Should I Slow Down Investing to Rebuild My Emergency Fund?

April 15, 2023

How should you prioritize investing over your emergency fund? In this highlight, Brian and Bo discuss what you should consider when it comes to building your emergency fund and where it falls within the Financial Order of Operations.

For more information, check out our free resources here.


Let’s move on to Amanda’s question. She says, “Should I slow my 401k contributions down to the employer match to refill my emergency fund, or take longer to refill my emergency fund?

This is such a hard one, Amanda, because I need more information. Here’s what I’d love to know: Amanda, if you were sitting across from me, what are your monthly living expenses? What does it cost for you to run the house? Let’s say they said, ‘Oh, it costs three thousand dollars a month through everything we want to do.’ Okay, great. Well, if it’s three thousand dollars a month, then I know you need three to six months of living expenses somewhere to have a fully funded emergency fund. Well, it’s very different if your emergency fund is at one month of expenses versus if your emergency fund is at four months of expenses. I would argue from a risk standpoint, those two situations are not equal. Because if you’re someone who is on that low end to where you’re down to the very nitty-gritty and you’re paycheck to paycheck trying to make ends meet, I think you’ve got to get real uncomfortable and start building up that emergency fund. But if you already have three to four months of emergency expenses in place and you feel reasonably secure that your employment is going to be there and you can do both, I can still build up my emergency fund, but I can still put money into my 401k, I don’t think that it’s crazy to go in that direction. Now, in your opinion, Brian, do you think that’s too aggressive? Like, is it too aggressive to not just jump back and say, ‘You know what? Nope, six months. You’ve got to have six months, and you can’t do anything else until you do six months.’ No, I think it has to be nuanced, but I do want to make sure I give a really quick, succinct because I trust and I respect the FOO, I mean the Financial Order of Operations, is road and weather tested, and the fact that, in Amanda, you catch it.

You understand you’re already looking at this. Right. And the fact that this is free money, you’ve got to get the employer’s free match. But then you didn’t give us the variables that Bo was talking about. Do you have high-end interest at because it’s okay? You get, after you get the free money from your employer, go hit and attack that high-interest debt if you have any of that. But then you see step four, before we can start loading up the 401k more, we are hitting the emergency reserves. And I think if you’re somewhere between zero and three months, do not skip this stuff. This is why it’s so important, and I’m glad you’re asking the question, Amanda, but Bo is right. Once you get at least that minimum three months and you feel like you don’t have a lot of risk in some of the other components because that’s what I’m trying to keep you from, if you lose your job, if you have some of these things that happen that could become somewhat catastrophic, you don’t have the big oopsie that runs your financial life into the ditch. So the three to six months of the emergency reserves is where you’re going to find some grace or nuance where you can potentially still keep investing into the Roth HSAs within your 401k or employer. And then of course, step six is maxing out their retirement, but don’t skip the step.

Do the homework to figure out as Bo suggested living expenses, and then what are the true risks of me losing my job, losing my ability to cover my expenses. Because that’s going to have a lot of impact on your emergency reserves. Three months? Is it six months? Is it even beyond that? If I’m about to cross into retirement, and bro, I don’t want to belabor this point, but I think it’s worth mentioning. Right when things are good, we feel like things are great and we feel like things will never be bad again. You know when you’re flush, it’s never as good as it seems, and when you’re bust, it never feels like you’ll be up again. Like that’s the idea. I feel like a lot of times when people’s emergency fund gets down, they say, “You know, I’m gonna be okay. Things are gonna be okay. I’ve got…I’m thinking about the short example you shared. You know what? Okay, it’s okay if my emergency fund is lean because I have home equity or I have this other option. I have this other option.” Keep in mind that your emergency fund is there for emergencies. It’s there for the things that you don’t know are gonna happen, that you cannot see coming. So don’t get an over an over sense of confidence around, “I’ll probably be okay. I’ll probably be okay,” because I think when we see people who are in fantastic financial situations, they get themselves in a pickle is because they did not pay true respect to where risk in their financial life lies. Well, it’s your oxygen. It’s true. I mean, it is your oxygen. We all take it for granted until you’re underwater. And by the way, when you hit a bad economy like we’ve been where you start seeing unemployment increasing, you start seeing tried and true businesses in the economy are actually starting to lay off big chunks of people, really good people. This isn’t…it’s not like these people got laid off because they weren’t good at their job. These are reductions in forces that reflect the economic environment we’re in. You do not want to be underwater, thinking you’re in a really comfortable situation, and then you come up and realize somebody put a lid on it. Yep. You know, because that’s the thing I always think about. If you’re going snorkeling, we’re all fine when we can come up and down as much as we want. But if you’re snorkeling and you decide you’re going to go inside the ship that’s down under the water, you’ve got…you know, hey, I might need a tank in my back to actually go instead of snorkeling. I need to be scuba diving because I’m actually going into an enclosed room and it’s changing the rules. Look at your finances the same way. You know, we all take it for granted we can bob up and down, but no. I’m telling you, cash liquidity is your oxygen for your financial life because I have been the knucklehead that thought my home equity, my six figures of home equity, who needs cash? Cash is trash. And then they change the sheet music, everything changed around us. The bank sent me the letter saying, “You know what? That cashier, that home equity you thought you had? Just kidding. It’s dunzo. Don’t write any more checks. Don’t use that debit card.” They took it away from me. Fortunately, I made it on the other side, and now I’m sounding the trumpet telling everybody, “Do not disrespect the value of having liquidity in cash.” Because, by the way, it also is a tremendous wealth builder. Ask Warren Buffett, ask me and Beau. But typically, you can pick up some outstanding assets when everybody else has misplayed how much cash they should have on hand.

Want to know what to do with your next dollar, you need this free download: the Financial Order of Operations. It’s our nine tried-and-true steps that will help you secure your financial future.



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