56: The Importance of an Emergency Fund
with Tiffany Soricelli
What is an emergency fund and is it important?
An emergency fund is a savings account that has earmarked dollars that– it's not deferred spending. It's not part of your normal monthly cash flow... An emergency fund is a fund set aside for the use in the event of an emergency. Each person defines an emergency differently, but I would argue that things like tires for the car, or a vet bill for an animal, those are th-- Cars, car things and animal things are the big things that people tend to steal from their emergency fund for. Those are-- you can plan for those expenses.
If you have a small animal or small human, you can plan to need funds for some sort of additional cost. If you have a car, you're going to at least need annual inspections, oil change, stuff like that. So when you have major expenditures, I would say that it's important to have sort of a-- I call it an opportunity fund. It's not your emergency fund. Your emergency fund is truly for use in the event of an emergency, as one would define it. And our society defines an emergency as illness or injury that prevents you from being able to work. So that's going to cover what your needs are. And how much should be in your emergency fund? Should-- I mean, everybody's different in terms of what makes them feel secure. But for working musicians, I would argue between 9 to 12 months of expense needs. And if you have other investments or a brokerage account or something where you can liquidate funds if you need it short term, absolutely. But I would argue that at least having three months of your expense needs in an emergency fund, which is liquid and cash, is, is really important.
The reason I would say not to invest at least the beginning of your emergency fund is because you don't want to find yourself in a situation like March 2020 when all of your contracts are canceled and the market has dropped 30%, so now we have no money coming in and our emergency fund has dropped. So it's really important to have that, that safety net of, I would argue at least three months of expense needs, and really especially post-pandemic, up to nine months of, of access to funds that can be liquid in a short period of time to protect you in periods of inconsistency in the income.
Kellogg:
For musicians, and especially for young musicians, there's always lean months or periods of time where there's not a lot of income coming in. What can a musician do to manage and prepare for those times?
Soricelli:
One of the things that I teach is it's almost, it's a, it's a spin on Maslow's Hierarchy of Needs, because when we're looking at what do we do with our money - I will answer your question! but this comes to it - when we're looking at what to do with our money, the first thing that I want to make sure individuals are looking at is, Where is our income coming from? And having a practice of projecting your income out at least six months ahead allows you to see when these lean periods are going to come.
And then from your income is, is your base. And then looking at, okay, Where's our emergency fund? Where's our safety net? Where's our opportunity fund? Having some savings, having some backstop is the next level of security. From there, then we go into investments and other, other pieces. But what young musicians can do in those periods of lean is, I mean, especially starting out, one of the things that I teach is diversifying your income. And that doesn't necessarily mean driving for Uber, you know, while playing on the side, it's, it's about looking at the varied ways that one can make an income. So maybe you're a working musician who-- you have an orchestra job, or you do subbing, but maybe you've a church job, or maybe you teach privately, maybe you are able to serve as an adjunct for a small, smaller college, maybe you tutor English as a second language. I mean, there's a million different ways that, especially with the interconnectivity of the Internet, that one can make side income. And what I would argue is, is that find the things that, that light you up, that don't feel like work, and that won't detract from your primary objective, which is your playing. So you don't want to be closing a bar at three in the morning if you have to be at an audition at 9 a.m.
So as long as it doesn't detract from your primary occupation, finding supplemental ways to bring in income allows you to navigate those lean periods without, without the stress of really, really being broke.
And then as, as you build up your emergency fund and your safety net and you build up what I call your financial foundation, you can step back from those side– side jobs and again, be more selective about the opportunities that you take on. But the goal is to get to a place where you have enough in, in reserve that you can fill in the gap between these lean months. So if, you know, for instance, that you feel comfortable or you need, say, $3,000 a month coming in to cover your basic expense needs and a quality life, you know, I don't want to just-- we're not eating ramen, you're– find out what your needs are.
So if you know your numbers - I call it the magic number - if you know your magic number is $3,000 a month, look at your income projections and plan for when you're going to be below the income needs. So when you're below the income needs, that's when you plan to pull from your surplus, or you take a couple of different catering gigs or whatever you plan for those months. And then in the months of surplus, we either sweep and we put the money back into our operating reserves so that we can fill in the next lean month, or you can get really intentional around some of the other financial goals that you have. In a month of surplus, that might be the month to cover the vet bill or the car bill or something like that.
But by doing your income projections, you can be intentional around when you use your money, and how you use your money, and you have to write it down. I think it's very easy to, you know, know that you have a huge contract coming up and being like, oh, I'm going to buy that computer and I'm going to do this and I'm going to do that, and I’m going to pay down the card, and yet you've already spent the money before it even arrives into your bank account.
So writing it down and creating a plan for yourself is one of the best things that young artists can do to help plan for, navigate the inevitable lean months.