Listen to the Full Episode:
How many months’ worth of living expenses do you need to have saved up and why? Do you have emergency (911 account) reserves? These questions bother a lot of people. But, the fundamental question for each of us is: What should we have in savings?
If you want to know what experts will advise you, tune in to today’s podcast, where Micah and Floyd discuss the importance of emergency funds for working and retired individuals.
Find out why you should be intentional about saving and separating different accounts for different purposes and why you should consider using different banks for operating and savings accounts.
What We Cover:
- How much emergency savings should you have?
- While Working
- How does leave/FMLA/Disability play in?
- While Retired
- What happens when:
- The roof has a leak
- The water heater goes out
- What happens when:
- While Working
- How do you separate out that money?
- How to separate out money
- Nickname – what it is / when it is/how much it is
- How to separate out money
- Where should that money be?
- Cash in the house
- Bank account
- Money market
- Money market
- T-Bill? One-Year MTA
- Review your accounts
- Set up different savings accounts for your goals
Resources for this Episode:
Ideas Worth Sharing:
I love to nickname the accounts. Now there's a secret to how you nickname your accounts. I like three things when I nickname a savings account, what it is, when it's for and how much it is. – Micah Shilanski Click To Tweet
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Full Episode Transcript
With Your Hosts
Micah Shilanski and Floyd Shilanski
You can spend. You can save. What is the right thing to do? Federal benefits, great savings plans too. You can save your own way, with help from Micah and Tammy. You can save your own way. Save your own way.
Micah: Welcome to the plan your federal retirement podcast. I’m your host Micah Shilanski and with me today is a special guest, the amazing Floyd Shilanski. Pop’s, how’re you doing?
Floyd: You know, I’m just doing great. Hope summer gets here soon but I’m doing great.
Micah: What do you mean summer gets here soon? It’s beautiful. We live in the great state of Alaska. What else could we possibly complain about?
Floyd: Mosquitoes? That’d be one.
Micah: Well that’s our steer bird, right? Come on. You got to get ahead right now.
Floyd: That’s right. For sure, for sure.
Micah: As time has come up with things to think about right especially like summertime, we’re out spending money life is happening all these great things. It’s kind of a good time to talk about you know, we’d love to play in Alaska, whether that’s fishing, whether that’s hunting that’s being active and going doing things, and sometimes when we’re out playing things break and then it comes to we get questions from clients who say, Hey, I blew a motor in my boat, or I need to replace a, b and c or I need to do X, Y, and Z and they call and say hey, I need to tap my emergency reserves because on my sport boat, I blew my motor and I need to replace it. And that kind of leads into a little bit of things we’re going to be talking about today pops, which is what you need to have in savings not only while you’re working, but when you’re retired.
Floyd: You know, as we talk to younger people who are just getting started in their careers, you know, three to six months’ worth of living expenses. Now that’s not at a reduced budget. That is what are you spending today that shouldn’t be set aside. Statistics you know, from Dave Ramsey and Susie Orman and these other gurus say most Americans are 60 days away from bankruptcy. So getting started in your career, especially if you’re a fan and have pretty decent job security. Three to six months is probably a good number. But as you don’t like it, the closer we get to retirement, and let’s say five years, seven years out, I don’t know about you, but I want three, four years of their expenses and that you’re spending normally today in that savings account getting ready to make the transition to retire.
Micah: Yeah, and this is really important. To be talking about differences in different types of accounts, right? Because when we talk about savings, man, that’s just global. That’s a big-picture concept. Right? Are we talking about retirement savings? We’re talking about savings for a trip or are we talking about savings for emerging funds? Are we talking about savings in our buckets for the first five years from retirement? Right so we use savings as a very general term, and I think sometimes pops in feel free to push back but sometimes that can be a little confusing to our clients, to our audience, etc. Because of what savings in particular we talked about and that’s why we are such huge fans of buckets about being very intentional about what accounts are for what savings.
Floyd: You know, as you were going through that I counted five buckets you talked about right, so intentional. One of the things that we tried that we started using about four years ago was that emergency fund, nicknaming the 911 account, not just saves, and so many times you know, we have clients, I have people who want to get plenty of savings. All right, and they go well, how about your 911 account? Oh, it’s all over here. Yeah, and I go and until someone says, Hey, let’s have a weekend and we’re gonna boil off here and you know, and go down to Napa. There’s a wine tasting. I was just saving for that. And here comes the money out that night or that savings account and it goes away. So separate. As we were talking before the podcast, you know, I like to see if you know, you make it a car payment, you continue to pay the car off, that’s fine. It’s 405 and $1,000 a month, keep making that payment into this account so when the car does have a hiccup, all right. You and I fly airplanes, I put money away in my Play account all the time for annuals for all those things not out of my general savings. All right, vacations. We put money away for Hawaii every year, and put it away on a monthly basis. Why? it’s a habit, get into that habit. But the 911 account is oh my goodness gracious. The World is coming apart. Now I need to pull these funds out. And you know, Micah you know, that’s not to say we can’t pull it from another resource. But when we allocate that to a lot of my clients, it gives them peace of mind. I know that I’ve got this money set aside, in case something happens.
Micah: Yeah. And really what this is talking about, it’s kind of these different layering pops. And I like that. So you talked about one thing that I want to pull on that thread on. We’re huge fans of nick-naming accounts. So whenever we’re meeting with a client or a new client, and we’re going through information I always like to ask what bank you’re at. So let’s give an example of a client saying they bank at Wells Fargo I first start by saying I apologize I’m sorry for that experience. I’m okay do not throw in too much shade on Wells Fargo just a fun joke. But you know that we say great. Where do you primarily bank now whatever bank they say I’m not just picking Wells Fargo, whatever bank they say is their primary checking and savings account. I do not want their savings to be I want it in a separate bank. Now why is that? We have this thing that pops you and I talked about you’ve taught me our financial thermostat. Now that financial thermostat is when we log on to our bank account somewhere between X and Y is a good dollar amount, right? It’s between there. We’re comfortable. If it starts going above Y I feel really good, and I stopped spending some money, and then it goes down below X, and I’m like, holy crap, who spent the money out of my account. It clearly wasn’t me but stop spending everything right. And we kind of move up and down in this little flow. So a great financial hack. Everyone’s always looking for the hacks, right? So a great financial hack that we have found is separating out our operating account from our savings accounts. So operating account is going to be one bank that’s where my most of my bills get paid for etc. Then I’m going to set up my savings my longer-term savings in a separate bank. Why Because I log on to pay my bills. I don’t see that extra money, and it doesn’t play with that financial thermostat.
Floyd: Micah, you know exactly. And so much so different today because you can log on and transfer back when you know 40 years ago, I would have separate custodians have one of their credit unions at the bank. Why? Because if your savings isn’t where your checkbook is, now you got to go to passbook savings, extract it to move it into the new checking account, and you know what you do typically you talk yourself out of it. Right. And these workers I used to love to meet our clients working in their working careers every quarter because it always look at what their checking account was. I look at what their savings account was. And oh, if their checking account got a little larger, guess what I would recommend, let’s move some of this money over here. Savings Account grew so much. Are you buying some? No, it’s just accumulated let’s move away, out of sight, out of mind.
Micah: So here’s how to implement that right and we’re gonna get into dollar amounts kind of how much people should have. It’s kind of a good walking around numbers, but one of the things that I like to do so I use a local bank I use Northrim as my local bank I do a lot of the kind of the main baking inside of there but I use Capital One as my savings bank. Now Capital One Marcus bank, I like a lot of the online banks that have higher interest rates right now you should be getting between four and 5% in your online savings account, at least at the date. This is recorded. It’s gonna fluctuate but that’s what it shouldn’t be for little to no dollar commitments in his accounts. Now when I set money up in those accounts in pops I know you guys do the same thing. I love to nickname the accounts. Now there’s a secret to how you nickname your accounts. I like three things when I nickname a savings account, what it is, when it’s for and how much it is. Now this is really really important to have those three components in there, especially if you are married. Because if you’re married and you say hey, I want a travel fund and you put money in a travel fund and you save that money. I’ve been like sweet, I’m going on a moose Hawk my wife says no, we’re going to Europe, okay traveled to different things to us right vacation and two different things that could be a realistic story from the person speaking you may not or it could have actually happened to me. So now what we really try to do is say let’s be more intentional. So when I set up a savings account it’ll be Europe may 2020 for $12,000 right or $20,000 or whatever that dollar amount is going to be then from the nickname both my wife and I can look at that savings account. We can say what it’s for when do we need the money by and how much do we need? Now we get to make a decision now this isn’t locked them money up. This is a permanently commit the money but I’m being hyper intentional about setting that money aside for that potential trip and we all know what that trip is going to cost and this becomes a spending account. Great news. When you have that money in there. Go spend it.Your plane account. Same thing you put money in a plane account you want to go flying great news, you got money your plane account now you want to add V G’s to your plane but you look in your plan account, you don’t have enough money. Good news, you’re gonna save up more for it right? And so the savings account allows us to spend money but it also allows us to kind of throttle and control how much we’re spending in certain activities.
Floyd: Intentionality is so important. Your example is you know, my airplane, I want to do X, you know, and I’ve only got y in the account. I’m sure I can always transfer it from another account right now I’m comingling so intentionality, all right and as our discipline. Hey, I’m only going to do this with this and anytime with your mom anytime I go outside of that we have a conversation. And yes, normally she says it’s okay. Then she reminds me when she wants to go shopping now remember when you get all this over here, you know that the back and forth on it all right. But those those different buckets if you will those different savings accounts Northrim I got 17 accounts over there. And when I go put money and they look at me, how come we got so many for this for this for this alright. And on the credit cards, we have a travel card we use the travel card when we travel. We have a gas card not not a gas like Texaco, we got one credit card that we use, we get the error miles if you will, for that. But each one of those allows us now to separate our expenses or our spending each month as we review our bills.
Micah: Now here’s the really key part about this right and pops is what you said is about being intentional. So one of these accounts we always have as a 911 account now we don’t call it an emergency account anymore, we change the language to our 911 account. Now why do we change the language? Because we get clients that would call and says Mike I got an emergency my boat motor went out and I need to pull out money that emergency fund replace my boat motor. Okay. Why do you use the boat? Well, we like to use it to go fishing. Okay, are you fishing for food? Are you fishing for fun? Well, Micah, how I stocked the freezer. That’s the same sales pitch I give my wife so that means you’re stocking it for fun, right? This isn’t we still had Fred Meyers in Costco in Alaska. And so we’re doing it for fun so it’s really not an emergency that you need to replace the boat motor. You really want to replace the boat motor. Now what is an emergency? My heat goes out of my house. Guess what in Alaska heats a vital thing. I kind of like having it right my heater goes out my water heater goes out. This is an emergency ever roof leak a tree falls and hits it. We have an earthquake and I have foundation damage. These are emergency things that I needed to have those 911 funds for. I lose my job the government goes on government shutdown and you still have to report to work but you don’t get a paycheck right not saying that’s… Wait, that has actually happened. Okay, so those would be emergencies that we need to pull these monies from during this period in time, not discretionary things. So your emergency account should be set up as a 911 account. You should have $1 amount associated with that nickname. Now you can always put money in the emergency account for non emergencies, right in your other accounts. So let’s say my travel fund my airplane fund or my you know, whatever other fund I want, I can move money between those because I want to reallocate that’s fine, but I don’t move money from my emergency account to my fun accounts because I want to spend more money. This is where people get in trouble.
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Floyd: It comes to me all right, and the people I work with, our clients it becomes a peace of mind knowing that if the world goes upside down, are they O-S happens. I got this fun over here to attend to that. Now a lot of the conversation is how much should be there. What’s the magic number? All right, and everyone’s different. You live in a million-dollar home or you’re retiring and you downsize to 1800 feet. What are those numbers of what could possibly happen and that’s just you have an emotional conversation with that? And our clients drive the emotions, we drive the I was gonna say practicality but we drive the finance side. What’s the worst thing that could happen? Well, they use your example is I can lose my roof. Okay, in the state of Alaska, if you can find a Roof Contractor after a major windstorm. It’s about 50 grand. Well, my insurance covered will cover it. Sure, sometimes in the future. And if you have a high you have an expensive home if they said that they’re going to cover it but they make the checks reimbursement check to you to also to the bank if you got a mortgage on it that covers that. So you have this separation of time. So we may replenish it with an insurance claim money as it comes into you. But you got to get the roof repaired before the insurance company even considers doing. So that’s where the piece of, I think the peace of mind comes in.
Micah: I agree so now let’s come to a question. How much money should you have in these emergency accounts? Right. And while you’re working, it’s between three to six months of what you’re spending, not what you’re earning. I think there’s a little bit of a distinction, right your state of what are you spending, right so what comes in every two weeks in your bank account, you know, whatever that number is times three months time, six months, that’s the number you need to have. Three is the minimum we start going over six. Now. Sometimes I like to go over six because sometimes, this gentleman offered my federal employees we have a couple of higher-end executives that every now and again they’ll change jobs and when they do, because of their compensation package. You know, it takes them a while to line up a new job. So we need some higher reserve so it could be a higher number. I have never seen a case for why it’s a lower number. We still need that money in there. These are the minimums that we need to have.
Floyd: Right? Right. You know, and changing jobs you know how many times that we’ve seen a fed from one agency to the next. All right, and take an extended period of time off. They’re gonna supplement. How about when you reach go to Fed retires Micah? Does that check instantly? Within next pay cycle?
Yeah, so all those are 100% Right? There’s all of those are different reasons. We need to have more so there’s the working side of it. Then there’s the getting ready for retirement side right now in the savings concept. You guys know us on the listener front that we like our buckets, right? And we like to have five years of money five years, any money you plan to spend in the next five years out of your retirement accounts needs to be separated outside of the stock market because it’s not if it’s when the market goes down. We need to have money that you can live on. Well, that’s account distributions, that’s retirement paychecks. You still need your emergency reserve that’s outside of investments that says when the tree falls, when an earthquake happens, when a storm hits, when the car blows up is something of that nature, what money am I going to be able to tap into and that extends a little bit for me I really like at least that six months, maybe even 12 months into that emergency reserve. So as we’re starting our career building, it’s three to six months, as you’re more mature in your career in closer retirement, it’s six to 12 months in that 911 account.
Floyd: You’re talking about executives; we have an executive right now that left a high-stress job. And he says I’m taking a sabbatical. So we knew this was coming. So we ramped up that 911 account that emergency fund anticipating that. Micah, he is unemployed for three weeks, and he calls me boy I got a job offer twice as much, and I can stay at home. Alright, okay.
Micah: Yeah, all those little things right but I’d rather plan to have a little too much cash and not need it and not have enough cash in needed. So alright, so we talked about kind of how much you need. We talked about different account allocations that you need to have as in we love different banks, we look for in bank accounts, right? FDIC insured pretty much whatever bank you want to go with and I mean, knock yourself out. When it comes to a sure sure, yeah, fair enough. I use those I know people draw a big distinction between those I use those synonymously. So the other thing that I would throw out there pops is it’s a little bit as to… Okay, once you’re in a bank or credit union, where do you put these emergency reserves? So some clients say, hey, I want to put this money in a CD. I want to put them in a bond, and there were two bills that route here that are paying 9% last year, so people are like, Hey, how do I get that? 9% Well, the first thing you got to do is get a time machine. And then you go back to last year and you can get those 9%. But they don’t exist right now there are a lot lower as a one time kind of flu. But there’s still some really good money market rates out there that you can put money into that are still FDIC insured. So whether it’s a savings account, maybe some short term CDs I’m not a huge fan of long-term CDs, especially for the savings accounts, because generally, you’re not earmarking the money for five years, right? It’s saying, hey, I want to spend this money in the next, you know, anywhere between six months to 18 months. Generally, that’s not a great fit for a CD.
Floyd: I agree. Micah and one of the points I’d like to stress when you say when you go to your bank or your credit, you want to make a money market account, alright? Just because it says money market. That doesn’t mean you’re getting the best interest rates and had a client walk in says why don’t worry about it. I got $100,000 in the money market. It sounds great and want to see the statement. And he did the credit union did say money market pinpoint by percent head he went to the super money market. It was gonna get 4.8% right and even sitting there like six months he was just very frustrated. What did they tell me? What in, Yes, the question. So very important to the listeners. If you go into the bank, he goes to the credit union to say hey, I want a money market. First question. What is the current interest rate? Oh, it’s point five. Do you have anything doing higher? And then make sure you gotta park that money at the highest possible interest rate you can get?
Micah: Yeah, and watch for the strings that are attached with that right anytime someone’s giving you a higher interest rate. There may be strings attached as in time commitments, penalties, limited access and pops and quite frankly, I was felt prey to this. I got a little days ago on my own personal savings with Capital One. They’ve always done a great job in their savings account, whatever it was, and they made a change last year before rates went up. They created this new savings account and I saw it but I was like well, the rates are the virtually the same was point zero 1% higher, point 001% higher but it wasn’t worth making a change for that little dollar amount. I was like, Well, no biggie. I’ll just keep in my same savings accounts. Then as rates went up and I saw Capital One just announced that the rates are going up and up and up. I assumed that I was part of that because it’s the way it’s always worked in the past. They did a product change of sneaky little guys. And the savings account that used to keep up with interest rates and no longer does their new savings account is the only one that does so had to go change all my savings accounts in order to get this higher rate but again, I missed it for about six-eight months because I just assumed when I saw Capital One raising rates that I was getting that it wasn’t until I like you did the math looking at my statement like whoa, that’s not 4% and then started working backwards and I was still stuck at a low rate. I had a frustrating phone call with Capital One in their comment is they’re hearing this from multiple customers, but this was a change they made. So even though it’s what you had in the past doesn’t mean it’s what you will have in the future. You got to stay on top of this as well. If it’s a difference of point 001 It doesn’t make any sense if it’s a point of difference of point two and 4.2 That’s a massive difference in interest rate that and dollar amounts that you’re getting probably worth taking the time to make a change to do that.
Floyd: Micah, you have to your point, though, is as you guys got some from Capital One today, six pages of updates you want to read all the fine print is to match me you know, you’re looking at your quarterly statement. Oh, you made 13 cents on $100,000. I thought you were paying a nickel. That should equate to a little bit more than 13 cents. You got to have common sense when we take a look at it so important to really watch that and to dig into it to make sure you’re getting the best you can possibly get.
Micah: So this isn’t something you guys got to look at on a monthly basis. This is something that’s semi-annual basis. Okay, so you give up a couple of months of a higher interest rate. That’s not the end of the world, right. But in the long term, we got to make sure your money’s working for you. So on the semi-annual side, you should be reviewing your bank accounts as long as the investments. Are they still suited well are well suited for you for long-term investing because that’s what we’re talking about here, not short term stuff, or long-term when it comes to investment, cash and money markets, bank accounts, those are for short-term things. Investments, that’s the CS and I funds. That’s your TSP, that’s IRA accounts, Roth IRAs, where the money’s invested in quote the market. That’s a long-term money it’s gonna go up and down. So we got to make sure we have that distinction. So Pops, this podcast is all about action items for our listeners. So what’s a good action item that they should be taking and doing this week?
Floyd: You know, what I would suggest is for the younger audience that is just kind of getting started you’ve been in the Fed system three, four or five years. Alright, make sure you have that three to six months’ worth of living expenses set aside and inhabitant passbook savings account at your bank, I would call and say what’s my interest rate? Okay, for those that are approaching retirement five years out, seven years out you know, Micah and I are we’re gonna want one, you know, nine months, a year and a half. I really like two years. Five years out with my feds. We started building that emergency fund with about two years worth of their spending. So it’s been $100,000 here, Floyd. Yeah, I’d like to see $200,000 out there. And oh, and but if they’re making it doesn’t make sense, right. Now, if you’re making 100,000 a year and you’re spending 60, then I’d like to see about 120 set aside, just in case. So from my perspective, Micah on the emergency funds that are younger just getting started three to six months, five, eight years away from retirement, one to two years possibly of emergency funds money.
Micah: Yeah, really important. Another thing that I’m gonna say a second action item. If you only use one bank, I’m gonna encourage you to use two or two credit unions, whatever you like, and I would separate out my operating account from my savings account. Again, that’s a financial thermostat concept separating. Now this might seem like a little thing I will say like several more casual conversations with clients once clients do this and I know it’s a pain to set up a new account and the new links I get it, I’m total with you. Keep your operating account the same, just the savings accounts that you’re opening up. It really does make a difference run out for six months, and you might be surprised at how much money you can sock away.
Floyd: Micah, I just want to add on to that when you say operating account. I can’t tell you how many of my clients when they create one checking account or they pay the mortgage. They pay the utilities, they pay the car payment, they pay the basic credit card out. When they do that, it’s amazing to watch the money and the other accounts start to grow. Grow yours, you’re spending X amount of money to live off of your food bills in there, right so you’ve got all that factored in, but you don’t have the excess the excess sets and another account, and then all of a sudden mysteriously where does all that extra money come from.
Micah: I love it. and, of course the last action item if you made it this far. Share this out with other people. Our goal is to help another 1 million federal employees with their retirement, and that goal starts with you. It starts with you sharing this information and getting this data out here. We want to empower you with great information so you can have a great financial future. pops, thanks as always for joining me next time; happy planning
Floyd: Happy planning.
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