EP 39: Emergency funds are often viewed as foundational to good personal finance, but is it really all that it's cracked up to be? In this episode, I discuss the role of a rainy day fund vs using the money to invest.Support the show (https://www.buymeacoffee.com/artrepreneurs)
Michael Der 0:02
You're listening to Artrepreneurs, a podcast that inspires photographers and visual artists to live their best creative lives. My name is Michael Der and I am a full time photographer with nearly 10 years of experience in the freelancing world. And I'm sitting down with an amazing community of visual artists to talk about process, business, and the lessons that have helped them grow. So let's get to it. Artrepreneurs starts right now.
Okay, what is up y'all Welcome back to another episode of Artrepreneurs thrilled to have you joining the show today. Now today I am going to address a topic that is an absolute favorite of mine, and that is whether or not you should create and contribute to an emergency fund. Now in all matters regarding finance, as usual, feel free to use or dismiss this information as you please, I am no financial planner, I am no money expert. I simply like to give people food for thought. And it all starts with gathering information so that you can make more informed decisions for your home and your business endeavors. So what is an emergency fund? Let's start there. And emergency fund is money that you have saved away to cover unexpected emergencies, which can range from any number of areas. They could be medical emergencies home emergency automotive computer, client or job loss emergencies and any number of unexpected expenses that require your immediate action. What it is not for are your discretionary expenses, things like vacations, entertainment, dining out clothing side projects, and emergency fund is a cover your ass fund, you don't use it to buy new gear, you use it to replace the gear that you had broken or stolen. And maybe you might say, well, that's what my insurance is for. And to an extent, I think you're right, insurance does cover a lot of areas like theft and damage. But keep in mind, not every situation will call for it. Let's say for example, it costs you $350 to fix your camera lens, and you have a $300 deductible, you may actually elect to pay that out of pocket and save your insurance for the bigger emergencies that you can't afford. In my opinion, insurance is for the big things that you can't cover on your own. That's its purpose, I'm not using my car insurance to cover a cracked windshield, I'm using it for major collisions. So to me, I think of the emergency fund as a rainy day piggy bank that's going to protect you in the short term when shit hits the fan. The reality is that the majority of Americans can't afford a $400 emergency without relying on debt, which is absolutely asinine. And this is why this conversation is such an important one, folks, because it's really not a matter of if you're going to experience an emergency expense. But when you're going to face an emergency expense. And the older you get, the more you understand this to be true homeowners, you're going to face countless projects that come up unexpectedly, parents, you're going to face increasing expenses for your kids that you had not accounted for initially. And first time business owners you're going to run into all sorts of financial obstacles during the course of your building process. Now, not every single unexpected expense falls into an emergency category. That's for you to decide on what is a major issue and what needs urgent tending. But if you do need funds to cover an emergency, having a dedicated place for that money can give you tremendous peace of mind. So what makes an emergency fund effective as opposed to let's say money in your checking account, for instance, is that it will never accidentally gets spent. So by splitting your money so that your emergency fund is on its own, you allow the ability for that fund to stay disciplined for such a rainy day disaster, as well as amplify your ability to contribute to it. If you kept your emergency money with your personal money, there's no telling how much you would spend from it because all your expenses are coming out of that one account. And this is why I think all you freelancers and entrepreneurs out there need to organize your funds, it's really hard to keep a tab on what money is meant for what purpose if everything is just jumbled together, think about all the things that you have to pay for groceries, utilities, transportation, shelter, insurance, medical entertainment, equipment, marketing and emergencies. If you paid for them all through the same account, it becomes really hard not to overspend in certain areas. Now the biggest con against an emergency fund is that it's not going to grow your money, that much we know is true. In fact, you could go as far as to say that it could cost you money by having your money stored in a place that doesn't earn any interest. So let's say you have $5,000 in cash sitting in a safe at home just in case of an emergency. Had you instead put that $5,000 cash into some form of investment vehicle that return let's say 5% annually compounding over 20 years, you could turn that five grand into $13,000 without ever adding $1 to it. Not to mention that same $5,000 in cash in your safe would actually technically have less purchasing power in 20 years due to the inflation rates chipping away at its value. So that in theory could be a difference of over $10,000 if you opt for the emergency fund over investing. Now with that being said though, an emergency fund really isn't so much about the mathematical growth of your money as much as it is about creating peace of mind which I can attest to being one of the best ways to prepare yourself. If you've freelance full time, slow months are going to happen as do unexpected high expense months. You never know when or if a big job you're banking on is going to get cancelled or when your transmission just decides to stop cooperating. As debt guru Dave Ramsey says in emergency fund is not an investment. It is effectively insurance. insurance costs you money. It doesn't make you money. So why would you Do insurance because it covers your butt, folks, it's not here to make you rich. That's what your investments are for. That's why you separate your money into different buckets. Some of it, you grow, some of it you save, the whole point of having money in your 401k, or your IRA is to leverage the long term compounding interest. So if you decide to use those vehicles as your emergency fund, you're effectively working against its greatest strength. And on top of that, you're going to get hit with penalties and taxes, when you take that money out. Think of your emergency fund is actually protecting your investments, it is there so that you don't have to disrupt the momentum of your investing vehicles, whether
it's stocks, crypto, 401k, IRAs, whatever it is. Now, I will admit that at some point, I do believe there is such a possibility as too much money being in your checking or savings account. And if you do want to keep two years worth of income in an emergency fund, just in case the next recession hits, that's your call and you're totally entitled to it. I just like to keep my emergency funds a little bit on the smaller side, if I have 15 to $20,000 sitting in my checking account, I feel very uncomfortable. I'd rather put half of that into an investment vehicle that I can grow over time. So personally, I don't like exceeding a three month emergency fund, which is basically enough money to cover my four walls of expenses, which are my groceries, utilities, my transportation and my shelter. I find that three months is a long enough runway to seek out new work just in case job loss and emergencies do take place. Now whatever amount you do choose to put into your emergency fund if you so choose to, it is important to consistently replenish it when you dip into that fund. So if you start off with $1,000 emergency fund, and you deplete it when your computer needs fixing, build that fund back up. This can be done by selling things or simply setting aside some of your next paycheck to that fund. And as far as where you put your money, there are a few general locations where people hold their emergency funds. One any type of investment or retirement vehicle, which we've already talked about as being somewhat risky, not only will you be going against compound interest if you take money out, but you'll also get penalised in most of those areas. On top of that you face market volatility. So if you did have an emergency while your stocks are dropping, you're accelerating the weakening of your money's potency. Your second option is to keep straight cash in your home generally in a safe. Now, I'm not opposed to having some petty cash around the house. But I actually don't find having three to six months or even longer of expenses worth keeping in cash, a lot of purchases, even emergency ones likely are available if not required through digital or online purchases. So if you just had cash, you might actually have to deposit that back into your bank account anyways, before you could pay. And the third area would be a separate bank account. And that is probably the most favorable spot, you can have it in a savings account, a checking account or a money market account, all of them work just fine, I would simply avoid a fixed term CD account, which is going to keep you into terms of let's say six months to a year or if not longer. And the whole point of an emergency fund is liquidity, meaning that you're going to want easy and fast access to that money when the situation arises. Now one thing I would add is that if you are looking to open up a separate bank account for your emergency fund, is to seek out online banking. And I suggest this because most big name brick and mortar banks require an upfront charge to open a new account, as well as minimum requirements that you must maintain in that bank account. To me, that's completely absurd. The point is to access the money, I don't want to get a $50 fee if I drop below their arbitrary threshold. So in closing, folks, I find that having some form of emergency fund can provide me a lot of peace of mind and reduce a lot of stress. When job losses and accidents do happen. Remember, it's just another form of insurance. It's not going to make you rich. But it is a financial discipline that can really help you and your business for those disasters that unexpectedly pop up giving yourself just a little runway can put your mind at ease. And I do hope you consider implementing some form of strategy to handle these situations. Remember, it's not if an emergency is going to happen, it's when the emergency is going to happen. Don't rely solely on credit cards and debt to bail you out. In fact, I would actually classify that as an emergency in itself. So if you have the means to pay for that new windshield, or that laptop replacement in full, I think you're going to be better off for it, and so will your business. So that's going to do it for us today. Folks, thank you for tuning in and supporting the show. I do want to give a shout out to all of our amazing listeners who participated in our recent giveaway. We gave away three copies of Todd Bigelow's book, The freelance photographers guide to success. And while I couldn't send one out to every single person who participated, I do appreciate your support and your participation. I just want to say thank you for that everybody. Wishing you all well. Have a great rest of your day, folks. And I'll catch you guys next week.
Hey, everybody, this is Michael Der thank you so much for making it all the way to the end of the episode. I hope you'll follow tag and engage with us on our Instagram account at Artrepreneurspod. We've also launched our website Artrepreneurspod.com. It is the central hub where you can sign up for our newsletter, read our blog posts, send us voicemails, and even access discounts from our amazing affiliates. It's also the perfect spot to shout out Artrepreneurs with what would be an immensely appreciated five star rating and review. And if you're feeling extra generous, you can even make a small donation that's really going to help accelerate the growth of this podcast. But no matter what you do, folks, I just want to say thank you so much for supporting this program. There are a lot of great photography podcasts out And I'm just grateful to have gained your trust even for a moment. Take care everyone. See you next week.
Transcribed by https://otter.ai