Episode 101 - Emergency Funds(original date 10/9/2023)

 Tired of money stress every time something breaks? This episode shows you how to set up a real emergency fund—how much, where to keep it, and when to use it—so you stop relying on credit cards and start living with margin. Practical steps, Catholic perspective, immediate peace. 

Transcript

Welcome to Catholic money talk, where we talk about all things money and finance, and we try to do it through a lens of being Catholic, where our ultimate goal is to one day be in Heaven with the Lord. I am your host. Paul Scarfone, thank you for being here today. Today we're going to talk about emergency funds and answer a bunch of questions that I get about them. But before we do that, let's say a prayer in the name of the Father and of the Son of the Holy Spirit. Amen, Heavenly Father, we thank you for this day, we ask You for all the grace and wisdom that we need to face the challenges or circumstances that we find ourselves in. We know that you love us and that you have a great plan for us. Allow us to yield to your Holy Spirit. We ask all this in Jesus name, amen, in the name of the Father and of the Son and of the Holy Spirit, Amen. So today I want to talk about emergency funds, and this is one of those areas where we're going to get into some very practical parts of finance, Catholic money talk, one of my hopes for this was that it's really where faith and money intersect. And so we have the spiritual side, we have the practical side, and they work together. They work in unison with each other. And an emergency fund is really one of those places where we see it, or where we can see it done well. And in some of my episodes, I've I've mentioned, you know what, we have the emergency fund, or we can just use the emergency fund. And so I get questions. I get questions from people listening to the podcast. I get questions from my clients, sometimes early on in our coaching process, and that is like, what is an emergency fund? So today, we're gonna answer that question as well as some others, and kind of dive pretty deep into some of this. So an emergency fund is an amount of money that we set aside to be used in an emergency and it it really is that simple. If you've lived on earth for any period of time, you have most likely experienced, or maybe you've witnessed a friend or family member deal with a financial emergency, and these can range from replacing a flat tire or maybe replacing a broken appliance to maybe losing a job and emergencies will happen to all of us at some point we just don't know when, and an emergency fund helps to protect us from the unexpected and provides us with a Fund with money that we can typically use to give us space to handle whatever The actual emergency is and get through it. Now I mentioned this is where spiritual and practical kind of intersect, and so to just address the spiritual side of this an emergency fund doesn't mean that we're placing our trust and hope in money instead of the Lord. Not, not at all. First thing we need to do an emergency is to pray and seek the Lord's wisdom and ask the Holy Spirit to guide us through whatever the situation is, but using wisdom is having an emergency fund. We think of the story of Joseph in the Bible, and I reference this story a lot. I love it, right? Joseph, he is the son of Jacob. He was sold into slavery by his brothers, and then, through a series of events, he has the opportunity to interpret Pharaoh's dream, right? Pharaoh had a dream, and Joseph was there to interpret it. And the interpretation was that there would be seven years of Great Harvest followed by seven years of severe famine. So Pharaoh asked Joseph, what do we do? And Joseph's answer was, let's make an emergency fund, right? So they were gonna store up food, extra food, lots of extra food during the years of harvest that they would be able to draw on when the famine came. What a wise plan. Inspired by the Holy Spirit, Joseph provided a solution to Pharaoh. Pharaoh then made him second in command over all of Egypt so that he could oversee this plan, because he had such great wisdom. So just like Joseph, we need to use wisdom, we need to build up a reserve, an emergency fund, that can cover us in those moments and then, through the Lord's love and grace, we can handle any situation we find ourselves in. Having an emergency fund adds another level of practical stability to help us through the tough times. So why should we have an emergency fund? Well, emergencies happen, and not just financial emergencies, but many types of emergencies can become financial emergencies very quickly if we aren't prepared. So what do we risk if we don't have an emergency fund? Right? Without an emergency fund, we open ourselves up to a whole host of different challenges. If an emergency hits, let's say, a medical bill or an insurance deductible, it can easily drive us into debt, or we'll need to get additional work. We'll need to get additional income, we'll have to pick up a second job. We might have to hack away at our budget to create the space to cover those bills, and if they're substantial, like a medic. Bill could be we could find ourselves being chased by creditors and collection companies. If you lose a job without having an emergency fund, it can turn a job search just into complete desperation mode, right? There's something about having an emergency fund that gives us some time to research and prepare well for a new job. Then if we don't have an emergency fund, we need to find work immediately, just to just to keep income coming in so that we can survive. And if we don't have the opportunity to get employment quickly, it'll just compound the situation and turn an emergency into a big crisis. Right, without an emergency fund, there's the possibility for any unforeseen circumstance to turn into a major crisis. So let's not let that happen. Let's create an emergency fund to avoid those moments. Now we have an emergency fund now. Taryn and I, we have an emergency fund now, but before we were being good stewards of our finances, we used to rely on credit cards to help cover emergencies. The problem with that is it can quickly turn a non financial problem into a financial problem. A vehicle issue can turn to a financial issue. A plumbing problem can turn to a financial problem, and even a health issue can turn to a financial problem if you don't have an emergency fund. But but this is the thing that credit card companies and a lot of the financial industry used to sell credit cards and other financial debt vehicles. Think of home equity lines of credit and such, they'll tell you it is good to have a credit card in case of an emergency, right? It's that's probably one of the worst times to borrow money. Is in the case of an emergency, it'll only compound the situation. So what does a fully funded emergency fund give you? Fully funded emergency fund? That's a mouthful, right? But it can give you peace of mind, knowing that if something arises, you're financially ready to handle most problems. It gives you breathing room in the case of a real emergency, if you lost your job or someone had a serious illness or accident, the emergency fund gives you some money that may allow you the time to figure out a plan to handle the actual situation. The other thing an emergency fund can do is that it gives us the potential to remove fear and panic and gives us some breathing room, right? And with that breathing room, we can actually prayerfully ask, what does the Lord have for me in this moment? And I'm saying this as an encouragement to all of you listening, but also as a reminder to myself, because recently I missed that we had a situation that I could have and should have handled better, and there was no reason not to have, right? So here's here's a here's the situation. It's very recent story. It's just last week. Last week, I was backing our large, we have a large 15 passenger van. I was backing it into the driveway. I was trying to pull it all the way in as far as it could go to make room for other cars. There was some people coming to our house that night. I wanted to make sure there was enough parking for everyone. I was looking in the side view mirror on the left to ensure that I was tight to the neighbor's yard so that we could have space to put we have to wheel the garbage cans down our driveways right next to our house. So if I'm tight to the neighbor's yard, that's gives us a big enough alleyway between the van and the house to roll the garbage cans out right to put them on the curb, and so I'm looking at the side view mirror. I wasn't looking in the rear view mirror or looking at the backup camera, and the alarm didn't sound on the backup camera, and I backed right into the metal tongue of my boat trailer. I wasn't going fast, but I have the boat trailers wheels chocked, so it didn't move at all. Instead, it created a nice, deep, two inch dent in the back door of the van. I was so frustrated with myself, absolutely frustrated. I get out of the car, I go to the back of the van and look at it. It looks so bad. I was super frustrated, really, really annoyed me. And the next day, I mentioned my little accident to a buddy of mine, he told me, Hey, there's companies that do paintless dent repair. PDR, I had never heard of it. I googled it, and I found there's tons of local companies. Many of them had great reviews. So I called. I called three different ones. They all asked me to send them pictures. So two of them quickly responded and said, You got to go to an auto body shop. The third one told me, Ah, he's not gonna be able to get it 100% but maybe he can get it 85% for 500 bucks. So I was super frustrated. And our car insurance, I don't want it to go up. We have $1,000 deductible, so anything under that's gonna come out of my pocket anyway. So I decided, well, two of them said, go to auto body shop. The last guy, you know, he's not gonna get it to 100% I didn't know how bad 85% would be. Paintless Dent Repair, he's not gonna paint the thing. I'm open to rust and all that. I figured, let me just let me swing it by. Body shop to get a quote. So I brought it by a body shop. He told me 1500 bucks. And my frustration just grew. If this was the only thing, it probably wouldn't have grown that much. But we had another situation running parallel to it, so at the same time, we've been going up and down the attic for different things, trying to purge some stuff out of the house, get rid of things we're not using, and going up and down the attic. We had noticed that there feels like there's a little moisture in the attic. And when we bought the home five years ago, the seller had to get some very minor mold remediated, and I was afraid maybe we had more mold. Maybe it was a ton of mold, and I was really kind of reluctant to figure out what's going on up there. I just, I didn't want a major expense, but I said, let me just schedule a company to come look at it. So literally, I'm getting home from the auto body shop getting a quote for the van, and the mold guy arrives at my house. And my wife, she had seen my frustration building from both situations, and she said to me, take a deep breath. Don't worry about it. This is what we have an emergency fund four I said, I know. And then I get into dramatic mode, I know, but we'll have to wipe it out if we have a$40,000 roof fanatic repair. I don't even know what that would consist of, right? But leave it to me to be dramatic. I have no idea what I'm talking about. I have no idea how much mold remediation or what. And you know, even if we had to replace everything above the second floor. I have no idea what that would look like, and I was just allowing fear and anxiety to take over. The mold. Guy goes up into the attic, up there with a flashlight, looking all over the place, comes down, there's no mold. He told us, yeah, you're definitely getting some excess moisture, and we should install humidistat in the exhaust fan in the attic. So we have a thermostat up there. It takes hot air out, but we need to get one that's going to remove extra moisture. So a humidistat, and he said they're not expensive. If I call an electrician, it's probably going to cost me a couple 100 bucks. And he checked everything else out and said it all looked good. So now the van that gets fixed. It took two days in the auto body shop. 1500 bucks. Thing looks brand new. My electrician, he did stop by, looked at the attic, gave me a quote. It's really not a big deal. I won't even, I really wouldn't even need to touch the emergency fund, because we can adjust the month's budget to fit in the cost of the installation. But I got, I was praying about this and thinking, Man, I got sucked into the frustration and anxiety, because I mostly was upset at myself for my stupid error with the van. Right? I mean, Thank God my wife's not the one that backed the van down the driveway. I probably wouldn't have been filled with tons of love and charity. Hopefully I would have been, but I would have been like, how did you not see the boat trailer? It's a 16 foot boat, right? But I'm the one who did it, so I was frustrated myself for my stupid error. My wife calm and peaceful the whole time, super gracious to me. She didn't get upset with me at all. She's really she's awesome, right? And she remembered the reason why we have an emergency fund, and she allowed it to do its job. The emergency fund is there to cover the emergencies, the unknowns that we aren't able to plan for. I was letting the unknowns frustrate me and get me out of peace in this situation. It's just a great reminder that I don't have everything under control. I like to, but I don't. I make mistakes, but we do have a sound plan and appropriate things in place to help us handle the unknown. I had just forgotten that and allowed myself to get swept into the fear and the emotion of it all, I should have asked the Lord, Lord, what do you have for me in this moment? So I apologize to my wife, and I decided to share this moment with all of you to not only just reinforce it in my mind, but to hopefully encourage myself and you that we need to run to the Lord in times of need, whether or not we have an emergency fund. You know, having emergency fund is important. It will practically support us in many different situations, but going to the Lord first and trusting him and seeking His will, it's so much more important. I must rely on the Lord and not on my ability. Trusting in the Lord is not an excuse to not have an emergency fund. But an emergency fund does not replace our trust in God. I mean, our heavenly Father. He's going to pull us through any situation, and having an emergency fund, it can allow us to see him more clearly and hear him more clearly. It also puts us in a spot to be able to assist others. It's kind of like being on a plane and they remind us when they're going through the safety protocols that you know if the oxygen mask comes down, we need to put ours on first before we can help others. Having an emergency fund is like having a financial oxygen mask without it. It makes it really hard to help others. So next question you might have is, how much of an emergency fund do we need? The answer is three to six months of expenses, of expenses, not of income. You. Yeah, an easy way to do the math is just look at your budget. Look at all the needs, food, shelter, clothing, transportation, work, and then maybe anything else that you think is a high priority. Add them up and then multiply them by three or six, right? So you're multiplying those monthly numbers by three or six. You might want to ask me, Hey, Paul, three or six months, that's a big range. We either need this amount or double this amount. What factors must we consider to have three months versus six months? So my recommendation is that you go with three months if you have consistently stable job, or maybe there's two incomes coming into the household. I usually recommend six months if just one of you is working. So if there's just a single income coming into the house, or if there's some type of variability in the income, maybe there's seasonal work, or maybe just a higher risk industry that might be sensitive to economic changes, right? Because having an underfunded emergency fund can lead to problems. Sometimes, I recommend my clients just think through a scenario or two. What would you want in the emergency fund? If one if you lost your job, what would you expect the emergency fund to cover? Or what would you need the emergency fund to cover if there was a medical situation, maybe it's a big deductible, right? So think of the emergency fund as kind of like, insure your own funded insurance for life happening, right? For the big stuff. We actually have car insurance, home insurance, health insurance, maybe Long Term Disability Insurance, the emergency fund, it covers the small stuff, right? So the emergency fund that's going to cover the things we're responsible for, the deductibles on our other insurance policies, it's also going to serve as our own short term disability coverage, right? But the big stuff, we still need insurance for that. Now, if you have debt outside of your mortgage, I highly recommend you clear that up before you save up your fully funded emergency fund. So you should have some type of emergency fund while you're paying off debt. You know, at least maybe 2000 $3,000 of emergency fund, but then get after your debt with full throttle intensity. Let the reality of not having an emergency fund, emergency fund, increase your drive to clean up the debt, see if you don't get rid of the debt first, saving up for emergency fund, it's going to feel so hard to do and for two main reasons. The first, you just might not have the cash flow right. Making debt payments is going to make it hard to have more money that you need to set aside to fund an emergency fund. Second, your emergency fund, if you still have all the debt, and you're trying to figure out three to six months of you know, expenses, you need to include your include your debt payments in that in order to have it truly fully funded, because debt payments, they fall under needs, we've got to pay those. Those are obligations that we've committed to. But once the debt's cleared, you can use the cash flow from what you were spending on paying the debt and use those to contribute to your emergency fund to get it fully funded quickly. The other thing you can do too is you can put a pause on your retirement contributions, because you don't want to hit a retirement account when you have an emergency, right, like that. That's not where you want to go. There's taxes and penalties if you if you go touch emergency funds. Yeah, you've got some leeway with the Roth, but we don't want to be investing our emergency fund. And we're going to talk about that a little more shortly. But, you know, pause the retirement, get rid of the debt, get that emergency fund filled up as quickly as possible. And then you can get back to, you know, once the debt's gone, you can, you know, and you have your fully funded emergency fund, you can buy as much as you want to retirement, you start to have a lot more breathing room. So once we have an emergency fund, we need to establish a few rules on how to use it. Okay? So here are my five simple rules for having an emergency fund. Number one, only use it for emergencies, right? Covering a car insurance deductible that can be an emergency, replacing a furnace that dies in the winter, that is an emergency, but paying for Christmas or a vacation, those are not emergencies. You, and if you're married, you and your spouse, you need to determine and agree on what constitutes an emergency and when you would access the emergency fund. Number two, this fund is not your bank. Don't borrow from it when you fail to plan for anything, particularly for larger expenses, if they are in emergencies, don't use the emergency fund. You need to discipline yourself not to touch the emergency fund unless it's a legit emergency, because if you don't, you're going to dip into it regularly. Don't let having an emergency fund be an excuse to be sloppy with your budget. Emergency fund's not there to just catch your slack. It's there to protect you and your family in an emergency number three, when you use the emergency. Emergency Fund, you must go back to building it up. Every now and then, I come across a couple that used the emergency fund and never went back to build it up. Then when an emergency hits, they find themselves in a pickle, and they could avoid that if they have just built the fund back up. It takes a lot of work, but you have to do it. It requires discipline. Rule number four, adjust your emergency fund as your needs increase. So what do I mean by that? As your monthly expenses go up, maybe your family grows, your property taxes on your home increase, or maybe your grocery bill increases, you need to make adjustments to your emergency fund. So if you had a $10,000 emergency fund when you and your spouse got married, you got married, and at the time, maybe you had $1,000 monthly rent on a one bedroom apartment. Let's say that was 10 years ago. Now you've got a $350,000 home with a mortgage three kids. I mean, your emergency fund should probably be in the 25 to $30,000 range. So at some point you had to have increased it from 10,000 to 25 to 30,000 and your emergency fund, it may actually need to be larger than that. Just do the math and figure out what amount is going to serve the needs of your family and your situation. And my last rule, rule number five, keep the emergency fund liquid and accessible. Don't invest the emergency fund into the stock market. Don't put it, don't, don't look at your retirement account, your IRA, your Roth IRA, and say, oh, there's my emergency fund. Why? Because it's gonna, you're gonna have funded a certain amount, and if the market goes down, then you have an emergency fund. Now you're pulling stuff out at a loss, right? This is you got to keep it separate emergency fund. It's really kind of just insurance for life. It's not in investments, so don't tie it up in CDs or other long term investments. It's not an investment. It's insurance against life happening. We keep our emergency fund. We keep our emergency fund in a bank savings account, and it's in a separate bank from our main bank, where all of our day to day transactions happen. I find it useful to keep it in a separate bank, to protect it from blending into our regular money. It creates another barrier for us getting to it, right? I can get to it whenever I want. I can write a check on the account we need it, but having it just in a separate bank, it removes any temptation to all these rules, right, to borrow from it, to dip into it if I need to, it just keeps it completely separate. So let's recap emergency funds. We need to have an emergency fund start with up to $3,000 as your start, as your starter emergency fund until you're out of debt. Once you're out of debt, you know, quickly pay off your debt, then save up your fully funded emergency fund. It should be three to six months of expenses. Then follow those five rules. Only use it for emergencies. Don't borrow from it when you use it, refill it, increase your emergency fund if your expenses increase, and keep the emergency fund liquid and accessible. Well, that's it. Our dive into emergency funds. Why you need one, and how to use it. If you have questions, you can go into the podcast episode description. There's a link to connect with me. If you have questions, I'd love to help you. I hope this has been helpful. Thank you for joining me today. God bless. Thank you for listening to Catholic money talk. I hope you join us again next time, please click Subscribe in your podcast app to get notified of new episodes. God bless you and have a great day.