Definition of Emergency
1: an unforeseen combination of circumstances or the resulting state that calls for immediate action.
2 :an urgent need for assistance or relief.
The Miriam Webster Dictionary.
Imagine the following scenario. A wealthy fund manager prangs their luxury car to the tune of $4000 - an easily covered (albeit annoying) drop in the bucket that presents minimal disruption. In contrast, a debt-laden, financially stretched resident physician does the same, to the tune of $400. The accident leads to further debt, missed appointments, and a cascading series of incidents that leaves them anxious, and in the worst cases, may undo months of progress. If $400 doesn’t sound like much, consider that countless surveys indicate that a $400 emergency would leave 36% of Americans in hot water.
In short, the term ‘emergency’ means different things to different people. However, while the specifics vary, the answer usually circles back to the same thing; money. More specifically, an emergency fund.
When emergency strikes, having a soft place to land in the form of a sufficient, readily accessible fund allows life to proceed as normal, and allows the unfortunate victim to sidestep what could otherwise be a personal and professional disaster. In financial terms, it’s called having a ‘reserve.’ This reserve parachute serves to provide space to step back, breathe, and act according to a decision-making process unfettered by emotion and stress. The same high-quality decision-making process that you, as a physician, must employ throughout your career.
In this article, we’ll tell you precisely how to create this reserve, and thus prevent an ‘emergence’ from becoming an ‘emergency.’
As a student, resident, or practicing physician, your required emergency fund will vary according to your personal circumstances, unique needs, and stage of your career. Consider the following:
It’s Highly Personal
There’s no such thing as an “average” emergency. Likewise, one person’s crisis is another's barely noticeable road bump. However, you’re a physician. Not a BASE jumper. Assuming you’re an ‘averagely’ responsible person, start by asking yourself what amount would represent an adequate financial buffer during an ‘average’ unexpected event. Or, what unexpected outgoing would represent a significant blow to your financial confidence? How much would derail you? How much would keep you on track? The answers will help you evaluate where you stand against the following rules of thumb.
Where do I Start?
Anything is better than nothing – An emergency fund has one job: To prevent a financial backslide in the face of the unexpected. Again, ‘emergency’ means different things to different people. Nevertheless, $1 in reserve is one dollar you won’t have to borrow or plunder from savings when an emergency strikes. Even on the most restricted budget, starting small and gradually building up is a wise move.
Set an initial target and grow from there – The average car repair is estimated to be around $400. Consequently, $500 - $1,000 should cover things. If circumstances allow, set it higher. Starting is often the hardest part. However, once the ball is rolling, momentum builds, in turn creating further peace of mind.
Next stop – one month – One month of what? What is your monthly take-home pay? What are your monthly expenses - mortgage, rent, loans, utilities, etc, that must be paid regardless of your personal problems? Is that daily $3 extra shot of espresso an essential item? Or, can you temporarily sacrifice it until your emergency fund is up to scratch?
Next stop - 3-6 months – Ultimately, a solid emergency fund should cover 3-6 months of either committed expenses or take-home pay. As well as the confidence of knowing you won’t be stranded, your solid financial footing coordinates well with other areas of the financial picture. For example, a 3-6 month emergency fund corresponds perfectly with the 3-6 month payout waiting periods of most disability policies.
Don’t forget infrequent expenses – “Expenses” aren’t just restricted to regular monthly outgoings. Often, quarterly or annual payments, such as insurance, or routine maintenance on your belongings are overlooked, creating another emergency when the bill inevitably arrives. Factoring these irregular expenses into your emergency fund adds another layer of protection when the unexpected hits.
“The journey of a thousand miles begins with a single step.” – Lao Tzu
After reading the above, do you feel like your emergency fund goals are within reach, a distant dream, or that you’re well on your way? Regardless of distance, getting started is the biggest step. As you continue that journey, anxiety will diminish, while confidence and a sense of control will increase. In turn, this leads to a more positive daily outlook, and a spring in your step that you can’t put a value on. So, how do you get off the starting block?
Find the wiggle – Examine your spending. Where are the leaks, or the frivolous, unnecessary expenses? Essentially, where can you find room to shore up your emergency fund?
Pay yourself first – Out of sight is out of mind. To put that mind at ease, instruct your bank to redirect a monthly amount, however large or small, into a separate emergency fund account.
Look at your taxes – According to the IRS, the average tax refund in 2021 was over $2,000. Although it may fall short of your target, it will at least make a decent dent in it. Or, if you don’t want to wait until tax season for a refund, consider lowering your paycheck withholdings and redirecting the same amount straight into your emergency fund.
Happy birthday – Look at the calendar. Are there events or holidays where you are likely to receive funds? Consider directing these cash windfalls directly into your emergency fund.
Get creative – Consider the guitar you never play, the bike you don’t ride, or the mountain of clothing you never wear. You can bet that someone on eBay will be willing to take it off your hands. Again, a relatively effortless, bonus windfall to go towards your emergency fund.
Pennies make pounds - Some banks and credit unions round-up expenses to the nearest dollar and send the difference into an account of your choosing. Those pennies can add up.
Re-“fill ‘er up” – Emergency funds exist because emergencies can, do, and assuredly will happen. When they do, celebrate your emergency fund's existence, pat yourself on the back for creating it, then begin replenishing funds using the same positive habits that made it possible in the first place.
Remember, this isn’t a stock investment, subject to gains and losses. It’s an umbrella, in a fixed state of readiness to shield you against emergencies, and strengthen your hand in the long game of financial success. So, where should you store your umbrella?
In the mattress – This is obviously a metaphor. That said, at least it’s safer than leaving it on the kitchen counter. While cold hard cash is an uncommon choice for a fully stocked emergency fund, it’s still an option. Just make sure it’s in a secure location.
Pre-loaded credit card – Back in the day, paying with a check or credit card might earn you a raised eyebrow from the cashier. Now, it’s more likely that paying in cash gets you the eye roll. Moreover, the choice to pay with cash payment may be unavailable if you are sending emergency funds non-locally. One option could be pre-loaded or secured credit cards. This still has a few drawbacks. However, it affords a larger amount of flexibility and keeps your emergency funds separate from your normal expenses.
Savings or money market account – Ready accessibility, along with a layer of distance between your routine expenses and the unexpected, is what makes a savings or money market account the most popular emergency fund choice. If not at the same bank as your checking or debit account, it should be digitally connected to it
Online, connected account – If you want to squeeze every bit of return out of your emergency fund, or add a further layer of distance, an online bank account, digitally connected to your primary account is an option worth exploring. With less infrastructure than traditional financial institutions, online banks can afford to offer customers higher interest rates. As with any financial institution, do your due diligence and evaluate the company's security and strengths.
Contact Forme. We are here to help. In the meantime, here are a few initial pointers.
Well done! You’re asking the right questions and taking solid steps to secure better outcomes custom-designed for you:- outcomes that Forme is here to help bring about. To find out how, reach out to us now.
The information provided herein was prepared for educational purposes only and is not a solicitation to buy or sell any security or insurance product, nor an offer to provide investment advice. All examples are hypothetical and for illustrative purposes only. Nothing contained herein should be construed as legal or tax advice and is not intended to replace the advice of a qualified tax advisor or legal professional. The information contained herein may have been compiled from third-party sources we believe to be reliable but cannot guarantee its accuracy or completeness.
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