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The Fundamentals of an Emergency Fund

In this episode, Royal Standley discusses the importance of avoiding over-complicating an emergency fund and how you can build your own. He reveals how an emergency fund benefits your financial plan even before you start creating a retirement plan and the debt you can avoid.

Episode 65 Transcript

Intro: Royal Standley of Oregon Pacific Financial Advisors offering securities through United Planners, financial services member, FINRA SIPC, guides clients with empathy in discovering and reaching their financial goals and creates financial plans for clients so they can live their lives by design. In these episodes, he relates his expert financial insights and discusses timely topics.

Royal strives for excellence and has a passion for sharing his knowledge and supporting his community. Now on to the show.

Aric Johnson: Hello and welcome to Life by Design with Royal Standley of Oregon Pacific Financial Advisors. Royal, how are you today?

Royal Standley: I'm doing well. How are you, Aric?

Aric: I am fantastic. My friend. Um, it's good to be back with you. What are we talking about today?

Royal: I thought we would jump into really one of the foundational pieces of financial planning. One of the things we recommend people start with really no matter where they're at in life. And that the emergency savings account. It's the fundamental piece that everything else builds off of and I think there's a lot of misunderstanding out there about what it is, what it's there for, um, where it should be placed or invested. And I just want to take a few minutes and go over that and just encourage people to take this topic seriously, because this really is your protection. It's your fundamental thing you can do to protect yourself from the unknown, going into credit card debt.

Aric: Mm-hmm.

Royal: So let's, let's just kind of just jump into this.

Aric: Yeah, absolutely. Okay. I would say that this is so important for those listeners who are beyond this step, you have an emergency fund set up and you've got, uh, you know, you're, you're well into your, your investing journey, if you will, don't tune out. Uh, and I'm sure that you have somebody in your life, uh, whether it's a child grandchild, somebody that you're mentoring some of the, you know, family friend, uh, that, that you can help direct this podcast to, or just share this information with them or talk to them about it, uh, because we all need to help the, you know, the next generation get into a position financially, that's going to be more secure for them in the future. So don't tune out, share this with somebody. All right, Royal, let’s do this.

Royal: Perfect. So I was having a conversation with a retirement plan that we, we handled. And we were talking about the, the subject of loans out of the 401k and whether or not they should offer that to people. And we really sat down with them and, and just had a conversation there about how important it is to educate their employees about what an emergency savings account is and why it, it really is that foundational piece, uh, that you should look at even before you start retirement savings, in some cases to put yourself in a place where you can feel more financially secure.

The amount of people who are out there living paycheck to paycheck, with nothing in savings. They're just, they just have a checking account that they drain down to as little as they can, until that next paycheck comes in. It's a scary proposition. And as financial planners, we know that we need to address this first to get people on the road for saving for retirement in the future. We do a lot of work here with, uh, you know, people who have gone through the Dave Ramsey program, um, whether it's, um, FPU, Financial Peace University or those who have read The Total Money Makeover and one of the first things that, uh, Dave Ramsey recommends is to start saving, even if it's just get $1,000 into a bank account, uh, or you know, an envelope at, in your home, just so you have a $1,000 will cover most emergencies that might just crop up, whether it's, you know, you blow a tire, you need to get the car fixed. You know, whatever that might be, you need to run to, uh, urgent care or the emergency room. That $1,000 just acts as a buffer. So you have somewhere to go to that isn't a credit card.

Aric: Yeah, absolutely. That's incredibly important.

Royal: Yep. Yep. For our clients and for the people that we sit down with, and especially the people that were counseling who are, just starting off with a retirement savings, we, we really have to define, okay, what is an emergency savings account and why is it so important?

So number one, the way we define emergency savings and kind of the target we want to work towards is, um, we want people to have three to six months of living expenses in the bank. That's our target. If you know, someone is spending, you know, $3,000, $4,000 a month, um, we'd like them to have somewhere between, you know, $10- and, uh, about probably $16,000 in emergency savings. Now for a lot of people who are starting out, that seems really daunting. You know, how in the world can we even be able to save up to that? And so if that seems daunting, let's just start, let's get to $1,000 as, as the first milestone that we can hit and then work from there.

The other thing that we want with emergency savings, it has to be readily available and not subject to market risk, meaning it can't be invested somewhere. Um, we want it to be able that you can get to within, you know, 24 hours or so. Um, the other thing is it's not there as a savings account for, you know, a, a new car. It's not there for a savings account for a new home, or, you know, a vacation. This is really separate from those where those types of things that you're saving up for. This is really just putting in that fundamental base that you can work from, uh, going into the future.

And really emergency savings account is the absolute best way of protecting yourself from the unexpected and from having to go into a cycle of debt.

Aric: Mm-hmm.

Royal: We talk with a lot of people, um, that have just had challenges have, that have gotten themselves, uh, backwards with credit card debt. A lot of times it's through a medical expense, um, could just be through the loss of a job. And we want people to have that three-to-six-month cushion so that they don't reach for the plastic right away, but really have an account that they've worked on and saved and put effort and energy into building. And it's much different, it's a much different experience when you're pulling money out of your emergency account to pay for an emergency versus reaching for the credit card. And now, you're going to be paying for that emergency for the next few months, the next year. And you're going to be hit getting hit with, upwards of, you know, 28, 29% interest on it. If you have an emergency account, something that you can just pull out and pay and then slowly replenish that emergency savings account.

Aric: Yeah. And I think that just takes discipline, right? Because your emergency savings account, isn't going to send you a bill every month like the credit card company does, right. It's not going to be automatically taken out necessarily. Now there are ways to set that up. I know that my bank, uh, I have, uh, my business account specifically. I have a savings account for my business and money automatically - I have a set amount automatically is transferred from my checking account right into that savings account. So I know that you can accomplish that, uh, to replenish that emergency savings, like, uh, that way. So it's kind of like its own bill.

Royal: Yeah. And there's, there's some strategies that we're going to just jump into, but before we get to that, I really want to define where you should have your emergency savings.

Aric: Okay.

Royal: My, my, my real recommendation is it's as simple as a savings account, possibly a money market, depending on the size. You know, and depending on your relationship with money, a lot of people are okay having their savings account you know, at the bank where their checking account is and they link it, uh, and that's very convenient. Other people might just need a little bit more separation there. It's amazing what happens with people's psychology when they start putting things in buckets or segmenting different accounts. So, if you're someone who has a tendency to dip into savings, you know, when, when they need something or see something that they want, it's sometimes better to shift your emergency savings over to a separate bank and just have that savings account. You can go to that bank anytime that they're open and pull money out of it as needed, but just having that, that extra space there and just knowing that's my emergency reserve over there. That's sacred. That's not something I'm going to dip into, uh, is really powerful.

Uh, personally, I like that even for myself, just having that savings account out there with with that three-to-six month’s of living expenses there that, you know, I'm not going to get tempted by most of the time. I just forget all about it.

Aric: Yeah. And I, I think that if I could make one suggestion, I love that. I would say, find a local credit union that you can do that with because most people have all their financials and billing and all the things that they do, most people have them with a larger bank, you know, not naming any names out there, but I think that if you're going to open a savings account and you want it separate completely, I think a nice little credit union would be a good option.

Royal: Yeah, absolutely. Absolutely. So that, that's where it should be. Let's go over where it's not. You know, I think there's this fear, especially as people have have a, uh, an emergency savings account for a while in the environment that we're in right now, they look at it and they say, well, I'm not making any money off of this account. And I really counsel people, that's not the purpose of this account. You know, your 401ks, your, your brokerage accounts, those are the accounts we're trying to make money off of. The purpose of emergency savings is to be there for you when you need it. And that's why we really, truly recommend not investing it. Don't even worry about putting it into a CD. Just have it in a savings account, readily accessible to you. And once you do that then we can talk about all the other investments that are out there, but just having that reserve there is critical to financial planning.

It's also not your 401k. Don't, don't start maxing out your 401k, getting an everything in there, thinking that well, if anything happens, I can take a hardship distribution. I can take a loan from it. It's just so counterproductive. Just focus on the emergency savings, get that built up.

It's also not a HELOC, a home equity line of credit. That's just another form of debt. It's, it's a nice tool that we have in financial planning, but we still want to have that emergency savings set up.

And it's certainly not an account that where you're invested in, um, you know, stocks or cryptocurrencies, the advent of the Robin Hoods out there and all these other little accounts. Yes, you could pull from it, but the risk there is, is if we have a market decline, and I think March 2020 is a great illustration of this, where people were, were laid off. Everything was topsy-turvy. The market's plummeted 30%. You just don't want to have your emergency savings in an account that's going to be affected like that.

So as boring and vanilla and fundamental as a sounds, a bank or a credit union. Just have it there where you can get to within about 24 hours. You know, the, the other place I'm okay with is some of the online banks, because they can transfer money over into your checking accounts. Sometimes you get a little bit better rate on it. I think that's an okay solution as well. Yeah, just make sure you have some money there. Maybe, maybe that $1,000 buffer just in case, but we just don't want to take any risk with us. It's not the purpose to make money. The purpose there is to keep you out of debt and give you peace of mind.

You know, if we've looked at the statistics, statistics of how many people just wouldn't be able to make it past a month without any income, it truly is terrifying. So, this, this really is something that they should be teaching in schools. Uh, and I have no idea why, uh, I have no idea why we're not spending more time just explaining the fundamentals of having money in a bank, so you don't have to rely on credit cards.

Aric: Yeah. Yup. Absolutely.

Royal: So finally, um, as we get into this, the big question I hear is, well, how in the world do I do this? How do I build my emergency savings? It's going to take forever. It's definitely something you want to have a plan around. It's definitely something you want to set a goal with. Uh, and it's something you want to be consistent with. It won't take forever. You know, it's something that can be done regardless of what your income is. Even if you know, it's $15 every pay cycle that you're just setting aside, Hey, keep doing that.

Aric: Mm-hmm. 

Royal: So what I recommend is, number one, figure out kind of what your, your benchmarks are. You know, if you start with, you know, six months, that's, that's my goal, you know, break that down into smaller goals that you can work towards. Tou know, maybe it's at first thousand dollars maybe then it's, you know. Okay. Well, I, my next target is let's get up to $3,000. Let's have a little celebration when I do.  

The other thing I really recommend is, is just try to do one thing at a time. Uh, if, if you've gone through the Dave Ramsey program, um, I think it's a, it's a nice mix there of baby step. Number one is get a thousand dollars in the bank. Step number two is get your debt paid off. And then baby step number three is build that three-to-six-month buffer. And I think that's an excellent way of doing it because if you're trying to do more than one thing at a time, you're probably not going to accomplish anything. Um, we have limited focus. We have limited focus, limited energy. Focus on one thing at a time. 

Aric: Mm-hmm. 

Royal: So once you reach that, uh, that time of building your emergency savings, that should be all you're focusing on. Maybe you put off going on those vacations. Maybe you put off buying that new TV. Um, whatever it is, just focus on that one thing.  

The other thing I have found that's been very helpful is look, look for found money. My insurance company will send me these, these rebate checks, uh, because we haven't been in an accident thank goodness in the last six months. And it's $15, $20 some months. And I just throw that into my emergency savings fund. As, as we we're, we're trying to build it up, you know, it could be a tax refunds are great ways of supercharging your emergency savings.  

So look for, for those, those events, those checks you weren't expecting, you know, even if it's, you know, five bucks here, 10 bucks there every little bit helps and it puts you in that savings mindset.  

Aric: Yeah, absolutely. Again, little at a time. Right? How do you eat an elephant? Uh, you've talked about that before one bite at a time. That's exactly what you're talking about.  

Royal: Yep, exactly, exactly. And then finally, you know, have a yard sale. Um, you know, sell some things online. We all have stuff just laying around we don't want, you know, the, the golf clubs we haven't used in five years, the skis we never used, you know, whatever that is, throw it on Craigslist, throw it on Facebook marketplace and look for opportunities there of building that foundational piece. 

Aric: Yeah. Royal, so let me ask you this. It's an emergency fund. The word emergency could be used in a lot of different ways. Like I really need a boat. Royal. I really need a boat. I need to get out in the water. That's kind of as an emergency for me, but not really, obviously.  

Royal: Right.  

Aric: Um, I say it kind of tongue and cheek, but what would you deem is an emergency that you should be dipping into that. 

Royal: Absolutely. So, so number one, medical expenses. Number two, anything that's going to affect your ability to, um, continue to be employed. So,for instance, if your car breaks down and you have to, you know, commute 20, 30 minutes to get to your job, boy, that's an emergency. Really anything that's going to negatively affect your life, that you're not going to be able to continue on. What's not an emergency, I think is a much longer list. 

Aric Boat. I get it.  

Royal: The boat is definitely not an emergency, uh, but for instance, a vacation, this isn't a vacation fund. Um, you know, set up another account somewhere else to start saving for vacations. That's an excellent way of doing that. It's not a savings account to save up for a down payment for a house. I think that's where there's a lot of confusion there. Where it's okay. I've got, I've got $10, $20 grand in the bank and I'm going to buy a house and I'm going to spend all that. It's like, okay, well now you have a house. And now you're on the hook for everything. So, you know, let's look at ways of, you know, continuing on setting up a house savings fund.  

You know, kid’s school is not an emergency. You know, let's come up with other strategies for paying for that. So really we want to keep this sacred and really look for, uh, those emergencies that, uh, that are true. You know, the pipe bursts under your house. That's an emergency. Your, your air conditioner goes out, uh, during the summer. Or your, your heating unit goes out in the winter. Those are definite emergencies.  

And the other part of that is okay, well, what, what do we do when, when we had to draw down our emergency account? Yeah, take a deep breath. And then you go back to where you were previously and you start to refill that. So maybe you lower down what you were putting in your vacation fund, your house fund, or your retirement savings, but you want to rebuild that. Because just because you, you, you were able to pay for one emergency doesn't mean that another emergency isn't around the corner. 

Aric: Mm-hmm. 

Royal: So we want people to just get in this habit and once it becomes the habit, it becomes easy. Of saying, I have this money over there. It's there for me in case I ever need it and I can get to it. And if I do need it, I refill that account. And by doing that and creating that habit, it's so powerful to move on to the other parts of financial planning and getting into a place where you are financially secure. Um, and it's, it's just that, that essential foundational building blocks.  

So once you have that emergency savings from that point on, then we can start having conversations about all the other stuff, um, that, that goes into financial planning and building wealth and, and all the fun stuff we like to talk about. I completely agree. Emergency savings. It's the eating your vegetables of financial planning.  

Aric: [Laughter] It's a great way to put it.  

Royal: You know, it's, it's, it's important that you do. So, you know, having a seven-year-old, I understand that they do not want their vegetables, but we still have to lure lure them into finishing them. 

Aric: That's right. That's right. It's for your long-term health. Both financial and physically.  

Royal: Exactly. Yep. Exactly.  

Aric: All right. Royal I think this is great. And again, I'm hoping that people share this podcast with the younger folks that are just starting their journey. And I'm, I'm hoping that maybe this starts some conversations out there. And if they want to continue that conversation with you, how do they get ahold of you? 

Royal: Absolutely. You can visit our website at You can schedule an appointment right there, or just email us. You can also call our office at (541) 772-1116.  

Aric: All right. Well Royal, thank you so much for the info. These weren't bad vegetables. My man, this is actually pretty tasty, tasty topic,  

Royal: a little salt, a little cheese. And you know, it goes down smooth.  

Aric: Yeah, and a little ranch, but that's just me. All right. Well, again, thank you so much for doing this today. And of course our last thank you is for you to listening audience. Thank you so much for tuning in and listening to the Life by Design podcast with Royal Standley.  

If you have not subscribed to the podcast yet, please click the Subscribe Now button below. this way when Royal comes out with a new podcast, it'll show up directly on your listing. It makes it really easy to share these podcasts with your friends and family. Again, thanks for listening today for everyone at Oregon Pacific financial advisors. This is AricJohnson reminding you to live your best day. And we'll see you next time.  

Outro: Thank you for listening to the Life by Design podcast, click the subscribe button below to be notified when new episodes become available.  

The views expressed are those of the presenter and may not reflect the views of United Planners. Financial services material discussed is meant to provide general information and is not meant to be construed as specific investment tax or legal advice. Individual needs vary and require consideration of your unique objectives and financial situation. Please seek the advice of your financial advisor or other qualified financial service provider with any questions you may have regarding your investments.  

Planning and advisory services offered through Oregon Pacific Financial Advisors, Inc. Securities offered through United Planners, financial services of America member FINRA, and SIPC. Oregon Pacific Financial Advisors, Inc. and United Planners. Financial Services are independent companies. 

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Please note that discussions in these shows are for educational purposes only. Information presented should not be considered specific investment advice or a recommendation to take any particular course of action. Always consult with a financial professional regarding your personal situation before making financial decisions. The views and opinions expressed are based on current economic and market conditions and are subject to change. All investing involves risk, including the potential for loss of principal. Securities offered through United Planners Financial Services (UP), Member FINRA/SIPC. Advisory Services offered through Oregon Pacific Financial Advisors, Inc. (OPFA). OPFA & UP are independent companies. Neither OPFA nor UP offer tax or legal advice.