Texas just endured a historic winter storm, and my family and I just happened to be there when it occurred. In the middle of all this chaos and disruption, I’m thinking about how we are handling this emergency and how it relates to financial planning. It got me thinking about the many similarities between the winter storm (whose effects we are still enduring) and enduring a financial storm.
I’ve learned some lessons from this storm system about how important it is to be prepared for unexpected weather events; many of these same lessons apply when going through a financial storm. But first, here’s our story.
My family and I are currently in South Padre Island, Texas, for a little sun and surf while the kids do distance learning. If there’s an upside to the COVID pandemic, it’s been the flexibility to do things like this and make some fun memories.
Little did we know, however, that our blissful warm weather was going to come to a screeching halt with an ice storm. Like millions of others, we have been affected by what Texas officials call an “unprecedented” weather event. Between the weather and the infrastructure, power grids can’t keep up, and nearly 4 million people here in Texas are out of power, us included.
I was alerted to the power outage when my CPAP machine shut off. It was 50 degrees in our bedroom due to the glass wall that overlooks the ocean. It was early, and I couldn’t sleep, so I decided to go on a coffee run to see if anybody had power and could give us our caffeine fix. I grabbed three Yeti cups (for me, my wife, and my mother-in-law) and headed out.
You know that saying, “the early bird gets the worm?” It applies here; I was able to get coffee before the crowds started pouring in. Did I mention our condo is on the 10th floor? With no emergency lighting, I headed back up ten flights of stairs in the pitch black. Made it!
Now on to the next problem. No power or water means no way to flush the toilet. We have seven people in our condo in total. As you can see, this is NOT a good situation! However, we have an accessible water source right outside the condo – the pool! I grabbed two empty gallon jugs and proceeded to trek down and up the ten flights of stairs filling the jugs with pool water so we can flush the toilets. Done.
On to the next issue — drinking water. With seven people in our household, we need quite a bit of water. Thankfully, we have a small stock of bottled water, 8 gallons. So, we are good for the moment. However, everyone is cold, so my wife and I decided to call the Marriott, where they have power and water. Success! We booked three rooms for our big crew.
Once we get down the Marriott, everyone is happy and sleeps well. That is until the water goes out. On day two, we woke up and learned the Marriott’s water is now out as well. Apparently, the hotel doesn’t have the part they need to repair the water system, and they have no idea when the hotel will have water again. My wife and I head out to see if we can beat the rush for bottled water. We are in luck and return with enough to last our group for two days, plus we still have 5 gallons left back at the condo.
At this point, we book our hotel room for another night because power and water are still out at the condo, with no ETA. We are glad we did it early because we learn the hotel sells out again for the night.
We are planning on the fly because of the weather emergency, but with your finances, the sooner you start planning, the better. Especially when it comes to your Emergency Fund. An emergency fund is a stash of cash available (ideally in a separate account) that can save you when you are in a difficult financial situation such as a job loss or health event.
Planning ahead and creating a stash of cash for emergencies means that you don’t have to be stressed when you’re in the midst of a financial storm because you have a plan.
If you don’t have an emergency fund, a great way to get started is to get real about where you are.
Get real about your situation, what do you have, and what don’t you have that you really need. That’s what we did with our water. We had some but stocked up with what we could find. It wasn’t the ideal amount, but it did give us some peace of mind. Having cash in the bank can provide you with financial peace of mind, knowing you have money to cover unexpected expenses.
Periodically, you’ll need to revisit this step. Life changes, and your situation may change, so it could be helpful to reassess whether your emergency fund needs to change and update if needed.
Next, determine how long your current emergency fund will last.
Ideally, your stash of cash should be 3-6 months. This number is based on your current monthly expenses. Determine how much you spend each month, and then divide the amount of cash you have by your average monthly spend to figure out how many months your money will last.
With our water supply, we were estimating a gallon per day per person. That’s the number we are using to plan our supply of water. We used less than that the first day, partially because we drink a lot of LaCroix (haha!)
If you have enough cash set aside in an emergency fund, way to go! If you don’t have enough cash set aside to cover three months of expenses, it can leave you feeling insecure about protecting your family in the case of an unexpected illness or emergency. That brings us to the third step.
Create a strategy to get to your desired amount of cash in your emergency fund.
Even if you don’t have a lot of extra cash in your monthly income to put towards an emergency fund, we recommend you start saving systematically. Even if it’s only $100, start automatically depositing that into your emergency fund every month.
If you don’t have a dedicated account set up, we recommend it. If you’re anything like me, when I know I have extra cash, I spend it. Having a dedicated account to stash some money for emergencies protects it from any temptation to spend it on non-essential items.
What kind of account should you set up for your emergency fund?
There are three common places people hold their emergency funds:
- High-interest savings account
- Money market funds
- Ultra-short-term municipal bond funds
- Savings account
Though savings accounts are common for emergency funds, they do have a downside. Most savings account earn close to zero interest, and you will eventually lose purchasing power due to inflation. On the plus side, nearly all savings accounts are FDIC insured. An FDIC insured account is a bank account at an institution where deposits are federally protected against bank failure or theft, up to 250,000 per depositor.
Some people prefer to take a bit of market risk because they hate the idea of inflation erosion; they will use a conservative investment strategy such as a short-term municipal bond fund, which also can provide tax-free income. Many of our clients choose to put half of their emergency fund in an FDIC insured account and half into strategies that have the potential to keep pace with inflation.
Hopefully, this gives you a good idea of why you should have an emergency fund and how to go about setting one up. Because life’s too short to spend it worrying about your money!
P.S. The weather has warmed up to 48 degrees and I’m off to find more bottled water!
**All written content is for information purposes only. Opinions expressed herein are solely those of One Life Financial Group Inc. and our editorial staff. Material presented is believed to be from reliable sources; however, we make no representations as to its accuracy or completeness. All information and ideas should be discussed in detail with your individual adviser prior to implementation. Advisory services are offered by One Life Financial Group Inc. a Registered Investment Advisor in the State of Minnesota.