Reach Your Goals

How I Built My Emergency Fund & Never Looked Back

You’ve just been told you won’t have a job in three months. How do you react? Sadness, maybe even anger. But above all, panic. How are you going to pay your rent, take care of your bills, feed your fancy chocolate addiction? Trust me, I’ve been there. I was lucky enough to get a heads-up that I would be “transitioned out” of the company I worked for, but it also prolonged the uncertainty that goes with being unemployed.

I had graduated college three years earlier with thesis honors and an impressive vocabulary, but almost no real financial skills. Thankfully, I knew that I should save for retirement through the 403(b) plan offered by my then-employer. I was also lucky enough to embrace another key piece of advice early on: build an emergency fund.

Your Emergency Fund Takes Money...And Commitment

As soon as I began earning money post-college, I dutifully stuffed some of it away into a savings account. I knew that I should put away 20% of each paycheck into my savings, but that wasn’t realistic for me at first. Instead, I opted for a slow and steady approach: I began with small monthly deposits of $50, which grew to $300 as my salary increased. Also, any extra income — from babysitting to birthday cash — immediately went to my savings.

Sure, there were times when I was tempted to spend that money on more exciting things, like shoes I’d wear once and then forever admire in my closet. But I got smart and set up an automatic transfer between my checking and savings accounts on the same day as my direct deposit, and eventually I stopped missing that money. That was a defining moment in how I managed my finances. From that point on, saving was no longer something I did after handling expenses and purchases; preparing for my future became the first thing I did.

I realized that saving money doesn’t have to happen in a savings account at a bank.

So let’s fast forward. Instead of panicking over how I was going to pay my bills after being let go, I felt calm. Most research recommends having an emergency fund that will cover three-to-six months of expenses — more if you work in a volatile field or would struggle to find a new job in the event of layoff. My emergency fund would last me for at least six months — more if I planned wisely. This freedom allowed me to turn what was a difficult and painful experience into a positive one.

I took several months to travel and recharge. One of the best trips I took was hiking with my parents in the High Sierra camps of Yosemite — a trip I wouldn’t have been able to go on if I was worried about being able to pay my rent when I got back. I also reflected on what I loved about my previous job and what had gone wrong. Once I gained some perspective on where I wanted my career to take me, I had the time to really look and wait for the right job.

Looking Beyond The Rainy Day

Having an emergency fund gave me control, and rather than being forced to be reactive when I learned I would be let go, I could strategically plan the next phase of my career and my life. But that’s not all I wanted for my money — to be ready if something bad happened. What about having my money help me prepare for the things I want?

Like most of my peers, I want to be a homeowner. But after seeing several headlines about low interest rates, it soon hit me that saving for a down payment would take a very long time. I wasn’t alone here, either. Fifty percent of millennials surveyed in a 2014 Fannie Mae study cited their inability to afford a down payment as a major obstacle to buying a home. I knew I wanted to break away from that group.

This became more of a possibility once I realized that saving money doesn’t have to happen in a savings account at a bank. Think about your retirement plan through work. Whether it’s a 403(b) or a 401(k) (which I have now), you’re saving for retirement by putting a portion of each paycheck into an account that, in most cases, contains investments. It reasoned that I could do the same for my dream of buying a home: save for a down payment by investing.

Yes, there’s more risk involved with investing than with traditional saving. The market doesn’t always go up, and my portfolio could suffer losses. Furthermore, my timeline for buying a home is shorter than that for my retirement, so, depending on the timing, a market downturn could leave me with a smaller down payment than I had hoped. But there’s also potential for higher returns, especially through the power of compounding, and I could end up with a sizable down payment.

After deciding that I would take the investing plunge, my next step was determining how much to invest. Remember that rule about saving 20% of your take-home pay? By that point, I had successfully rebuilt my emergency fund and was already used to setting that money aside. I’ve continued to do so. The only difference is instead of automating transfers between my checking and savings accounts, I’m making regular contributions to my investment portfolio.

Had you asked me a couple of years ago if I considered myself financially savvy, I would have said no. Today, my answer is a resounding yes. I’ve learned that my money can work for me in different ways depending on how I plan on using it. And here’s my plan: My emergency fund is here for my what ifs, my 401(k) is here for my best weekend ever, and my investment portfolio is here for my wants.

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Disclosures

Information was obtained from third party sources, which we believe to be reliable but not guaranteed for accuracy or completeness.

The information provided should not be relied upon as investment advice or recommendations, does not constitute a solicitation to buy or sell securities and should not be considered specific legal, investment or tax advice.

The information provided does not take into account the specific objectives, financial situation or particular needs of any specific person.

Diversification does not ensure a profit or protect against a loss in a declining market. There is no guarantee that any particular asset allocation or mix of funds will meet your investment objectives or provide you with a given level of income.

Investing entails risk including the possible loss of principal and there is no assurance that the investment will provide positive performance over any period of time.

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