Today I want to talk about the first line of defense when it comes to your financial plan, and that's your emergency fund. I'm going to give some real life examples of times. The emergency fund really came in to save the day for some of my clients. I want to talk about how much you might want to think about keeping in an emergency fund, and then one of the really big pitfalls I see people run into when they're trying to maintain that emergency fund. but first I'd like to introduce myself. My name is Warren Berger. I'm the owner of Luminary Financial Advisors. We help people that are nearing retirement or just recently retired, create a plan to help them save taxes throughout their retirement. So I think most people understand that it's probably a good idea to have some cash aside in case there's an emergency.
you need a new roof on your house, your dog needs surgery, things like that. the question remains though, how much should you put aside and how do you manage that cash account? And I just want to give a couple of examples first to just sort of, you know, clients that I've worked with and kind of how they ran into it. One of them was one client couple. they have a daughter that they recently found out was sick. She has cancer and it's, it's a really tough situation. And her living situation with her children wasn't the best. And so my clients decided that they, they wanted to buy a house for her to make sure that she was in a comfortable and safe environment. Now fortunately we were in a situation, their retirees so we manage cash differently for retirees than we do for people that aren't retired.
And I use a, a cash bucketing system. So we use cash, bonds and stocks. I actually have a video on how that works on the channel. You're welcome to go take a look at that. But fortunately, we were in a position where we had two years of expected expenses set aside in cash. and so we were able to use that. And so that functions as not only expenses, but also as an emergency fund. And we were able to use that to offer cash to buy the house. And because this happened recently interest rates have gone a lot higher. When we ran it through their plan, it made more sense for us to pay cash for the house than it did to get the mortgage. And so because we had all this money set aside, we had the flexibility to be able to sort of jump in in that emergency situation and get this done.
Now we're going to have to make some moves in order to replenish that emergency fund, but we have time to do that. And so we were able to respond to this emergency very quickly. We had the funds available, and now what we can do is we can replenish that over time. Another example comes from a client who is currently working. She's in her fifties, she works for a tech company. she's sort of eyeballing retirement in the future, but she's not quite there yet. but because she's in the tech industry and right now they are undergoing a lot of layoffs in general in that industry there's a lot of uncertainty around her job. So what we did is, fortunately she's in a position where we could put away a year worth of her expenses into cash.
Now, for someone that's working, that's, that's generally a lot more than I would probably recommend having in your emergency fund. But because of the uncertainty with her job, we decided that that was a more prudent way to go. And so we have that set aside in case something happens with her job and we're going to, we're going to reevaluate every six months and say, Hey, how are we feeling? And it's, and it's such a point that we feel like her job is more stable then we would probably do something else with that cash. So we don't have too much in that emergency fund. but for right now, it gives her a really good sense of security. And then we have another smaller emergency fund. She has an older house, so things seem to pop up on the house occasionally. So we wanted to make sure that we have another set of funds that's just there in case these things pop up.
So the idea is to build in the flexibility into your emergency fund, but to, to not be reactive to what comes at you, but be proactive in our thinking and say, Hey, what do we see coming down the line? How much cash might we anticipate needing if this worst case scenario comes? And making sure that we put something aside for that. That story dovetails nicely into the question of how much should you keep in your emergency fund? And that's a really subjective question, right? It comes down to how much do you have available, what are your anticipated needs, and then also what is your personal comfort level? What is it going to take for you to feel comfortable that you have enough set aside? So couple of things to think about. Generally, if you are not, if you're still working and you are the sole income earner for a household, so let's just say you're a husband or wife.
You go out working, the other person is at home, maybe with children one income coming into the household, I generally tend to recommend having at least six months of expected expenses in place so that if something was to happen to that person's job, you have some flexibility, you have some time to be able to react before you might have to get into that next level of funding for an emergency situation. Now, if you have two people in a household and they're both working, bringing in an income, you might be looking to sort of shift that down to maybe just three months of expected expenses because you do have some flexibility built into the fact that you have someone else that's working, especially if both of them have health insurance benefits, things like that, that you could lean on in case someone wants to lose their job.
Now, there may be other things in consideration. People might have health conditions where they're subject to having to come out of pocket for cost. You know, these are emergency situations that you want to keep in mind. if you are in a situation, for instance, like my client I discussed earlier, she's in an old house, things tend to break down. You don't know when that's going to happen. You might want to sort of up that emergency fund. The idea is to try to anticipate might what might be coming at you and then set aside what you think is in a reasonable amount of money to be able to cover that in case it was to happen. Now, here's the biggest pitfall that I see people run into with their emergency funds. They set
Up up their emergency fund. Great, they've done their due diligence, they really feel comfortable with what they have there. But now these unexpected expenses come up. You use funds from the emergency fund, but then you don't replenish them. And so, you know, in order to replenish those funds, sometimes you're going to be in a situation where you have to scale back on some other things. That might mean doing a few less dinners out over a couple of months or spending on, you know, delaying the spending on that car you were thinking about getting. Because that emergency fund is your first line of defense. We always want to make that a priority after you've spent some money out of that. So if you have to put other things on the back burner, that's fine, as long as you can make sure that you have a safe amount of money in place for these emergencies.
The other pitfall, and I think probably the most common that I see is that people lose some discipline with their spending. they may end up having credit card debts start to build up because they have not been living within their budget or living within their means. And so they start pinching from the emergency fund to cover that sort of extra credit card bill that came in and things like that. And if that's happening, you have to really examine if your current spending is in line with your priorities. Because if that extra night out or that extra vacation or you know, whatever it may be for you, if you're finding that those things are popping up more frequently and you're constantly scrambling to try to get your emergency fund back up to where you want it to be, that's probably a spending issue. And you really have to sit down and take a hard look at what's most important in your life and what are the changes that you're willing to make to make sure that you are safe in the future. I hope that you found that helpful and we have additional resources in the comments section some checklists and flow charts that I think are really helpful as you're approaching retirement. Some things to think about. And if you're interested in having a discussion about your personal financial situation with me feel free. There's a link below that you can link to my personal calendar and we can have a chat and see where you're at and see how I might be able to help. Thank you very much and we'll see you on the next video.