🔥 How to FIRE Up Your Savings: Emergency Funds for High Earners

☕ Good morning!

Career transitions can be choppy, and the need for a financial lifeboat becomes even more pressing when the stakes are higher– bigger mortgages, private school fees, and, let's not forget, those spontaneous trips and AirBnBs. 

This week, we’re going over proper emergency funds for high-earners. 

❤️‍🩹 An emergency fund is like a financial first aid kit.

It’s there to bandage unexpected expenses, income gaps, and financial crunches. 

Many financial planners recommend having between three to six months of living expenses tucked away, but proper emergency fund construction is more dynamic than it’s often given credit for. 

An emergency fund shouldn’t be a pile of cash collecting dust eroded by inflation over time. It’s a strategic reserve that needs regular calibration based on lifestyle changes– whether they be sharp, like a career change or having a kid, or gradual, like the growing expenses due to rising prices or quality of life. 

It’s also about keeping your money (still) working for you while you sleep. Dial down the aggression on investment strategies– this isn’t pocket change to throw on memecoins or derivatives. 

🛏️ In a world where cash under the mattress earns you zilch, it's time to get creative with your emergency fund. 

Sure, you could let your hard-earned dollars collect dust in a regular savings account, earning a measly 0.1% APY. But where's the fun in that?

Instead, why spread your emergency fund over a few high-yield savings accounts up to the $250,000 FDIC insurance, chasing those 4% to 5% APY?

Money market funds can be a conservative alternative to HYSAs, providing competitive returns and stability.

Investing in U.S. Treasury bills, notes, and bonds is akin to betting on Uncle Sam himself—about as safe as it gets. TIPS (Treasury Inflation-Protected Securities) are especially attractive now, as they adjust with inflation, an added protection that your money doesn't lose value over time. 

Yields vary, but these securities often provide a higher return than traditional savings accounts.

On the slightly riskier side of the highly conservative investing world, municipal bonds offer tax-free interest income and fund local projects. 

For a touch of the stock market without the rollercoaster ride, dividend aristocrats are the way to go. These blue-chip companies, with a long history of increasing dividends, offer both steady income and potential for capital appreciation. 

Yields typically range from 2% to 4%, making them a sturdy but not guaranteed pillar in any conservative investment strategy.​

💰 But if we’re talking about a career change, the size of your emergency fund could actually affect the size of your paycheck.

Here’s how. 

Job security in specialized fields can be like a tightrope walk, so a solid safety net is crucial.

Job replacement might take longer for those in highly paid niche roles; it’s not uncommon for specialists to maintain emergency funds between $500,000 to $750,000 to cover two to three years of expenses. 

Your emergency fund helps you stay patient for the right opportunity, paying you top dollar for what you’re worth rather than jumping on a less-than-perfect fit or lower-paying salary for a more generalized role. 

This empowers you to wait for the right opportunity rather than settling for a lower-paying role.

However, if you’re playing your emergency fund cards right, you could buy yourself a slice of early retirement when you wait.  

Well, that’s the idea of the FIRE (Financial Independence, Retire Early) movement anyway. This movement is all about accumulating enough wealth to cover your living expenses indefinitely through a combination of cash-flowing investments and gradual withdrawal strategies.

In theory, an emergency fund of $300,000 brings about $1,250 per month at 5% APY– while it’s likely a far cry from covering your full monthly expenses, it’s still something to help keep you afloat without burning through your savings. 

📅 It’s not really a “set and forget” sort of thing.

High earners often experience a wider array of significant changes in their financial circumstances, whether due to career advancements, lifestyle upgrades, or unexpected life events.

Set a specific time each year to assess your emergency fund and evaluate your current living expenses (burn rate), perceived income stability, and any changes in your financial obligations. 

Living expenses have increased for just about everyone—not out of gluttony but because of rising costs of living across the board. They’ve been a bit of a “silent killer” people haven’t come to terms with. 

As the cost of living rises, the purchasing power of your cash reserves decreases. Regularly adjust your emergency fund target to account for inflation and ensure your safety net remains effective in covering unexpected expenses.

Any new expenses, such as a larger mortgage, car leases, and any new contracts, should be reflected in your emergency fund target. 

In addition to annual reviews, be proactive in adjusting your emergency fund after major life events before they happen, such as planning for a career change, having a child, or purchasing a new home with plenty of lede time. 

psst: Curious about more personalized emergency fund strategies? I'll be covering emergency funds and how top earners can use a job change as a lever to optimize wealth at 5:30 PM EST today (Wednesday 8/7)!

I’d love to have you there. RSVP here!

Making Cents of Emergency Funds for High Earners

Emergency funds are the financial superheroes of our lives, ready to swoop in and save the day when unexpected expenses or income gaps threaten our financial stability.

It’s your financial first responder, providing immediate access to cash in case of sudden expenses like medical emergencies, car repairs, or job loss. Without this safety net, you might have to rely on high-interest credit cards or loans, which can lead to a vicious cycle of debt that makes building lasting wealth, even for high-earners, a tricky pursuit. 

However, with proper planning, it can be a safety net with some bounce to it, putting you in a better position to take calculated risks, whether it's a career change, starting a new business, or investing in further education. 

A key component of this is using your emergency fund to grow while keeping your money accessible; by diversifying into high-yield savings accounts, money market funds, and conservative investments like Treasury bills and municipal bonds, you can combat inflation and potentially subsidize a longer “funemployment” period in between jobs. 

A financial planner can also help you connect the dots by regularly reviewing and adjusting your emergency fund, helping you maintain a financial safety net that evolves with your life.

Until next week!

Dan from Tailored Cents

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