Savings Hierarchy of Needs: Part 1 First Line of Defense & Emergency Fund

Apr 11, 2023

I get these questions a lot in the DMs: "I'd like to start investing, but I don't know where to start." or "I want to optimize my retirement; how best do I invest in my 401k at work? Is there a better option for retirement?"


What do you think my first response is? You are correct if you guessed it's a follow-up question!


I ask them what their cash savings look like. The typical response is: Not that great. 


So here's the deal when it comes to investments/retirement. When choosing to put your money in the stock market, you essentially say, "I don't need this money for a long time." But you DO need cash in the short term. You need cash for emergencies, upcoming big expenses like weddings, travel, surgeries, big vet bills, gifts, once-a-year skin treatments, etc. 


Cash is Queen, and she NEEDS to be a part of your investment strategy. So before you join me on the geek-out train of investments and retirement, let's talk about some essential steps.


The Beyond The Green Savings Hierarchy of Needs

Checking Account - First Line of Defense is your standard checking account. You should have at least one month of expenses sitting in this account. You only need one month since most checking accounts don't offer interest. (However, Sofi offers 1.2% interest for cash in their checking account). 


The cash in your checking account protects you from double charges (like your rent being charged by mistake), immediate cash needs, AND prevents the "waiting for the next paycheck" cycle. 


But why do we need one month of expenses in a checking account? To practice TRUST and RESPECT. By keeping money in this account, you feel like a winner!!! You don't see zero when you open your bank account. You feel successful. You trust you won't use this money to overspend, and you respect its purpose on your mental, spiritual, and emotional well-being. 


Emergency Fund: This is where you keep 6-12 months of cash for, you guessed it, emergencies. Any good financial planner would advise you in the same way. Why are emergencies fund so crucial for a good investment strategy? Because you wouldn't want to have to pull money out of investments at an inopportune moment. Say you needed cash during 2008 when the market tanked or in March 2020. You would have been seriously disappointed with your returns (if you had any). You want to have cash so you can make decisions that don't impact your future. (Check out Best HISA April 2023)


Here are some ways you can protect your investments by having 6-12 months in cash:

1. You don't need to pull from investments/retirement to pay off high-interest debt.

2. You don't need to pull equity out of your home to pay for college/bad debt or even home repairs.

3. You don't need to borrow money from your 401k to fund your life/debts.

4. You don't need to take out HELOCS to cover emergencies.


Here's what you get to do when you have an emergency fund:

1. Say you work for yourself and get offered a project that you know in your gut sucks; you can say no, and not stress about the bills.

2. You can take advantage of investment opportunities, buy a property, or make tax-incentivized investments during tax season.

3. If you need more liquidity, you could slowly take from investments, easing the capital gains tax repercussions by dripping the funds instead of taking out a large sum. 

4. Say you want to leave your job. You can.

5. Say you want to leave a relationship that no longer serves you. You can.


Emergency funds give you freedom. Emergency funds help you achieve long-term goals, so you can retire, buy a home, raise kids, and not stress about money.


Stay up to date with Part Two: Short-Term Savings Accounts.

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