Emergency Fund for the Zombie Apocalypse
Episode 295
Episode Guide
Episode Timestamps
ChooseFI Episode Show Notes
Episode Summary
In this episode of ChooseFI, hosts Jonathan Mendonsa and Brad Barrett delve into the evolution of financial planning, focusing on the impact of emergency funds and the importance of healthcare pricing transparency. They explore how these topics affect financial independence and give insights into the optimal use and management of cash in an inflationary environment.
Key Topics and Timestamps
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Introduction to Healthcare Pricing
- Discussion around the lack of price transparency in healthcare.
- Community feedback and the introduction of resources like MDsave.com for upfront pricing on medical procedures.
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Discussing Emergency Funds
- The traditional view of emergency funds versus a more strategic approach.
- Recommendations for a minimum psychological emergency fund of $1,000.
- Evaluation of what an emergency fund should look like in different life stages.
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The Role of Cash in Financial Independence
- The issues with holding cash long-term due to inflation.
- Strategies for managing liquidity while investing.
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Investing and Inflation
- How inflation impacts purchasing power and savings.
- The importance of diversifying investments to protect against inflation.
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Exploring Precious Metals as an Investment
- The potential of precious metals to serve as a hedge against economic uncertainty.
- Discussion on the differences between holding physical precious metals and investing in related ETFs.
Actionable Takeaways
- Reassess the structure of your emergency fund; aim for a minimum of $1,000 to ensure some cash flow flexibility.
- Utilize MDsave.com for price disclosure on medical procedures to ensure better budgeting for healthcare expenses.
- Consider investment options that keep pace with inflation instead of letting cash sit idle and lose value.
Key Quotes
- "Absence of process for upfront pricing is absurd."
- "Rethink the true purpose of your emergency fund."
- "Six months of cash sitting idle creates a wealth-building hurdle."
Discussion Questions
- How has your view of emergency funds changed as you've progressed in your financial journey?
- What resources or strategies do you currently use to seek price transparency in healthcare?
- What steps are you taking to protect your purchasing power from inflation?
Related Resources
- MDsave.com: A resource for transparent pricing on medical procedures.
- ChooseFI Resources: Explore tools and resources to kickstart your path to financial independence.
Hosts
- Brad Barrett: Co-host, emphasizing practical finance tips.
- Jonathan Mendonsa: Co-host sharing insights on investment strategies and the role of cash in achieving financial independence.
Note: The content above is formatted for clarity and engagement while providing comprehensive insights based on the discussions from the podcast episode.
Rethinking Your Emergency Fund Strategy
Emergency funds have long been a cornerstone of personal financial management, traditionally recommended as holding three to six months’ worth of expenses in cash. However, changing economic realities and personal finance philosophies necessitate a reevaluation of this concept. This article provides you actionable insights on how to rethink your emergency fund and integrate it into your broader financial strategy.
Understanding the Purpose of an Emergency Fund
An emergency fund is generally a cash reserve set aside to cover unexpected expenses or crises. While having a safety net is crucial, the function and amount of that safety net can vary greatly depending on individual circumstances, financial goals, and stages in life. Here’s how to redefine what your emergency fund should mean for you.
The Evolving Nature of Financial Independence
Many individuals see their perspective on money shift as they progress along their financial journey. Initially, the psychological comfort of having cash reserves may provide a sense of security. However, as your financial literacy and savvy grow, so too should your approach to managing that cash. Understanding that cash can be a depreciating asset due to inflation is key.
- Key Insight: Aim for a basic psychological emergency fund of at least $1,000 that serves as an immediate cushion while you build better investing habits.
Reducing Cash Holding
As you advance in your financial independence journey, it becomes clear that holding large amounts of cash can act as a wealth-building hurdle. Every dollar not invested is a missed opportunity to grow your wealth. The opportunity cost of keeping cash idle can be significant, especially in an environment where inflation continues to erode purchasing power.
- Consider This: Instead of keeping six months’ worth of expenses in cash, think about where you can place that money to grow while maintaining a level of liquidity.
Investments Over Idle Cash
Rather than letting your emergency fund sit in a low-interest savings account, consider reallocating it into investment vehicles that offer higher returns. Here are a few options to explore:
- High-Yield Savings Accounts: Although not a perfect substitute, they typically offer higher interest rates than standard savings accounts.
- Short-Term Bonds: These can provide relatively stable returns without being tied up for long periods.
- Precious Metals: Metals like gold and silver serve as historical stores of value and can be a hedge against economic instability. Consider using ETFs (Exchange-Traded Funds) backed by physical metals as part of your strategy.
Managing Cash Flow for Greater Peace of Mind
While some individuals keep cash on hand for peace of mind, knowing where that cash is allocated can further enhance your financial stability. The key is ensuring that you have sufficient liquidity to handle “Murphy’s Law” events—surprise expenses that come up unexpectedly.
- Task: Maintain a cash buffer in your checking account to manage regular expenses and ensure you meet your obligations without stress, but keep this to a minimum to promote active investing.
The Role of Price Transparency in Personal Finance
In addition to rethinking cash management, it is crucial to advocate for price transparency, especially in healthcare. Many people find themselves confused and frustrated by the lack of upfront pricing for medical services. Resource platforms such as MDsave.com provide clear pricing on medical procedures, promoting informed financial decisions.
- Takeaway: Leveraging price transparency helps in budgeting and reduces financial stress related to unexpected medical costs.
Creating a Balanced Cash Management Strategy
In today's economy, it's essential to create a balanced approach to cash management. While having an emergency fund remains important, consider these strategies to maximize your financial health:
- Reassess Your Cash Needs: Regularly review how much cash you actually need readily available. Keep enough to cover necessary monthly expenses but consider investing the excess.
- Utilize Technology for Investments: Platforms like M1 Finance can allow you to easily manage investments while keeping some funds liquid for emergencies.
- Diversify Your Assets: Instead of relying solely on cash, look into a mix of investments that provide liquidity, growth potential, and safety against volatility.
Final Thoughts: Move Towards Active Wealth-Building
Your emergency fund should not simply be a sum of cash. Instead, it should evolve as you journey through financial independence. Reflect on the true purpose of your fund and how it can more effectively serve your financial goals.
- Look Ahead: What does your financial safety net need to protect you against, and how can you best leverage it as part of your broader investment strategy?
By understanding the changing dynamics of financial planning and actively managing your cash, you can create a more robust financial future that not only prepares you for the unexpected but also propels you toward financial independence.
Call to Action
Evaluate your current emergency fund strategy. Consider reallocating funds to better investment opportunities that outweigh the inflationary pressures on cash, while still ensuring you have sufficient liquidity to cover unanticipated costs. Engage with resources that advocate for price transparency in healthcare and other expenditures to maximize your financial management skills and insights.
Elevate your financial wellness journey by being proactive in your planning and investment strategies.
This Friday's episode continues with the theme of looking back at our perspective has changed since the show began. What has changed, have we pivoted, and what do we feel more confident about now than we did then?
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Episode Synopsis
Medical System
Last Friday Brad shared the saga of trying to find out how much a CT scan was going to cost him. In response to the story, members of the community reached out with their ideas for saving on the cost.
One listener shared a link for MDsave.com, a company that contracts with different healthcare providers to provide very specific pricing for a number of healthcare-related services and procedures that you pay in advance for.
Using the CPT code for his procedure, Brad discovered there were no providers in his area, but there was a good number in Charlottesville about an hour away. Had he used this website, he could have paid under $300 for his CT scan. Without using it, his insurance company was billed $2,083.
For prescription drug needs, there is a similar website called GoodRX.com
The healthcare system is broken. Price transparency in healthcare, like both of these websites offer, cuts the middleman out and lowers costs.
Jonathan suspects that anytime you are using these apps you are sacrificing some privacy.
If you have a high-deductible plan and rarely if ever reach it, you may be better with the discount as you cannot double-dip and need to choose whether you go through the app/discount card or your insurance company. However, prescriptions do qualify as HSA reimbursable expenses.
Emergency Funds
Emergency funds are a part of every financial plan, with most stating a fully funded fund contains three to six months' worth of expenses.
ChooseFI has pushed back a little on the standard emergency fund concept, asking if you really need one, what does it need to look like, and what are we protecting ourselves from?
Both Brad and Jonathan's perspective on the emergency fund has changed over the years. Most personal finance experts conceptualize it as money sitting around doing nothing waiting for an emergency to occur.
The further down the path to FI you travel, the role of the emergency fund begins to change. At what point should you stop allowing your emergency fund to lose value from inflation and invest it instead?
When first starting out, a fully-funded emergency benefit provides psychological benefits. But 10-15 years down the path to FI, there are very few true emergencies. There is an opportunity cost to your money sitting on the sidelines. Could you have that money invested, earning and growing for you?
Brad can't think of a scenario where he would need thousands of dollars in cash in a hurry. Even if the unthinkable were to happen, he could pay with a credit card or a check. Worst case scenario is that he would need to access money by selling funds in an investment account and he would have it two to three days later.
For individuals just starting out and moving away from living paycheck to paycheck, having $1,000 available in cash as a crisis fund makes a lot of sense.
Brad keeps a couple thousand dollars extra in his checking account just so that he never needs to worry. There is an opportunity cost, but he finds it worth the peace of mind.
Jonathan tries to keep as little in cash around as possible. He has one or two months' worth of expenses in cash. Because he knows his monthly expenses, when he gets paid, he's able to save first, get it invested, and live off the remainder.
Interest rates on bank accounts are so low that there's no incentive to keep it there. Inflation alone erodes the value of money by an average of 3% per year. Is there a way to hedge against inflation while still meeting a need for liquidity?
Beginners may need to keep their money sitting in a savings account to feel comfortable. Once you get to the point where you can put money away and realize you aren't going to touch it for 30-50 years no matter how the market fluctuates, start investing.
March 2020 was without a doubt, a black swan event. Was an emergency fund a factor for you? Did you think about its value more at that time than previously?
Brad certainly felt better knowing he could rely on the cash from his net worth if it was needed.
Events of the last year had Jonathan thinking more about his net worth acting as a store of value. In a changing landscape, he wants to use the assets at his disposal to make sure he is more valuable.
He doesn't see cash as a great store of value. Due to inflation, cash is depreciating. When it is invested in the market, it produces value and increases with inflation.
As a store of value, bonds can provide stability, a regular income, and a negative correlation.
Cryptocurrencies, such as Bitcoin, are another store of value, although due to its volatility, it feels very speculative.
Precious metals, like gold and silver, are yet another store of value that can be owned physically or as paper assets through ETFs. However, with precious metal ETFs, not all are structured where every share is backed with the precious metal.
For Jonathan, the ideal store of value is a conservative emergency fund that beats inflation and if the worst happens, there's an upshot for him where he hasn't lost his store of value, and finally that it has liquidity.
A margin loan from M1 Finance gives Jonathan access to a very low-interest loan with stability, liquidity, and plenty of upshot.
Brad's ideal store of value is a business that is producing some type of income, like a diversified rental real estate portfolio.
For your emergency fund, you want to preserve its value, but its store of value all comes down to what you are comfortable with. It's worth analyzing the role of your emergency fund at its particular point on your path to financial independence.
Resources Mentioned In Today's Conversation
ChooseFI Episode 066 The Emergency Fund...Is it a Bad Idea? with Big Ern
Get started on your journey to financial independence at ChooseFI.com/start.
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