You cannot cruise the internet without tripping over articles about the partial government shutdown and the increasingly horrible effects it’s having on many government workers and their finances and their psyches.
The whole situation is doing a marvelous job of illustrating that you do not want to have only a little bit of cash in the bank. You want quite a lot in order to survive the crap life can throw at you. And in the tech industry, I bet you can think of a few such pieces of crap.
Enter the Emergency Fund. If you’re working in the tech industry, how should you think about one?
Losing Your Job is the Obvious Reason to Have an Emergency Fund. But There Are So Many!
The government shutdown has made very clear one reason to have an emergency fund: you might unexpectedly lose your income. In the tech industry, “furloughs” aren’t exactly gonna happen, but layoffs do. We all know they happen during industry implosions like in the Dot Com Bust in the early 2000s, but they also happen even now, in these heady tech times (witness: Tesla, and also tiny (former) startups that some of my clients have worked at).
Basically, an emergency fund comes in handy when Bad Shit Happens that you can’t reasonably predict.
- You get laid off. (Been there.)
- Your pet gets sick.
- A wind storm destroys your roof. (Ahhh, home ownership.)
- A loved one is in a crisis and you want—need—to support them. (Also been there.)
- Unexpected last-minute expenses when buying a home. (Yup.)
- Damn kid breaks her arm. (And there, too.)
- You or your spouse becomes disabled. (This happens. Oh please believe that it happens. To regular people. Like you or me.)
- Whoops! Underpaid your taxes last year and now it’s April 15. (I’m suppressing.)
And on and on. If you’re the “expect the worst” kind of person, I’m sure you could add a few dozen more scenarios to that list.
Lest you be depressed by this whole discussion: It’s also possible to construe this in a positive light. An Emergency Fund can give you the freedom to change your life, like, now: quit a job, change your living situation, and so on.
How Big Should Your Emergency Fund Be?
I think I’m pretty “average” in recommending my clients have an Emergency Fund equal to 6 to 12 months of baseline expenses. “Baseline” meaning you’d strip out all the unnecessary expenses in your life (eating out, trips to Ulta Beauty, 3-D printer parts, etc.) and get as close as possible to just the unavoidable expenses (insurance premiums, rent or mortgage, school tuition, groceries, etc.).
You can adjust up or down depending on:
- How risk averse you are
- Keep more in cash if you are the anxious type! Nothing wrong with that! (Yes yes, “But you could get a bigger return if you invested the extra money instead!”…Try to comfort yourself with that when you’re lying awake at night worrying about your finances.)
- Other sources of income in your household
- Do you have some side hustles? Do you have a partner with income? Do you receive rental or passive income? Basically, the more “diversified” your income stream, the less you need to protect against loss of any one of them. That said, there are many reasons beside “losing your income” to have an emergency fund, so this only helps so much.
- Other people you can rely on
- Do you have parents or other folks whom you could rely on to help you out financially if you needed it? I have many clients who really don’t like to think about that, but know they could rely on their families if they needed to. And you know what? As systemically unfair (this has all sorts of implications for the racial wealth gap, for example) or as icky as that feels, it’s a reality for you.
How to Grow an Emergency Fund, Either Slow and Steady or Overnight
An emergency fund is a concept that applies to everyone. But how you actually create yours (or increase yours) can be very different if you work in the tech industry.
Most people simply have to save a bit out of each paycheck until they’ve built theirs up. And that’s a totally legit strategy. Biggest problem is that it takes time, and we humans are nothing if not impatient creatures.
Working in tech might give you all sorts of other ways to create one overnight:
- RSUs and bonuses. Particularly in tech, big “lumpy” income is pretty common. If you’re accustomed to living off of your normal paycheck (and let me say, that’s a good thing to be accustomed to), you can just shovel RSUs or bonuses directly into your Emergency Fund. And judging from a lot of the RSU vests and bonuses I’ve been seeing lately, that could likely get you all the way there in one shot.
- Per paycheck. I already mentioned it above, but if this is the approach you’re taking, you might even consider reducing your 401(k) contribution (not below what’s necessary to get your full match, mind you) to free up some money to accelerate your savings.
- Existing pile of cash. I can’t tell you how many women have come to me in the last year who list “What am I supposed to do with this giant pile of cash in my bank account? I know I should do something, but what?” Voila! Funding an Emergency Fund is a great first use for it.
- Sell some of your pile of company stock. Many of my clients come to me with a lot of company stock, usually because they simply haven’t been paying attention to their RSUs vesting every quarter for years. It’s important to reduce your concentration in company stock in order to reduce your investment risk, but selling some to fully fund your Emergency Fund might be an even better motivation.
Keep in mind that if you’ve got high-interest debt (see: Credit Cards), it’s probably best to pay those off first.
An Emergency Fund Is Only One Part of Protecting Yourself
No one part of your financial life stands on its own. It’s part of a larger picture, whether or not you recognize that, or whether or not know how to make all the pieces fit together well.
Your Emergency Fund is one part of “Risk Management,” as we’d say in the trade. When your life goes pear-shaped, I’d love for you to have many risk-management tools in place:
- An Emergency Fund. This covers short-term needs.
- Long-Term Disability insurance. If you become disabled, you’re going to need to replace your income for a long time. What else are you going to live off of?
- Life insurance. If anyone depends on you for money, you need to make sure they can still get money even if you, ahem, kick it. And if you depend on anyone for income, make sure they have life insurance. (If you have a big mortgage with someone, or kids with someone, you both probably need life insurance.)
- Estate planning documents, like Powers of Attorney and a Living Will
- Marketable career skills and a strong professional network. Don’t coast in your career, especially when you’re in the early or middle stages of it. And especially as a woman in the tech industry. If you get laid off or need a higher-paying job, you want to have all the professional horsepower you can.
Also, remember that Life Happens. Sometimes the best laid plans aren’t enough. We can’t plan our way around or out of all the risks in life. And that’s where a strong professional and personal community can really shine.
It doesn’t take a village just to raise a child. It takes a village to grow and protect a meaningful, healthy personal and professional life, too. And cultivating that village is an important part of your own risk management. (Which sounds incredibly callous…wow.)
But, you can start it all with an Emergency Fund. Which, thankfully, is perhaps the easiest thing I just listed.
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Disclaimer: This article is provided for general information and illustration purposes only. Nothing contained in the material constitutes tax advice, a recommendation for purchase or sale of any security, or investment advisory services. I encourage you to consult a financial planner, accountant, and/or legal counsel for advice specific to your situation. Reproduction of this material is prohibited without written permission from Meg Bartelt, and all rights are reserved. Read the full Disclaimer.