1. Emergency fund

An emergency fund is versatile and can help protect you from a wide range of unexpected financial events. Lose your job? Your emergency fund can help bridge the gap until you find a new one. Get in a car accident and need a rental car? Emergency fund. Pet needs expensive surgery? Emergency fund. A study conducted earlier this year found that 42% of Americans don’t have an emergency fund, which could help explain why so many are stressed about money.

If you are one of those 42%, where do you start? Check out the Financial Order of Operations. Building a full emergency fund is step 4, so depending on where you are at, it may not be an immediate priority. Once it is, consider saving at least 3 to 6 months worth of expenses in a high-yield savings account. Depending on the potential financial risks you face, such as a higher risk of job loss, a larger emergency fund may be more appropriate.

2. Investment accounts

Most investment accounts aren’t meant to be accessed until retirement, but they can still reduce a great deal of financial stress in the present. 61% of Americans age 50 and older are worried they don’t have enough money for retirement. Start investing for retirement as early and often as possible. It’s rare to find someone that wishes they would have invested less for retirement, but all too common to find people that wish they would have saved more or started saving earlier. Check out our free download, “How Much Should You Save?,” to see exactly how much you could have saved by retirement based on when you start saving and how much you invest.

3. Insurance

Paying for insurance coverage can often feel like a waste of money – until it isn’t. There are many different types of insurance out there, so I want to give a quick rundown on which types of insurance coverages may be worth it.

Life insurance isn’t necessary for everyone, but if you have financial dependents, like a spouse or children, consider using term life insurance as a tool to cover your family in the case of your untimely death. Almost everyone should consider their need for homeowners or renters insurance, auto insurance, and health insurance. Umbrella insurance may be worth a look if you have a significant amount of assets. If you live close to a body of water that is prone to flooding, flood insurance may be a smart idea. Disability insurance may be a necessity if you are at risk of suffering a long-term disability that would impact your ability to continue earning the same wages.

Check out this article to learn more about different types of insurance: “What Types of Insurance Do You Need?”

4. Financial plan

Whether you are a DIYer or work with a fee-only financial advisor like Abound Wealth, a financial plan can help address some of your biggest money concerns and preemptively eliminate money stressors. A financial plan can help you identify and prioritize your financial goals and develop a plan of attack for accomplishing those goals. Without a plan for your money, you are just a rudderless ship drifting about the sea. Give every dollar a job and let your money work harder than you do.

5. Estate planning documents

If there’s one thing we all enjoy, it’s sitting down and thinking about what happens after we die, right? Nobody really likes estate planning, and it might as well be called death planning, but it can greatly reduce your financial stress knowing that your family and assets will be taken care of according to your wishes. There are three major estate planning documents that you should consider a top priority to put in place. 

A will and/or a trust can be used to designate the distribution of all assets not already covered by beneficiary designations and can also direct assets into trusts to support family members. An advance healthcare directive or living will outlines your healthcare wishes if you are unable to make decisions yourself and can designate a proxy to make decisions on your behalf if you become incapacitated. A durable power of attorney can make financial, asset, and other legacy-related decisions on your behalf if you become incapacitated.

Unexpected stressful financial events in your life are unavoidable, but being unprepared for those events is completely avoidable. By using the tools available to you, including an emergency fund, investment accounts, insurance, a financial plan, and estate planning documents, you can be better prepared for many of life’s financial risks.

It’s safe to say that just about everyone should have more than $1,000 in savings, but how much do you actually need? The often-repeated general rule of thumb is to save 3-6 months’ worth of expenses for emergencies, which is a great benchmark, but might not be the right guidance for everyone.

Is it the right time to build an emergency fund?

An emergency fund is a priority to building financial stability, but it shouldn’t always be the first priority for your dollar bills. Following the Financial Order of Operations, before building a full emergency fund, you should first cover your highest insurance deductible. Next, you should invest enough to get your full employer match in your retirement account, if you have an employer match. After that, you should pay off all high-interest debt (credit cards, other consumer debt, and some high-interest student loans). It is only then you should consider building a full emergency fund. Covering your highest deductible before building a full emergency fund makes sense, but why invest in your workplace retirement account and pay off debt before building a full emergency fund?

We believe the opportunity cost of missing out on your employer match is simply too great to ignore. If you get a dollar-for-dollar employer match, that’s an instant 100% rate of return on eligible money invested in your retirement account. It makes sense to pay off high-interest debt before building a full emergency fund since the punitive interest rate on your debt is likely much higher than any interest rate on your savings account. Since your highest insurance deductible is already covered, you do have some level of protection before beginning to build a full emergency fund.

Does covering my highest deductible count towards my emergency fund?

The short and sweet answer is yes, saving for your highest deductible in Step One of the Financial Order of Operations does count towards your full emergency fund. Depending on how high your largest insurance deductible is, you may have a while to go before building a full emergency fund or not long at all; in some cases it could even be possible for your highest insurance deductible to be more than what you need in a full emergency fund. If this is the case, you should always have the higher of your largest insurance deductible or a full emergency fund in savings.

How much do I need in an emergency fund?

The general rule of 3-6 months’ worth of expenses is great general guidance, but isn’t always right for all situations. Everyone should maintain at least 3 months’ worth of expenses, but in some cases more than 6 months’ worth of expenses may be necessary. When determining how much you should have saved in an emergency fund, ask yourself the following questions:

• How many sources of income are in our household?

• • If you and your spouse are both working, and/or one person has multiple sources of income, you may not need as large of an emergency fund as a single-income household. If a single-income household experiences job loss, the household income drops to $0, so a larger emergency fund would be wise to help compensate for this risk.

• If you have more than one income source in your household, how similar are they?

• • There is a greater risk of losing both or all of your sources of income if they are very similar. If you and your spouse are both working for tech startups, it may be wise to have a larger emergency fund than a household with two very different occupations.

• How quickly would you be able to find a new job?

• • If you were to lose your job, how quickly could you find a new job with similar pay? Some occupations have very high demand, and you could get a new job with similar pay as soon as you’d like. Other jobs are more specialized or don’t have much demand.

• In the worst-case scenario, do you have other funds that could be used for emergencies?

• • We wouldn’t ever want you to take money out of your retirement accounts or use high-interest debt to pay for expenses unless it is the last resort, but it is something to consider when building an emergency fund. If your emergency fund is the only money you have available for an emergency or in the case of job loss, a more significant savings reserve may be warranted.

What if my emergency fund runs out?

Sometimes we experience needs for our emergency fund that last much longer than 3-6 months. 1 in 8 workers will become disabled for more than 5 years during their lifetime. What do you do if you become disabled and are unable to work in a similar job or unable to work at all? Long-term disability insurance offers coverage for disabilities that last an extended amount of time. The typical elimination period, or period of time before you start receiving benefits from a long-term disability policy, is 90 days. Benefits usually pay about 40% to 70% of your pre-disability income, depending on the policy you choose.

You may also be eligible for Social Security disability benefits if you are unable to work due to a medical condition that is expected to last at least one year or result in your death. It’s important to note that Social Security disability benefits and “any occupation” long-term disability insurance policies only pay out if you are unable to work any job. 

This could be a problem if, for example, you are a surgeon that suffers permanent damage to your hand and are unable to perform surgeries. You could get another job that doesn’t require very precise motor skills, but it might be unlikely you could find another job that paid as much, at least in a reasonable period of time. In many cases it may make sense to opt for what is called an “own occupation” long-term disability insurance policy. These policies are typically more expensive, but offer coverage if you are unable to do your specific job, which could be a great benefit to those in certain occupations.

Nobody likes to predict what unexpected events could cause them to need their emergency fund, but it is important to build a full emergency fund, and often a long-term disability insurance policy, to protect yourself from unexpected events. Losing your job or experiencing a financial emergency is never pleasant, but it is much easier if you are prepared with a full emergency fund.

What exactly does a Financial Mutant look like? We survey our wealth management clients every year to get an idea of the traits that are most common among those that think about money differently and experience financial success. Here are the traits we found to be most common amongst Financial Mutants.

10. They work together with their life (and financial) partner.

89% of those surveyed are married or widowed, and those who are married are on the same page financially as their partner. 84% have accounts jointly titled, 12% have a mixture of both individual accounts and joint accounts, and only 4% have accounts separately titled. Being on the same page as your spouse financially is essential to being a Financial Mutant power couple.

9. More often than not, they attend public schools and universities.

You may be surprised to learn that most of our clients did not attend expensive private schools and universities. The overwhelming majority attended public schools until college, and nearly two-thirds attended public universities if they went to college. This runs counter to the narrative that it is a requirement to spend big on education if you want you or your children to be successful. The data shows that is simply not the case.

8. Financial Mutants are overwhelmingly optimistic.

When it comes to having positive financial behaviors and being successful building wealth, it should be no surprise that being an optimist helps tremendously. 85% of those surveyed said they were optimists, while only 47% of the general population describes themselves as optimistic. Having a positive outlook towards the future is very conducive to wealth-building and good financial habits.

7. Most reached millionaire status at an older age than you might think.

No, the most common age to reach millionaire status isn’t in your 20s or even 30s. 85% of those surveyed reached 7-figure status in their 40s or older. Even for a Financial Mutant, real wealth doesn’t come quickly and easily. It is a long process with many bumps, twists, and turns in the path to wealth. Don’t get discouraged if you don’t feel like you are gaining much traction financially in your 20s and 30s; true wealth takes time, consistency, and patience.

6. They chose the right career path.

The majority of the general population does not work in a field related to their major. The majority of those surveyed, however, do work in a field related to their major. Attending college is very expensive, and choosing the right career path is very important to your financial success. Choosing a field you are passionate about that has good earning potential, while limiting any student loans to less than your expected first year salary out of school, is a great recipe for success.

5. Financial Mutants don’t typically inherit their wealth.

The stereotype of nepo babies who inherit their wealth or only achieve financial success because of their parents simply isn’t true for the majority of millionaires. Our survey found that 80% received no inheritance or less than $25,000. While inheriting money can certainly be a path to wealth, it is not a path to becoming a Financial Mutant.

4. They understand the importance of saving for unexpected emergencies.

Putting money in a savings account for a rainy day isn’t always fun. Your money usually doesn’t grow as fast as money invested for retirement and if you have to use it, you are probably going through a stressful time financially. But building up a solid emergency fund is vital to keeping your financial life on-track and preventing any surprise expenses from derailing your progress. The vast majority of clients surveyed have four months or more saved for emergencies.

3. Financial Mutants have a healthy relationship with debt.

Debt is like a chainsaw: a very useful tool when used properly, but when handled improperly, it can be extremely dangerous. Financial Mutants know how to use debt as a tool. 99% of those surveyed use credit cards, and of those, 97% pay them off in full every single month. 59% of those that took out student loans took out between $10,000 and $50,000, and 77% kept their total student debt load below their first year salary out of college. Knowing how to use debt responsibly is a requirement of being a Financial Mutant and building wealth.

2. They invest in their future.

How can you be a Financial Mutant if you aren’t investing what you need to be for retirement? 83% of those surveyed save 20% or more of their income (or are already retired), and just 3% save under 10%. If you aren’t certain how much you should be investing for retirement, check out our Know Your Number course. The course includes video lessons and interactive tools designed to get to the heart of your “why” and help you break down the numbers to see just what you need to be investing for retirement.

1. They start investing young and understand the value of time.

While we know the majority of Financial Mutants do not reach millionaire status until their 40s or later, they do get serious about money at an early age. The majority start in their 20s, with only 12% not getting serious about their finances until their 40s. Having financial success early in life is not a requirement of being a Financial Mutant, but planning for the future and making good financial decisions is.

Being a “Financial Mutant” is not about your retirement accounts reaching a certain balance or how much money you make. You can be a Financial Mutant at any level of income with any amount of money saved for retirement: it’s about how you think about money, and making smarter money decisions than most of the population. If you could boil what a Financial Mutant is down into one single term it would be deferred gratification, or the ability to sacrifice a little bit today for a more beautiful tomorrow.

Is a Roth IRA an appropriate vehicle for an emergency fund? Since you can access basis penalty and tax-free, some advocate for using it as an emergency fund. Learn why Roth IRAs are so powerful and why they might be the perfect next step on your wealth building journey with our Roth IRA Guide.

In this highlight, we discuss why it is important that you have an emergency fund built and what you should aim to have.