Doctors, above anyone else, know exactly what an emergency looks like.
Remember that time you did chest compressions on a kid while in medical school or the time when that mother delivered a baby before she could make it to her hospital room?
Yep, those were emergencies.
Of course, there are financial emergencies that pop up from time to time too, and it’s important to be ready for them so they don’t negatively impact your hard earned income.
I know what you’re thinking: please don’t make me read another emergency fund post. But, if you stick around, I’ll share some of my unique insights on emergency funds.
What the Experts Say
If you read almost anything out there relating to personal finance, you know “the rule.” The experts constantly say, “Save 3-6 months of your total monthly expenses.”
Moreover, these emergency funds should be held in reserve, in a separate savings account, in case something bad happens.
Believe me, there will be times that you will need to have this fund, and there are situations and circumstances that you will not need to blindly follow the advice meant for the masses.
It all comes down to your personal situation and your risk tolerance (how comfortable you are with risk).
If you are in or just finished up training, you will more than likely be in the camp that needs an emergency fund. The typical resident has a negative net worth, a significantly smaller salary than they deserve, and little to no cash in reserve or invested.
If this is you, you need an emergency fund.
The Quick & Dirty Explanation of Emergency Funds
The best way to plan for uncertainty is to have an emergency fund. An emergency fund is, essentially, cash set aside for an unexpected event. It acts as your financial safety net.
For example, I purposefully saved up 2 years worth of living expenses in the bank so I could start my own business from scratch. I kept working at a 9-5, saving as much as I could in my emergency fund account. So, for me, my emergency fund not only protected me in case something bad happened; it also grew large enough to enable me to quit my job and start my own business with room to spare.
Of course, this is just how I did it. The amount that people set aside for times of uncertainty depends on the household. If you belong to a dual income household with no kids, you might only need 3 months of expenses as reserves. If you have kids and one spouse is a stay at home spouse, you might need to save up 6 months or more in order to establish a true emergency fund.
Everyone’s situation is different and general advice is just that: general. What’s important to remember is that creating budgets to manage your cash flow is fantastic, but unfortunately, it can’t capture everything. No one expects to get laid off or have significant car trouble, but these things happen every day.
So, how do we put this information into action?
First, determine how many months of fixed expenses you need to have in reserves. Then, set up a separate savings account at your bank and label the account something that will stand out to you as being your emergency savings.
If you have the funds available, transfer the appropriate amount into the new savings account. If you don’t have enough funds in your checking account, plan how much you will save per paycheck over the next 6 to 12 months. Start the process immediately by setting up an auto transfer into the savings account, and don’t stop until you have reached your targeted amount.
If you want to minimize the opportunity cost on your money (ie: not leave it in your bank earning next to nothing), you can open up a savings account at an online bank like Ally and earn 1.15% (at the time of this publication.) While it won’t amount to much ($20,000 in savings is only $230/yr in interest income), it’s better than the $2/yr you are earning at your current bank.
Once you establish this uncertainty fund and make progress towards it, you will start to have a more positive outlook on your financial future. Establishing this savings will not only provide stability for you in time of need, but will also provide peace of mind knowing that IF something was to happen, you are covered.
Let’s hope that you will never need to use those funds for any real emergency, but if you do, you will be happy that you put this in place.
The Goal: Being So Cool, You Don’t Need an Emergency Fund
So who doesn’t need a dedicated emergency fund? Well, that club includes physicians that are more established in their careers, have ample savings in their non retirement investment accounts, reliable monthly income from outside investments (ex: real estate rental income) or who are at or near retirement/financial independence.
They don’t need to have the typical 3-6 months of reserves in the bank because they have enough liquidity in their investments or reliability in their income that if something bad happens, they will be able to “weather the storm” by simply putting the emergency expense on a credit card and have it paid in full when it comes due.
They wouldn’t carry a balance or get buried alive in pile of credit card debt because of the unexpected expense. They would just use the cash that comes in reliably (from their income) or by liquidating a small portion of their non retirement investments and transferring it to their bank to pay off their credit card.
This is similar to the concept of self insurance: if you have the ability and risk tolerance to “self insure” your emergency fund, you don’t need it.
For the rest of us that haven’t made it yet, it still is a good option to have a contingency plan if something bad was to happen.
The good news is that with proper planning, all physicians can be cool kids.
If you want to learn how to get there, feel free to set up a free introductory meeting with me.