Why You Need an Emergency Plan, Not an Emergency Fund (Moolala: Money Made Simple With Bruce Sellery) Sirius XM Radio Channel 167

You may have heard that you MUST have an Emergency Fund. 

And yet how many of you actually have one?

I was recently interviewed about this topic on the Sirius XM Radio Channel 167, which is now out on the Moolala: Money Made Simple podcast with Bruce Sellery.

As you know, I’m all about unconventional financial wisdom. You do not need an emergency fund. You need an emergency plan.

Listen in (and read the blog post below) to hear my insights on this topic and discover the answers to:

• What is an emergency plan?
• Benefits of an emergency plan.
• Difference between an emergency plan and an emergency fund.
• Why you don’t need an emergency fund.
• Why it might be a mistake to save for an emergency fund.
• When you would need an emergency plan.

Moolala: Money Made Simple with Bruce Sellery

Bruce Sellery wants to inspire you to get a handle on your money so you can live the life you want. If personal finance makes you want to take a nap, tune in for a new spin on it. We’ll talk about getting better at spending, saving, investing, borrowing, and more. Moolala is Money Made Simple!

Interview:

What is an emergency plan?

• Money you can access in case of an emergency when you don’t have time to save up.
• Could be a savings account, credit line with available credit, investments they would not mind tapping into on short notice, or something else.
• Instead of a savings account, a credit line works more effectively for most people.
• Should be only for unexpected emergencies. You should have the intention of not using it.
• Rule of thumb is 3-6 months’ expenses.
• “Emergency number” can be different for everyone. What is your largest possible unexpected expense?
  • Most people, it is losing their job. Not finding another one for a year or more.
  • Large home repair, such as roof or furnace.
  • Car repair or accident not fully covered by insurance.
  • Family needs money.
• Step 1: Figure out your “emergency number”.
• Step 2: Apply for a credit line with available limit to cover unexpected expenses.
• Step 3: Invest your cash in long-term investments, instead of cash in a savings account.
• Step 4: Pay off credit line if you ever use it. Or roll it into your mortgage when it comes due.
• If you have decent income, you can pay off the credit line after.
  • Or you can roll it into your mortgage when it comes due.
    • Mortgage is the lowest interest rate.

Benefits of an emergency plan

1/ No need to spend a long time saving money.

I see young people spending years trying to save up $30,000 or $50,000 in a savings account, because someone told them the most important first step with your financial security is an emergency fund.

a) Most people have very few unexpected large emergencies in their life.

2/ Not tempted to spend it. People with a lot of cash sitting around often spend it. That is why it can take many years to save an emergency fund.

a) Really, they are just spending all their money and saving nothing, since they keep spending from their emergency fund.

3/ Don’t have $30-50,000 sitting in a low return, high tax account for decades. You miss out on a huge amount of growth.

a) $30,000 sitting in a savings account for 30 years instead of invested for long-term growth for your retirement, you could miss $250,000+.

4/ You can focus on retirement. The biggest part of your financial plan is the retirement fund. Most people need more than they think to retire with the lifestyle they want. It’s important to have a Plan and focus the bulk of your investments on retirement.

a) When you have a retirement plan, including figuring out the retirement you want and when, you find you probably need to invest 10-20% or more of your income.

b) You lose a lot to have money sitting around that you are tempted to spend.

Difference between an emergency plan and an emergency fund

• Emergency fund is money sitting around.
• Emergency plan is knowing where you can access money if you need.
• Instead of cash sitting around, have a credit line and invest the cash for long-term growth.

Why you don’t need an emergency fund

• You can use your money effectively. Focus on retirement.
• Most people have very few unexpected large emergencies in their life.
• Pay it off after or refinance it, instead of saving before.

When you would need an emergency plan

• Nearly everyone needs an emergency plan. What will you do with an unexpected large expense?
• Emergency plan = Peace of mind.
• Some people with large portfolios can just dip into those if necessary.
  • Generally best not to rely on them, because you don’t want to sell if your investments is temporarily down.

Ed