Not another fire drill!

Most educators know fire drills. Heck, almost everyone alive in America knows fire drills. They have been part of the PK-12 school experience since the middle of the last century. These semi-regular exercises have students, staff, and others exit the school (or district) building when a specific school bell or alarm sounds.

Teachers and staff corral kids to a safe designated place on the playground or other location outside of the school. Administrators and/or security staff check inside the building and eventually give a signal that all is clear and students can return to their classrooms. Until that time, teachers and staff are losing instructional time and getting rained on. 

In my former high school library, one of the alarm sounders was mounted on the wall just above the library clerk’s desk. When the alarm klaxon would go off, virtually everyone in the library jumped from and/or soiled their seats, no one more than the clerk, Maxine (pseudonym), who was often working at her desk. When they thought of it, one of our friendly security team would surreptitiously tip her off so that she could be farther out of the alarm’s piercing scream. But they didn’t always remember.

It might be helpful to think of an emergency fund as something like a fire drill. Safety drills are investments of time, planning, and effort to better manage emergencies like fires, intruders, or other unexpected surprises. An emergency fund is an intentional investment of money to manage emergencies ranging from natural disasters to a broken clothes dryer. And both are proactive solutions to address the uncertainty in our daily lives, providing a modicum of security and peace of mind. 

Here’s to you, Maxine. I dedicate this post to you! I hope that you’re enjoying retirement and don’t need hearing aids. 

Emergency funds offer educators a win-win-win

An emergency fund is a savings account to cover unexpected costs. It’s also a simple way to build your financial intelligence and independence, offering you a win-win-win. Here’s why.

Win — Having ‘money in the bank’ can help pay for a new dryer when the old one dies vs. adding the cost to your already heaving credit card balance.

Win — Due to recent increases in interest rates, many savings accounts offer some level of return on your money. Even though these rates may not keep up with inflation, they are far better than what existed a few years ago when savings interest rates were at or near zero. 

Win — Any contribution to savings builds your personal or household net worth.

What is an emergency fund? 

In olden times, it was called a rainy-day fund. But since I’m writing this post as hurricanes and rain storms inundate coasts of the United States, that’s a bit quaint. So let’s just call it what it’s for — emergencies (big and medium-sized). 

Writing in previous posts, I’ve used a metaphor contrasting water from a tap vs. water from a tank. An emergency fund is the latter — money saved and secured for the unexpected. It is there when the water gets turned off and/or you need more water than is available. (Or after stormwater pours into your house from flooding.)

An emergency doesn’t have to be a hurricane or earthquake. It could be as banal as an out-of-pocket expense for a broken tooth, an overlooked property tax payment, or your kid getting into a fender bender. An emergency fund is a dedicated savings account that is set aside and used only when absolutely necessary. Sounds like a logical and great idea, right?

Unfortunately, most Americans don’t have one. Financial writers and articles regularly document how few Americans have any money saved for emergencies. Google “Americans emergency savings” and you’ll get an array of statistics which will hopefully convince you to start your emergency fund as soon as possible. 

Those of us who work in education might also be lulled into a false sense of security. After all, we generally enjoy a lot more job stability. By and large, educators have good benefits, work under contracts and labor agreements, and often have formal, if not informal, tenure in their positions. Once the school year begins, we are pretty well set until June finally arrives. And more often than not, we can count on a renewed contract as we enjoy summer break. And we regularly practice fire drills!

Workers outside of education are far more likely to have experienced job cutbacks, layoffs, loss of insurance, and other personal financial crises. As such, they may be more familiar with the unexpected financial emergency, even if they are not saving for one. 

How much should I have in my emergency fund?

Short answer? Probably more than you have now. According to numerous sources, as of January 2023, 57% of Americans can’t afford a $1000 emergency expense. So if you have $1000 in an emergency savings account today, give yourself a FIRE Me Hi Five. You are better than the rest! Now work to double it in six months time. 

Next steps? The general recommendation is having 3-6 months of living expenses saved in a liquid, Federally-insured (FDIC or NCUA) savings or similar account. If you don’t have a clear (or accurate) handle on your monthly household costs, you can ballpark a figure by adding up your income instead.

Assuming that you’re more or less living within your means on a month-to-month basis, simply calculate one month’s take home (not gross) income — yours and others in the household. Then multiply that by either 3 months to 6 months and you have a beginning target for your emergency fund.

In my post about The Averages (our average family of four), their monthly income and expenses were between $7500 and $8000. In a perfect world, The Averages should have between $25-50K in their emergency fund. 

But here’s the bottom line — having ANY money in a designated emergency fund is better than having NO money in an emergency fund. By creating an emergency fund, you are building your financial intelligence and your financial independence. 

What constitutes an emergency?

Here are some things that I personally wouldn’t consider emergencies:

• Needing to purchase a new TV because you’re suddenly hosting a Superbowl party
• Amazon Prime Day
• Buying a used car for a kid that’s going to college

In my mind, an emergency purchase or cost is not discretionary, but necessary. A broken tooth needs to be fixed. If you don’t fix it, you won’t be able to eat and will either die of hunger or some gnarly infection. And in the meantime, it will hurt and your breath may start to smell nasty. 

Your property tax needs to be paid or you will (eventually) lose your home. Sure, for a while, you’ll just accrue penalties and interest, but you enjoy having a roof over your head. And you have some pride in your credit score. 

A used car for the kid in college? Some of you are going to disagree with this example. Duly noted. I’ll also suggest that ‘necessary’ to a 20-year old is very different than necessary to someone in their 40s. (Or not.) But unless the college student is living beyond a bus line or a walk to campus, a car probably isn’t necessary for them to attend college. Convenient? Yes. Necessary? Probably not. Emergency? Definitely not.

When do you use your emergency fund? 

Ultimately, it’s your call, but in a perfect world, never. Like a Go Bag for catastrophes, an emergency fund is there for your peace of mind. And if/when you use it, you should feel one or more of the following:

Grateful that you have it in place to address whatever necessary emergency expense has come your way,  

Proud of your financial intelligence and planning for this unexpected moment, and 

Validated that you are working to be financially independent for yourself and those around you. 

If you feel guilt, this could be a warning sign that whatever you’re using the money is less necessary than discretionary.

Where should your emergency fund live?

Your emergency fund should be, at once, easy to access AND a little hard to access. Let me explain.

An emergency fund needs to be a few clicks away on your phone or computer. Your money needs to be available at any time or day or night, ideally in a bank or federally-insured financial organization. And it should be secure — not subject to declines in market value or other types of loss like theft, fire, etc.

For many of these reasons, having your primary emergency fund in investments like certificates of deposit or mutual funds (even money market mutual funds) is not a great idea. Also, stashes of cash underneath the mattress or in the bowling ball bag [Flintstones reference] are not recommended. 

As I mentioned above, many savings or money market accounts now pay some level of interest so that your saved money might be able to work for you. However, many brick and mortar banks and credit unions don’t offer competitive interest rates for a savings account. While many neighborhood banks may offer interest-bearing certificates of deposit (CDs), these are not a great choice as you will pay a penalty for early withdrawals from these types of investments. 

If your own bank doesn’t offer a suitable savings account, looking on the web for national online banks (which should be FDIC-insured) is worth considering. But at the end of the day, earning a little money on this emergency fund is secondary to having funds set aside for the unexpected. The value in an emergency fund comes from creating security and building your net worth for the future.

Your emergency fund should also be a little hard to access. I repeat from above: an emergency fund needs to be a few clicks away on your phone or computer. Note the phrase “a few.” Your emergency fund should be in a dedicated savings or similar account that is a few clicks away from daily access by you and others in the household. It could be part of your online banking profile or landing page, but not an account that’s used for normal day-to-day purchases and payments. 

Put another way, your emergency fund should be out-of-sight, but not out-of-reach. You could create a distinct savings or money market account at your bank or credit union for this purpose. Or you could create a separate online bank account just for your emergency fund (but linked to your primary accounts). 

Like many ‘first steps’ to financial independence, the first one can be the hardest. Here are steps to begin building your emergency fund. 

You. Can. Do. This.

Now

1. Create a dedicated emergency savings account at your banking institution (or elsewhere) if you haven’t already. You can use an existing savings account, but if you do, you need to make a commitment to mark this as emergency money and to not pillage this when doing Christmas shopping. 
2. Put a minimum of $100 in the account. If you have more, aim for $1000. That puts you in a better place than most other American adults.

Next

1. Set up automatic periodic or monthly transfers from your main checking account (or other source) into this emergency account. Select an amount to be transferred a day or two after your paycheck is deposited into your account.
2. In a year, check the balances on your emergency fund. If you started with $100 and added only $100 a month, you’d have $1200. That would pay for the following emergencies:
   • A decent new dryer
   • A co-pay on a root canal
   • A $500 deductible for a new fender
3. Review your monthly and yearly cash flow and decide if you can increase your automatic monthly balance transfers to accelerate your savings into your emergency fund. If not, sustain your current levels for now. 
4. When you calculate your net worth, make sure to add the balance from your emergency fund to your assets category.