Yes, You Need an Emergency Fund

From the very beginning of this blog, I’ve stated an emergency fund is critical in life. It’s also certainly not just me: Dave Ramsey preaches it; every financial advisor advocates for it. The very first step in my being able to quit my job was having an emergency fund. I’ve mentioned it repeatedly in past blog posts, so why bring it up again?

Because I just had to spend nearly all of mine.

It’s one thing to have an emergency fund — that cash set aside in case life intervenes — and sleeping easy at night knowing you’re prepared for what might come the next day. It’s another thing to watch it drain out over the course of a few weeks. Over the past six months, I had bulked my emergency fund up to cover six full months of expenses in case something happened to my wife’s job or my business. There was no need to panic, it was just good financial sense.

So what happened?

In early March, I had a simple medical procedure done as a prevention measure. My mother was diagnosed with cancer in her mid-40s, so me in my late 30s have been pressured by my doctor to have some preventative testing done. As it turns out, the procedure is not covered by my insurance (because they deem me “too young” to have the testing done — even though it could save them millions in the future). Bill #1 was over $1,340.

This year was my first year of paying quarterly taxes. When you own your own business and you’re not on a payroll, it’s common practice (and the IRS can issue penalties if you don’t) to do a mini-tax return every 3 months and mail in your own withholding. So April 2021 was my first quarter 2021 taxes (January – March). Fine, I was prepared for that. What I wasn’t so prepared for was my CPA discovered my previous 2019 tax return wasn’t filed properly by my former CPA, and there was significant back taxes and interest owed because of it. Bill #2 was $8,100.

This month 2020 taxes were due. The number was slightly higher than anticipated, and my tax savings account decimated by the 2019 taxes, so I had to pull from my emergency fund to cover the shortfall. Bill #3 was $2,200.

Three tax hits in a row and a medical bill. I had gone four rounds with Murphy’s Law and could get back up. But Murphy wasn’t done.

Last week not one, but two major appliances in my house went. My LG refrigerator (do not ever buy a LG fridge) had the compressor go and has slowly been getting warmer and ruining the food in the freezer and fridge. My washing machine had its motor burn out. Bill #4 and #5 were $2,400.

That’s over $14,000 in 60 days that had to be covered. Imagine if I hadn’t had an emergency fund to draw from? Or if I hadn’t decided to beef up to 6 months of expenses saved — it would have been life altering. I would have had to go into debt to cover the medical costs and appliances, making payments and paying interest. Even worse, the IRS does not take credit card. Taxes must be paid in cash. If I hadn’t had the emergency savings to pay all the taxes, the IRS would have set up an installment plan — with more penalties and fees — and I’d have to pay them back monthly for years.

This is why you need, NEED, NEED, NEED an emergency fund.

So my six months of expenses is exhausted. What now? The process restarts. I will set aside money to ‘regrow’ the emergency fund. Life always regroups and will come around again. You can keep Murphy at bay, but he’s never truly gone. I will set aside what I can each month to rebuild, and given the extent of these past two months, I have resolved to save beyond six months expenses. Maybe a year this time?

If you plan to quit your job and build your life, you can’t do it without an emergency fund. If you have an emergency fund, let this post inspire you to add a little extra to it! Life strikes randomly. Things happen. We can’t plan for everything or know everything, but we can do is be prepared.

5 Ways to Build Your Savings Fast

Savings is a key component of having a healthy lifestyle. Having savings means not worrying about the “what ifs” — What if the car breaks down? What if I need a new roof on my house?

It also means having money when opportunity appears — whether to take that vacation or invest in a startup idea. Having money waiting in the wings gives you freedom.

#1. Pay Yourself First

If you take away anything from this post, let it be this one. I saw my savings grow exponentially when I started paying myself first. The idea comes from the book The Richest Man in Babylon, a book of financial advice told through parables: take 10% of what you earn for yourself.

This means save 10% of everything you make BEFORE bills, expenditures, and anything else in your budget. If your paycheck is $1,000 you save $100 before anything else. The $100 goes in to savings, and you have $900 to spend on bills, entertainment, etc. If you do nothing else to save, you’ll have tucked away quite a bit in a year. I love this rule and I follow it every time I get paid or make money.

The psychological effect of this is huge. I know what it feels like to get a paycheck and it’s gone. You feel like you’re not getting anywhere, you work for bills. When you pay yourself 10% first, it gives a sense of accomplishment and more importantly — worth.

#2. Keep the Change

No 8,000-year-old Babylonian wisdom here; I came up with this one myself. When I began my financial transformation, I started using a budget to keep track of spending. I would estimate my next paycheck (I was wage plus commission, so no two paychecks were ever the same), determine what bills must be paid during those two weeks, and determine what I could spend. I always gave myself a $100 buffer from each paycheck — this gave me breathing room so I wouldn’t fret about every penny plus if a friend wanted to grab lunch or something small caught my eye, it came out of the $100 buffer.

That way, I wasn’t living like a monk every two weeks.

But I rarely spent the full $100. Sometimes there was a dollar left, sometimes much more. When the next payday came, I would take whatever was left in my checking account and move it into savings. By sweeping up the leftovers, it would eventually build up in my savings account. $10 may not sound like much, but when you put it into savings every two weeks, before long you’ve got $100s in there.

#3. The Waiting Game

A big part of building wealth is knowing yourself. That means knowing your (bad) habits, like for me impulse purchases was something that got me into trouble. It plagued me throughout my 20s, and helped run up big balances on my credit cards. Amazon made it easy to get anything in two days and it was so easy to put things in the cart and hit “buy now.”

I knew my weakness. I knew how I behaved. So I made myself institute a waiting period on Amazon purchases. Any thing I add to my cart I wait three days to buy. What happens in three days? The impulse dies away. I forget about stuff I put in there. When I go back in, a lot of times I’ll delete things or move them to “save for later.” I have literally hundreds and hundreds of items “saved for later” in my Amazon account…but I didn’t buy them. It’s money well not-spent.

It’s an added bonus that sometimes Amazon will lower the price of things in your cart to draw you back to buying! So if there is something you plan to buy, Amazon might put it on sale to get you to pull the trigger.

#4. Think on a Full Stomach

This may sound dumb, but going to the grocery store hungry will cost you a fortune. I noticed a big difference in grocery bills just by going after a meal instead of before. I mean, it makes sense, right? But it’s one of those things you never think about. I certainly didn’t, but I was looking at my own habits to find out where I could cut down on spending, I started to study my grocery shopping.

If you’re hungry when you push the cart down the aisle, EVERYTHING looks good. You’re shoveling extra snacks into the cart. Fantasizing about giant meals you’re going to make — all of which need massive amounts of ingredients. By the time you get to check out, you’ve blown up the budget.

If you’re full, however, you don’t really want to think about food. You just want to get out of there. Get what you need and get out. It’s much easier on your cart – and your wallet.

#5. Separate Your Savings

If you haven’t caught on by now, each of these things has a psychological component. “Save more, spend less” is really just a mind game. You have to know yourself, how you are, and what you can do to beat yourself to the punch.

I recommend separating your savings from all your other money. Make it hurt to draw from it. When I first started saving, my first $1,000 was in cash. Why? Because cash feels real. You have it in your hands instead of seeing a number on a computer screen. You don’t want to part with it. I also kept it in $100s, because I didn’t want to break any of those nice, big bills.

When it was time to move to an actual savings account, I opened up a savings account with the same bank as my checking. It was easy to funnel money back and forth. So easy, in fact, the savings account became an account for several things (like where to put aside my tax withholdings). It got so convoluted I didn’t know what my actual savings were — what was savings and what was meant for taxes? How much of it was set aside for an upcoming big purchase? Money was coming and going, and my savings was getting caught up in it.

I finally got my savings its own account, isolated from everything else. I have a nice, easy number to look at and know “that’s how much I have saved.”

See, it’s all psychology.