If you read anything about personal finance at all, you’ll already know about the importance of having the cushion of an Emergency Fund (EF). There’s even a commercial on TV about how only 41% of Americans could afford a $1000 emergency – scary thought! And you just know a big chunk of the other 59% consider their credit card as emergency back-up, which, at 15-27% interest, is an even scarier thought.
Before 2002, I used to think an emergency fund was meant to cover the largest sudden expense that could crop up. In the 1990s, when I was living abroad, I determined that would be the need to fly back the the States for a family emergency, and I put a value of $1200 on that ticket. Then I moved back to New York City in 2000 and lost my miserable job in 2002; to my surprise, I had trouble even getting temp work. Two things worked in my favor at this point – I was so used to living on peanuts in the UK that I had more than $1200 in savings from the previous two years of working in low-paid admin roles, and my monthly expenses were less than unemployment.
Then right about when unemployment ran out the following year, I discovered gigging. Game changer! I’m embarrassed to say that there was a certain element of flying by the seat of my pants, which isn’t my normal way of going about anything financial or professional. But the tech bubble had just burst and I couldn’t think of anything else but to get my hustle on! What I then discovered over the following years of self-employment was…
You never lose all of your income as a Gig Boss the way you do if you lose a job.
I dabbled in a few things while I found my way way forward – temping as a Power Point expert, teaching other admins the basics of Excel, stuff like that. But nothing that added up to enough to live on. Then after some fascinating training, some of it even in Thailand!, I spent 7 years as a massage therapist (an odd fit for me, really). The last few were rocky after the crash in 2008, so I seized other opportunities as they came along until something clicked. And I continue doing that as industries change, opportunities come my way, etc. For example, I’ve wanted a career in finance since 1998 but didn’t fit anyone’s mold, and now there’s a place for me in this little corner of the blogosphere 🙂
The formulas out there for determining how much you need in an EF are perfectly good for the sake of simplicity, and really there’s nothing wrong with having a lot set aside for a very rainy day. So 6-9-12 months of expenses…go for it, especially since, the way things stand, we don’t ge the luxury of qualifying for unemployment. But as long as you’re not relying on one client for nearly all of your business, a downturn in your personal economy means supplementing from your savings, not living entirely off your savings. The big unknown for your EF is the possibility of a significant health event (major surgery, heart attack, etc). Most of those are a 1-3 month recovery and may or may not mean zero work during that time.
Every piece of advice out there says to put your Emergency Fund in a High Yield Savings Account, and the most popular are accounts offered by Ally and Marcus. Yeah, well, these days you’re lucky if that’s 0.5% when the average is 0.05%. I would suggest the somewhat old-fashioned idea of a CD ladder, where you have CDs that mature every month or quarter as they might be needed, but those rates aren’t even 1% – not worth jumping through hoops for.
That fund is meant to last you 6-12 months of unemployment, or to see you through an expensive, sudden expense. So think about what you might need the money for, how much, and how fast. Leave that chunk somewhere that you can access it within about 10 days and look for a better place to park the rest. So if you’re a homeowner – a new a/c unit or a roof repair/replacement tend to be the big ticket items that crop up without much notice. Car owners, you don’t even want to think about a transmission overhaul, or replacing the car entirely. Ouch, right? But at least you’ve got the money, and you can get to it any time.
My favorite place to park funds over $10K is perhaps a little unusual – easy-access bonds. If you’re not worried about FDIC insurance backing, I recommend Worthy community bonds, where you get 5% and can withdraw any time without penalty and without sacrificing the interest earned (unusual for bonds). Your money is invested in small businesses whose assets exceed the amount they’re borrowing, and in all of 2020 I have not experienced a reduction in returns, which is really saying something for such a rough year. Using my link gets you and me a bonus $10 bond…but that’s not my motivation for recommending them. I just love a magic number of 5% with easy liquidity (under 10 days for amounts under $50K) and think we should all have a piece of that money pie in our portfolios! Currently I keep most of my EF in a simple crappy-yield savings account, but 10% of it is now in these bonds, and I’m shifting that balance every month.