Welcome to Taking Stock, a space where we can take a deep breath and try to figure out what the COVID-19 economy really means for our finances. Every month, personal finance expert Paco de Leon will answer your most difficult, emotionally charged questions about money. This last two years have forced many of us to reprioritize our finances, and there’s no clear road map for getting through the pandemic yet — but Taking Stock is here to help us figure it out together.
This month we're talking about emergency savings – how much is enough? And how do we save up when life is so expensive? If you'd like to share your own experience saving up for emergencies, we'd love to hear from you.
I’m 26 and feel totally lost when it comes to how much money should be in my savings account. I’ve been working towards padding up my emergency savings fund and have been hearing that I should have anywhere from three months to a full year of living expenses in case of an emergency. I work in an unstable industry where layoffs happen often and want to be as prepared as possible, and I struggle with not feeling like I have enough saved up. Is there an equation or an easier way to determine exactly how much I need? When I do have enough of an emergency fund saved up, what should I be doing with the money I’m saving? Investing? Putting it away for a rainy day? Help!
Dear totally lost,
The math behind the emergency-fund calculation doesn’t get any simpler than choosing between having three to twelve months of your expenses (rent, food, etc.) saved. The hard part, which seems to be what you’re struggling with, is deciding what amount feels right for you.
Personal finance is personal
For emergency funds, the three-to-twelve month range is the starting point, but the exact amount you need is up to you, your personal circumstances, and how you feel about risk.
Based on how you describe your work — an unstable industry where layoffs are a common occurrence — I’d say it’s prudent to aim for the higher end of the recommended range: at least six months. Next, consider how much risk makes sense for your personal circumstances. I’ve met people who say less than a year’s worth of expenses in their emergency fund makes them anxious. Then there are others who feel completely fine with three months on hand. Both their circumstances and feelings about risk play into their decision.
Once you’ve got six months saved, see how you feel. If you’re still worried, then aim for seven (or more) and reflect on your feelings when you get there. The right amount of money is whatever will help you sleep soundly at night.
If you’re still feeling uncertain, anxious, and insecure when you have hit your number, there are ways to address this issue both practically and emotionally. Practically, you can start investing your money towards a less-fragile and more-resilient financial life — when I say invest, I mean using money you’ve saved up outside of your emergency fund. Before we get into financial fragility and the emotions behind “enough,” let’s tackle your question about what you should be doing with your emergency fund money. In short, nothing really.
To invest or not to invest your emergency savings
Should you be investing your emergency fund? There are two schools of thought. One says no, and the other says yes, keep it in low-risk investments. I have yet to meet an actual real-life person that has ever belonged to the latter camp. Most personal finance experts and professionals I’ve known and worked with have all agreed that an emergency fund should remain uninvested — in cold, hard cash — in a high-yield, money market savings account.
A common avenue to opening up a high-yield money market savings account is through an online bank, like Capital One or Ally Bank. If you prefer to bank at a credit union, do some research or reach out to learn more about high-yield money market savings account offerings and options. (High-yield money market accounts offer a higher interest rate because banks invest in short-term, highly liquid low-risk assets. The interest payments you receive are compensation for the banks using your money.)
Most experts and financial professionals recommend keeping your emergency fund in a high-yield money market account because it’s basically cash, which means you’re taking almost no risk with your money. The downside is that you won’t earn as much on your money compared to investing, but that’s not the point here. The point is to have the cash available when you need it, and keeping it in cash means you aren’t running the risk of losing it.
Most savings accounts are FDIC — short for the Federal Deposit Insurance Corporation — insured. The FDIC is an independent agency of the US government that protects depositors of U.S. insured banks against the loss of their deposits if an insured bank fails. Make sure to verify that your bank is FDIC insured (try the bank’s website for this info). Most banks in the US are, but there are rare occurrences where some may not be.
In case you’re wondering about the second school of thought, those who say you should invest your emergency fund, I only recall seeing this advice given by companies that offer investments as their product or service. This brings a turn of phrase to mind: Don’t ask your barber if you need a haircut. In other words, understanding the incentives behind financial advice is an important aspect of making personal financial decisions.
Aiming for an anti-fragile financial life
When we’re financially fragile, we become vulnerable to financial and economic shocks. Shocks — from global pandemics and unexpected layoffs to normal economic downturns — are unavoidable; they are not a matter of if, but when. Once you realize that shocks are inevitable, you can start to prepare for them. Aiming for an anti-fragile financial life is all about minimizing these shocks as much as possible. When you’re anti-fragile under the pressure of stress, you’re able to bend and adapt, instead of break.
Of course, I understand that financial fragility may be a result of circumstances outside of one’s control. It’s also true that in many situations, we can choose to focus on our agency in spite of these things. Arguably, it’s the only thing we can do. Even though saving for an emergency fund can feel out of reach, especially if you’ve got student loan debt and you’re just starting to earn money, it’s important to simply start where you are even if that means you can only afford to save $40/month. The important thing is to start building the savings habit. Just start where you are.
In addition to an emergency fund, there are many other things you can do to help you feel less financially fragile. They are including but not limited to the following: invest via a retirement account, invest via a brokerage account, invest in your personal and professional development (learn new or sharpen existing skills), get insurance (renter’s, auto, and health to name a few), build a solid network of folks you can tap for support (both personally and professionally), prioritize your physical and mental health, consider a side business (if you have the bandwidth and desire), create an additional revenue stream, work on practical skills like cooking, understand how to regulate your nervous system, meditate, keep a gratitude journal, try a “buy list,” go to therapy, do something that feels fulfilling and puts you in a flow state so you’re not always anxious about money, get the fuck off social media, unsubscribe to annoying emails trying to sell you shit, try to be in the present moment, appreciating everything you have.
Maybe I gave you too many things, and the point wasn’t to overwhelm you, the point was to show you all the ways you can find agency and fortify your financial life and sense of security.
Struggling with feeling like you have enough
“Enough” will often feel like a moving target. Many times we convince ourselves that if we just save X amount of money, we’ll feel like we have enough. If we’re privileged, fortunate, and disciplined enough to get to that number, we often arrive at our intended destination feeling no more safe or secure and with another ambitious goal to march towards. While this may be the mindset that allows progress, it can also lead to discontent.
This is so goddamn cliche, but try to just focus on the process. You’ve got a lot of life and work ahead of you. Life is a wild ride and there will be plenty of bumps along the way. You’ll get off course and need to course correct and if you can find a way to appreciate the process, you’ll learn important lessons along the way.
I need to internalize this next statement maybe as much as you do: Money alone isn’t safety. Money can help you afford the things to make you feel safe and secure and can ease the anxiety of the natural uncertainties baked into the human experience. However, it’s important to remember that life is risky. That isn’t a prescription to throw your hands up and YOLO into meme stocks. Instead, it’s meant to help you get to the root of your worries and encourage you to find all of the things that will help you feel more secure in an insecure world.
Your favorite finance friend,
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