Emergency funds & the worst financial advice I ever received
After graduating from college and starting my first full-time gig, I went into my local credit union to meet with the financial advisor, a service provided to members at no extra cost.
“So, I want to start investing. Where should I start?” twenty-three year old me asked of the middle-aged gentleman.
“Do you have an emergency fund saved with enough cash to cover six months of your expenses?” he replied.
“No, I don’t.”
“Well, start there.”
The conversation ended five minutes after it began and I left the office without the startup investment pointers I longed for.
Thirty-year-old me stores that conversation in my memory warehouse under “the worst financial advice I ever received.”
Working to save $6,000+ in an emergency fund before progressing with other objectives stalled timely deposits into a 401K or Roth IRA account. I missed out on capturing a 3% retirement match from my first employer and the compound interest I’d earn from early investments into retirement vehicles because I lacked financial literacy. Me, the product of two college graduates and a pricey private school education, still didn’t know what the heck I was doing when it came to my finances.
This is a problem.
What else was absent from the advisor’s suggestion to save an emergency fund as the first and only step in my financial strategy? Information on how to compare savings accounts to capture the best interest rates. Most bank savings accounts offer interest rates less than 1 percent compared to the 10 percent average return of the stock market.
To my knowledge, I never saved six-months worth of expenses and working toward this narrow goal limited my broader vision of how to slowly build a safety net over time.
Now, it’s not fair to place all the blame on this one financial advisor. Encouraging people to save money isn’t bad advice. I understand how it’s imperative to have money in the bank to plan for the unexpected, but I was a young twenty-something earning $12/hr, with no dependents and living at home. Planning for the unexpected didn’t need to be my one and only money goal.
Although this experience took place about seven years ago, there’s still a lot to learn — both for individuals crafting their first investment strategy and for banks looking to reach the Millennial and Gen Z markets.
What I wish I knew then.
I am not a financial professional. I repeat, I am not a financial professional. The learnings I offer up below are specific to my self-taught journey with finance after my not-so-helpful first encounter with a financial advisor.
I visited a friend completing an MBA in Amsterdam a few years ago and sat in on one of her classes titled Financial Engineering. Ahhh, it all made sense. A company engineers its finances to get through tax loopholes and minimize its tax burden. Finances and engineering go hand in hand, whether you’re working for a multinational company, or just trying to get over the hump of living paycheck to paycheck.
Most individuals (hi, there!) can’t afford to employ a staff of MBAs to lower their taxes and capture incentives; all I have is software like Mint and TurboTax. In the absence of my dream team of trusted financial strategists, below are some of the methods I’ve used to increase my assets while decreasing my debts.
Loan refinancing & balance transfers
Refinancing a car is a tool to lower interest rates and consolidate debt. In 2012, I financed about $17,000 for a car. After paying off a good chunk (~$10,000, numbers not exact), I refinanced my loan to obtain an interest rate under 2% and take out additional money on the loan.
Based on the car’s value, my credit union allowed me to add $8,000 on top of my remaining car note balance. I took the $8,000 in cash and paid off a student loan with a 6% interest rate. Now, instead of two separate loans, $7,000 at 3% interest (car) and $8,000 at 6% interest (student), I left the bank with one $15,000 loan at 1.99% interest. Refinancing the car loan reduced two payments down to one and lowered the interest rate across all my debt.
In 2016, I moved to Oakland for six months while completing an unpaid internship. I utilized a balance transfer through Capital One to give myself a loan (0% interest for 18 months + a 3% fee) while working for free. The balance transfer provided me some cushion to extend my internship from three months to six months. Note: If paying back the borrowed money before the 0% rate expires may be an issue, then this might not be a good solution for you. Beware of the interest rate that will kick in after the 18-month special offer period as it may be in the 20–25% range, depending on your credit card.
Roth IRA & 401K contributions
In 2018, I maxed out my Roth IRA contributions for the first time ($5,500) at age 29. In addition to my personal Roth IRA, I contribute 15% to my workplace 401K and gain the benefit of a 5% company match.
If your income includes bonus or commission, applying your same 401K contribution to bonus checks in addition to your biweekly paycheck is an easy way to quickly grow your retirement balance.
The employer 401K programs I’ve participated in all default contributions to select investment funds. It’s important to review all of the funds available and choose the funds that will work best for you. Different funds bring varied expense ratios and fees that will impact the growth of your money over time. If your employer offers both a Roth 401K and a Pretax 401K, research which account will work best for you in the long term and stack your money there.
Repulsed by the business practices of America’s largest banks (e.g., Chase, Wells Fargo, Bank of America), I opened an account with CNote as a way to shift capital to local communities and capitalize on a higher interest rate.
CNote loans out the balance of my savings account to Community Development Financial Institutions (CDFI) to invest in small business loans, affordable housing, and community development in low-income areas.
In 2018, investments helped create or maintain over 1,400 jobs, 60 cents out of every dollar invested funded minority-led businesses, and 43 cents out of every dollar invested funded women-led businesses — that’s around 10x the national average. -CNote
I receive a 2.75% return on my savings, am allowed quarterly withdrawals, and I feel confident that my money is supporting a more inclusive economy. Since I can only make quarterly withdrawals, I keep enough cash for three months of expenses in a traditional savings account so that I‘m able to float myself should anything unexpected come up. Note: CNote is not a bank and its investment products are not eligible for FDIC insurance.
Invest your time
Without a financial advisor, it takes a considerable amount of time to research the index funds I want to invest in and learn the best ways to balance my portfolio. I can see the benefits of working with an advisor who lives and breathes finance as a full-time job, but I’m not ready to trust someone with my financial decision making.
I will continue to weigh if hiring a financial advisor, such as Edward Jones or Liberty Mutual, makes sense for me as the amount of money I invest increases and I become more risk-averse.
If you need some wit to make learning about finances less painful, bloggers like Mr. Money Mustache offer easily digestible content with a side of sass. Companies are even leveraging games to instill positive financial habits. A startup called Flourish, launched an app to help people save money while competing to win prizes. Thank you to Flourish Co-founder, Pedro Moura, for encouraging me to write on the topic of money and inspiring this post.
Money can be a big stressor, I hope the tools shared above shine a light on the myriad of ways to engineer your finances to work better for you. Financial services as an industry is convoluted, with a history of taking advantage of consumers with low-moderate incomes. Knowledge is power and the earlier we start soaking up financial knowledge, the better.
Katelyn Harris Lange is an executive recruiter passionate about equity in hiring and community-centered business growth. She is a philanthropist involved in the African-American Women’s Giving and Empowerment Circle and Civic Engagement Chair with the Greater Phoenix Urban League Young Professionals.