Emergency Fund 101

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Hi, and welcome to Money Talks. My name is Ken Wink. Today, we're going to be talking about an emergency fund. If you'd like more information about what you hear during our show today, give us a call at 586-226-2100 or go to our website, summitfc.net. While you're at the podcast page, you can subscribe on Apple Podcasts, Spotify, or Amazon Music. So I was driving up north last weekend, and I ran over something and heard a terrible sound and got that dreaded notification on my pickup, tire pressure low. So I had to pull over, and my treads were too low to get it repaired. I happened to pull over into a Bell Tire parking lot, which is a tire place around here. So anyways, you know, totally unforeseen situation happened. And, you know, a thousand bucks later, I've got four new tires. So that stinks. And that happens every day to people. Unfortunately, everyone knows that things have gotten quite a bit more expensive, especially in the last few years. So whether it's health insurance or groceries or your tires or Just things happen that are unexpected. So with all of those increasing costs, it's not really that surprising that people are having a hard time setting extra money aside, especially for emergencies. So today we're going to be talking about the 136 rule and just how important it is to have an emergency fund. But before we jump in, let me welcome Tony, my co-host, Tony Shore. My wife wants an emergency fund that is just strong enough to handle a DoorDash order of Starbucks. What's your emergency fund looking to handle these days? Pizza and record albums for myself anyway.

But that's not an emergency. Those Starbucks pizza records, those aren't emergencies. But that's the problem. If you put the money into the checking account, And think, oh, what's left at the end of the month I'll put into an emergency fund or savings or my retirement. That never works well. You got to pay yourself first and put money away first before it ever hits the what I call the general fund in checking because poof, it's gone. It's gone if it hits the general fund. But yeah, tires. I mean, it reminds me of that line from the first vacation movie with Chevy Chase where he crashes the car out in the middle of nowhere. And then those guys at the service station take him for all he's worth. And he goes, hey, I just paid a thousand dollars for four ball tires and a tow. Check, check on Edna's purse there. See what she's got for change. He tells the kids to go through Edna's purse. He's desperate for cash. So anyway, yeah, tires crazy, isn't it? Over a thousand dollars. If you want four tires, a decent, you know, uh, that's crazy. So, uh, we have to have money set aside for that. Uh, that's important. I can't wait to talk about that. I've had a great week. My wife's finally home after being gone for 10 days. So, uh, I'm eating well again and, uh, the laundry's getting folded. So, uh, the pets are happy. Uh, now that mom's back home, uh, how about you? How's everything going there? Your emergency pizza fund was completely depleted after the last week of not having a wife for a week. Yeah. Yeah. I take out, you know, let's see, Jersey Mike's Chinese takeout pizza. Yeah. Yeah. I hit all the highlights.

Yeah, my week of being a single dad, my wife had surgery on her Achilles last Tuesday, so she can't put any weight on it. And she's starting to get the hang of the crutches and one of those little scooters that you can put your knee on to sort of wheel around in. So she's only fallen once, Tony. Yeah. Oh, no.

Well, you got to step it up and take care of, you know, anything she used to do. You've got to kind of step it up now, don't you?

Yeah. Yeah. I'm doing everything that she does, everything that I normally do, plus working full time, plus getting the kids to volleyball practice and piano and everything else. So, yeah, it's been great. It's been a challenging week for sure, but we're headed in the right direction. You know, she's feeling better every day. So hopefully she'll be able to walk normally in a month or two. But I'm sure she'll get the hang of the crutches as time goes on too.

One step at a time. Yep. One step at a time. And that brings us to our emergency fund conversation, right? I mean, how do you build an emergency fund? How do you eat an elephant? One bite at a time, right? That's right.

Yeah. I mean, so many people just don't have an emergency fund. We know stuff's going to happen. We know that there's going to be unexpected expenses and it's just so easy to to spend that money when something fun comes along or concert tickets, you know, an opportunity pops up. There's just so many things that you could spend it on fun money. So it's really, really important that everyone establish an emergency fund. And then we normally recommend that you have it in a separate account just so that it's completely, like you said, not in the general fund, just so it's there for medical bills, car repairs, tires, you know, and eventually possibly a temporary income replacement. That's, that's just so important because if you don't have that emergency fund, then you're most likely going to use a credit card or a home equity line of credit. And those typically have pretty high interest rates on them. You know, An emergency is not going to wait until it's super convenient. I also had somebody sideswipe my car, not too bad, just the front corner yesterday in a parking lot. So now I should probably get that fixed up. So just stuff happens all the time. You got to just make sure that you're prepared for it and you just do not want to use credit cards when these types of things pop up. Right.

Yeah. And you don't you don't want to run up credit card debt because, you know, you're you're solving one problem by paying the bill with a credit card, but you're creating more problems by doing that. And so you're just it's like, you know, when you're in quicksand, the more you struggle, the deeper you're going to sink. And that's what credit cards do. They'll pull you under so you can't. You can't do that. You've got to avoid that. And working with somebody like yourself and Summit Financial is one way to help make sure you have a solid plan in place. You've got to start somewhere, though, with this emergency fund, right?

Yeah, yeah, absolutely. You know, I think it's important to to have people like take a step back and just put themselves in that emotional situation. Like, OK, we've had an emergency come up or we've lost our job that that's really stressful in and of itself. And I found a study on Bankrate.com that said that six in 10 Americans have not enough or absolutely no emergency fund. So, gosh, you know, you've got the stressful situation on your side, you know, stressful situation that you're going through. And then if you don't have a way to pay for it, you know, then that makes it even more stressful. So once once you get an emergency fund, then you can start focusing on the fun stuff and sort of have a clear conscience and good mental health. Because, you know, once that emergency funds covered now, now we can do some fun stuff, Tony. Now we can look at. uh, retirement or semi-retirement and vacations and concert tickets and, you know, the fun stuff, but we got to get our basics covered first.

Yeah. Yeah. Concert tickets, right? Concert tickets.

After the show today, I'm jumping in a queue to try and get some concert tickets for me and my wife to see Alan Jackson. We're country music fans. So yeah, that's, that's top

of mind for me today. Yeah, I bet. Well, and I think a lot of people, obviously, like you mentioned earlier, we all experience those life happens moments when the washer breaks, the car needs repairs, tires, like you mentioned. And when you've got an emergency fund, you're solving the problem, not scrambling to find money. Right.

Right. Yeah. Another thing that I should point out before we jump into how you should accumulate your emergency fund. One thing that people don't often think about when it comes to emergencies is health insurance. So even if you have great health insurance, there's a decent chance you still have a deductible. So if you have a deductible, it could be. It could be $1,500. Mine is $3,300. So if you have a medical event happen, like an Achilles surgery, and you don't have the money already set aside for your deductible, that's going to be a big bill. The one silver lining about medical debt is that you can always contact the hospital or whoever is billing you for the medical stuff and tell them, hey, look, I want to pay you, but I want to get on a payment plan. And there's typically not any interest or penalties charged for doing that. So be proactive about it. Don't just hide in a turtle shell, you know, reach out to them and say, hey, I can I can spare 50 bucks or 100 bucks a month. In most cases, they're going to be really happy that you're being proactive and not just stringing them along because we don't want these kinds of things to go to collections because that'll really beat up your credit. So just another reason that it's really important to establish an emergency fund.

Oh, huge. I mean, there's few things that are as important as that. Now, you know, the typical they say you need an emergency fund for what, three to six months of your you need three to six months of your expenses saved up. Is that right? Yeah. That's right.

Yeah. So we really like helping people to set up a playbook for how if you don't have an emergency fund right now, let's come up with a game plan. Let's come up with a playbook and actually strategically and methodically start setting aside some money each month to get to this point. So the rule that we use is the one three six rule. And once you hit each of these different benchmarks, then you can sort of change the speed that you're saving money. So the first one is just the one in the 136. So with that, your goal is to get one month of expenses, but we don't want it to be discretionary stuff. we want it to be the basics. So your housing costs, so whether that's rent or mortgage, property taxes or homeowners insurance or auto insurance, and then you want to include transportation, so your car payment, your gas or electricity, I guess, insurance, if you live in a big city, public transit costs, and then just everything else that you consider to be essential. So like groceries, utilities, cell phone, internet, If you're in a relationship where you're married and you're splitting costs, you got to think about what your partner might be paying for. So just try to think of everything, you know, daycare, after school programs. Some people consider dance and kids sports to be a non-negotiable, like whatever your list is of things that you just can't live without. You want to accumulate enough money to be able to pay one month of those. Pizza buffet.

Oh, I'm sorry. I had to clear my throat there.

Very important thing.

I was just clearing my throat. I was just clearing my throat. Yeah. You know, but seriously, not not the wants, but the actual needs and the priorities. Right. That's that's the thing. So but it would take a lot of pressure off to build this up. Right. But you can start small. Like you said, it doesn't have to be you don't have to. People are like six months. Where am I going to get that kind of money? But, you know, start build up one month, then then three, then six. Right.

Yeah, so I would say if you don't have one month of emergency expenses already set aside, just take a one month break or however long it takes from some of the more discretionary things in your life. So, you know, maybe don't go out.

Maybe don't jump online and try to get expensive concert tickets. I'm not going to name names, Ken Wink, but we know people that might do that. I have given you a hard time.

Oh, yeah. Yeah. I got my emergency fund, Tony. I'm good.

Oh, you're set.

Good. Good. Yeah. So now I can do fun stuff. But yeah, I would say if you don't have one month set aside, just have a month where you just cool it. You know, try not to go out to eat. Try not to buy concert tickets. Try not to spend any money on extra clothes or, you know, just cool it just for a while until you can accumulate that one month emergency fund. So, yeah. You know, when I say one, three, six, this first stage for one, just really, really try hard and cut where you can cut until you do get that one month set aside. Now, once you get that one month set aside, now we'll sprinkle in some fun. But until you have one month in an emergency fund, we typically recommend like. really make it your goal and a priority. And like you mentioned at the beginning of the show, don't take the leftover money at the end of the month in the general fund and put it towards this. Set a goal. And then whether you get paid weekly or biweekly, have the money actually taken out of your main general.

Right off the top and direct, have it automated to go right into a savings account. Yeah. Yeah. Yeah, because that's what you've referred to that before. I learned that from you. It's called pay yourself first. Right. You got to pay yourself first before putting money into the checking account, because then poof. you know, right? Yeah, yeah.

If you wait until you've got leftovers to save for an emergency or invest, it typically does not end well for people. So paying yourself first, taking it out of the paycheck, as soon as the money comes in, this way you can reach your goal Time and every you know, this is one month at a time that we're trying to save the money. This is months at a time that we're trying to actually get into the emergency fund. It's just you got to get the small wins, Tony. We're not trying to hit a home run here. We're just trying to hit base hits to get to where we want to be and having that one month emergency fund set aside. Sure.

Yeah, that makes sense. So it's one month at a time, one small win at a time, and that's going to help. So how do you how do you know how much you need to set that goal? Right. You talked about basically the the necessities that you add those up. That's how you figure out how much you need each month. Right.

Yeah. And we recommend that you work with a financial advisor because they can give you a budgeting sheet. Uh, but you could also just do it on your own, you know, look at your bank accounts, look at your credit card statements, find out exactly what you're spending your money on. I mean, that's a good thing to do in any case, you know, keep an eye, know where your money's going every single month. Um, and then you can sort of say, Oh my gosh, we're spending this much on eating out or, Oh my gosh, we're spending this much on vacations. Uh, You know, it's good to know where the money is going and decide, is this really where we want to send this much money every single month? Or are there some other priorities that might be higher on the list? And while you're looking at your expenses, you could also look at the savings account itself and see what it's earning. So once you get the money in the emergency fund, we don't just want to set it and forget it. We still want to try to You know, it's money. We might as well make money off of it. Right. We don't recommend investing it in the stock market because that can go up and down. And we want this to be stable and we want it to be there when you need it. Because if the economy is in a recession, you know, there's a chance you could lose your job. And if you lose your job and your emergency fund is disappearing in the stock market, that wouldn't be good. So we normally recommend a high yield savings account or a money market. Just find the best interest-bearing account that you can. If you're a client of ours, we typically work with Charles Schwab as our brokerage, and they have a great money market that's paying around 4% right now. That beats a lot of the rates that banks are offering, and we don't charge any fees on that because we're not doing anything. We're just plopping it inside a money market. So it's a great way to get a little bit of extra money. on your money. And yeah, if you call us by four o'clock, we can typically get it in your bank account the next business day at 10 a.m. So pretty quick turnaround, pretty quick, or I should say pretty good interest rate. So once you have this emergency fund, surprisingly, don't invest it. You know, as a financial advisor saying, don't invest that money. But yeah, don't invest that money. Let's just put it in something that has no risk. So, you know, it's going to be there when you need it.

Yeah. Yeah. Makes sense. I think that's really good. And again, it's like paying yourself first attainable goals. And I think it's not necessarily how much you save, like, oh, I've only got four months, not six. it's more that you're saving each month and putting money into it and building it up. Right. It's that you start, right? A lot of people just don't start.

Yes, yes, yes, yes, yes. Just start, just set it up. Uh, the best thing you can do is just set up an automatic transfer. So whether it's coming out of your paycheck or going from one bank account to another bank account or from a bank account to a Charles Schwab money market or whatever makes the most sense for you, uh, Try to set it up electronically so that you're paying yourself first so that you don't have to think about it and that it gets done automatically. So let's just say that your monthly expenses, Tony, were $2,400 for a month. I spend that in pizza a month.

It's easy to do. It doesn't have to cover my mortgage or anything? No, go ahead.

Priorities, yeah. Yeah. So if it was $2,400 that you figured out your monthly must pay expenses are, then maybe you set it up so that $200 a month or $100 every two weeks or $50 every week or whatever the timetable is that makes the most sense for you so that it's not really... you got to be able to pay all your bills while you're saving too, obviously. Yeah. Going to credit card debt to create an emergency fund, but right. Your budget, look at what you can spare. You know, maybe it's a couple less Starbucks coffees or eating out a couple less times per month. Right. Um, It could really make a difference so that if you do run into an unexpected expense or you're laid off from work or something like that, we've got a backup plan.

And I think you opened the show or early on in the show, you shared a statistic. I'm trying to remember what it was, but it's... Um, a lot of people don't have any money or very little saved, right? You look at these polls, uh, and there are two ends and I'm, you see both extremes. Uh, unfortunately it's rare when somebody comes in and say, I have exactly three to six months in my emergency fund. You're like, wow, this is great. Uh, That's the rare, uh, what's common is, you know, people who have less than a thousand or less than $500 in savings. Um, that's unfortunately the most common, but the second most common, and this happens to a lot of people as well, is you can go too far the other way. I talked to, uh, just yesterday and it just, uh, I 500,000 is the most I had heard yesterday. I talked to, uh, a mutual friend of ours in the financial world, Jamie Malm. And she had someone come to her and maybe it wasn't Jamie. It was, but someone, another financial advisor, a good financial mind told me yesterday that, I talked to a few people and one of them told me they had someone come to them for financial advice to become their financial advisor. And they had saved $700,000 for retirement. And it was all in a regular savings account, $700,000. Oh my gosh. And I had not that long ago, about three months ago, had someone tell me they had someone come to them with 500, and I thought that it was crazy. So you can have too much because if it's all in the bank, you're not keeping up with inflation. They're losing money to inflation and opportunity costs lost, stuff you've talked about. So you can go too far one way or the other. But the sweet spot, six months, right? I mean, isn't that what you're telling us?

Yeah. I mean, especially if it's a non-retirement account, we can send the money back to someone so fast. So even if we did invest it, whether it was in one of our tax managed portfolios or in one of our actively managed portfolios.

You even mentioned that Charles Schwab money market where right now it's 4%. They're getting less than 1% on the $700,000 in that savings account. Less than one percent. And so they're not really earning anything on it. True, their principles protected. But from what? Not from inflation. Right. And now and then.

Yeah.

And it's not even insured. It's only insured up to two hundred and fifty thousand dollars. The FDIC.

Yeah, that's what I was just going to say. You're over the FDIC limit there, too. So, yeah, I mean, there's safe investments out there. You know, we've got structured notes where you can have downside protection, but also great upside potential and potentially do much better. So there's options out there. If you've got too much money in the bank, Tony, to our listeners and viewers on YouTube, yeah, give us a call. We'd be happy to just throw some ideas at you. Whether you move forward with it or not, that's totally up to you. But there's some really neat options out there right now, just because interest rates are relatively higher than they were in the past. there's some pretty neat options out there and some are short-term, some are longer term, you know, whatever is the best fit for you, we will find it. So yeah, give us a call at 586-226-100 or summitfc.net and hear what we have. Cause there's some, some neat ideas out there. That's, that's a great problem to have Tony, just too much money, too much money sitting around. Yeah. I know.

I mean, that sounds like a big problem and it can be, I mean, they could have probably doubled their money in the time they had saved all that up, unfortunately, and did not. It is what it is. It is good to save though. It's better to make the mistake on that end than the other end. And that's why you've got to build that emergency fund. Great show today, Ken listeners and viewers. Pick up the phone. Give Summit Financial a call. Ken and his team there will help you. 586-226-2100. That's 586-226-2100. And that does it for today's episode of Money Talks with Summit Financial Consulting and our host, the man with the plan, Ken Wink. Thank you for joining us for Money Talks. Don't head into retirement without a strategy that addresses both income and taxes. For more information, please contact Ken Wink at Summit Financial, working with people you trust. Call 586-226-2100 or visit summitfc.net. Join us again soon for another episode of Money Talks.