Before we jump into the amount needed in an emergency fund, let’s do a brief recap of the blog to this point. For ministers and seminarians looking to invest, we’ve covered some good ground thus far:
- We’ve looked at the first step to becoming an investor.
- We’ve determined to be investors rather than speculators.
- We’ve understood that an emergency fund is essential to successful investing.
Even with those three posts alone, you, the reader, are already “ahead of the game” when compared to the majority of Americans. Yes, I’m serious.
We’ll eventually address some financial literacy statistics on this blog, I’m sure, but take my word for it for the time being that if you’ve read the first three posts on this blog, you already know more than most individuals. So congratulations! Let’s keep at it.
At this point, it’s possible you might feel a little discouraged, though. Perhaps you’re thinking, “Wow. It’s going to take a lot to get to the point at which I can begin investing, and I’m not sure I’ll ever get there.” I understand.
Or perhaps you’re thinking, “Man, this is quite the runway into teaching me how to invest. When will this blog get to the actual details of investing itself?” I understand that, too.
But hear me out.
What we’re beginning with here on the blog is the foundation for a lifetime of successful investing, the foundation of the investing house you’re going to build (or have already started building), in a sense.
As I’m sure you already know, if you don’t have a strong foundation on which to build a house, there’s a really high likelihood that your house will collapse at some point in the future when external forces are applied. (Jesus himself used this illustration, did he not?)
For our purposes here, that collapse equates to you not, in fact, being a successful investor. And as we’ve already discussed, successful investing is the only way for you to reach your financial goals, including a financially secure retirement.
So don’t be discouraged. You should actually be encouraged that we’re spending so much time on these foundational matters before getting into investing itself. Getting these foundational matters right is essential. You must have them in place.
Now let’s get back to where we left off with your emergency fund. Last time, we covered the need for an emergency fund. This time, we’ll cover the amount that should be held in it. I’ve got “bad” news and good news.
The “bad” news is that, generally speaking, you’re going to want a goal of 3-6 months’ worth of basic living expenses in your emergency fund. That’s a lot of money, I know.
The good news is that it’s an eventual goal that you’ll be working toward, and that there is instead a more immediate goal of a smaller emergency fund in the meantime: $1,500. That’s still a chunk of change, granted, but it’s our starting goal.
We start with the goal of $1,500, and we work our way toward 3-6 months’ worth of basic living expenses. But why does the emergency fund ultimately have to be so large?
Frankly, for all the rest of our finances–particularly our investments, which is where we want our money to grow over the long term–to work as they should, we need a sufficient emergency fund to draw from so that we do not hurt the growth of our investments.
The 3-6 months’ worth of basic living expenses not only should be enough to cover most emergencies, but most crucially, it provides a good buffer to help us in case of the major emergency of job loss, hopefully getting us from the job we just lost to another job that will be bringing in at least some income, even if it’s not our ideal job.
Put squarely within the context of ministry, an easy hypothetical example to think of is a pastor, associate pastor, or youth pastor being fired from his position and having to take any other job while he searches for a new ministry position. Having an emergency fund with 3-6 months’ worth of basic living expenses would help prevent having to pull out money that has been invested.
Now getting to 3-6 months’ worth of basic living expenses saved in an emergency fund is going to take a while, for sure, especially if you have high-interest debt to contend with first (that topic will be coming up on the blog soon).
Trust me when I tell you not only that you need to consider an emergency fund that has eventually reached this level a requirement, but also that once you have it, you will be so very thankful and relieved that it’s there. Believe me, it will definitely bring some peace of mind, and that’s even outside of thinking particularly in relation to its impact on your investments.
But again, being real, it will take a while to get there unless you’ve been a super-saver already and have avoided high-interest debt. That’s why, to begin, we should try to shoot for a $1,500 emergency fund to get us started.
And that’s where the following steps, in order of priority, toward a full emergency fund come in. Because of the various financial circumstances we find ourselves in, we need to prioritize some things in order to arrive at the 3-6 months’ emergency fund level.
- Save $1,500 in an emergency fund (remember, this is the beginning of the fund). This $1,500 is to cover more minor emergencies that might crop up so that you don’t get off track with the steps to follow. Before you do anything else, make absolutely sure that you have $1,500 that you will not touch unless there is a true emergency.
What is a true emergency? It’s an immediate cash-flow requirement: cash that must be used now, e.g., car repair. If at any point later in the process this fund drops due to being tapped into, you prioritize getting it back up to the level it needs to be before continuing. - If, and only if, your employer offers a retirement plan with an employer match, you begin contributing the exact percentage or amount of your paycheck required to receive your employer’s maximum match (this will vary by employer). Budget-wise, if you are unable to contribute that amount, then you work your way up toward it, keeping in mind that you are also working toward building the 3-6 months’ emergency fund and will need to work on both concurrently.
The reason this step is next in the priority order is because the employer match to your retirement account is free money, which is the absolute best investment return you will ever get (a guaranteed 100% return). Never, ever, leave free money on the table. If your employer does not offer an employer match to your contributions to the employer’s retirement plan, then you can ignore this step.
(I realize we’re in the early stages of this blog and haven’t gotten into investment strategy yet, so if you need a recommendation on which fund to use in your employer’s plan in the meantime while you are still learning, look for either a target retirement date fund or a life-stage fund, each of which handles asset allocation for you.) - The next step toward the 3-6 months’ emergency fund is to pay off every cent of high-interest debt. High-interest debt is its own discussion, so I’m not going to say a lot here, other than to point out that paying off high-interest debt is a required step before you’re able to focus on investing as you should. Again, paying off high-interest debt is a required step before you’re ready to invest. We’ll talk about why this is so important.
- Now you’ve finally arrived at the continuation of your emergency fund to get it up to the level of 3-6 months’ worth of basic living expenses, although I recommend that you do so concurrently with funneling into investments at least some of the money you’re saving. Some argue that you do no investing at all until you reach the 3-6 months’ worth goal in your emergency fund, but I disagree with this.
The reason is two-fold: Contributing at least some money to investments while simultaneously beefing up your emergency fund to its ultimate goal (1) helps you build the habit of consistently making regular contributions to your investments, and (2) allows you to begin investing sooner rather than later, as building an emergency fund up to 3-6 months’ worth of basic living expenses takes time.
In summary, you must have an emergency fund, your initial target for it is $1,500, your ultimate target for it is 3-6 months’ worth of basic living expenses, and once you’ve hit the initial $1,500 (and assuming you have no high-interest debt), you are in a position to begin investing in small amounts.
But in what type of account should your emergency fund be held? That’s coming up next time.