We live in strange times my friends.
That’s an understatement.
The coronavirus has literally shutdown much of the world.
And with that, has come a massive financial fallout.
Just this week, several million Americans have been laid off or furloughed because of the coronavirus crisis — and millions more may lose their jobs in the weeks ahead.
As a result, the unemployment rate is also primed to soar from the current 50-year low of 3.5%. The jobless rate could quickly climb above 10% and go even higher.
People are hurting financially. And it’s likely to get worse.
A massive $2 trillion government rescue package aims to ease the pain for the countless Americans put out of work with expanded unemployment benefits and loosened eligibility requirements. The bill also allows certain qualified retirement plan participants, including 401(k) plan participants, to take new distributions and even bigger loans from their plan accounts than before.
Which brings me to the point of today’s essay….
Specifically the concept of emergency funds. Notice I said “funds”, plural. I’ll get to that in a moment.
The very idea of setting aside an emergency fund has been scoffed at by many people in the past. “Why would you just have 6 months of salary stuck in the corner doing nothing?”, goes their thinking.
The coronavirus and its impact on the world’s economy answers that question unequivocally. This is exactly why everyone should have emergency funds.
You see, for those dependent on an income from a job or business, not having an emergency fund actually compounds the financial challenge. In other words, the problem goes from being very bad to horrible.
Here’s what I mean…
Needing money to pay the rent, mortgage, utilities and grocery bill, the person without emergency funds will do what was previously unthinkable…
They’ll take a bank loan out to pay for basic necessities.
They’ll borrow against their retirement funds just to pay the car note.
And then they’ll make the mother of all financial mistakes…
They’ll put day-to-day living expenses on their credit card and then proceed to pay the minimal amount each month.
Look, I’m not making light of anyone struggling right now. Nor am I judging anyone who is doing these things to stay afloat financially.
What I am doing is providing a backdrop for something that normally falls upon deaf ears.
The need for emergency funds, and as important, the compound and devastating effect, that the lack of them has on peoples lives in these situations.
Let me put that into perspective…
The average return on the stock market is about 10%.
The average return of the greatest compounder of money the world has ever known, Warren Buffett, has been about 18% over decades.
Now, imagine putting thousands of dollars onto a credit card for basic necessities and then have that money compound away from you at 20% for months or years.
Just do the math for what it would take to recover from that.
After finally paying off the credit card balance (which can take years), you would need to then earn a rate of return on your money that nears Warren Buffett’s level….just to break even.
It won’t happen.
This is why going into credit card debt is one of the single biggest mistakes a person can make. It literally puts them on a financial treadmill that takes years (even decades) to recover from.
You, see not having an emergency fund doesn’t just kick a person in the shorts once, it keeps kicking them over and over because of the financial wounds they inflict on themselves just to get by.
I’m a big fan of emergency funds. In fact, I recommend that you have several. Yes, 6 months of salary tucked into a money market account. Yes, even more funds stashed inside longer term savings accounts. Yes, even more funds invested in long term CD’s or Treasuries.
Here’s what I want you consider…
Think of concentric circles around you, each one a set of funds to protect you. Each one a layer of defense.
In extreme times, like what’s happening now, these funds will protect you. Yes, you might deplete that first level, but then you have others to fall back on and so forth. The idea is to protect you, your family and also your assets.
Think of credit card debt as the enemy at the gates. You want to build moats, draw bridges and fortifications to keep that enemy from ever getting close to you. Think of bank loans and 401k loans as pirates trying to board your ship. Protect your financial ship with cannons and armies, all fighting for you.
When we come out of the current financial crisis, people’s memories will fade. Guards will be let down. Old financial habits and ideas will creep back in and yes, the concept of emergency funds will once again be scoffed at by many.
Let that not be you my friends.
If you’re someone who has put off building emergency funds, let this be a turning point for you. Make the idea of tapping into your retirement funds or taking on debt a very last option, not the first option for people who have no funds set aside.
Start as quickly as you can.
It takes months or even years for some to build a robust stash of savings to protect themselves and their families. Start building those circles of financial defense, one by one. Fortify yourself and your assets. Build financial immunity.
Friends, the number-one financial regret among Americans tends to always be the failure to save for emergencies and for retirement. This is a time when both of those objectives come into sharp focus.
As the saying goes, don’t start to build your well when you’re thirsty. Build it now. Be ready for the next financial “hurricane”. With several emergency funds in place, you’ll weather the storm, assets intact, and continue on your journey. The journey to financial freedom.
Be free. Nothing else is worth it.
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