Life has an uncanny way of throwing curveballs when we least expect them, and if you’ve ever been hit with an unexpected expense, you know what I mean. However, n my experience, when it comes to financial planning, it’s better to prepare than to repair. That sentiment couldn’t be more accurate when we start talking about building an emergency fund, especially for my fellow CRNAs.
Imagine this – you’re happily cruising along in your professional life when suddenly, an unexpected expense hits you right in the pocket. It’s like getting blindsided in a football game, except there’s no referee to throw a penalty flag. That’s where an emergency fund can step in as your financial safety net. Let’s unpack this.
The Nitty-Gritty of Living Expenses: An Essential Element for Your Emergency Fund
Ah, living expenses – a term you’ll frequently hear in finance discussions, but what does it really encompass? When calculating your Liquid Term (Lt), you must have a firm grasp on your annual living expenses. After all, how can we determine how much we need in our safety net if we don’t know what we spend in the first place?
But let’s pause here for a second. This isn’t about penny-pinching or scrimping on your latte. It’s about understanding your spending patterns so that you can make informed financial decisions. Decisions that align not just with your current lifestyle but also with your future financial goals.
Let’s kick off this process by considering the following expenses:
- Housing: This can include rent or mortgage payments, property taxes, and maintenance costs.
- Utilities: Consider electricity, water, heating, and even your internet and cable bills. Nowadays, I’d even put a cellphone in this category!
- Groceries: Include all your regular trips to the supermarket or local farmer’s market.
- Transportation: Include costs for fuel, vehicle maintenance, public transportation, or even bicycle maintenance.
- Insurance: Health, auto, home, life – they all add up.
- Health care: Don’t forget out-of-pocket expenses for things like medications, doctor visits, and other treatments.
- Personal care: Expenses for grooming, clothing, and personal hygiene.
- Entertainment: Movie tickets, dining out, and other leisure activities.
- Debt repayments: Student loans, credit card bills, personal loans, etc.
- Vacation & Gifts: Harder to estimate here because it’s not as consistent from month to month, but it needs to be included nonetheless.
Remember, the goal here isn’t to cut back on everything or anything; it’s about gaining awareness of where your money goes each month. You might even find areas to save or spend a little extra! By keeping a clear record of your living expenses, you’ll create a realistic pathway to building your emergency fund, boosting your Lt, and achieving financial stability.
As a CRNA, you’re used to taking care of others – now it’s time to take care of your financial well-being.
The Power of Tiered Cash Reserves
Our society loves a good “rags-to-riches” story, but let’s flip the script and aim for “stability-to-success.” This starts with tiered cash reserves – a two-pronged approach to your financial safety net.
Tier-One Cash Reserves: Your Everyday Safety Net
The first step on your financial security ladder is building a Tier-One cash reserve. Think of this as the financial cushion for your day-to-day expenses. Aim to save about 1-2 months’ living expenses in a readily accessible checking account.
This may seem like a herculean task for some, but remember, the journey of a thousand miles begins with a single step. It doesn’t matter if you can only accumulate a small amount each month – what matters is that you are creating a habit, a culture of saving.
Tier-Two Cash Reserves: The Strategic Safety Net
Once you’ve got your day-to-day expenses covered, it’s time to climb a rung higher on the financial security ladder and start building your Tier-Two cash reserve. This should ideally constitute the next 3-6 months of expenses and can be tucked away into a high-yield savings account for that extra oomph of interest.
The golden rule? If you’re in a dual-income household, aim to have at least three months’ worth of expenses stashed away. If you’re single or the sole breadwinner, shoot for a six-month cushion. It’s a reasonable target that balances prudence with practicality.
The Delicate Balance of Cash Reserves
Now here’s a nugget of financial wisdom that I’ve come to cherish: “Every dollar goes to work for someone.” Remember, your money should be working for you, not your bank. That’s why maintaining the balance in your emergency fund is crucial. Too little and you risk financial exposure; too much and your dollars are working harder for the bank than they are for you!
It’s akin to a football team having the right blend of defense and offense. If you have too few defenders, you’re in for a world of hurt when the opposition charges at you. But too many defenders, and your goal-scoring opportunities dry up. It’s all about balance.
Unraveling the Financial Vital Signs: Liquid Term
In healthcare, vital signs are the first go-to measurements to assess a patient’s critical bodily functions. They give a quick snapshot of the physical health of a patient at any given time. Similarly, in the world of personal finance, we have what we call ‘Financial Vital Signs.’
One such vital sign, and one that’s particularly important when talking about emergency funds, is the Liquid Term (Lt). It indicates your financial health and is pivotal in building a solid emergency fund. But how do we calculate this?
The Liquid Term is calculated by taking your annual living expenses and dividing them by the dollars you hold outside of retirement accounts. It’s an invaluable score that gives a clear picture of how liquid you are, i.e., how quickly you can access your cash if an emergency arises.
Let’s tie this back to our safety net – the emergency fund. If you’ve diligently set up your Tier-One and Tier-Two cash reserves, you’re well on your way to a healthy Lt score. The stronger your Liquid Term, the more resilient you are in the face of unexpected expenses. And the more resilient you are, the better you can weather financial storms that come your way.
Why is a strong Lt so crucial, you ask? As discussed in a previous article, aiming for an Lt score of at least 0.5 should be the #1 financial priority for every CRNA. This ensures you have a substantial safety net in place before setting your sights on other financial goals.
By having a firm understanding of your Liquid Term, you’re not just preparing for financial curveballs; you’re taking the reins of your financial journey and putting your money to work in the smartest way possible.
Emergency Funds: The Unsung Hero of Financial Planning
As a financial planner, I’ve witnessed the full spectrum of financial scenarios – from soaring stock market gains to the crushing blows of economic recessions. If there’s one lesson I’ve learned from my career, it’s this: an emergency fund is one of the most overlooked yet crucial elements of a robust financial plan. It protects you from the things that can go wrong, enabling you to invest more confidently for the things that can go right.
Our journey to financial freedom should not be a sprint or a reckless dash for riches. It should be a steady, measured marathon where we’re prepared for any hurdles that come our way. And an emergency fund is the perfect training partner for this marathon.
So, as we forge ahead, let’s commit ourselves – to weaving a safety net that will catch us if we stumble, to balance our cash reserves to ensure our dollars are working for us, and to create a culture of saving that helps us prepare for the unexpected. Because remember, in the game of life, there’s no referee to call time out when a financial curveball hits you. Stay on point, stay prepared, and let’s build those emergency funds.