If I received a nickel every time someone asked me for financial advice, I would be rich. Around the cooler, in the grocery store, and at family gatherings are just a few of the places where people seek information. “What should I buy?” or “What is hot in the markets these days?” When I explain that financial planning yields better results than just managing an investment portfolio, people quickly agree and follow up with “What is the outlook for the economy?” Most advisors enjoy these conversations because of exciting gains or “knowing the most about capital markets.”
I, however, think it is time for a different post. This blog post outlines the realities of the Carmany household and how we deal with the challenge facing us. Now we must rebuild our emergency fund.
Basics of an emergency fund
While studying for the Certified Financial Planner designation, potential certificants learn about the importance of an emergency fund. “Save three to six months’ worth of expenses in case an emergency happens.” This cornerstone is usually one of the first steps in a financial plan. Often, I find people misusing the fund for nonemergency conveniences. What is an emergency? The web defines an emergency as “a serious, unexpected, and often dangerous situation requiring immediate action.” Buying a TV or taking a last-minute trip to get away from stress are not emergencies.
I will admit, my own past demonstrates abuse of earmarked emergency funds. For example, we bought our last car out of convenience rather than to meet a need. See, my family was getting ready for one of our annual trips to visit family. Our normal hustle was under way for our departure the next morning. The yard needed to be mowed, and our SUV needed to be pulled out of the garage so that we could access the mower. As soon as I started the car, I noticed it was running funny. My first thought was to deal with it after mowing the lawn. Once I looked over the SUV and completed my research, I found two bad sensors to replace. (We were going to take the SUV on our trip.) I had no idea how to deal with this riddle. I thought about it as we closed up the house for the evening. Amazed at the string of bad luck (the washer and window also broke the same evening), I quickly went out and bought a new SUV for my wife (one she likes) on credit the next day using part of our emergency fund as a down payment, all because I did not want to slow down and deal with the situation.
We recovered and have since moved on from the car buy.
My current situation
Currently, as I write this, my family faces our second and much larger emergency fund depletion. This time, however, it is real, as in “not having water turns the household upside down.”
We moved three years ago to a bigger house as our family expanded with my youngest daughter. I did not plan to move at first, but a couple of months after my wife, Yvonne, found out she was pregnant, she set a hard date. July 15 became our deadline and we had four short months to find a home, get our current home ready to sell, and move.
We made the deadline with time to spare and have been happy with the choice we made. There have been large outlays. The largest one so far is getting 85 percent of the house replumbed. The water pressure from our well had been slowly dropping, so a plumber suggested that we replace our well pump and a few other items. The total cost: roughly one month’s expenses. After getting the work done, the plumber took the time to discuss with us the problems present in our current plumbing. He explained that his current fix may last a short while or longer. Guess which one it was? Two weeks later, here we are, getting the home refitted with new plumbing. The original pipes were not up to code and cheap material had been used. (I experienced personally how cheap it was, as one of the pipes cracked in the wall.) Total cost: several months’ worth of expenses.
The good news is, the house will be updated and our family will be able to get back to business as usual. Or will we?
I now remember starting the emergency fund a long time ago. “Saving at $XX/ month, it will take T months to get back to the correct reserve amount” runs constantly through my mind. Additionally, the time taken away from funding other luxuries for the family will be put on hold. “Why did we buy THIS house? Why do WE have to wait to fund these other goals (which are luxuries)?” Sound familiar? It feels like starting at square one.
But I am not starting at the beginning. We now have the experience of dealing with a real emergency (having no water for the family). No credit card debt, no hassle over how to pay for it.
I hope sharing this post shows: 1. Financial planners are subject to the same pitfalls and challenges as the families we help. In many cases, the planner does not practice the same techniques he preaches. 2. Many articles discuss the importance of an emergency fund, but do not discuss the next step after it has been used.
In my family’s case, the second family trip for 2016 will be placed on hold. We will get back to the practice of building the fund to a suitable level by cutting costs. In the back of my mind, I do wonder about another emergency taking place. What will we do with no emergency fund?
In this case, we will start moving down the line of liquidity. We have additional investments in taxable accounts which are accessible.
As we make progress in building our emergency fund, I will share updates. When you meet with your advisor, ask him about emergencies he has experienced and how they were addressed.
If he does not practice the same techniques he teaches, you may need to look for another advisor. I believe a great advisor practices the same techniques that his client does. In this case, I know firsthand how the process works (the bucketing system) and I help people maneuver through the emotional turbulence of the situation.
If you have questions about building an emergency fund or about the bucketing system, or if you just want to share your story, please feel free to contact me at firstname.lastname@example.org or 317-805-0840.