April 03, 2022

Most people know that you should have three to six months of savings in case an emergency happens.     Having money set aside in the bank can really help when a financial emergency occurs such as getting laid off of work, having a large medical emergency, or a large house expense . However, most people have a hard time thinking an emergency situation will happen to them and the emergency fund doesn’t get funded.

So, let’s change the name from “Emergency Fund “ to “Life Happens Fund” because life happens.  As we all know that little things in life occur somewhat random but definitely quite frequently.  A big car repair, helping out a child, minor medical expense, a big vacation, etc…. These are more of your $1,000-$10,000 expenses that can come up out of the blue that need to be paid for.  It was reported last month in a survey  that 40% of middle class Americans could not cover a $400 emergency expense.

To start a Life Happens fund, set a monetary goal of saving half of your salary. That is a big number, but it is simple to calculate.  Now that you have the number, start transferring a set amount each month from your checking to savings. 

Once you get to about half your goal, I would switch from putting money into a low yielding savings account to a taxable brokerage account.  If you are prone to more life happen events (also known as having kids) then continue to put more in the savings account.   Invest in mutual funds (never pay a sales load) holding stocks and bonds in a conservative portfolio.   Being in a conservative portfolio, you will have money invested in the stock market for the growth, and also have money in the bond market which will dampen the overall risk of the portfolio.  This money can grow over time and can be used to fund those expenses when life happens years from now like a wedding, new car, or a bigger vacation.  Now you may have to pay capital gains tax on any growth in the portfolio, so keep that in mind.   

Another option for some people to consider is utilizing a home equity line for their Life Happens fund.  A home equity line is a line of credit utilizing your home as the collateral.  The interest rate is typically is not a fixed rate, but is adjustable.  There is usually a origination/appraisal fee to open the line, so the bank can process the line. Shop around for the best deal.   So, with the line in place you can access when Life Happens to help cover the expense very quickly.   You would pay interest on the amount you advanced.  If you never use the line of credit, you won’t have to pay any interest.  It is like having a credit card in your wallet that you never use.

If you have to access the home equity line, have a plan to immediately payback the advance as soon as possible.  This is debt on your home, so it is not a long term solution.  You may have to sell some investments, get a loan (like a car loan) from the bank, or pay it back monthly over time from your salary. 

Life happens.  Be ready for it.