Right now amidst the Coronavirus pandemic there are three groups of people, financially speaking. The first group, the group you want to be in, are those who have a solid financial position and are not worried about money, despite the uncertain future - even if it leads to being unemployed.
The second group are the ignorant. They don't know what they don't know and have no savings, but despite their lack of savings they have no concerns regarding their financial future. They're partying on the beach without a care in the world, at least for now.
Then there are those in the third group, which is probably the largest of the groups. These are people who are living paycheck-to-paycheck and were broke even before the pandemic hit. If you think there are no doctors or other high income professionals in this group think again!
Just because you have a high income doesn't mean you have money to weather a storm such as this. The latest Medscape Physician Wealth Report provides all the evidence we need to show most physicians do a poor job of using their high incomes to build wealth.
This blog is for the first and last groups. It will solidify for the first group what you've done is wise and simply reinforce your good financial behavior. For the last group we hope this blog will provide some insight into how to move into the first group.
It's cool to be a prude!
When Scott was growing up in the late 80's being a "prude" wasn't cool at all. A prude was someone who didn't like to have "fun". Someone who didn't like to party and break the rules.
However, when you look further at the definition of what prudent actually means it turns out being prude is a good thing, especially during times like these!
A key component to being prudent is having a wise and careful view of the future, while the opposite is being extravagant and making unwise decisions.
One of the key financial actions you can take to become more prudent is having an emergency fund to help during challenging times. While our focus today is on the Coronavirus pandemic, challenging times could also include having a long term illness, losing a job, having a major automobile problem, or a serious issue related to your home.
How much do I need to save?
The first question is determining how much is enough. To answer this question requires looking at how much you spend each month to maintain your household, which brings us to another critical behavior - doing a monthly budget.
It's hard to know how much you need to save if you don't know how much you're spending!
We suggest a minimum of three months and a maximum of six months of monthly expenses as a starting point. We have six months in our fund if you need a point of reference. For us the added security the extra money represents far outweighs what we might be losing by using the money another way (i.e. investments, rental property).
Where should I keep my savings?
It's way too easy to "accidentally" spend your emergency fund if you keep it mixed in with your regular checking account. We highly suggest keeping your emergency fund in its own savings account that you can link to your checking to make it easier to transfer quickly, if the need arises to use it.
There are some "high" interest savings accounts that may also be worth considering to earn a little interest on your money, but keep in mind the goal of your emergency fund is not growth, it's security. Think of the fund as an insurance policy against loss of income.
Speaking of insurance...
How much you need to save could also be influenced by the waiting period you may have for long term disability benefits to kick in. Don't have long term disability insurance? Get it now!
Most disability plans have a 90 day waiting period before they kick in. Consider this as you determine how much you may need to save.
5 ways to create your emergency fund.
The fastest way to get your fund started is to simply move the cash you have in your checking account to a designated emergency fund savings account, but if you don't currently have the money here's five ways to get it.
1. Save a little each pay period.
After determining how much you need to save, divide the total amount by the number of pay periods you have in the next 2-4 months. To add an extra oomph of effectiveness to this strategy setup an automatic transfer of this amount to take place the day after each paycheck is deposited into your account.
2. Sell something.
Another quick way to establish your fund is to sell something. With so many online selling tools such as eBay and LetGo, it's never been easier to sell stuff to get cash quickly.
It can be hard selling things you really love, so we suggest asking one simple question as you develop a list of possible sale items, "Would I rather have <what you could sell> or have a greater feeling of security by having $X,XXX in the bank for an emergency?". Much of the time you'll probably answer with the latter versus the former.
3. Cash out non-retirement investments.
This might be a last resort option with the market as low as it is now, but you could also consider cashing out any non-retirement investments to complete your emergency fund. Perhaps one good thing about selling now is that you could use it as an opportunity to tax loss harvest as well.
4. Use your tax refund.
If you're getting a tax refund it may also provide cash to fund your emergency savings. We would also suggest it is also an opportunity to change your withholding so you quit loaning the government money interest free.
The IRS has a great tool to determine what you should have coming out of your paycheck, but another simple tactic is to just tell your HR department (assuming you're a W-2 employee) to take out an even amount from each pay period that equals whatever your typical refund is each year.
5. Get a short term side gig or work more OT.
Another approach to getting your savings fully funded is to take on a short term side gig to earn additional income. This can be especially easy if you have an overtime option to pile up more hours to build up cash.
Finally, a combination of these methods can also provide a valid approach that might be the fastest of all approaches. Whatever your approach, don't wait! The sooner you get started the sooner you will finish and the sooner you will have peace of mind, financially speaking that is.
An emergency fund is PPE for your finances!
We want to thank all of you working on the frontlines in healthcare to help those who have been affected by the pandemic, and pray you will remain healthy during these trying times.
There are many reports that personal protective equipment shortages are expected, and in a similar way an emergency fund is PPE for your finances. Without it you might face a financial crisis.
Just like PPE in your work minimizes your chances of physical illness, an emergency fund is PPE for your finances that minimizes your chances of financial illness.
Be proactive! If you don't have an emergency fund we're not sure there's any better reason we could give you than the Coronavirus pandemic to start building one. Don't delay, start today!