Episode 4 – The importance of an emergency fund
Episode transcript:
[musical intro]
Jenny
Welcome back to Fund Your Future with DRS. And today we’re talking a little bit about building an emergency fund, which is such a crucial part of financial planning and just planning for futures, planning for unexpected expenses. There was a recent article that I found in CNBC that said that 56% of Americans would have a hard time covering an unexpected $1,000 worth of an emergency expense. And so obviously, this is an important topic.
Seth
It’s like almost the first thing people talk about when they talk about financial wellness, budgets, spending, all of those things. Financial gurus, usually the first thing is do you have an emergency fund and people, it’s either yes or no. It is pretty clear it seems like a clear cut thing. But then I think there’s a questions like, Well, how big is an emergency?
What counts as an emergency? All of those things and the article you’ve referenced is a great example. I know there’s been a lot of studies recently. I think the one that caught a lot of people’s attention was like most people wouldn’t be able to fund $400 worth of an emergency expense without putting out a credit card or selling something or borrowing.
There were all these caveats. I don’t remember exactly what the study was, but it was….one of the things that I think is really telling about studies like that – oftentimes is it’s not just people who are making less money. Income doesn’t necessarily always play a role and it can have a bigger impact, but it’s people who are making lots of money still might be living paycheck to paycheck and not be able to handle a refrigerator dying or a car repair.
And so, you know, we talked previously about budgets and kind of knowing what you’re spending and you have those set life expenses that, you know, every month, month after month. But there are lots of things that happen infrequently just randomly. I don’t know… What for you counts as an emergency. What do you think of when you think of emergency savings? What would you tap into emergency savings for?
Jenny
I would say like any sort of unexpected car repair, like having to get uh… I don’t know. Yeah, like maybe getting your tires replaced. I think for me, a lot of the emergency savings, I think of like either medical bills of either for myself or also for my pets. And pets are obviously another one of those things that can creep into the emergency savings.
Seth
Pets in general, it could just be emergency spending.
Jenny
Emergency spending of… This happened to me a couple years ago. My dog was chewing on a stick and we noticed that her chewing was sort of, you know, not normal. And we had to take her in. It was she had a little piece of wood that was stuck in her gums. And it was like that was like $400. To have them go in and remove it. And yeah, it’s just all these kind of things, sort of life that creep up.
Seth
We have a running joke in our house that like any time you take the car to the shop, it’s $400. It doesn’t matter what it is like that that makes sense. It’s the minimum cost for labor or whatever, an hour of labor. But I mean, clearly in some of these studies would qualify as an emergency.
And I’m glad you talked about cars and auto and medical. I think both those things are things that are unexpected. I think housing sort of things oftentimes fall into that category.
Jenny
And then there’s the house part, too, where if you I mean, if you rent, typically your landlord would cover those expenses, like you said, the dishwasher, refrigerator breaking. But obviously, for those of us who own or… I actually was in a situation previous to this where my landlord we were renting, but my landlord would have us pay for the expense upfront and then he would reimburse us the next month.
And so, we still had to put up the money for whatever the expense was. I think he just didn’t want to have to do with like a lot of the hassle.
Seth
Oh, that’s an interesting strategy. Did you get to then pick like, “I get the appliance I want” or…
Jenny
Well, we never had to replace any appliances when we were there. I think there was a few things with like, you know, carpet cleaning and maybe the washer dryer unit had…I think we had to have someone come fix it or something.
Seth
But that’s interesting. That would be that’d be something you want to know going into the situation. So I have money set aside.
Jenny
It was nice that he was hands off, but at the same time we had to know that we had to have extra money.
Seth
Yeah. Yeah, that’s true. I was, I was thinking more about this leading up to our conversation today about when you talk about size of emergency funds, would it be beneficial to know that, you know, the average vet bill is this amount and so I’m going to have that amount set aside. It’s $500 or $1,000 or whatever.
I mean, I know I’ve thought about this with housing, especially like our water heater was getting older. We just replaced it because it was like, I don’t I don’t want to worry about the emergency of not having hot water. I mean, I, I feel like that is one of the key things of living in a house is being able to have hot water.
But, knowing how much…. Like, I have no idea how much a new roof costs. What if we had a hole in our roof? Like, should I have that amount saved? What’s the difference between emergency savings and planning ahead? You know, you’re going to get a new car in so many years…Like, what’s the difference for you?
Jenny
Yeah, I think I don’t know, for me personally, kind of what I’ve heard from different people just in terms of planning for emergency savings is having at least three months worth of expenses saved up. And mostly that’s for… I mean, at least in the in the government sector, there’s not much of a risk of being laid off from your job.
But obviously that’s a real risk for a lot of people. And so, you know, if you look at your expenses and say, okay, we’re spending about, say, $3,000 a month. Then your goal should be to have at least $9,000 in sort of an emergency savings fund that you could put towards if you were laid off from your job, then you knew that you could at least be covered a little bit on rent… things like rent and groceries. Or obviously if you had an unexpected expense come up with your health or your car, then you could put the money towards that.
Seth
Yeah, I think thinking about it in terms of what you need to live. I think there’s a baseline emergency fund for a lot of people that a lot of folks recommend, like having $500 or $1,000 that you can just pull out so that you don’t have to put something on a credit card and go into debt.
Or you can put it on the credit card, but you can pay…
Jenny
…off the credit card the next month.
Seth
Yeah, exactly. I don’t feel you just walking around with, you know, 10 to $100 bills or throwing cash on the table. But yeah…I was reading the book because I only read personal finance books right now, it feels like. But the author referred to it as her noodle budget. Like if I was only living on noodles, if I had to cut to the bare bone essentials of my budget for three months or six months, what would that be?
And I think that can sometimes be a way to make it a little bit less intimidating. Yeah, I’ve got to pay my rent. Yeah, I’ve got to, pay my mortgage or pay for my insurance or whatever those things are. But I could stop paying for Netflix or I could not go out and have a drink with my friends.
Jenny
Right? Yeah. Those basic life expenses, like you said, mortgage or rent and groceries and keeping the lights on. Yes.
Seth
Yeah, yeah, yeah. Trying to figure out what are what are the bare bones or what could I kind of scale things back to. Because that was the other thing I was trying to think about in terms of how much to have in an emergency fund would be: What are those unexpected amounts? And like the different categories, the car, the insurance or the health sort of things, the house sort of things like, what are the things like big things that could happen?
Because you’re right. I mean, I think public sector employees tend to feel more safe in their employment. It doesn’t necessarily…. I mean, every time there’s a recession, people could certainly get laid off and things happen. But, when I’m trying to think about emergency expenses… like, what are the things that I want to make sure I have money available for?
So it’ll be annoying, I’ll be frustrated, I’ll be concerned, but I’ll still be able to sleep at night. I’ll still be able. That’s what I always feel like with an emergency fund. It’s like it helps you feel a little bit more comfortable going to bed. Like I have one less worry.
Jenny
Yeah, that’s a great way to put it. It’s just having sort of money set aside that you feel like you can sleep at night, like, say if you’re one. Kids are obviously another big one too, with, you know – hospital expenses – falling out of bed break, kid breaks his arm and has to go to the emergency room.
You know, that’s definitely an emergency expense.
Seth
Yes. Kids in and amongst themselves are probably an emergency expense. And that’s I know both of both of us have like that blind spot of like not having kids and not understanding what that expense looks like. But I’m certain that there are a lot of unexpected E.R. visits and or random. Well, somebody showing up like I’m going to camp next week or, you know, I’ve somebody’s birthday party that I need to go to and I didn’t have that in my budget.
Jenny
So, but I think kind of getting back to that whole thing of like trying to define emergency expenses and obviously, like you said, it’s just about having enough sort of money set aside that you feel like you can sleep at night. But yeah, it’s those unexpected things. It’s not a vacation. It’s not going to your friend’s bachelorette party.
It’s that what if my car breaks down? What if my roof leaks? What if, you know, my kid breaks his arm? That I can have some money set aside for this.
Seth
Yeah, and that’s what I was trying to get at.
Jenny
And maybe it’s that people will combine. You have a fund that you use for vacation and for emergency funds, and you’re like, “Okay, well, we feel that we have enough in our in our savings fund that we can comfortably, you know, spend this small percentage of it, for a vacation.” You know, it all depends. As we say, “personal finance is personal.”
Seth
Yeah. That’s exactly what I was trying to get at is it seems unlikely that you’re going to lose your job and your car is going to break down and your kid’s going to go to the emergency room all at the same time. Yes, hopefully not. And so, like, if you’re trying to plan for all of those emergencies at the same time, that could be really overwhelming.
And I think that’s why oftentimes that guidance is $1,000 or three months of pay or six months of spending or whatever. Just pick a number that you feel comfortable, that you feel like will allow you to breathe a little bit easier.
I think the other thing that I know I wanted to talk about – oftentimes when people…if they don’t have an emergency fund, it’s like, “I don’t have any more money in my budget.”
How can I set money aside for an emergency fund? And that’s part of the challenge…when you do have that emergency, is that then you’re having to put it on a credit card and pay extra in interest for. And so not having an emergency fund, oftentimes makes your life more expensive. And it’s hard to think about it that way because, “I just don’t have that money available.”
But I think that’s one of the reasons [why] it’s usually the first piece of advice — when people are talking about personal finance — is to be able to save money for other things. To be able to save money for retirement or be able to save money for [your] kid’s education or save money for a vacation. And you have to have that little bit of wiggle room in your in your budget.
And so trying to figure out, you know… we’ve talked about looking at all of your expenses and that’s part of what you have to do. If you don’t have the money for the emergency fund, are there some of these expenses I can trim? Can I stop paying for Netflix for a year and move that $20 and put it in my emergency fund?
Jenny
Yeah, definitely. I think it’s just about really starting small. If you’re kind of looking at your budget and going, “Oh gosh, I don’t feel like I have a lot of a lot of wiggle room here.” Even if it’s only $20 or $30 that you can set aside. And again, we talked about sort of setting up those automatic transfers.
That makes it a lot easier that way. You don’t have to think about it, but it just automatically happens that every month, you know, $30 or $50 goes in to a particular account and you say, okay, this is going to be my emergency fund and I’m not going to touch it. And that’s just for…maybe it’s helpful for some people just list out sort of those possible things.
Okay, I own a home. I could use this for home expenses or this is for like possible medical expenses or things like that.
Seth
Yeah, that’s I’ve heard people talk about I have not ever done this, but I’ve heard people talk about for that emergency fund, setting it up at a different bank. Having the money transfer out because it takes two or three days to get the money back. You know, “I need to get this money to pay for that unexpected credit card bill.”
And that way it puts a little bit of intentional friction there. Like sometimes you want to make things harder, like for your future self. Sometimes you wanna make things easy for your future self, but sometimes you wanna make things hard for your future self. Yeah, I think that’s an interesting strategy. I don’t know how effective it is for people, but I’ve read that multiple times recently. I think that’s part of, as you’re saying, personal finance being personal is like figuring out what works for you. And if that’s if that’s what you need to do, I don’t think there’s anything wrong with it, especially now with online banks. And there are lots of different ways to…
Jenny
There’s tons out there. I recently set up an account with Chime. One because they have a really good savings rate and two, because I wanted to have a separate account basically for home expenses. So it’s specifically for the unexpected, you know, refrigerator breaking but then also being able to save up for home improvement projects that we want to do.
So for us, it’s kind of like a joint purpose, if you will.
Seth
Yeah, I really like that way to think about it for different as we talk about with different types of emergencies. Like I might be saving for a new car or a replacement for my vehicle, but then I can use that money to make a decision of: do I use it to purchase a new vehicle or do I use it to repair some of the money to repair?
Yeah, that that’s an interesting, interesting way to think about it. I hadn’t I had never considered that. It’s kind of like different ways to bucket your emergency fund but also encourages saving.
Jenny
Yeah, yeah. And so I think it’s… I’m kind of a visual person and it’s just it’s easier to be able to say…to divide it up. Instead of looking at one big number in my savings account and going, “oh gosh, do I feel like I have enough money to go on vacation or save for emergencies?”
It separates it into more visual buckets, if you will. I’m like, “okay, this account is for home expenses, and then this account is for emergency expense sort of thing of the what-if’s.”
Seth
That make sense too when you’re setting up your budget to really think about like this, this dollar amount is going to my residence or this dollar amount is going to my transportation. And it covers kind of all of those things because those bills are those expenses they aren’t very standard. You know, they aren’t happening every month or every week or sometimes even every year.
Jenny
You want to share from a personal where how you store your emergency fund?
Seth
I was thinking about this. I haven’t been very good about setting up a specific account for that, but I try to keep a cushion in that makes me feel comfortable. I’ve talked to friends about this and sometimes it’s like everybody’s got a different number that they feel like they’re….
But early on in my relationship with my wife, for a couple of years, she was in school and not working. I was working then for a year, she was working and I wasn’t working. And so we got really used to living off of one income. And so I think that helped us think about it differently. Like, what would happen? What would we do if only one of us was working or neither of us were working here, the ways we would kind of change our lifestyle and got into those habits.
So, yeah, I just, I keep my emergency funds in my normal bank checking savings accounts and don’t necessarily segregate them as much as I probably should. But yeah, that’s worked for me. And then knowing what other…I’m going to do some more research now though. I’m thinking about: how big of an emergency could happen at my house and what would that look like?
Because I mean, hopefully folks have insurance and, there are things that cover health costs as well. I think a good rule of thumb is for health stuff, you should have as much on hand as your deductible is, at least a starting point to be able to cover… So yeah, being a newer homeowner and getting closer, more into the adulting sort of phase of life thinking about what are… An emergency when you’re 22 is very different than when you’re 42.
And I think people’s emergency funds can probably change over time as well.
Jenny
Yeah yeah, I think it’s important to start and that it’s okay to start small. Yeah. And just to kind of go from there. It can get really intimidating thinking about “oh my gosh, I have to save for all of these things.” But, it’s just important to start. I think that’s the main message.
Seth
Yeah. Start small and then recognize or ask: “what is an emergency and what would I be comfortable with?” What would make me feel a little bit better sleeping…
Jenny
…sleeping at night. Yeah. Great. Well, thanks so much, Seth.
Seth
Yeah, It was a good conversation.
Jenny
Yeah.
[musical outro]
