[Editor's Note: This post discusses an important topic- the back-up plan. Just like when you go to intubate a patient, you've already thought through the possible scenarios where things go wrong and what you will do if those things occur. That way if you run into a “Can't intubate, Can't Ventilate” situation, you've already got the scalpel and a cric hook ready to cut their neck at the bedside. In this post, WCI Network Partner Physician on FIRE discusses financial back-up plans. Hopefully as your financial life progresses, you have more and more options in case something goes wrong. ]
On a frigid winter morning, I woke up to a cool house. Not the “hey man, cool house!” type of cool (well, actually, yeah, it is) but I’m referring to the air temperature in this instance. It wasn’t ice cold, but rather chilly, so I put on another layer and waited for the furnace to do its thing. The furnace did not do its thing.
It was 10 a.m., the thermostat was set to 69° F, and it was 61° in the house. Air was coming out of the registers. Cool, 61 degree air. The furnace was out.
I didn’t freak out. First, I called my Dad to see if he had any quick and easy troubleshooting ideas. He had some thoughts, but there was nothing I could really do safely on my own. Then I called a professional heating and cooling place.
Five hours after I was told “one of the guys would give me a call,” none of the guys had given me a call. I wasn’t too concerned, and I figured I’d call again in the morning if I hadn’t heard anything by then.
My wife suggested I might want to call back yet today. That’s her way of saying “Call now or I’m gonna freak out!”
So I called.
Plan Bs, Redundancies, and Contingencies
I was pretty nonchalant about the no heat in January thing because we had already implemented our first backup plan. After I called the pros, I started fires in our two woodstoves — one on the main floor, and one in the basement. By mid-afternoon, the house was 71°, and I have enough wood stacked alongside the house to heat the place for a couple weeks. That’s right; we have redundant heating options.
We also have contingency plans. If we ran out of firewood, couldn’t get more, and the furnace was still out, we have friends and family nearby. We could stave off frostbite and stay with someone else if necessary. We could also start running the handful of electric plug-in heaters we’ve accumulated over the years.
Well, we didn’t have to do any of that, because the furnace was fixed the next day. It was a simple fix. But even if it hadn’t been, it would not have been an emergency, because we’ve got our Plan Bs.
There are many aspects of life that benefit from redundancies and contingencies. Since this site is first and foremost a personal finance site, I’d like to address two that fit nicely and are frequent topics of discussion: emergency funds and early retirement.
You May Not Need an Emergency Fund
Do I have an emergency fund? Not in the traditional sense. A standard emergency fund is three to six months worth of expenses sitting around doing nothing, earning next to nothing, waiting for the day when I might need to access $20,000 to $30,000 pronto.
redundant and wonderful heat
I don’t have that. I keep $1,000 to $2,000 in checking and savings at a local bank branch, and at least enough to cover a month’s worth of typical credit card bills in an online saving account with better interest rates.
How do I plan to cover a money emergency? You guessed it — we’ve got redundancies and contingencies, including:
- Plenty of headspace under our credit card spending limits
- Biweekly paychecks that exceed our monthly spending
- A taxable account with 15+ years worth of expenses that can be easily accessed
We could also take out a home equity line of credit against our paid-off homes. The bottom line is, although we don’t have a pile of cash languishing in a savings account, we do have redundancy (taxable account) and contingencies (credit card, next paycheck) that would help us come up with the need funds in an emergent situation.
I’m in good company. A number of my comrades have weighed in with similar thoughts on why several months’ worth of cash may be overkill for people like you and me.
- Biglaw Investor asks, Is an Emergency Fund Necessary?
- Dr. Big ERN explains why Our Emergency Fund is $0.00.
The cool kids think along the same lines. By kids, I mean millennials. Sorry, kids.
- Millennial Money sings the virtues of Investing Your Emergency Fund.
- My Money Wizard challenges the paradigm in Emergency Funding Like a Pro.
You Don’t Need the Perfect Plan to Retire Early
If you’ve been reading half as much as I have about early retirement, you’ve probably come to some of the following conclusions:
- Better have at least 25 years of expenses. 33 years would be better.
- You’d best know how much you’ll be paying for healthcare.
- Fund your children’s future education or know how you’ll do it.
- Know how much of your money is actually yours.
- Figure out how you’ll be spending all that newfound free time before you have it.
Frankly, there’s nothing untrue there, and I’m doing my best to check all the boxes before checking out. But that doesn’t mean I’m doing so without redundancies and contingencies.
First, I’ll address redundancy. When I do step away, I won’t go around telling everyone I’m 42 years old and retired. I’ll treat it as an extended and potentially permanent sabbatical from clinical medicine.
My redundancy, and part of what I’ll be “retiring to” is what you’re looking at.
While it was not necessarily the crux of my plan when I launched this site, it appears more and more likely that site revenue will provide some meaningful income, while allowing me to donate many dollars. Writing for you also gives me a different sense of purpose and way to occupy some of that newfound free time.
I’ll have contingency plans, as well. In the year that I resign, I plan to update my ACLS, BLS, and PALS certifications, which will remain in effect for two years. I’ll continue to earn enough CME to maintain a medical license, and might even consider a little locums work early on to see how it feels to go back to work after many weeks or months away.
I also need to consider contingency plans for the rest of my family. While a life of adventure appeals to my wife and me in theory, the reality might be that we’re natural born homebodies. It’s easy to focus on the positive aspects of family travel and discovery (the Facebook version of life), while not giving enough consideration to the challenges that a partially nomadic life will invite.
We’ve got boys to think about, too. I don’t know how they’ll respond to an abrupt change in lifestyle. They’ve been resilient and excited to travel so far in their young lives, but we need to ensure their intellectual stimulation and overall contentment remain a priority. If our plans don’t work for them, we can go to Plan B and revert to a more traditional existence.
I’ve only scratched the surface.
It would not be difficult to compile a more comprehensive list of topics in personal finance and life where a little preparation and flexibility can go a long way. I try not to make too many definitive statements regarding our plans, our beliefs, or our future. It’s best not to be too rigid.
Plan for the worst, hope for the best, and enjoy the ride.
What are some of your best financial Plan Bs, redundancies, or contingencies?
Emergency funds don’t have to come from low paying savings accounts. Having a plan and knowing both the short and long term costs of alternatives is the important factor. Good article with many critical points to ponder – and act upon.
My daughter has two plans she had in pocket these past 35 days. 1- borrow or ask for money from us. As she explained when we went over her financial plan a few years back, she does not have an emergency fund in hand, rather it’s at the bank of mom as her childhood savings and previous car purchase had been kept / funded. (She verified that we stood willing to be this for her.) Should we not be available in her time of need, she will have Pension funds and credit cards and taxable retirement savings to cover as an option.
2- when we had tried to talk her into getting a 15 year mortgage, she advised that she wanted a little bit more flexibility since she was planning to pay a pretty high percent of her pay on her mortgage until another big expense came up, and was willing to pay the bit of extra interest for that flexibility. She took out a 30-year mortgage and has been paying double. (Though maybe she couldn’t do that for January or February depending on when her back pay arrives.)
I have not been able to fault her logic, even during this unusual and unexpected test.
I suppose I could ask my parents for money if desperate, but I’m proud to say I haven’t been in a situation where I’ve had to do so as an adult. Am I reading this wrong?
I’d probably go with the 15 year mortgage to lock myself in to putting that much towards the mortgage each month. If you need flexibility, a HELOC could be the backup plan.
Best,
-PoF
PoF- She’s 24. She won’t buy my argument (yet) that she might want to retire before 60- she argues persuasively that working for NASA is a lot better than working for the VA where I was glad to FIRE, but agrees in not wanting cash tied up earning little when she can invest in more lucrative things- last year a house where renting rooms to NASA interns should reduce her housing costs and get her on the booming govt/mil town real estate ladder. She’s about 5 years ahead of all my colleagues’ kids on the age when she stopped owing us any money, as well as 2-5 years ahead of them in her years of college degrees, and while I am her financial advisor she no longer HAS to follow my advice. So she went against our advice not to buy a home, to just invest in mutual funds, to get 15 year mortgage, and to get her PhD. She has agreed with me not to get an investment I wouldn’t bother with (or be able to teach her about in 10 minutes) so a HELOC isn’t really cheaper- I’d only charge her 2% and no fees. We’ve agreed to be part of her plan, so it isn’t desperation, it’s us slowly lengthening the umbilical cord. But I won’t count that as severed until I no longer worry whether she’s done her taxes and she has her own telephone plan solo or with a partner instead of us.
OK — she sounds more responsible than I thought! Strong-willed, but responsible.
NASA? You must be very proud — we just watched Apollo 13 with our kids and we’re contemplating Space Camp for them in the next year or two.
🙂 “My daughter the rocket scientist” rolls right off the tongue.
Thanks for bringing up that emergency funds aren’t as likely to be necessary for this site’s population, especially in the scale of 3-6 mo income. What kind of emergency is going to both cost $75-$150,000 and need to be so fast/liquid that it has to be cash in a savings account? Wrecked house or car is insured already, you just might need a little cash for rental/hotel for a bit till the check clears. Even sudden unexpected job loss you have a few days to cash out investments. If you start stacking emergencies up maybe you could get there (lost my job in the middle of a govt shutdown because I was falsely accused of a heinous crime and also now have bail and legal fees) but that starts getting to the bizarre/uncontrollable/unlikely.
Most people do 3-6 months expenses not salary. Since many of us live well below our means it doesn’t amount to such a huge drag.
I think am emergency fund is necessary for young physician, like me. I became an attending less than 2 years ago, not much investments except maxed out 401K and IRA. Hence, in case of job loss or catastrophic event I’ll be in a bad position without an emergency fund. I spent my first year as an attending creating that fund, should cover me for about 9 months (I’m financially conservative). I feel much better having it.
I agree, you need an emergency fund. 9 month is a pretty generous one. If I had an emergency fund that big it is likely it would include something besides cash.
I truly feel your pain on this one POF.
Just last week the geothermal unit for the main floor had an issue and wouldn’t heat the home. My master bedroom, fortunately, was the only one affected by this as the temperatures started getting to 60-61 degrees. I am not going to lie it was way colder than I wanted. There was supposed to be an electric backup emergency heating system and that failed as well when I turned it on. I do have a 2nd geothermal unit heating the bedrooms downstairs so my daughter at least got to be ok with the 71 temp setting I typically keep throughout (I left the door to the stairwell open to poach some of that heat, but really was ineffective).
Finally got it fixed 2 days later (after many piles of blankets on my bed). Turned out the emergency heating system flipped a fuse and was why it didn’t work.
As for your financial emergency funds, I actually have almost the exact same thought process. Every paycheck I make sure I have about 2k in the account, transfer rest into a higher interest online savings account from my physical bank and use that money to invest when the opportunity arises. I like to keep $10k in that account at minimum after a major investment for just in case scenarios).
Although in my mind I have backup with credit card limits and a pretty high infusion of cash every other wk from my paycheck, it is technically playing the odds that something catastrophic doesn’t happen as it is not the ideal way you construct an emergency fund (say huge financial market catastrophe and stocks plummet, my taxable account would be hit and if I tap it during an emergency of my own, lock in losses. Same time market drops, economy suffers and I get laid off, there goes the high paychecks. Then force to live on credit card which technically could support 4-5 months of living, but even making minimum monthly payments with no job would deplete the cash reserves quickly). Can this scenario happen? Of course. It’s unlikely and I am playing the odds that it doesn’t.
It happens to my Geothermal all the time, flip the switch when the emergency strip kicks in, usually in the morning of a frigid day as I let temp drop a little bit to be more comfortable at night and in the morning seeing a big difference between between the two temp it kicks in the emergency strip. When it flips the switch, the breaker looks off but not really off (its an old breaker). So you keep turning it on and off and it does not work, but the key is to when its off, push it really hard towards off and an extra click kicks in and really turns it off and then you can turn it back on.
Dr Dahle it was really nice to finally meet you in person at Cayman Islands, thanks for staying late and talking with me. Hope you had a good trip.
25-30 years ago I attended a financial seminar that included discussions on asset protection. One technique suggested was to have your regular paycheck deposited into an account that was never used to pay any expenses. The only disbursements from it were after 6 months it paid out the amount deposited 6 months prior. As long as the accumulated interest is also currently paid out this money is protected from any creditors including a malpractice payout.
I am employed by a PA that I am part owner of. My salary is paid bimonthly at approximately 60% of my total yearly compensation. The amount is direct deposited into the account I mentioned above. Bimonthly I also transfer the amount I was paid 6 months prior to my regular checking account. Monthly I also transfer the accrued interest to my checking account.
I know I am giving up some earnings on this account. I look at it as an insurance cost. The money in this account ends up serving two purposes. It is protected from creditors and also is one of my Plan B emergency funds. Just another tool to consider.
Why would that money be protected from creditors? Is it too late to get your money back from that seminar?
Some states treat annuities (what I’m betting he was sold) as IRAs and, as such, protect them from creditors.
Typically annuities receive less protection than IRAs, although it varies by state.
Heavens forbid, you get a call that you relative ( son/nephew etc..) got into big trouble (DUI/DWI with someone killed) and in custody now. Bail/lawyers etc.
That’s where the numerous backup plans come into play.
I could have plenty of money in a matter of hours, but if my son or nephew killed some while drunk driving, they deserve more than a day or two in jail it might take for bail money to arrive from Vanguard if I didn’t want to use my checking / savings / six-figure credit card limit.
Best,
-PoF
This piece is very timely given that government employee doctors got the whole “You need to keep showing up to work and we’re not giving you a paycheck” runaround for the last 6 weeks. Not avoidable (except by not working for the federal government in the first place), not insurable, and the mortgage still needs to be paid.
True — the timing was not intentional, but not lost on me, either. The importance of an emergency fund/plan became front page news. Or at least it should have been. The fact that many government employees have none was painfully obvious.
If you had a few months’ of expenses that you could tap into, the bills would be paid and the worries would be small.
Best,
-PoF
What a lot of people aren’t getting is the difference between PoF and a government employee with no savings. A multimillionaire doesn’t need an emergency fund just like a retiree doesn’t need an emergency fund. The nest egg is the emergency fund, a multidecade emergency fund. Someone without a nest egg needs an emergency fund.
We dumped our emergency fund too when we hit FI, just like we dumped disability insurance. It was insurance that was no longer needed.
Yep, we had a similar situation when my husband’s company failed to pay salaries over December, (it’s a small fintech startup, bumps were to be expected). Many of his colleagues were in a panic about what to do about it. He was irritated but unconcerned. He had an emergency fund to cover what he needed, I covered his share of the homeloan payment and life carried on as usual, It was a small event in our house because we live modestly on two salaries that are quite good.
Did every medical section have to report in? Guess we are all mission essential. As Army GS our budget’s already approved, and I was envying the thought of furlough (vacation with no leave charged if you have an adequate emergency fund) in some other agency. My daughter at NASA had the 5 week free deferred pay vaca, though some of her colleagues got your raw deal. But all at upper levels where I doubt the money was an issue yet, and my bank USAA once paid us even when military pay was held up a few days. Dunno if they’ll do it for 2 whole paychecks over a month out.
VA docs were not affected. Not sure about army docs.
No, we (Army civ/ mil) weren’t. What about NIH CDC Coast Guard USPHS? Guess Coastie docs were in same kettle o’ fish as the rest of the CG.
I know Indian Health was affected.
I think the main reasons we have an emergency fund are:
1) convenience- sometimes big expenses like having to replace a sewer line happen right at the time the college tuition bill is due AND you want to fund your IRA’s AND you are buying vacation plane tickets (and the market happens to be down)- while other months you don’t need any cash reserve at all. Maybe just “laziness” but I take the position that one reward of being FI is not sweating stuff like the opportunity cost of a cash reserve
2) minimal effect- at the tail end of your career the “3-6 month” reserve is 1-2% or less of your net worth. The decreasing years of compounding ahead of you limit the value of shuffling every dollar into your taxable investment account. Yes you lose money, but you don’t think twice about how to pay the odd large bill
I totally agree with the idea that once you have enough you don’t have to get every dime out of your money. A similar argument can be used to pay off low interest rate debt. You simply can afford the luxury of being debt free and not having to use leverage to meet your goals.