What is an emergency fund?

Video transcript: What is an emergency fund?

0:00 Hey everyone, thanks for stopping by. This is Phil with Foundation Wealth Planning and today I want to talk about the emergency fund.

0:07 So what is the emergency fund? How much should we have in it? This seems like kind of a basic concept, but It is a foundational building block to your financial health and well-being.

0:20 And so I haven't done a video about it. I need to have it out there so that people can see what that's all about.

0:26 Now there is a few things, that I'm going to go over in this video. And if you like it, please, you know, give it a thumbs up, like, follow the channel, follow my website.

0:36 You know, come back over here on the, on Instagram and everything, wherever you found, the video, please continue to follow it and check out more.

0:44 So I hope to do more of these videos, moving forward in just a few minutes for a quick hit of financial knowledge.

0:51 So the emergency fund is there to be that buffer between you and you know, being up a creek without a paddle, as they might say.

1:02 So when you think about emergency fund, the typical advice is three to six months of expenses. So, you know, what does that mean?

1:15 And does that apply to you? So there is some variation on that and really that's like a guideline, right? So people.

1:21 People usually say in terms of months of expenses because that gives you a way to think about how long you could live and pay your bills if you lost your job.

1:31 In this economy, most of you, if you were to lose your job, you could find what's still pretty fast. But if we do hit a recession where people have higher unemployment time periods,

1:43 You may actually be dipping into that. So if you take your monthly expenses and I would take. You know not the bare bones minimum of what you would need to live, right?

1:53 Because we always spend more and more expenses come up than a what we envision in this picture perfect life. So give yourself some buffer.

2:01 You know, take that and multiply that by, you know, three or six months. And, you know, that's really a good way to do it.

2:11 You know, you could take also just say, you know, how much, how much do I need?

2:22 You know, if I were to have some sort of catastrophe, right? You can look at various things like

2:28 What's my deductible on my medical emergency? What is my out of pocket maximum? Right? So if we lose a job, that's one thing.

2:35 If we have a medical emergency, that's another thing. What's our elimination period(I misspoke in the video, the elimination period is associated with disability insurance or long term care insurance) on our house, right? Do we have

2:44 deductibles on if we have a new roof, a new HVAC, right? How much of that has to come out of pocket versus what do we have insurance for?

2:53 What does that cover? So you know, there are various things that can happen when you own a house, emergencies come up, and you got to pay for it.

3:02 When you own a car, right? You have deductibles and things like that to come up with a car. If there's a wreck or what have you. The insurance company might come to help you.

3:14 It might take some time before they do that. Maybe they don't make you all the way whole. There's a lot of reasons why you want to have an emergency fund and the three to six much is this simply a guideline.

3:23 And you can think about it in terms of, well, okay, I could live for three months on basic expenses if I lost a job. Or that pool of money can be used for some of those other things that might come up that are unexcited.

3:37 Expected, but unexpected. Right, we know that things are gonna happen when we gotta go to the hospital. We just don't know when or how much that's gonna cost.

3:45 We know that someone's gonna have the house. We know that someone's gonna have it with a car at some point.

3:50 So these are, you know, unknown in terms of scope or when they will happen. But we shouldn't be surprised when things like that do happen because that's life.

4:03 So we gotta be prepared. And we don't want to have to go into debt for this. And this is how you get into credit card debt.

4:11 That's how people get into personal loans, taking out loans against their house. And you might be one of those that's in that situation and you need to work on, you know, digging yourself out.

4:24 That would be another video talking about some of that type of thing. But in terms of trying to either avoid going into further debt or, or getting yourself from getting into any more debt or, or any debt at all would be making sure you've got an emergency buffer.

4:38 You know, and typically you would look at three to six months. If you're married and you know, both husband and wife working

4:46 you would be more comfortable on the, on the three month side potentially. If you're a single income, you would definitely want to be higher to that six months.

4:57 And if you're getting close to retirement, or if you're going to start a business, or if you're going to do something else, having more like 12 months in place can be really beneficial in those situations.

5:10 And, you know, the other question that people get is, okay, so I've got this three or six months expenses. What do I do with it?

5:17 Well, you've got, obviously, a little bit of money, you're checking account. There are money market accounts at the bank and high yield

5:23 savings accounts. They are very similar but how they function on the back end is slightly different.  But a money market, if it's FDIC insured or a high yield savings account

5:37 from your perspective, going to look very similar. And so you can pick one of those at your local bank or you can pick one that has a little higher yield on it.

5:47 If you've got excessive amounts in there, you could go to something that's a little bit more of an interest rate, but it's going to be a little bit less liquid.

5:59 So liquidity would be how quickly can you turn an asset into cash and be able to spend it. So you know everything that's in your emergency fund needs to be liquid. It needs to be able to quickly be moved from whatever it's in into being able to be spent if need be but the amount of liquid that you would

6:19 need can vary based on you know the liquidity scale is going to be a little bit different. So you got a checking account but then you've got things that on the other side that are more like short term CDs, treasuries.

6:35 Those would be the two that would probably come up the most. You could put a little bit more in there but they're going to be locked up a little bit more so a treasury you could liquidate but it might take a little bit more to get to.

6:44 A CD you might do a three, a six or even a 12-month potential CD but again if you're waiting for that to you know, expire or to “come due,” would be the term you would use.

6:58 You don't want to have all of your savings in those types of investment vehicles. So, you know, this is certainly not advice you want to talk to an advisor to talk specifically about your situation but those things can be out there.

7:12 They might play a role in your, in your situation. But this is for education purposes. Talk to your advisor. If you have questions on that about your situation, feel free to reach out to me and I hope this was helpful.

7:22 Hope this got you a little bit more background on the emergency fund. The importance of the emergency fund and, and how to get to it.

7:30 But basically,  keep it in, in something that's easy to get to. Savings account. High yield savings, money market. 

7:38 If you have got a lot more in there you can potentially put a little bit more into something a little bit more like a CD, but you don't have to.

7:45 Keep it easy to access, get a little bit of interest on it, and make sure it's there when you need it.

7:50 Thanks for stopping by. God bless and have a great day.

Phil Francois, CFP®
Foundation Wealth Planning
phil@foundationwealthplanning.com
https://www.foundationwealthplanning.com/