Don't Panic (Yet): Building Your Financial Safety Net
A crucial step to achieve your financial goals
Introduction
The markets have been on a wild ride for the last several months, and uncertainty in the job market has been high. So many people I know have either lost their jobs or fear that they may lose them.
In my opinion, the most crucial step in pursuing your financial journey is to establish an emergency fund. It may not be the most thrilling topic, but in today's unpredictable world, having a financial safety net is more important than ever. A well-stocked emergency fund can be the difference between weathering a storm and facing a financial crisis. Think of it as your "I can still afford avocado toast" fund. This newsletter will walk you through creating and maintaining this crucial financial cushion.
Disclaimer: This is NOT financial advice. I am just sharing my strategies, investments, stocks, and index fund strategies, what I'm buying, and where I plan to take those investments. Everyone’s financial goals are different. No financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert.
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The First Steps Before Investing
Before I ever start investing, the first thing I’d do is to contribute to an employer-matched 401K plan. Often, an employer will match 5-8%, so that’s an easy 100% return. It's like your employer is saying, "Hey, I'll give you money to save for retirement…because I know you'll probably need it after working here." I would make sure to contribute the full amount that the employer will match. Even if you’re unfamiliar with investing, you can put that money into a safe money market fund, and you’re making a 100% return with the employer match alone.
The next thing is to create an emergency fund. Life, as they say, is what happens while you're busy making other plans. And by "life," I mean unexpected medical bills, a leaky roof, car repairs that cost more than your car – these unforeseen events can derail your budget and lead to debt if you're not prepared. An emergency fund acts as a buffer, allowing you to handle these situations without resorting to high-interest loans or 25% APR credit cards.
Dave Ramsey has some great advice, which I agree with, and that is to first establish an emergency fund with $1,000. It’s enough to cover, say, a really good weekend in Vegas…just kidding! It's for actual emergencies. Once you have that, work on getting rid of credit card debt (my newsletter on squashing credit card debt is here), and then work on your emergency fund again.
How Much Should You Save?
A common recommendation is to aim for 3-6 months of essential living expenses. But let's be real, "essential" is a highly subjective term. For some, it's rent, food, and utilities. For others, it's rent, food, utilities, and their daily Starbucks fix. (No judgment here.) So the ideal amount varies depending on your individual circumstances:
Consider your job security: If you're in a stable industry, 3 months might suffice. If your industry is volatile, aim for 6 months or even more.
Factor in your dependents: The more people rely on your income, the larger your emergency fund should be. If you have kids, pets, or that weird roommate who eats all your food, you'll need more.
Evaluate your health: If you have chronic health conditions or high deductibles, a larger fund can provide peace of mind.
Calculating Your Essential Expenses
Track your spending: For a month or two, meticulously record all your expenses. Use budgeting apps, spreadsheets, or just a good old-fashioned notebook. (Remember those?) This is where you'll discover just how much you actually spend on avocado toast.
Identify essential expenses: Distinguish between needs (housing, food, utilities, transportation) and wants (entertainment, dining out). Rent? Need. Daily latte? Want. (Again, no judgment.) WrestleMania tickets? Need. (Just kidding.) Focus on the needs for your emergency fund calculation.
Calculate your monthly total: Add up all your essential expenses to determine your monthly needs. Multiply this by 3-6 (or your chosen timeframe) to arrive at your target emergency fund amount.
Where to Keep Your Emergency Fund
High-Yield Savings Account (HYSA): These accounts offer competitive interest rates instead of just mocking your balance. I listed my top 5 high-yield savings accounts here. CIT Savings remains my main high-yield savings account, and they currently offer a 4.1% APY with a balance of $5,000 or more. Some of the other accounts I listed were AMEX Savings, Sofi Bank, and Citibank, which all currently have a 3.7%-3.8% APY with no minimum balance. All the banks listed are FDIC-insured.
In general, it’s a good opportunity to double-check where you have your savings. For instance, a standard Chase Savings account has a 0.01% APY. If you were to store $10,000 in a CIT Savings account, you would have earned $410 in interest after one year. With a Chase Savings account, you’d have pocketed $1.Money Market Account (MMA): Similar to HYSAs, MMAs often offer higher interest rates and may come with check-writing or debit card access. Some of the money market accounts I currently utilize are FZDXX at Fidelity (4.15% APY) and SWVXX (4.25% APY) at Charles Schwab.
Tips for Building Your Emergency Fund
Start small: Even small contributions add up. Begin with a manageable amount and gradually increase it.
Automate your savings: Set up automatic transfers from your checking account to your emergency fund each month so you don’t have to rely on willpower.
Cut unnecessary expenses: Identify areas where you can reduce spending, such as dining out less or canceling unused subscriptions. Do you really need that fifth streaming subscription? Probably not. Direct the savings towards your emergency fund.
Boost your income: Consider taking on a side hustle or freelancing to accelerate your savings progress.
Stay disciplined: Resist the temptation to dip into your emergency fund for non-emergencies. That new pair of shoes does not count. This fund is for unexpected crises only.
Maintaining Your Emergency Fund
Review your fund regularly. As your income and expenses change, so should your emergency fund. And if you do have to use it (because, life), replenish it as quickly as possible.
Conclusion
Building an emergency fund is like flossing: you know you should do it, but it's easy to put off. But trust me, it's worth it. It provides a safety net for life's unexpected events and gives you peace of mind knowing you're prepared. Start today, and you'll be well on your way to a more secure financial future. Your future self (and your stomach) will thank you.
That's it for this week! As always, no financial decisions should be made solely on this newsletter, which is for informational and entertainment purposes only and is not intended to be a substitute for advice from a professional financial advisor or qualified expert. If you haven’t already, please subscribe to this newsletter below and never miss an update: