The Emergency Fund: What You Need When the Sh*t Hits the Fan

Money well spent is also well saved if you do so before a financial calamity. Why every family needs a plan and how best to save for it.

No one tells you in advance you’re going to be laid off. Rumors will start, promises will be broken and when the sh*t hits the fan, you may find yourself unemployed with a pittance of severance and/or benefits.

In fast-paced industries… when consolidation happens or during economic downswings… or when senior management questions the company’s headcount, your talents do not matter.

In many cases, it comes down to an excel document. One column represents a department’s headcount and right next to it is the number that represents each employee’s compensation.

Your talents will likely empower you to find another job, but when you move into your late 30s or early 40s, job hunts take longer. Entry-level and junior employees can easily find other gigs or pivot to growing industries as their compensation requirements are lower than yours.

Now that you’re a dad, and perhaps responsible for bringing home the bacon, it’s time to have a plan in place to cushion the blow before the next recession. If you start early enough, you’ll be able to weather the storm.

Financial advisors will recommend a six-month cushion of cash in case one’s household income dips. That’s easier said than done, but by starting as early as possible, you won’t be in a crunch if you represent the breadwinner.

If you don’t have all the figures in front of you, in terms of income and expenses to figure out how much money you need, here’s the easiest way; use the number that represents your monthly rent or mortgage and divide by 33%. That percentage is a standard financial professionals often use to gauge your monthly income.

To figure out the emergency fund you need, multiply that number times six. It may seem daunting but there’s nothing worse than selling off investments or other items to cover your monthly expenses.

First, take a step back and consider your options if and when you are laid off. Some suggestions:

Severance and Benefits: Whatever package you are offered, do not sign anything. Use the evening to draft a letter outlining the positive impact you had on the overall business and note your accomplishments. Note the provided package does not equate to a fair deal and ask for an increase in both severance and benefits. This process ultimately represents a negotiation—don’t cave in without a fight.

Legal Considerations: You may have no case to make and never need an attorney, but get a recommendation from either friends or family in the event you’re asked to sign more detailed paperwork, i.e. a non-competitive clause. If that appears in the termination paperwork they ask you to sign, you should definitely fight for more compensation.

Superfluous expenses and projects: Unless you’re in the middle of a demolition, do not start any home-improvement projects. That may seem obvious, but if you have plans to redecorate a room, landscape your backyard or upgrade your car, don’t. You can add them back to the honey-do a bit down the road after you find a new job.

Sweat equity: Do you own a lawnmower, but hire someone to cut the grass? You will have plenty of days to fill, I regret to say, so hit the pause button on those outsourced services. Do it yourself.

Selling items: If you are in your 40s and own a second car, but you do not use it every single day and can share a single car with your wife, sell it. This may seem extreme but you can always buy another car. This will dial down the costs you pay for insurance. And yes… this suggestion sucks because who doesn’t love their car? Reciprocally, it’s a quick way to raise capital.

Credit Score: Bear in mind that if you have a mortgage and you’re out of work for 5+ months, your credit rating will take a dip. Financial institutions will downgrade you as you’re financially tied to the debt associated with your mortgage.

Suggestions on How to Save

The easy answer, if you’re a new dad, is to immediately put 5% to 10% away every month—direct deposit to an interest-bearing savings account. Online banks offer better interest rates, for the record, and can easily accommodate direct deposits. 5% on a $50k net salary equates to $209 saved per month.

What will this equate to in three years, in a savings account offering a 2% interest rate? $7,657 before taxes: that’s not nothing! If you are compensated via commissions or with an annual bonus, allocate a percentage of that compensation to your emergency fund. Based on a $100,000 net salary, the goal should be to have $50,000 saved before your first child enters Kindergarten.

Don’t invest the money and don’t plan trips abroad with these funds—just keep it tucked away in a safe place.

That way, if you get knocked sideways during the next recession, you have a lot less to worry about.  Plant the seeds of an emergency fund today so you’re well prepared in the future.