Do You ALWAYS Need an Emergency Fund?

July 3, 2023

In this highlight, we discuss why it is important that you have an emergency fund built and what you should aim to have.

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.


Question is up next. Later in life, when you are in the drawdown phase and have access to ample brokerage funds, do you need to have an emergency fund? Oh, man, you know where I’m going with this. Spicy, okay. I’m gonna do that, yes, again. I’m getting these really good ones. So, what? Why do we have an emergency fund? To protect us against emergencies. I know that seems sort of silly, but that’s, in fact, what it is. When we are accumulating, the emergency that we might encounter is a loss of job, a loss of income, a loss, an unknown home repair, a car accident. Fill in the blank of all these unknowns that take place.

Well, when you get into retirement and when you get into Financial Independence, there are still a lot of unknowns. Maybe your unknown is not a loss of income because you stepped away from the workforce. But the big unknown that you have when you’re retired and you’re living off your 100 bills is, “I don’t know what the market’s going to do. Is the market going to go down this month, next month, the next six months, the next year, the next 18 months? We don’t know the answer to that question.” And because we don’t answer that question, just like when we were accumulating, we have to protect ourselves. And one of the ways we do this, we protect ourselves with an emergency fund.

And you may be surprised to hear this and broaden this one, I want you to speak to a little bit. I’m of the opinion that our emergency fund is actually larger when we get to financial independence and retirement than it was back when we were accumulating. Yeah, Crystal’s falling into the access to cash trap versus actually having cash. I’m falling into this trap. I mean, I think all financial mutants, because we want to maximize every dollar that comes into our control, and we’re like, “Man, why would we want to do this now?” Look, it’s a little different now because interest rates are actually over four percent, and so you can actually make something with your cash. But there have been decades where you literally couldn’t make anything on your cash, and I fell into that trap in the 2000s where I was like, “You know, look, I’ve got six figures of home equity. The bank was crazy enough. They gave me a checkbook, even a debit card on this thing. What could go wrong? Why would I hold cash? Why would I have something that makes less than one percent when I can go invest and maximize every dollar that comes into my control? I could always just use this access to cash for an emergency.”

It doesn’t work because, as I’ve told you guys and you’ve heard me say, all the horrible things economically that can happen, whether it’s an economic downturn, people losing their jobs, real estate values plummeting, or a full-on recession or bear market with your financial assets. They’re all extroverts, they all hang out together, smoking cigarettes on the street corner, causing trouble and havoc. And I just don’t want you to fall prey to that. Because, Crystal, when those guys show up in your neighborhood and start wrecking and causing havoc, and spray painting not just the walls, but the curbs, that’s right, they’re actually spray painting the curbs that cause trouble, you’re going to say, “Man, I wish I had actual cash.” Because I don’t want to go sell, you know, the stock market, my holdings, my equities when they’re down 25 to 30 percent. And my bonds, those government things that are supposed to be a great diversifier, well, even they’re down six to eight percent right now. This is horrible! You’ll look back and say, “I should have listened to those guys when they talked about having cash.”

And I’ve shared with you guys, I actually prayed, “Get me through this,” back when. Because the rest of the story on my situation was, the bank sent me this nice little letter (and I’ve shown it on screen before in certain episodes) where they’re like, “You know that home equity line? The one we told you you have a debit card, a checkbook? Just tear those up because we have frozen that bad boy. We think your house is worth half of what you thought it was worth a few years ago, and what we told you it was worth. So, we’re just gonna freeze your access to it.” And I’m like, “Freeze my access? That was my cash! That’s what my emergency fund is, actually. That home equity line.” They’re like, “Just kidding. No, you saw those guys that came in your neighborhood, started spray painting the curbs? You’re stuck.” And that’s the point that I said, “Lord, if you will help me out of this situation, I will never, ever, ever be without cash again. I will respect emergency reserves.” That’s why we set it up as step one and four. It’s so important. Cash is so important. We give it two steps, one and four. And you’ll find out, and I’ve made this analogy: Cash is your oxygen. We all take it for granted. We can just breathe it in, breathe it out. We can waste it. We don’t care. We even fill it up into inner tubes and rafts and everything else. Who cares? It’s all around us. But as soon as you go into water, you’re like, “Oh my God, I need some oxygen. I need to breathe.” And that’s what your cash is. You can take it for granted, not worry about it. But as soon as you go underwater, when those horrible things of the economy, the recession, the real estate market collapsing, all those extroverts show up and start hanging out together, you’re gonna be so happy you actually have cash.

So, take advantage of the Financial Order of Operations, the two steps, one and four. Don’t overlook it as you get closer to retirement. Because, Crystal, you said you’re getting later in life. There’s a reason people pick on us about this. I think somebody who’s about to leave the workforce, instead of having three to six months, you’re probably gonna find out that you’re gonna need more.

It doesn’t work because, as I’ve told you guys, and you’ve heard me say it, all the horrible things economically that can happen, whether it’s an economic downturn, people losing their job, real estate values plummeting, just full-on recession, bear market with your financial assets, they’re all extroverts. They all hang out together, all smoking cigarettes on the street corner, causing trouble and havoc. And I just don’t want you to fall prey to that because, Crystal, those guys, when they show up in your neighborhood and start wrecking and causing havoc and spray painting, not just the wall, but the curbs, they’re actually spray painting the curbs, that cause trouble. You’re going to say, “Man, I wish I’d had actual cash because I don’t want to go sell, you know, the stock market, my holdings and my equities when they’re down 25 to 30 percent, and my bonds, that you’re going to think 18 months. Maybe I even have clients that have three years. I know that sounds crazy, but there’s a weird psychological thing that happens when you leave the workforce. Because the first time those horrible extroverts show up in your neighborhood and you’re no longer working, you’re like, “Oh my gosh, I’m completely at the mercy of what’s going on economically with my financial investments. I need to have a little extra cash, a little slack in the system to make me feel good.” Because when you’re in the workforce, you’re like, “It’s okay, I’ll just retire later, I’ll just keep working.” You have this coping mechanism that does not exist once you’re retired. And so, you need to fortify not only your financial life but your emotional life, such that you don’t freak out. And a little extra cash can do that for you.

Plus, I’ve used cash to get rich. I mean, a lot of people don’t think about that. I’m baby Buffett. Just call me baby Buffett. And the fact is, whenever things are horrible, I’ve got my extra cash that I’ve had ever since the day I made that promise and said that prayer. I was going to keep extra cash. And I bought this building with Bo. I mean, we’ve used having cash when others do not have cash. It’s a great amplifier of your wealth. Nobody talks about that stuff. 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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