149: Emergency Fund Before Investing: Your First Financial Step

The Emergency Fund’s Real Job

Jessica 0:07

In today's episode, we're talking about the fund that is boring but makes everything else possible. It's what lets you stay invested, dodge debt, and make calm decision when life happens. Of course, we're talking about the emergency fund. And today we're talking about how much you need, where to keep it, and why it should come before investing. Stay tuned. Welcome back everybody to the Sugar Daddy Podcast, where we help you build a clear financial plan so you can feel confident and in control of your money. If you're an OG, welcome back. We're so glad to have you. And if you're new here, thank you for tuning in today. And we hope you'll be back next Wednesday and the Wednesday after that. Hey babe, what are we talking about today?

Brandon 0:49

Today we are talking about the building a proper and adequately funded emergency fund and why that is so important.

Jessica 0:57

Okay. Why is it so important? Well, let's just dive right in.

Brandon 1:01

Well, the thing is that, like, you know, in this world of social media, so much uh hype is and so much time and effort is focused around talking about various types of investing, which is obviously an important part of the financial planning piece. However, it's not the first piece that you should be focusing on.

Jessica 1:17

Okay.

Brandon 1:18

And that's what I think is highly overlooked. Because it's not, it's not sexy, it's not fun, it's boring, and that's why it's not talked about enough.

Jessica 1:26

Well, but even good investing is boring. So this just keeps going with like the good financial education and good solid financial advice is boring.

Brandon 1:37

Yeah.

Jessica 1:37

Right?

Brandon 1:39

I think majority of the financial majority of the investing that you should be doing is going to be boring. Obviously, there's that small little portion of that can be a little bit more fun and sexy, but the bulk of it is vanilla.

Jessica 1:49

Yes.

Brandon 1:50

And I I I know some people out there love vanilla ice cream, but you know, it's whatever.

Jessica 1:56

Um, so let's talk about the boring account

Why Cash Stops Bad Decisions

Jessica 2:00

that is the foundation of everything else.

Brandon 2:02

Well, it's not an investment, and it's honestly a little bit more on the insurance piece as far as from a risk mitigation standpoint, and that's your emergency fund as far as having it in a high yield savings account.

Jessica 2:12

Okay. Okay. So high yield savings account, we will link our favorites. Um, I'm sitting here with my Ally Cup. Ally, if you want to sponsor us, let us know. But we love Ally because it's a high yield account, um, good interface, super simple, and you can have buckets.

Brandon 2:28

Yeah.

Jessica 2:29

So what do you want to talk about next?

Brandon 2:31

Well, the biggest thing is that when you don't have an adequate amount of cash, that's when bad decisions are made, and that's when you go in debt.

Jessica 2:39

That's true.

Brandon 2:40

Because I'd never met anybody that really goes into debt because they have money on hand.

Jessica 2:46

Yeah, that's not a thing. So the emergency fund is exactly that. It is not an investment. This is not where you're putting money away to later invest. This is for those unexpected life things that happen. And we all, I don't even want to say them out loud because I'm like, don't put that in the atmosphere. But it's, you know, it's the the blown tire, it's the appliance that stopped working, it's the washing machine that all of a sudden is like making a really weird noise, and you're like, oh no, please don't be on your last leg. It's all of those things. It's something happening with your animal, something happening, heaven forbid, with your kids or a family member, with your home. Those are the just the daily, like, well, hopefully not they're not daily, but like the life things where you're like, I don't want to pay for this right now.

Brandon 3:29

Yeah. And it's the emergency fund is for exactly like it says, emergencies. It's not for because you want to buy some new clothes or you want to go on this trip that just all of a sudden came up. That's not what an emergency fund is for. It is for those unexpected things that need to be covered. You know, one of the biggest ones that emergency fund really is for is say if you are laid off and you lose your job.

Jessica 3:49

That's we see we're seeing that all over.

Brandon 3:52

And having a properly adequate uh properly funded emergency fund is going to allow you to continue to live in the home that you're living in, continue to pay your bills until you can actually get back into the workforce.

Jessica 4:02

Yes, exactly. So,

The Three Month Starter Goal

Jessica 4:05

how much do we actually need in this emergency fund?

Brandon 4:09

So I always say, you know, a good if you don't have anything saved up, I do want to make a realistic goal to begin with. And that is like trying to hit that three-month mark, three month worth of expenses. And once again, everything that we talk about builds upon itself. So we've had episodes talking about cash flow and budgeting, knowing what that number is as far as what are your monthly expenses, because that's going to determine how much you're putting away into an emergency fund. So, for example, if your expenses are $5,000 a month and your first goal is gonna be three months worth of expenses, that's $15,000 that you're looking to hit as a goal for the beginning part of funding your emergency fund.

Jessica 4:45

And and let's just be very clear if you don't have an emergency fund right now and you're like, okay, $5,000 times three, $15,000, how am I gonna do that? Let's start with $100. Let's start with $200, let's get to $500, let's get to $800. Like, don't let something like that overwhelm you into doing nothing.

Brandon 5:03

Yes.

Jessica 5:04

So $15,000, that's a ton of money.

Brandon 5:06

But that also goes back to knowing your numbers, how much money is coming in, how much is going out.

Jessica 5:10

I know I just don't want people to feel overwhelmed right from the right from jump.

Brandon 5:15

And then I like to go the next step further. Once you kind of hit that three-month mark and you've started to build a habit and you're on your way, I like to go a minimum of six months. A minimum of six months. Now how much you actually have in the emergency fund could be from six to twelve months. So it's all gonna be based upon you as an individual. So are you single and you're the only person that has to worry about is yourself? Are you friends? Yes. Are you married? Do you have kids? If you're married, do you have a are you a single income or a dual income? What um industry do you work in? Do you work in an industry that has high turnover in the sense of there's a lot of layoffs going on, like say tech industry? Or are you in a more stable industry? And even on top of that, if you were to get laid off, are you a very niche where you have a high probability of being hired right away? All those different um aspects are gonna come into determining how much you should actually have in your emergency fund, you know, whether from six to 12 months. And that's gonna be kind of an individual thing that you or you and your partner need to discuss. And also could just be from a comfort level. So for example, it doesn't even have to be a static number. We actually talked about on probably a previous episode, talking about how with some of the layoffs that Just has experienced over the past couple of years, we're looking to up our emergency fund. And that's just simply based upon what we've seen in our life and things have changed. So we're changing that number.

Jessica 6:31

Exactly. Yeah, but again, that requires evaluation. You have to get vulnerable, talk about where your comfort level is is financially. Um, you know, because I'm in in tech and it's a very volatile industry, I told him I would just be more comfortable having more in savings. Now, on the flip

Picking Six To Twelve Months

Jessica 6:50

side of that, have you ever run into people who have too much in savings?

Brandon 6:53

I have. Now, what I mean by that is, because a lot of people probably heard then, like, how could you have too much in savings? What I mean by that is that the way that we look at, you know, from kind of like a rule of thumb when it comes to having cash on hand, because you got to remember, having cash, even in a high yield savings account, is not investing. Because a high yield savings account is going to probably get the one of the higher interest rates that you can have on safe money, but it's still not going to keep up with inflation. So technically, you're probably still losing money. What I mean by that is that a dollar today, it's not gonna be able to buy the same thing a dollar next year. So you want to make sure that you have really thought out how much cash you want to have on hand. And kind of the way we look at this is that if you are going to invest money in the market, bare minimum, I want it to be in there five years or longer.

SPEAKER_02 7:41

Okay.

Brandon 7:41

So if you're going to need money in less than five years, kind of really don't want to invest it. We want to keep that in safe such as a high yield savings account. And so if you have money on hand, for example, like you we've already talked through, hey, I want a year's worth of an emergency fund. I also have some of these other expenses because the thing is too, here is that you could have some other expenses as well that are going to be big expenses, like if you're gonna buy a car within the next couple of years, or you maybe have to replace windows or buy an AC unit for your home, that's also gonna come into money that you would want to keep in a high-you savings account. Now, if you take into account all those and then you have an additional $50,000, just chilling there, that is not earmarked for anything that's gonna happen within the next five years, that money could probably benefit you more by being invested. Because once again, if it's not invested and growing, you're losing the ability of future purchase power. That money is technically decreasing what it's gonna be able to buy you in the future.

Jessica 8:36

So, what would you say to people who really like a large amount of savings?

Brandon 8:42

Um and I would start to question what is the um psychology behind that? Because if I'm having a conversation with you and I'm talking about all the things that you want to cover and we're starting to just purely do math now, yeah. Mathematically, you need this amount for, you know, six months worth of emergency fund. We're looking at buying windows, this is approximately how much it's gonna cost to replace the windows, this is how much an AC unit's gonna cost, you know. We've done all the math there, but then you still have a significantly higher number. My next question is why? What is the reason behind that? Because we've gone through the reasons why people wouldn't put that money away into the emergency fund.

SPEAKER_02 9:20

Right.

Brandon 9:20

But now you're wanting to keep more than the reasons you were telling me. So that might come from a plethora of things. You might have come from a household that was unstable and you know uh money was up and down, you didn't necessarily know where your next meal was going to come. So you might be hoarding the money that you have because as long as I have it in my personal possession, I feel safe and comfortable. You might also have been, you know, grew up in a household where financial literacy, well, a lot of us grew up in high school households where financial literacy wasn't taught to us. So you might not understand how investing works. And it might have been framed to you as gambling.

Jessica 9:52

Yeah.

Brandon 9:53

When that is not at all how it is.

Jessica 9:55

I think especially in black and brown communities, it has been portrayed as something that's just not safe.

Brandon 10:02

Yes. So breaking down the reasons why you want that excess money, and then maybe looking at ways that we can overcome that hurdle and that understanding so that you can do what is best for you with that money.

Jessica 10:16

Well, and then also, you know, these savings accounts, they typically have FDIC insurance up to $250,000. So if you're keeping $251,000, that $1,000 extra dollars is not insured. So multiply that if you have, you know, I mean, there are people who just want their money to themselves. They don't want to put it in the market. And, you know, again, we are not financial counselors or therapists or psychologists. So you might need to talk to somebody about that. But whatever you're doing, you want to make sure that the money in those accounts is at least insured. So if you're going over that $250,000 mark,

When Savings Becomes A Drag

Jessica 10:55

you need to open up another account.

Brandon 10:57

Yeah. And the thing is, we kind of prepped before is that like this debt comes before investing. Now, I will say this there is one exception in this scenario. And that is if you have like access to a 401k plan, 403B, whatever type of retirement account through an employer, and they do provide an employer match, I is the exception. Go ahead and get the match and get that free money. But you know, you got to think about this way: no one is going to become a multimillionaire tomorrow by investing a couple thousand dollars in a given year. It's just that's that's not mathematically how that's not how it works. Investing to build wealth is a long-term play. So this is many years in the making. However, if you don't have a properly funded emergency fund, an emergency today or tomorrow can completely cause a huge issue in your financial life.

SPEAKER_02 11:47

Yeah.

Brandon 11:48

So this is one of those fundamental things that you want to do at the beginning of your financial planning journey.

unknown 11:53

Yeah.

Brandon 11:53

Start working on building that emergency fund.

Jessica 11:55

Yeah, because you don't want to have to undo or heaven forbid, pull money from your retirement accounts and then have those taxes and and all of that burden because you didn't plan properly.

Brandon 12:07

Well, the thing is too, here is that when we talked about the investing aspect, one of the biggest benefits of obviously investing is compound interest. Now, compound interest can work against you if you don't have a properly funded emergency fund. Because if you don't have emergency fund funded, this is when people go into debt, more specifically, credit card debt. Now, with a credit card, you're having an interest rate of over 20%. Now compound interest is working against you.

Jessica 12:30

Yes. It can it can be positive when it's in the market and your money is growing over time, but it can also be negative when the interest uh for your debt is compounding.

Brandon 12:41

And having a properly funded emergency fund helps prevent that. So this is why this is one of the first steps you should be focused on doing.

Jessica 12:47

Yeah. So open up a high-yield savings account and then automate whatever the number is that you come up with after you get your cash flow under under control and you figure out what that number is. And then you automate every single month or every paycheck, whatever makes sense for you, that money into your savings account.

SPEAKER_02 13:06

Yes.

Jessica 13:06

And then you want to increase that number as you can

Where Not To Store It

Jessica 13:10

up until whatever the point is that you no longer need to contribute.

Brandon 13:14

Yeah. And the big thing here is also we've been telling you about where to put it. I want to tell you where not to put it.

Jessica 13:19

Oh, let's talk about it.

Brandon 13:20

Do not put it in a checking account.

Jessica 13:22

Oh no.

Brandon 13:23

I have don't put it in a checking account. And honestly, don't put it in a savings account at one of the standard brick and mortar banks because you're going to be getting a little bit more.

Jessica 13:31

What about your credit union, local credit union?

Brandon 13:34

I mean, you have to check the interest rate.

Jessica 13:36

Yeah.

Brandon 13:36

Now, most of the credit unions, most of the credit unions are better than the brick and mortar, but that most of them are not as well as like, you know, say like an ally or like uh a Capital One 360 account. Like a lot of them aren't going to be the same as those.

SPEAKER_02 13:49

Okay.

Brandon 13:50

So the biggest thing is knowing, hey, what is the average interest rate on the high yield savings accounts? And what am I currently getting? Am I on par? Like, you know, if you're not like you know, around three to three point five percent, you know, you look at yours, you're getting two, or you're getting 1.5. Like you need to make a change.

Jessica 14:07

Yes. We will drop our ally link. Ally is great. You can have the buckets.

Brandon 14:11

Don't you be surprised I'm people I see that keep a lot of money in the checking account.

Jessica 14:14

Oh, I don't have like, yeah.

Brandon 14:17

Also, do not have it in an investment account. I have had because I've had way too many conversations with individuals that are like, ah, I don't like having, you know, and these are people who have a properly funded emergency fund. They're like, I don't like having $60,000 just sitting here not doing anything.

Jessica 14:33

Like so they want to be like undo the investing mindset.

Brandon 14:37

So you wanted an investment that said, I'll just pull it, you know, if I need it. And I was like, And pay a 10% penalty and taxes. No, because it's not, it's a brokerage account.

SPEAKER_02 14:45

Oh, okay.

Brandon 14:45

It's not a retirement account. So they have access to it if it was invested. But the problem lies is that if you actually need a certain amount of money and your account is down and you pull it out, then you've lost money.

Jessica 14:58

Yeah, yeah.

Brandon 14:58

So I'm like, you need to separate the buckets. I cannot stress that enough. The emergency fund bucket is not an investment bucket. Do not look for it to be an investment bucket. That is not how you look at it at all. This is money that is easily accessible should an emergency arise, and you know that you're not going to have less than what you put into it.

Jessica 15:16

Yeah. I I bet that's hard, especially for people who are fiscally very responsible and have been investing for a long time, to then just, you know, like you said, see that money sit there and not do anything. But that's why it's in the high yield account. You're getting a little something for it. It's not sitting in a checking account, literally losing money every day. Which but I I get it.

Brandon 15:36

The you know, the financial planning aspect is also the behavioral finance from it as far as switching your mindset on how you actually should be viewing your money.

Jessica 15:42

Yeah.

Brandon 15:43

Like you cannot view that emergency fund bucket as a growth bucket. It's not a growth bucket.

Jessica 15:48

It's not a growth bucket. It is literally an emergency bucket.

Brandon 15:50

Correct.

Jessica 15:50

Well, and then reminding people that when the emergency comes, because inevitably it will happen. Use the money. Even if you're, you know, and again, maybe you are the person that uses the credit card, put the thing on the credit card, get your points and miles or whatever, and then move the money out of the savings account to pay off

Layoffs, Severance, And Next Steps

Jessica 16:10

what's on the on the credit card.

Brandon 16:11

Yeah. And even for those individuals who are married with a partner or whatever it may be, and your um finances are together, you guys can have these conversations together and figure out how much you should have an emergency fund, what you're comfortable with. So, for example, like we just said earlier, you know, Jess was really, you know, stressing because she's the one that's had to go through it first. Like we we went through it, but it was hitting her the hardest because she's the one that was directly affected by it. And she was like, I want to have more saved up in an emergency fund. And the thing was, is it was an emotional aspect for her as well.

Jessica 16:43

Well, to be very clear, I was like, I want $100,000 in the emergency fund. And Brandon was like, whoa, killer, like what where is this number coming from?

Brandon 16:51

So I always draw it back to the number where like she and when we talk, and that that that's the relationship aspect of having open conversation to get to a solution. And what I found out from her is that she wants a year's worth. So it wasn't just a hundred thousand. She had pulled a number out of the air. And what I want to find out is what specific is like she I want a year's worth of expenses in an emergency fund. Okay, we can have that number. It's not $100,000, but you know, we we now I now know where she's at.

Jessica 17:17

I also said in the event that I get affected by a layoff again, I also don't want to have to just like rush back into finding a job and doing the resume and do it, it's like that's very stressful. And I mean, I really like where where I'm working and I like the people that I'm with and all those things, but I've I've liked that in the past too. And again, most of these layoffs now are not performance-based at all, right? Not at all. So you just need to be prepared. And I also, because I had that garden leave after I was impacted from one of the Fortune 500 companies that I was working for, that garden leave was nice.

Brandon 17:56

I also want to specify that when it comes to, for example, with Jess, one of the companies she was at, it was kind of really well known that when they did layoffs, you did get a really nice severance package. However, I also argue that maybe you should not take into account your severance package as part of your emergency fund.

Jessica 18:15

No, well, and we tried to not use the severance in like we wanted the severance to pad the emergency fund, really ideally.

Brandon 18:24

Because the idea here is that most of the time a severance package is not built into your contract.

SPEAKER_02 18:29

Right.

Brandon 18:29

And so if you get laid off and it's not built in, even though other people have gotten it, doesn't mean that you are 100% guaranteed. Yeah. And even in some scenarios where if it is built into your contract, if you're with a smaller company that's going out of business, they don't even have the money to pay you. So good luck with that. So I always say, I want to focus on the things that I can control. What can I 100% control? I can control how much I'm putting into my emergency fund. I don't control necessarily if the company's gonna give me a severance package when I leave, but I can control how much I have if I do get laid off.

Jessica 19:00

Right. Yeah. So I mean the emergency fund is planning for the worst case scenario. Yes.

Brandon 19:05

So that's which is another reason that people don't want to talk about this stuff because it's sad.

Jessica 19:10

It's bad. It's not negative.

Brandon 19:11

But I'm telling you, once we put a plan in place for worst case scenario, nine times out of ten, worst case scenario doesn't happen for everything. Which is so you know you can make it through it. And then once we have the basis for all the worst case scenarios and we're putting all the things in place that we can to help protect or prevent those, now we can talk about the fun stuff.

Jessica 19:28

Yeah. Because again, we just want to have a plan for our money. Yes. That's what this is. It's planning for our money, but we also know that life be life and and we need to have a plan for the unexpected that we know is coming. So um, we will drop the link to our ally. Uh, again, highly recommend. Love the bucket, set up the buckets, and just remember to switch your mindset from this is not investing, we are not investing this money, and it's okay that this money is quote unquote just sitting there because that's early steps. That's what it's supposed to do. And it's an early step in this financial journey. Hopefully, this episode has helped you. Share it with a friend, and we will talk to you next week.