Building an emergency fund sounds straightforward, but it becomes a lot more complicated when life starts to get in the way. In this episode of Merging Into Life, host Sabrina Pierotti sits down with Lori Atwood, personal finance expert and founder of Fearless Finance, to break down what a financial safety net looks like in practice. From calculating how much you need (hint: it’s probably more than you think!) to finding your monthly margin and choosing the right place to keep your savings, Lori offers no-nonsense, judgment-free guidance for anyone trying to build financial security without feeling like they have to give up everything to do it.
[00:00:01] Lori Atwood: Avoidance is the No. 1 poison for your finances. When people are just like, I’m too busy, I am too busy to cook, I’ve got to get takeout, we’re just too busy, things are just too busy. You got to sit back and decide and figure out, as the adults in the household, what is making you so busy? Because it’s starting to hurt your finances. It’s probably hurting your health. Let’s get to the bottom of all that.
[00:00:26] Sabrina Pierotti: Money is a funny topic because more times than not people feel ashamed talking about it, yet it is one of the most prevalent aspects of all of our lives. Most financial advisors will tell you that after figuring out your basic figures, like how much you make versus how much you spend, the second most important piece of financial health is having an emergency fund. Financial security looks different for a lot of people. Between debt, rent, childcare, subscriptions, rising costs and the general unpredictability of adulthood, building a financial cushion can feel easier said than done. Today, we’re talking about what it really means to build a 90-day financial safety net. How much do you actually need? Where does that money come from if things already feel tight? And how do you start saving emergency funds without making your life feel totally joyless in the process? Welcome back to Merging Into Life. I’m your host, Sabrina Pierotti. Joining me today is Lori Atwood, a personal finance expert and the founder of Fearless Finance. Lori helps people make smarter, more grounded financial decisions by combining practical planning with a deeper understanding of the emotional side of money. Lori, I am so glad that you’re here. I am so excited for our conversation. I really want to focus our chat on building out an emergency fund. So, we have probably all heard about that three to six months of emergency savings. So, I want to start there, and I want to start with the why. So specifically, the three-month cushion. When you talk about a 90-day safety net, what makes that number so important?
[00:02:13] Lori Atwood: First of all, thank you for having me. It’s great to be here. Second, to me, the three to six months of emergency savings is the second thing you do with your financial plan.
[00:02:24] Sabrina Pierotti: Oh, OK, great. What’s the first?
[00:02:26] Lori Atwood: The first is you make sure that you are on a consistent basis spending less than you earn, period. There is nothing more important than that, period. Once you’ve checked that box, then we wanna pivot to the balance sheet. And that means making sure your savings and debt are being managed. So the first thing for savings is do you have an emergency fund? So why is it typically three to six months? I have to be honest with you. I’m telling clients now that we want six months minimum because here’s why comes originally from the fact that it takes at least three months to unwind the very key positions in your life if you need to. Even if you’re single, right? So let’s say divorce is off the table. Let’s say you’re young, so you’re healthy. We don’t have to worry about any sort of disability. Boom, you get laid off. There’s nothing you can do that day. You need a couple of months to one, possibly break your lease, possibly sell your place, possibly get a roommate, possibly move in with family. Now, in the best case scenario, which I don’t believe is this current economy. But in the best case scenario, three to six months of runway allows you to remain in your home while you look for that next job. So it’s the new minimum on a temporary basis because the no fire, no hire will go away once a lot of the uncertainty goes away. And there’s a ton of uncertainty right now.
[00:04:00] Sabrina Pierotti: Now I want to clarify what an emergency fund should actually be used for. I think it is safe to say that an emergency fund consists of a person’s nonnegotiable bills or how I like to view it as the bills that keep the lights on. Would you agree with that?
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[00:04:16] Lori Atwood: Yeah, and I would even I would go further. To be honest, if you’re a household of four people, you have a mortgage, you’ve got two little kids, and depending on what part of the country you’re living in, you could be spending $8,000 a month right now while everything’s good and everybody’s employed. I would want you to have six times eight, which is 48,000. Why eight? Because if something happens to my job, we’re not going to go out to eat anymore. That’s what everybody says. But the reality is it’s never zero. Eating out, clothing, any entertainment, a book, a magazine, movie tickets, whatever. That to me is all discretionary. All of that comes under discretionary spending. It is never zero. My mother is 90, and it’s not zero. You’ll be able to cut it down, but it won’t be zero. And so, when we calculate the emergency fund, I typically don’t give people a bunch of discount for, well, you know, we won’t be doing this, and we won’t be doing that. It’s hard. So, you need to factor all that in.
[00:05:27] Sabrina Pierotti: Life still happens. So, I want to kind of walk through like a very basic example of how to calculate an emergency fund goals with that extra leeway for discretionary like you talked about. So let’s say somebody is like, how do I calculate this? I think to start off, start by making a spreadsheet of those nonnegotiable bills. But then to your point, adding a little bit of extra discretionary in there, is there a certain percentage that you would add on top of the nonessentials to account for that discretionary that will inevitably happen?
[00:06:01] Lori Atwood: I rarely use percentages there. So the first thing I would add is definitely make a list, whether you use a spreadsheet or you just want to use a piece of paper, whatever you’re comfortable with. But remember, somebody may be doing therapy, occupational or talk therapy or whatever. You’ve got a dog. The dog has certain needs. There might be other loans that you’re servicing. These are still all contractual obligations. They’re not discretionary. Maybe you have a home security system, it’s 50 bucks a month. These things they’re contracts, you can’t break them, or it takes a while to get out of them, whatever it is. For discretionary, for a single adult in most urban areas of this country, so this would not be in a place that is not urban, but at this point in the game, it’s a $1,000 a month of discretionary. It’s part of life, we all want to go to the movies once in a while. That is true. And what I don’t want to have happen, but I see happen all the time, is people decide that they’re suddenly going to, you know, become an ascetic, and they’re going to live a life of no discretion, no joys at all. Then there’s just an explosion, and then you end up spending a whole lot more. So, allow yourself the occasional cup of coffee, just not to a day. Allow yourself the occasional movie. Allow yourself the occasional takeout. Reduce it as much as you can but allow yourself some of it. And what I’m saying here is that even in the tightest of circumstances, when looking at how much should a single person have in an emergency fund, I still think for one adult, that’s got to be $800 to $1,000 a month.
[00:07:42] Sabrina Pierotti: So, the contractual nonessential expenses plus $1,000 per adult per month times six months or nine months.
[00:07:50] Lori Atwood: Yeah, that’s a very basic way to calculate it. If you’re a client of mine, you know exactly what you’re spending each month. But if you sit down with a piece of paper or a spreadsheet and really just, you’ve got to lift up every rock, you’ve got to remember all the stuff that you pay for. Don’t just take a broad swipe at it because there’s usually a few hundred dollars of stuff that we all forget about.
[00:08:10] Sabrina Pierotti: So, $8,000, let’s say, times nine months, that is $72,000.
[00:08:14] Lori Atwood: So, let’s talk about that.
[00:08:18] Sabrina Pierotti: OK. That is scary, Lori. Like, that’s extremely daunting. And I can see how that can be just frustrating for people to hear that, especially when money’s already tight.
[00:08:26] Lori Atwood: The basis of all financial planning, personal financial planning, is that how much that burn rate each month. I said that at the beginning of our discussion, I’m going to say it again, right? So, if one adult in the household is earning $3,000 a month net of taxes, and the other one is earning 4,000 a month, seven is coming into the house. Start subtracting everything. God willing, there is a positive number at the bottom, and that’s what I call your margin, and that your amount that you can save each month. And so, what I’m saying to people is, OK, you have $230 of margin each month, which is great, by the way. I’m telling you to have that auto-transfer to a high-yield savings or brokerage account and left in money markets each month, and you’re going to grow it. It’s going to happen. The more important number is what is that margin number? How can I get started? What can I do today? Well, today, you can make your list, and you can figure out if your margin is a positive number or a negative number. If it’s negative, you have got to go back to that list and start cutting. And I’m ruthless about that stuff.
[00:10:26] Sabrina Pierotti: I’m curious, Lori, what are some other ways and other obstacles that you see that get in the way of people having that margin at the end of the month where they can save?
[00:10:38] Lori Atwood: Especially people with little kids, because, you know, when you have little kids sometimes the house can be chaotic, etc. People hiding behind the, oh my God, I just don’t have time to deal with this. Avoidance is the No. 1 poison for your finances. When people are just like, I’m too busy, I am too busy to cook, I’ve got to get takeout, we’re just too busy. Things are just too busy. You got to sit back and decide and figure out as the adults in the household, what is making you so busy. Because it’s starting to hurt your finances. It’s probably hurting your health, you know. So, let’s get to the bottom of all that. And what are the main goals? Maybe the main goal is moving to a larger house. Maybe the goal is retiring early. Great. But every single trip to the carryout is exactly competing for those same dollars. So don’t blame the dollars. It’s the adult that is having to make that priority decision. Somebody’s going to do that stuff. Somebody’s going to repair the lamp instead of replacing it. Somebody’s going to do whatever needs to be done in service to the greater goal, which might be, I don’t know, adding a new bathroom or whatever it is.
[00:11:54] Sabrina Pierotti: Now, still talking about one of the many reasons why savings is so hard, I’m glad that we’re spending a lot of time on this because there are so many actual reasons and stories people tell themselves as to why they can’t save. Can we go into a little bit more detail about how someone who has that building interest in the background at a heavy pace can go about building $72,000 of an emergency fund?
[00:12:19] Lori Atwood: The first thing I would say is, has that person figured out what made the accumulation of credit card debt? If it’s a one-off thing, fertility treatments, a divorce, you know, some hideous car accident or something like that, is it done? OK. If it’s done, then what we know is we’ve got this debt, and it’s circled, and we need to just service it. If it’s not done, if it’s lifestyle, then trying to save is not going to happen. You’re just going to end up spending. So again, get me a Step 1. Are you spending less than you earn? There we are again. It’s rearing its head again because it’s the most important thing, right? So, then part of it is servicing debt. Part of what you’re doing each month is servicing debt. And if you accumulate more debt, there’s more debt to service. And that is how people go bankrupt.
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[00:13:40] Sabrina Pierotti: So, we covered a lot of reasons why people, the big reasons, hopefully, why people struggle to save some money. Now, I want to talk about logistically, when someone sits down, and they realize they have money to save, how to go about doing that consistently. And one of the most overwhelming things for people is just kind of knowing where to save the money. So where do you recommend that you put an emergency fund?
[00:14:05] Lori Atwood: So, I have two answers, two options for people. Either a high-yield savings, just Google it, there’ll be a million. Anybody reputable is fine, right? FDIC insured and reputable makes sense. Or a brokerage account in the money market, which is usually the settlement account. The money market fund and or settlement account is not a stock. It does not go up and down with the equities market, with the S&P 500 or whatever, the Dow, whatever you’re looking at. I mean, everybody needs to understand that. When you have a brokerage account and you transfer a hundred bucks into it, it will automatically go into this thing called the settlement account. It’s just this blah, blah, blah security that is just a money market. They’ll get you a few couple dozen basis points over a high yield savings account. You can still access it anytime you need it, and you can set up an electronic link to your regular checking so you can send the money back there. It is not in the equities markets, it’s just in the brokerage account.
[00:15:12] Sabrina Pierotti: Now, explain to me the difference between an emergency fund and a sinking fund.
[00:15:18] Lori Atwood: So, a sinking fund, I like to call it an annual needs fund for us. Most people go on a couple trips a year, maybe they have large annual expenses, like their life insurance payment or camp. I have people put money each month into an account, and then they take it out when they need it when they have to pay for camp. That’s a sinking fund. You’re putting the money in and you take it as you need it, but you just keep putting it in monthly and then maybe, I don’t know, where I live, you pay for camp in January and May. So, then the camp bill comes, and you write the check, and you pay for camp. So that’s a sinking fund. And that’s fabulous, but that’s different than your emergency fund.
[00:16:04] Sabrina Pierotti: If someone listening wants to walk away from this episode and do just one useful thing this week to start building their emergency fund, what would you want that one thing to be?
[00:16:15] Lori Atwood: It is the one thing, period. Sit down with that list. If you can’t tell me exactly what you can save each month, you’ve got to make me a new list.
[00:16:28] Sabrina Pierotti: All right, now we are headed into our mailbag segment. And this is an exciting segment where listeners of the podcast and AAA members have a chance to ask their questions. So, our friend wrote in and said, “I’ve been working hard to get my finances back on track, and I’m close to paying off my credit card debt.” Congratulations. “After that, I’ll still have a car loan, but the interest rate is pretty low. I have a bonus coming up, and I’m wondering what the best move would be since I know it’s usually good practice to have an emergency fund, but also like the idea of being totally debt-free. Is it smarter to use that money to pay off the car loan faster or should I focus on building an emergency fund first?”
[00:17:12] Lori Atwood: 100% emergency fund, 100% emergency fund. If you have a solid car loan with a decent interest rate, as long as you plan to keep that car, don’t worry about it. Debt is not evil. What is bad is bad debt. A good solid securitized loan at a good rate? Fabulous. Just continue to pay that car off and keep it. That’s the most important thing about cars is keeping it. And put that money into a high-yield savings account or your brokerage account into the money market. And that’s going to be the basis of your emergency fund. Great work to the listener. That’s fabulous news.
[00:17:56] Sabrina Pierotti: I know they got rid of that bad debt, which we all want to see. And now focus on building up that cash cushion.
[00:18:03] Lori Atwood: Absolutely. All day long, that would be emergency savings.
[00:18:07] Sabrina Pierotti: Absolutely. If someone wants to reach out to you because they need help with it, where can people find you?
[00:18:11] Lori Atwood: Oh my gosh, please, absolutely. So go to fearlessfinance.com, which is our site, and there’s a contact form. Fill it out. A planner will get back to you in one business day. You can set up a free intro call and just see if the chemistry’s right, your questions are getting answered, that kind of thing. Our site has lots and lots of other resources as well. On social media, you can find us at pretty much any Fearless Finance handles.
[00:18:41] Sabrina Pierotti: Lori, thank you so much. You have been a wealth of knowledge. I feel like there were so many topics we could have gone down and explored something else completely. So, thank you, so much, it’s been a pleasure.
[00:18:52] Lori Atwood: Thank you so much for having me. So fun.
[00:18:57] Sabrina Pierotti: A 90-day safety net can sound intimidating, but this conversation was such a good reminder that you do not have to build it all at once. You start by getting honest about your expenses, giving yourself a realistic plan and saving what you actually can on a consistent basis. Lori also helped clarify that there is a difference between your emergency fund, your oopsies fund, and your sinking fund, and knowing which is which can make money feel a lot less chaotic. At the end of the day, financial stability is not about being perfect, it is about being prepared. If you found this episode helpful, leave a review and share this episode with a friend who could use it. It helps more than you know and helps more people find conversations like this one. Thanks for being here with us. The views and opinions expressed in this episode do not constitute financial advice and are not necessarily the views of AAA Northeast, AAA and/or its affiliates.
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