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Hello Aspiring Chillers,

Today, I want to share a crucial chapter from my own wealth-building journey, focusing on the indispensable role of emergency funds. Reflecting on my path, from managing daily finances to planning for decades ahead, I've realized how vital it is to understand and master short-term financial stability as a stepping stone to long-term wealth.

My Discovery of Emergency Funds

My introduction to emergency funds was a game-changer. I learned that an emergency fund isn’t just a safety net; it's a foundational pillar in any financial plan. Experts often suggest a 3-6 month expense cushion, but through my experience, I found that a personalized approach works best. When I was in a stable job, I felt comfortable with a 4-month reserve. But as I ventured into self-employment, I expanded this to a full year, recognizing the unpredictable nature of entrepreneurship. This fund has been my lifeline, offering peace of mind and financial stability during transitional times.

Separating Life Events from Emergency Funds

In the journey of financial planning, it's crucial to differentiate between savings for significant life events and your emergency fund. For instance, when it comes to major milestones like weddings or the pursuit of home ownership, these require a separate financial strategy. Take home buying: many young people can benefit significantly from strategic approaches like house hacking (as I've detailed in the House Hacking article).

When planning for major purchases (travel, home) or events (wedding, children) I believe that you should set an initial budget by doing all of the research you can about the journey you are about to embark on, then add 20% to that. This has worked out well for me in many aspects of life for knowing what the actual costs are going to be. There will always be something that pops up so just plan ahead for it. Always remember,

Tactics from My Playbook

In determining the size of an emergency fund, I looked at my own lifestyle and expenses. For those in stable jobs or with in-demand skills, a smaller reserve might suffice. This does depend a lot on your risk tolerance. When I say stable I mean you are mission critical. Without your specific knowledge of the system the company would be in a major scramble. The bar for “stable” is very high. I built and was the only person who could run an important system for our business and therefore was in as stable a position as you could be.

Due to that, my marketable skills and in general being more risk-tolerant I chose a 4-month fund initially. Knowing that I would be able to pivot pretty quickly if life threw me a curveball.

As for where to keep these funds, I explored various options. High-yield savings accounts (HYSA) and treasury bonds were my go-to choices, offering flexibility and security. Generally if you have a brokerage account I suggest treasury bills/bonds because it cuts out the middle man of the bank. If you do not need to be liquid you could buy them direct and maybe make an extra 0.1% but the brokerage account allows you to trade in and out of the bonds, instead of being locked in. Therefore they are just as liquid as a high-yield savings account but you get better returns.

Account Choices

I have not spoken about this directly and as we are finishing up the initial Cash Management advice I think we should lay out a good system of accounts that I think everyone should have.

Checking Account: National Bank (Chase, Back of America, etc), This should have no monthly fees and is where your direct deposit from work should go.

High-Yield Savings Account (HYSA): Online Bank (Make sure FDIC Insured & no fees!), This is best for Emergency Funds or Life’s big purchases (Homes, Travel, Bucket List Items). I recommend that these accounts are separate.

Brokerage Account: I mainly use Fidelity, mostly because that is where my retirement accounts are and it’s just easier to manage from 1 place. There are a ton of options. This is where we will start investing our savings once we have our emergency fund built up. Personally I skip the HYSA and have a brokerage account that holds my emergency fund in treasury bonds.

Retirement Account: This is for anyone with a 401K or IRA from work. You should contribute to these accounts out of your paycheck. Make sure you are getting your employer match. More on these soon!

Credit Card: You need a minimum of 1 credit card. Buying assets without credit is damn near impossible. Get a no fee one. You should put all purchases on this card, and pay it off every month. Again more on these soon!

Using Financial Planners

I have never been a fan of financial planners personally because they can be incentivized to give you bad long term advice. So, when choosing a financial planner, opt for a fee-based professional. They're more likely to align with your long-term interests, focusing on steady growth rather than high-risk, high-reward strategies. A good planner should first inquire about your emergency fund – it's a telling sign of their approach.

Reflections and Looking Ahead

Building my emergency fund is not just about saving money; it is about creating a resilient financial base for all future endeavors. It's a step I urge everyone not to skip, as it paves the way for a more secure and prosperous financial future. In our upcoming newsletters, I'll delve into investment strategies, sharing insights from my journey to help you build your own financial success story.

Until then everyone start working on saving up so we can start our investment journey!

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