Full Throttle: How to Build a Fully Funded Emergency Fund

There is a big difference between financial security and financial freedom, mainly the amount of passive income your portfolio generates.

Financial security means a major emergency or repair will not be a significant setback for your family. 

Financial freedom means your portfolio generates enough passive income for you to stop working and live on the proceeds.

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What is an emergency fund? Both scenarios require you to have a large emergency fund. An emergency fund is money you can access immediately when something random happens.

There are many philosophies behind emergency funds, and your viewpoint may differ from mine. Let’s review some of the general guidance behind emergency funds.

1. Build a $1,000 emergency fund as quickly as possible.
2. You should store your emergency fund in a high-yield savings account.
3. Your fully-funded emergency fund should eventually cover 6-12 months of expenses.

Let’s define expenses. Many people confuse the cost of living with their expenses. This makes a fully funded emergency fund seem out of reach by making it seem prohibitively high.

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Your expenses are your bare-bones necessities with a little extra. Your household may run on $10,000 monthly, but $6,000 is your actual expenses.

This distinction makes a significant difference when you discuss saving six months of expenses ($60,000 versus $36,000).

Building an emergency fund that’s right for you. Every household is different from the next. Ultimately, you want to sleep well at night.

If you have a steady government job or pension, you may not need as much in your emergency fund as someone in car sales.

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What is your biggest fear or concern? I own three homes, so many daily concerns are vacancies, air conditioners, and random maintenance bills.

I have enough cash flow to cover a month or two of vacancies without tapping into my emergency fund.

I also have a 10-year warranty on one of my air conditioners at one of my rentals—allowing me to sleep easily at night.

If your biggest worry is losing your job, you want 12-24 months of expenses in your emergency.

If your biggest concern is protecting your children from financial pain, you want 12-24 months of expenses.

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Reducing your emergency fund with common sense. Sometimes, discussing your major concerns and creating a plan can alleviate the need for a large emergency fund.

If your primary worry is losing the income from your job, then create multiple streams of income (rents, dividends, business, royalties) to assist you if you lose your job.

If you fear your kids will need financial assistance, allow them to stay home until they have a fully funded emergency fund.

Ideally, you want a mix of common sense, savings, passive income, and access to credit to help you in a pinch.

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Saving for your fully funded emergency fund. We know we need to save $1,000 in a high-yield savings account as fast as possible, but what’s next?

Under Dave Ramsey’s plan, our next step is to pay down debt using the debt avalanche or debt snowball techniques (I prefer the debt snowball).

I agree with Mr. Ramsey on this one. It’s simply too difficult to save when losing 10-20% in interest every month.

It may take 2-3 years to completely pay off credit cards, auto, student, and personal loans. In the meantime, you must ensure you have enough to cover your main concerns.

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Going down a different path. This is where I differ from conventional wisdom. I think building a high-yield passive income portfolio is a priority over a fully funded emergency fund. 

First, you want to join the Elite Savers of America by saving $10,000 in a high-yield savings account. I am currently at $9,400.

To generate passive income, you want to build an extensive portfolio of savings bonds, treasuries, dividend stocks, and closed-end funds.

Here is my reasoning for creating an income portfolio directly after saving $10,000. The main reason we have an emergency fund is to protect us from a loss of income.

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Therefore, we don’t need our fully funded emergency fund if we generate our own income. Let’s look at some examples.

Earning $2,000/month in dividends. Let’s say you build an income portfolio that pays you $2,000/month in dividends.

Your child needs $10,000 in a pinch. Instead of using $10,000 from your emergency fund, you can borrow $10,000 against your brokerage account (leverage).

Then, you can repay yourself in five months using your dividends—you never touch your emergency fund. Eventually, your kid will pay you back, which can go into your emergency fund.

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Losing your employment income. Let’s say you get down-sized from your job. You need $5,000/month to run your household.

You use your $2,000 in dividends, rent a room for $1,000/month, and rent your car for $1,000/month. Now, all you need is to use $1,000/month from your emergency fund to survive for a few months.

Using passive income to complete your emergency fund. If you keep building your income portfolio, eventually, you will be flush with cash.

It may take five years to reach this point, but it is inevitable. This is the time to complete your large, fully funded emergency fund.

Don’t Gamble with Retirement 7

Instead of trying to save $60,000 while earning 4% interest, you can use your 9-10% yielding dividend portfolio to fund your portfolio.

Or you may want to take some capital gains from your dividend portfolio to fund your portfolio quickly. That is the advantage of building financial intelligence versus just saving money.

Conclusion. Saving $60,000 to $100,000 in a high-yield savings account may seem impossible; however, you can get there.

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I am a huge proponent of learning how to use money to make money. You can do it slowly; just don’t get discouraged, as you will have minor setbacks.

If you learn how money works (leverage, options, dividends), you can expedite your savings tenfold. It is much easier to grow a considerable portfolio when you use the power of compounding.

You must do what makes you comfortable. I recommend reading tons of books on personal finance so you can get many different opinions.

Somewhere amongst all the voices is your own combination of financial security and financial freedom—find it and get there as fast as possible. Good Luck!

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Disclosure: I am not a financial advisor or money manager, and any knowledge is given as guidance and not direct actionable investment advice. I am an Amazon Affiliate. Please research any investment vehicles that are being considered. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it.  I have no business relationship with any company whose stock is mentioned in this article. All Right Reserved Military Family Investing