Everything to Know About Your Money (Improved): Part 3 - Downside Protection
Are you wearing protection?
This post is 1,199 words, a 5-minute read. Enjoy!
It has been a minute since the last part of the Everything You Need to Know About Money Series. I took a detour like any great anime does to formulate the story's bigger narrative. But the return is back and stronger than ever.
If you need a reminder of the last part, click below. It was all about managing debt.
Everything to Know About Your Money (Improved): Part 2 - Debt
This post is 1,023 words, a 5-minute read. Enjoy!
The key takeaway, "Go Through The Fire"
Now let’s get into Part 3 - Downside Protection
If we continue the analogy of driving in a storm. Protecting the Downside is leaving early for your trip because you do not know what you might encounter on the road. So when the storm shows up suddenly, you can take your time driving through it and even stop if the storm gets too rough for you to keep driving.
In your finances that is your EMERGENCY FUND.
This gives you the ability to take on trash situations without you ending up in the trash. As Money With Katie calls it, "An emergency fund is what I affectionately refer to as the “oh, shit.” fund."
Morgan Housel says it best:
You can save just for saving’s sake. And indeed you should. Everyone should.
Only saving for a specific goal makes sense in a predictable world. But ours isn’t. Saving is a hedge against life’s inevitable ability to surprise the hell out of you at the worst possible moment.
Or as Professor Scott Galloway aka Prof G says, "An emergency fund is like wearing kevlar when you get shot. Sure, it hurts like hell but you will live."
This provides you with a sense of freedom and confidence, knowing that if certain things come up. YOU WILL BE FINE!
It is one of the best feelings to know that life can go full life and you can brush it off. This removes so much anxiety that we all deal with on a day-to-day basis. This allows us to take risks in other areas of our life.
Enough of my excitement about my love of Emergency Funds. You get the idea. But the next question we all have is:
How much should I save?
Answer no one likes
What does it depend on? The financial stage of life you are in.
The key difference is pre and post-debt.
For someone working on paying off high-interest debt (refer to part 2 of the series to understand what is considered high-interest debt), their emergency fund will be a lower amount because a lot of money will be focused on freeing themselves.
For someone who has paid off high-interest debt, their emergency fund will be a larger amount because the spare money can be used to fund the emergency fund.
For someone who owns lots of assets aka homes, cars, other vehicles, etc. You will need a higher amount. This is why it is so important that you are careful about the things that you own. Because those things can easily start owning you.
Three ways to determine your Emergency Fund Amount:
If you are paying off high-interest debt:
Start with having enough to cover your insurance deductibles
Typically this will be anywhere from $2000-$5000 (depending on if you own a home or not)
If you just want an easy answer (this is Kelechi's personal savings numbers)
Single and does not own home and can live with parents: $2500
Single and does not own home and cannot go back to parents: $5000
Single and owns home: $10,000
Married without kids and no home ownership: $10,000
Married with kids and no home ownership: $15,000
Married with kids and home ownership: $25,000
Adulting Emergency Fund, the typical financial advice.
3-12 months of Core Expenses
3 months if you are single and can live with risk
6 months if married with family
12 months for entrepreneurs
If you know your monthly expenditure, this will be extremely easy to figure out
Tip: Core expenses mean stripping out all the luxuries of your expenses. This is the minimum you need to survive.
How to Save
Open a separate High-Interest Savings or Money Market account.
My favorite is Ally
Runner Up: SoFi
Runner Up 2: Marcus by Goldman Sach
Tip: Don't get bogged down trying to pick an account. Just pick one and move on
Make it automatic
If you have direct deposits at work, select an amount that automatically gets sent to the Savings Account
I know these numbers may seem crazy and way out there. Plus, it can be much harder when you feel like you are saving for no real reason. But I promise getting to the point where you have this, makes a world of difference for you mentally and emotionally.
Also. you will not have your emergency fund immediately. It will take time but as the old proverb says, "The best way to eat an elephant, is bit by bit."
It is time we all put on protection.
Remember Generosity>greed
✌🏾
Recommendation Section
Ben Carlson in "What's a High Income?" Ben breaks down how incomes have grown over time and uses numbers to put into perspective comparative incomes from different decades.
Katie Gatti Tassin in Incentives are Not Instructions, breaks down ways that wealth (for lack of better words) effs up your world view. A snippet form the post:
While nearly 90% of Americans agree that “the government should spend what’s necessary to ensure all children have good public schools,” only one-third of the richest 1% feel the same way. Fifty-nine percent of the general population say they’d be willing to pay higher taxes in order for every person to have healthcare; only 41% of the richest 1% say the same.
Morgan Housel in Minimum Levels of Stress, perfectly describes the current state of things in the US. Where things are great but yet everyone feels absolutely terrible.
Nick Maggiulli answers the question Is $1 Million still a lot of money?.
Johnathan Clements in Advice For The Kids, gives some of the best financial advice for us youngins in bite-sized form that I've ever seen
There are hidden costs in almost everything we choose to purchase. Doug and Heather Boneparth have a series covering many of them. The latest topic is on Holidays
🎙️Two podcasts I love:
50Fires. It is by Carl Richards, a recovering Financial Planner and Advisor. He could help other people with their finances but had a difficult time talking about money with his wife and children. It has quickly become one of my most anticipated podcasts to listen to every week.
Money For Couples by Ramit Sethi. Ramit is no one new to the world of money and personal finance. In his podcast, he talks with couples about their finances and helps them better enjoy their money or better get aligned. This is very important podcast for me as I enter a new stage of life.