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Rainy Day Fund
I was on FaceTime the other day with a dear friend of mine and we were talking about emergency funds. This friend has a fund set aside that represents almost one year of their expenses. I think that’s quite impressive foresight to set this kind of money aside for their rainy day.
Having that kind of money just “sitting” in the bank is hard for a lot of people. We have been told repeatedly we have to get our money to “work” for us. It has to earn interest, pay dividends, appreciate, and be invested right?
Don’t Just Sit There, DO Something!
From my perspective, the most important thing an emergency fund can do for us is just be there. Like a friend you call when you need help moving that giant sofa or when you get a flat tire. Your emergency fund is doing it’s job by just waiting. It’s waiting for the day you want to tell your boss, “I’ve had enough of your bullsh!t, I’m out of here.” Or the day you need to jump on a plane and go see your grandma one last time. Or the day your hot water heater destroys everything in the basement. The list of things your emergency fund can ease you through is endless. If you have an emergency fund in a savings account just a day or two away from being cash in your pocket, that’s a miracle AND that’s your money doing a very important job.
Maybe we need to call this money something else? Some call it FU Money because it’s meant to give them the option to leave a less than fulfilling job. Some call it an emergency fund, only to be deployed when you need to replace a flat tire or fix the front window the kid next door broke with a fly ball (I was the kid behind the ball once). One of my nieces calls it a “Yes” fund for when her friends call and want to meet in fun places like New York for a long weekend, and if she has the money in that account her answer can be “YES, let’s go!”
Although these funds are just sitting in cash or a savings account, they most likely aren’t making money in that position. But ask the question, is making money really their job? This FU, Yes, or emergency money is meant to be quickly accessible. Its job is to be ready to be called up from the bench, to step in as your backup quarterback, to be there as your copilot. If your extra money is tied up in CDs, invested in the stock market, or in home equity that would require a loan application process to reach, then that money would take too long to access in an emergency.
Now We Have Pools of Possibilities
We used to have an account that we called an emergency fund, and a “Yes” style vacation fund. Now that we have left our jobs, and we no longer need a vacation since we are full-time nomads, what we have is a pool of cash set aside for this year in a savings account. We transfer money to our checking account every month like an allowance. We also have CDs earning a little bit of interest for the following year. Then we have index fund investments that earn dividends and capital appreciation in a taxable broker account. After that we have tax deferred accounts that we can access after I turn 59.5 years old, and more tax deferred accounts that we can access after Ali turns 59.5 years old. I think of this as our steady stream of money. It gently flows from one pool to another, continuously feeding the next chapter or purpose downstream. Some of these pools are so far upstream (Ali’s tax deferred accounts since she’s only 44 years old) we can’t access them anytime soon, but others are available to dip into and enjoy anytime we need to cool off. See our Money Crush post, “Visualizing Your Money” for more detail on our full flow of money.
We want to be ready for emergencies! We have enough money in our checking account that we could withdraw some fast cash if needed. Then we could draw more from our savings account if needed. We also think of our travel rewards credit cards as the next level of backup for an emergency. That’s an additional reason to be disciplined about paying off card balances every month, we want to make sure we have enough credit available on our cards to cover emergency flights back to the U.S. to be with family as quickly as possible if they need us. I’m sure we could be earning a little bit more interest if we didn’t hold as much money back in our checking and savings accounts, but having a solid pipeline we can access immediately through online/mobile transfers, ATM, and credit cards, holds real tangible value to us.
Decide for Yourself – Missed Opportunity or More Security?
Many bloggers I follow don’t set aside very much cash for an emergency type of fund because they prefer to be fully invested. For me this feels a little bit like FOMO (fear of missing out). Even for me, it’s hard to choose not to have ALL of your money “working” for you. But I do think some amount of money set aside, like a backup guitar for Bruce Springsteen, is invaluable. You never want The Boss to be without his guitar! And I never want to be in a situation where I don’t have access to readily accessible backup funds. For me, these funds represent choice, flexibility, safety, and freedom. And I sleep better at night knowing I can call on them any time.
Be the Boss of your Future
Getting back to my dear sweet friend… I really feel with such a strong stash of cash they are in a stronger position than they realize. With these funds they could complete some big home repairs, or ditch their job if things get unbearable, or make a downpayment on a new truck to pull that trailer they’ve been dreaming of getting. Or, they can hold steady to see how it all plays out for a few more years. The important thing is, they have a little pot of gold ready to help make some dreams become a strategic reality for them. I am truly impressed with their focus on the future. Keep it up! And call me if you need to move that sofa.