My Emergency Fund: What is in it and is a $100,000 too much?
Life's full of unexpected twists—some hit you like a ton of bricks. That’s what lit a fire under me to build my financial safety net, a journey that’s been both wild and wildly enlightening. Stick around as I dive into the trenches of setting up an emergency fund, where I’ll share the raw numbers, and the revelations I stumbled upon while dodging life's financial bullets.
⚠️ Disclaimer The views shared in this post are solely my own and are provided for informational purposes only. They should not be taken as financial advice. Readers should consider their own financial circumstances and, if necessary, seek professional advice before making any financial decisions based on this post.
How Emergency Funds Helped Me Throughout My Life
Financial Independence or "F you" Money
Back in the middle of 2017, I was fed up with working for Amazon as a delivery driver. I have always wanted to do something that applied my talent in math. And even though I hadn’t heard of personal finance back then, I have always been a natural saver, planning to do something with the money eventually.
Then, I found out about software engineering from a friend of mine. Turns out, you don’t need a college degree to do it; I was intrigued. At that point, I had $9,000 saved and a very modest lifestyle, sharing a room and a car with my friend. I was able to live on less than $1,000 a month.
I attempted to pursue learning how to code in the time after work, but that was almost impossible. Long commutes and physical exhaustion did not help. At this point, I decided to say no to the money I was making driving for Amazon to pursue something I would fall in love with - coding. It took me over 9 months from that decision to get my first software job. All thanks to the $9,000 I had stuffed into a savings account.
- Funds at the resignation: $9,000
- Time to save up: 12 months
- Time lived on savings: 9 months
- Funds at the end: -$900 on the credit card
- Financial anxiety level: Mid-High
The Day My Emergency Fund Saved Me from Disaster
Back in March 2020, I was faced with a pandemic and a subsequent layoff due to the startup I worked for failing to raise another round - pretty unexpected, huh? At least for me, it was. As a result, I was stuck with a lot of purchases from the lifestyle creep, thinking I was making enough to sustain it. I had a $2,600/month apartment, a $600/month car payment, and a bunch of expenses that totaled around $5,000/month.
At the time, all I had in my checking account was just above $10,000. Companies started announcing layoffs left and right, and finding a new job quickly seemed unlikely. At that moment, I made a decision to drop everything I had, leave it all behind in rainy Seattle, and move to cheaper North Carolina until things got back to normal. Breaking the apartment lease cost me 2 months of rent - $5,000 (robbery). I loaded what I could in my car and drove all the way to North Carolina, where I paired with my friends and spent no more than $1,200/month for everything, including car, rent, and groceries.
My emergency funds did not last too long this time, but by breaking the apartment lease and drastically reducing my spending, I was able to outlast the madness.
- Funds at layoff: ~$10,000
- Time to save up: 6 months
- Severance and other incomes: $5,400 + a laptop (sold for $500)
- Time lived on savings: 9 months
- Financial anxiety level: High
Stress Reduction
I have become a big proponent of budgeting and keeping track of all my financial assets. Knowing I have a dedicated emergency fund significantly reduces my financial anxiety. The peace of mind that comes from having this safety net is invaluable. It means that when faced with a financial emergency, my primary concern is not about money but rather resolving the situation at hand.
Foundation of My Personal Budget
So far, saving has really helped me get through a lot of situations, from unpredicted circumstances to self-induced shots in the foot.
A simplified version of my personal finance routine today has changed to:
- Make money through W2 employment.
- Spend on lifestyle/necessities.
- Make sure the emergency fund is full.
- Invest in education or side hustles.
- Invest in the stock market.
On Stocks and Other Investments as Emergency Funds
It's crucial to understand why investments should not be conflated with emergency funds. The primary purpose of an emergency fund is to provide financial security in times of unexpected expenses or financial downturns, ensuring that you can cover such costs without resorting to loans or credit cards. Here’s why investments don't serve this purpose effectively:
- Volatility: Investments, particularly those in the stock market, are subject to volatility. This means their value can fluctuate widely over short periods. In times of economic downturn, when you might most need access to your emergency fund, your investments could be significantly down in value, forcing you to sell at a loss.
- Risk of Loss: Investments inherently come with the risk of loss. Using your investment as an emergency fund means you might not have sufficient funds when you need them the most. The risk of loss is minimal for funds kept in insured savings accounts or as cash.
- Mental Peace: Knowing that your emergency fund is safely stored in a low-risk, easily accessible form such as a savings account offers peace of mind. You won’t have to worry about market fluctuations affecting the money you might need for emergencies.
So, considering all this, I've decided to put my emergency fund in a high-yield savings account, away from my investments. This move is all about keeping my money safe from the ups and downs of the market, making sure I can get to it easily when needed, and ensuring it's there for its main job—helping me out in a pinch.
Can Saving Be Taken Too Far?
The short answer is - yes. As you can see above, for me, filling up the emergency fund comes before investments into the stock market and even before investments into myself. Currently, I have a goal of building the emergency fund up to 12 months of my family’s expenses.
This can hurt me in the long term, and it most certainly will, after all, the best way to have more money is to make more of it. But over time, I have attached a lot of anxiety to the number in my savings account.
In time, I went from the goal of saving up $10,000 to $20,000 and more. And as this number grew, so did my personal expenses (lifestyle creep). $10,000 won’t be enough to pursue a new adventure for a year anymore, nor will $20,000 or even $30,000. Living in New York City gets expensive, and the last time I checked, 12 months of expenses came close to the $100,000 mark. Which is a lot of money to be sitting in a savings account, especially considering that they go there before they go into my personal projects and education.
That way, I have been stuck in this cycle of chasing something that helped me greatly multiple times before - the 12-month savings mark.
In the end, it's about finding balance. Navigating the financial seas with an emergency fund as my compass has been a game-changer. It's not just about the money; it's about the confidence and security it brings to the table.
How I Manage the Savings with a Spreadsheet
When it comes to keeping my emergency fund in check, my secret weapon is a good old spreadsheet. This isn't just about tracking dollars and cents; it's about creating a visual roadmap of my financial safety net. Let me walk you through how this simple tool has become my financial dashboard.
Setting Up the Basics
First things first, I need to get transactions from the savings account to the spreadsheet. This is easily done with OpenBudget, just connect your bank account and set up auto syncing of transactions from the savings accounts. OpenBudget will categorize transfers as “Transfer In” and interest as “Income”. This let’s you easily separate the two in your spreadsheet.
What do I track, Building out a Dashboard
Savings Target (months): 12
This indicates the goal to have enough savings to cover 12 months of living expenses. It's a measure of how long you can sustain your lifestyle without any additional income.
Budgeted Spending: $7,450.00
The amount you plan to spend monthly. This figure should cover all your expenses, including bills, groceries, rent, etc.
Actual Spending Average: $10,306.46
The average amount you've actually spent per month. This figure is often higher than budgeted spending due to unexpected expenses or overspending.
Budgeted Savings: $1,950.00
The amount you aim to save each month, based on your income and budgeted spending.
Actual Savings Average: $2,842.89
The average amount you've been able to save each month. If this is higher than your budgeted savings, you're doing a great job at managing your finances.
Savings Target: $89,400.00
The total amount you aim to save to reach your 12-month living expenses goal.
Current Savings: $79,799.46
Your net savings after accounting for any debt against your savings. It’s your current balance minus any debt that I hold in savings.
Deposited: $96,413.04
The total amount you've deposited into your emergency fund to date. This includes all contributions made over time.
% Earned: $3,386.42
Interest or any other earnings on your savings. This shows how your emergency fund is growing not just from deposits, but also from earning interest or investment returns.
$ to savings target: $9,600.54
The remaining amount needed to reach your savings target, providing a clear goal for future savings efforts.
Time to savings target (months): 3.38
The estimated time to reach your savings target at your current rate of saving. This helps you project when you will achieve your emergency fund goal.