Broker Check

Emergency Fund

March 26, 2020

I want to share some insight from a recent prospective client engagement. This is not meant to be an “I told you so” story. This is more of a cautionary tale and the very reason we favor the planning first approach when it comes to our financial advice and services.

Everyone should know how expensive college is by now. If your kids are headed to a top tier school the price tag can be in the hundreds of thousands after you factor in tuition, books, housing, and the list goes on. If they go to a local school, it might cost more as they eat all the groceries in the house and wear on your last nerve every day. Either way, if you are involved in paying for your children’s education it will not come cheap.

Enter Jack and Jill. They came into our office and wanted to get started on a college savings plan for their two children. Both Jack and Jill are self-employed and know how valuable an education is for taking charge of your own career. They both have a little saved for their retirement and thought it would be best to start college savings early.

Jack and Jill had one issue, though. They didn’t have an emergency fund. Not nine months of expenses, not six, not three. While they had started retirement savings, they had only a small amount of cash savings to use in case the water heater went out, one of them became unemployed, or a global pandemic shut down the free world.

Our plan for them was to first build up an emergency fund and, because they were self-employed, it should be more than the recommended minimum. We gave them some suggestions on how to make it happen and promised to check in with them as they built their cash savings. Jack and Jill were not happy with our recommendations, however. It was not what they wanted to hear and maybe we could have been better about expressing the importance of risk management to them.

It can be a daunting task to build an appropriate emergency fund. This is especially true when you are self-employed, work seasonally, or have an unpredictable schedule. It is important to remember that if nothing is standing between education or retirement savings and a disrupted cash flow they will get raided at the worst possible time. Nobody wants to be in the position of cashing out their future dreams to pay today’s bills.

Sometimes the right advice is the advice you don’t want to hear. Selling a young, hardworking couple the promise of sending their children to college is not hard. Charting a financial path for a couple that is guided by their values, built on a solid foundation, and informed by our everchanging environment is a different thing altogether. Which is why we take the process seriously and always keep our clients’ best interest in mind even if that means providing advice that is hard to swallow.

Anyhow, I must end this abruptly, there is a toddler making demands in a language I have yet to learn.

For the low low price of simply waiting a few days you can get my next post…

“What to do if I don’t have an emergency fund but am now a self-isolated homeschool teacher that can’t stop singing the Frozen II soundtrack”