Teach You to Be Rich, he keeps at least one year of expenses on hand at all times. Alex Hormosey, who's an individual who teaches a bunch of people about business, he keeps millions and millions of dollars on hand just because that's what makes him comfortable. And so for a lot of people, just making sure you figure out what your number is is going to be really, really important. Your finances, I want you to hear this, your finances don't have to be perfectly optimized for what the math said.

you want them to be optimized to reduce your stress and anxiety. That's what you want them optimized for. You need to save until you can sleep well at night, which is why we call it the swan number, sleep well at night. Now here's one other thing to notice as well, is that your swan number may change over time. So, for example, I was much more comfortable

with less cash on hand before I was married. Once I had kids, I wanted more cash on hand because now I have three people to take care of, now four people to take care of, and now we have another one on the way. So five people to take care of. And so my number changes all the time. You may start at six months and all of a sudden as life progresses, you want 16 months.

It doesn't matter where you want to be. This is really important to make sure that you just understand that this number can change over time and it is okay for that goalpost to continue to change. Figure out what your swan number is and go from there. I want everybody to remember that. Next, we're going to dive into what you should do if you are self-employed or an entrepreneur. And then we're also going to talk about as you approach retirement. All right. So next we're going to be talking about a business owner.

And if you are a business owner, you know for a fact that sometimes you need some cash on hand to take care of business matters. And so if you're self-employed or you're an entrepreneur, you need to have even more money saved than just a regular person. Why? Because if something happens in your business, you want that business to continue, you need to have cash on hand in order to take care of situations. And so the more cash you have saved up, the longer you can keep a business alive,

especially if it's struggling. And so nine months is the minimum for me, for people. who are self-employed or if you are an entrepreneur. You need to at least have nine months of cash on hand to take care of a lot of different situations. And also if you're a business owner, it may take you a little longer to find a job if you decide you're going to shut down the business and you're going to go out and find a job. And so making sure you at least have nine months at minimum saved would be, A, the amount that I would have to open a business and B, the amount I would have if I'm a business owner and I didn't think through this already. And so making

sure you have nine months at a minimum, I would much rather have 12 months or more. But at least nine months at a minimum because I know how difficult that can be to save up. Now, if you're a person who is going to start a business, I want you to have nine months saved up before you start that business. And I want you to make sure that that business is already earning money before you just jump into this next thing. Do not start a business and go directly into that business without it earning any income taking care of your income. In fact, I would not ever jump into a business until it is matching the amount of money that I am making at my day job and or you can see a direct correlation between you not having enough time because of your day job

and the amount of money that you can be making. Those are the only two ways that I would do this. And I like to think of this as walking into the ocean, okay? Maybe your goal is to go underwater into the ocean, but you want to progressively, which is you going full time, but you want to progressively start walking into the ocean slowly over time. Because as you start to walk into the ocean, now you get your feet in, then you get your knees in, then you get your waist in, then you slowly get your stomach in. You start to progress towards actually diving into your new business endeavor and your income is the representation of the water. And so as you start to get closer and closer to diving fully in, all of a sudden your income is also progressing with you.

And this makes a very safe way to actually get into that water and go full on. So I would have nine months of expenses. I would make sure the business is making enough money to cover my expenses month in and month out before I even take that dive. Warren Buffett has a quote for investors who did not do their due diligence, and there's a lot of things that go into this quote, but he said, when the tide rolls back, we see who's swimming naked. And it is one of my favorite quotes, because if you do not have that financial foundation, you don't have cash saved on hand, that quote also coincides with something like that. And that's why I love using that water analogy. Take your time and leave working in your business full time when you're 100% ready.

You got to be safe when it comes to that. All right. And then now let's talk about retirees. For retirees, I am of the opinion that retirees should have at least one year of cash on hand, really two to three years of cash on hand. Now, a lot of you may be saying to yourself, that is way too much cash on hand. And sure, if you are someone who hates having cash and it drives you crazy and it actually stresses you out to have too much of cash on hand, I don't really have an issue with you having a little less cash on hand when you're retired. But for me personally, I'm going to have multi years of cash on hand, especially as interest rates are like, you know, 5% right now. I have no problem doing that whatsoever.

But here's the real reason why is because, say, for example, we have a year like the Great recession. You go through retirement and you're three months into retirement and you're playing golf or pickleball or you're going full on into your hobbies. You're fishing every single day. You're having a grand old time. You're traveling with your spouse. You're going all over the world and you're doing all this fun stuff. Let's say three months into your retirement though, all of the sudden, an event happens like the Great Recession. And the Great Recession happens and takes your investments and wipes them down to 50% of their value. Now, as we know, as long-term investors, these investments will go back up in value. They will correct themselves, at least historically they have. And so we aren't going to

really stress out about that as much, but we will if we just retired. And so one of the things we want to think through is, well, if I have a couple of years cash on hand, I can utilize that cash while my investments are knocked down to live off of. And then as my investments start to recover over the next couple of years, then I'll be able to start to draw down on my investments. So for me, it is just a way to de-risk my retirement and ensure that my retirement is going to successful because you can increase the probability of success by having more cash on hand. Now, it is very difficult to save multi years of cash on hand, especially if you started investing late and you're just trying to get to retirement to have enough money. I get it. So that's not something

I think every single person should have, but having at least one year of cash on hand, I think is pretty important so that you can protect your retirement going forward in the future, and then also just thinking through some of the additional bonuses that you can have. Now, I would utilize something like Social Security as a forced additional cash on hand. So I would save enough to cover my living expenses in my investment accounts. Social Security is going to be that added bonus that's going to allow you to have extra cash on hand. And then you also have your emergency fund. That, to me, is a fortified retirement that gives you three different angles for you to have income coming in so that you can protect your finances in retirement. That's the number one thing you want to do is just

de-risk everything and protect your finances. And so retirees, I would rather have way more cash on hand. I would not take the risk of having, you know, just a couple of months in your emergency fund. think you need to have one year or more. Now, I say all of this, but you also need to make sure you you don't have too much cash on hand. So for a lot of people like I was alluding to earlier, if it stresses you out, you definitely want to make sure that you do not have too much cash on hand. Why? Because your money can work way harder than you can in investments. And so to optimize the amount of money that your money can make, you don't want to have too much of cash on hand. I increase my emergency fund amounts past six months once I started to really hit my investment

account numbers. And so once I started to allocate enough money towards my investment accounts, my income started to increase, then I would take my extra income and start to beef up my emergency fund more. See how this cycle is starting to work. And so I don't want you to have too much cash on hand early on. Like you're saving for a year of emergency fund before you even start to invest your dollars. No, I want you to start to investing at that three month level. And then after that, as you start to progress, then you'll be able to see a big, big difference. And you can increase your income, take those extra dollars, put them towards emergency fund. Because your money can work way harder than you can. You need to, also outpace inflation. Inflation is going to erode away at your money

if you're not investing your dollars and you will never get ahead. So you have to make sure that you're investing to outpace inflation. And then lastly, you'll never be able to retire without investing. So you have to invest those dollars over time. Now, where do you save this money? Number one is a high yield savings count. Always put your emergency fund if you don't know where in a high yield savings count is the easiest place. I would recommend anybody go look. I keep mine at ally. There's a bunch of great ones out there, though. There's some with higher interest rates, betterment, all of those. I'm not associated with any of them. So there's a bunch of great high yield savings account. Just pick one that is reputable that you like. You like some of the

benefits in there and utilize that one. Number two is you can use something like a CD ladder and we've done episodes in the past on a CD ladder. If you see that CDs have way higher interest rates than a high yield savings account and it's worth it for you to do a CD ladder, then you can go do that. Or you can also utilize something like a low cost bond fund for a portion of your emergency fund. I would not really make it that complicated though. Honestly, I would just use the high yield savings account. That's the route that I like, and I like to simplify, simplify, simplify as much as possible. If you wonder why I use Ally, the only reason why I use Ally is because you can actually budget in what are they called savings buckets inside of Ally.

And so when you're in there, you can utilize this budgeting system essentially that says, hey, this portion of my emergency fund is save for car repairs. This portion is saved for home repairs. And you could do some cool stuff like that. So that's why I use it. But there's other bank accounts out there that can also do that now too. So check out the one that you. think might work best. All right, next I want to dive into how to maintain your emergency fund. I told you this is going to be the ultimate guide because this is one where we got to think through exactly how we want to maintain our emergency fund before we wrap this one up. All right. So the last section here I want to talk through is how to maintain that emergency fund.

And this is one that I think most people don't talk about. But I know for a fact, and I've talked to people who have an issue with this and how they don't know exactly how to maintain or how to refund their emergency fund. And so we're going to talk about that today. And that's why the 136 method was actually developed. It also helps you refund your emergency fund as well so that you can get back to exactly where you wanted to go. And so you may have never been told this before, or it might be something that you just like to have this prize in the shelf, but your emergency fund is there to be used. And I want you to use your emergency fund for actual emergencies. What a lot of people do is they like to look at their emergency fund like a, you know, a trophy on the mantle. And they

they don't really like to actually use their emergency fund and they try to find other ways to take care of emergencies instead of using the money as it was intended. And so this is something I think that is very important for all of us to really, really look at as we start to progress is that you need to make sure that you're using your emergency fund. And so, you know, when emergencies come up, your car breaks down, you don't have the cash on hand already, then you can use it. Now, if you're someone who is really trying to build it up to like that one year mark, then I would just add additional cash to it so that you can, you know, if emergencies come up, then you have cash on hand to actually have that going. But don't keep your emergency fund looking pretty on the mantle. Use it when you need it.

Now, the 136 method was developed and the reason why I like to talk about this for refunding it as well. So say, for example, you need to use your emergency funding. You had a big, big emergency come up. Maybe you had a big medical bill that wiped out, you know, one or two months of your emergency fund. I would follow the same process, meaning I would get you one month refunded in your emergency fund. okay and if you need to refund three months then I would go one month refunded

I would try to get back to three months again before I started to invest so I take my investing dollars and attack towards getting to three months get it built back up and then you can start investing again

and so I just continue following the same process and I would follow that same process if you're really trying to build it towards 12 months or even larger amounts you can also follow that same process but it's meant to be utilized

over and over and over again as you want to start to build this emergency fund more and more. You want to just continue the cycle over and over again for the 136 method. Really important to think through this process so that you can get to the point in time where you are achieving your financial goals. And listen, emergency fund is there for you to use. It's there to protect you against life. And it is one of the most important things in personal finance that you need to understand. Can I thank you guys enough for listening to this episode. I truly

hope you got value out of this episode. We are trying as hard as we possibly can to bring you as much value as possible so that you can build generational wealth for you and your family and be that first person in your family to have that generational wealth. I cannot thank you guys enough for listening to this episode. I truly appreciate each and every single one of you and we will see you on the next episode. Thank you again.