What is an Emergency Fund? 

Many people just call their emergency fund a savings account, yet it can be so much more than that. Generally, an emergency fund is a liquid (i.e. easily accessible) sum of cash that you have set aside for the unexpected. The great thing about an emergency fund is that once you have it, you can use it to cover costs without seeking outside financing of some sort, like credit cards and personal loans. That way, you’re not stuck making payments on a one-time purchase for years to come. 

While life can seem pretty predictable—depending on who you ask, anyway—the unexpected still pops up every once in a while. Usually, it comes in the form of a car repair, medical bills, unexpected fees, or even job loss. Having an account to fall back on that WON’T put you in further debt is incredibly helpful, and can help you overcome any challenges with relative ease. 

Why Emergency Funds Are Important

As mentioned, emergency funds can be a critical piece of your financial landscape because they allow you to handle unexpected expenses with ease. Your emergency fund is like a bucket of water on a fire—quick and efficient. 

Without emergency funds, there can be a lot of undue stress added to an already stressful situation. If you’re scrambling to figure out how you’re going to afford an emergency, it can suck away your time and attention. 

Yet saving consistently and systematically can help prepare you for these situations and take away all the added stress. It may not make it fun to have an unexpected payment, yet at least you’ll be able to “put out the fire” and move on.

Benefits of an Emergency Fund

Besides the obvious upside to an emergency fund, here are some other benefits to consider as you work toward saving more money. 

• Peace of mind. You don’t have to expend energy worrying about something BEFORE it happens, because you know you’re covered if it does.
• Opportunities. We take an elevated approach to emergency funds by calling them emergency/opportunity funds. That’s because being in a position of cash also allows you to partake in unique opportunities. 
• Growth. Depending on where you save and how you think about your savings, you can turn your emergency fund into something even better than a savings account alone. A system and app like Currence enables you to save automatically and helps you think about passive income opportunities. Whole life insurance helps you keep your account safe while also earning interest and dividends. 

How Does an Emergency Fund Protect Your Wealth?

By having some emergency savings in place, you can also protect your wealth curve. For example, imagine your car breaks down and the bill is going to be $2,000. You don’t have the monthly cash flow to just pay it off, so you have to pay it off some other way. Your credit card balance can take it, but you know that will take you months to pay off, and it’s going to severely impact your ability to save until then. You could also enter into a payment plan if your auto shop offers it. Yet, that’s also going to cut into your monthly savings potential.

On the other hand, you have your emergency fund. If it’s in a regular savings account, you can simply withdraw those funds and pay off your car. Then you can continue to save as you usually do. It will take some time to replenish your savings, yet you feel better about that than servicing debt. Unfortunately, this also means you lose some momentum on your compounding interest.

Here’s one option we think can be even better. What if the cash value of your whole life insurance was your emergency fund? Yes, that does mean you’d take a policy loan against your cash value. The difference is that because you’re not making a withdrawal, your cash value will continue to earn interest and dividends. The compounding interest is so valuable, and whenever possible, you want to keep that momentum. 

Yes, you’ll have a payment. However, you get to choose how and when you make payments, according to your personal cash flow. And every dollar you pay toward it “replenishes” the amount you’re able to borrow for something else. In this way, your cash value can be used over and over and over again, while earning all the way through. 

Where to Keep Your Emergency Savings

As we’ve alluded to, there are a few places to keep your emergency fund, though some are better than others. 

Savings Account

This is one of the most common places to store your emergency fund or emergency savings. It’s easy to access, and you can earn a small amount of interest on your account. In fact, if you need to access your cash immediately, this is going to be the fastest way to do that. 

Whole Life Insurance

We like whole life insurance because, on top of being a great insurance product to protect your income, it also has living benefits. Those living benefits include access to a cash value, as we shared earlier. 

When you want access to your cash value, you can do so through a loan with no questions asked. You can also repay the loan on your own schedule. And as we touched on earlier in this article, the start of the show is that your account can keep compounding at its full value. 

While whole life insurance is liquid, it can take a bit of time to receive your funds—maybe a few days to a week. If you need money lightning fast, it’s a good idea to have a secondary savings account or emergency savings for those kinds of needs. 

Stocks/Bonds

While we don’t consider stocks and bonds to be a viable emergency fund, there are many people who do. Most people choose to invest with the belief that their accounts will grow about 12% on average. Unfortunately, this isn’t the case for most people. And while they may see growth, much of it is simply from their monthly or annual contributions to the account. (And even really substantial growth can be undermined by a loss the next month or year.) 

One of the major problems with treating your investments like an emergency fund is that if you need to pull some money out when the market is down, you lock in those losses. And since you don’t get to choose when you “need” emergency money, you’re playing an even riskier game. 

If you want to invest, it’s better to invest with money that’s not earmarked for emergencies and opportunities. Save money first, build up your savings, and then consider investments later. 

The Best Way to Store Emergency Savings is Currence

So, what’s our vote? 

It might surprise you to know that our vote is a combination of two strategies, thanks to Currence. Currence is an app and an account that enables you to save money and do it without even thinking. 

With the app, you create a Reservoir™ account that you flow your income through. From there, you determine how much of your income you want to deposit into your checking account. The rest stays in the reservoir. By saving money FIRST, you can capture more savings without a sense of “missing out” on your lifestyle. You get to choose exactly how much income to take, and you can pay all of your bills and expenses from your usual checking account. 

Your Reservoir™ becomes your emergency fund, and you don’t even have to think about putting money away because it captures your savings first. Over time as your Reservoir™ grows, you can then redirect the excess to whole life insurance policies, your business, and much more. All the while, you maintain a baseline amount in your Reservoir™.

Effectively, your Currence Reservoir™ becomes your stable emergency fund, and the whole life insurance becomes your opportunity fund (for fun and investments). 

How to Start an Emergency Fund

In general, the best way to start your emergency fund is with a baby step. Then you take another, and another. Generally, we encourage people to save at least 20% of their monthly income. However, we recognize that depending on your current lifestyle you may be able to do more or less than that. So the next best thing is whatever you CAN do. If it’s 5%, that’s certainly better than zero. If it’s 30%, fantastic! 

Send it to a savings account and try to forget it’s there. This can be easier if your savings account is with a different bank than your checking account. You’ll be less tempted to spend. Fortunately, Currence does just that. Your Reservoir™ is a savings account you set up separately from your bank. And while your income flows from your Reservoir™ to your checking account, it’s an amount that you choose. 

When you set up Currence, you work with your financial advisor to determine how much money you want to save for your emergency fund. This is your “Target,” and it can be whatever you’re comfortable with. Your advisor can also help you decide how much income you’d like to take each month. Just know that you have complete control over all the functions of your Currence account, not your advisor. It’s your choice!

How Much Should You Have in Savings?

This is going to depend on what you want to do with your finances, ultimately. A good rule of thumb for most people is to have 3-6 months of expenses saved up. So if you spend $4,000 a month, you might want to set your Target anywhere from $12,000 to $24,000. 

However, when you use Currence, one of the objectives you may have is to save to your Target, then use the excess to invest for passive income or even start a whole life insurance policy. That may or may not impact how much you want to Target in your Reservoir™. Speaking with your advisor about your vision for the future and how you want to use your money can help you both gain clarity about the right Target for you personally. 

When to Use Your Emergency Fund 

So you’ve got an emergency fund… when should you use it? Only you’ll know what constitutes an emergency, yet generally, you can categorize it as something you didn’t expect to pay. Sometimes, you may have small “emergencies” that you can cover from your monthly cash flow with no issue. That might be a $20 parking ticket, or something else. 

Otherwise, if you can’t cover the expense from your cash flow and you don’t want to put it on a credit card, use your emergency fund. It’s difficult to dictate what you should and shouldn’t do, because it’s going to depend on your circumstances at the time. You might have no problem paying off the credit card balance in a month or two, and you don’t want to withdraw from your Reservoir™ for it. That’s fine! 

If you’re stuck in analysis paralysis, think about how you want the following months to go. Do you want to be making payments? Do you want to decrease your savings capacity for a few months? Will your Reservoir™ bounce back quickly? Is it worth disturbing the Reservoir™ or can I make a small lifestyle sacrifice somewhere? Only you know those answers. 

Capitalize on Opportunities with an “Opportunity Fund”

So what’s an emergency AND opportunity fund? It’s something that is the best of both worlds: money for emergencies, and money to partake in opportunities. Opportunities can look like just about anything. It could be a once-in-a-lifetime travel opportunity, or it could be an investment that seems like it was made for you. An opportunity could be an old car you’ve always wanted to fix up, or it could be starting the business you’ve been dreaming of. There’s no one way to define an opportunity, except to note that opportunities often require cash. 

When you combine Currence and whole life insurance, you create an emergency/opportunity system. Your Currence Reservoir™ covers your emergency expenses. Then, when you reach your target, you can start funding a whole life insurance policy that can be used for funding opportunities. This is a powerful combination that ensures you are protected and have plenty of capital for whatever life throws. 

Not to mention, when you use a policy loan for opportunities you get the added benefit of leverage. If you leverage other people’s money (the insurance company’s) then you can create powerful results. Suddenly you have a real estate property funded by OPM and paid by the tenants, and you get to benefit from the cash flow. 

Ready to Start Your Emergency and Opportunity Fund?   

If you’re ready to get started, we can help you enroll in Currence or get started with a whole life insurance policy. If you’re not sure of the best order of operations, let’s talk and get you headed on the right path. Have questions? Send them to us at welcome@prosperitythinkers.com. 
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