Emergency Funds and Porcupines
In this edition of the Flying Point Update we're going to talk about the importance of emergency savings, the optimal order of funding emergency expenses, and the amazing defenses of porcupines.
Top of Mind
Since the last Flying Point Update, I've had a string of unexpected big expenses. Both our cars needed a few repairs, I needed to hire a bat removal professional (we'll discuss bats in a future update), and to top it off my two dogs, Luna and Rambo, decided to try their luck with a porcupine. The worst part was that this wasn't their first encounter with a porcupine. They've lost every fight… I've written a few large checks lately.
These experiences reminded me why emergency funds matter. Life happens. Cars break down, old houses need fixes, and dogs never learn about porcupines. Having cash readily available means you can handle these situations without derailing your broader financial plan.
This is the real benefit of emergency savings - it protects your long-term investment strategy when unexpected expenses arise. Without an emergency fund, you're forced to make financial decisions under stress, often liquidating investments at bad times or interrupting retirement contributions just when cash flow is tight. Federal Reserve data shows that 40% of Americans couldn't cover a $400 emergency expense without borrowing money or selling something. This forces many people into expensive credit card debt or early retirement account withdrawals with hefty penalties.
I prefer a simple implementation of an emergency fund: 3-6 months of typical household expenses in a separate high-yield checking or money market account. This keeps funds highly liquid but distinctly separate so you're not tempted to use emergency savings for everyday expenses. This isn't just practical advice - recent Vanguard research with over 12,000 investors found that having just $2,000 in emergency savings was the top predictor of financial well-being, even more than total assets or income. People with that emergency cushion spent about 2 hours less per week thinking about their finances compared to those without any savings.
Lean toward 3 months if you have stable employment and good insurance. Lean toward 6 months if you're self-employed, have variable income, or are the sole earner. Business owners often need even more since both personal and business income can be disrupted simultaneously. I recognize this might feel like a big cash cushion, and it's absolutely a conservative approach. But I value peace of mind tremendously in financial planning. The ability to handle life's curveballs without financial stress is worth more than the potential investment returns you might miss. Of course, every family's situation is different and the right approach depends on your specific circumstances.
Worth Knowing
When emergency expenses hit, the order of funding matters for tax optimization. I see clients make expensive mistakes when they're stressed about unexpected bills and randomly liquidate investments without considering the tax implications.
Here's a better hierarchy to follow:
First: Emergency savings. This is exactly why we advocate for that separate high-yield account with 3-6 months of expenses - so you can handle unexpected costs without any tax consequences or disruption to your long-term plans.
Second: HSA funds for any medical expenses. In a perfectly optimal world, you'd leave HSA funds untouched to grow tax-free for decades, but life isn't always optimal. When human medical emergencies hit, HSAs are still better than most alternatives. Unfortunately, most veterinary bills are not HSA-eligible qualified medical expenses. There is an exception for service animals, but Luna and Rambo are absolutely not service dogs.
Third: Roth IRA contributions. You can withdraw your original contributions (not earnings) from a Roth IRA anytime, penalty-free and tax-free. If you've contributed $30,000 to a Roth over the years, you can withdraw up to that $30,000 without penalties, even if the account has grown to $50,000.
Fourth: 401(k) loans. You're borrowing from yourself and paying yourself back with interest. No taxes, no penalties, and the interest goes back into your own account. The catch is you typically need to repay within 5 years, or immediately if you leave your job.
Fifth: Taxable investment accounts. When you must sell investments, be strategic about it. If you have losses in your portfolio, harvest those first to offset any gains. You can also use the specific identification method to sell the highest-cost shares first, minimizing taxable gains.
Last resort: Early retirement account withdrawals. The 10% penalty plus ordinary income tax makes this expensive. Some exceptions exist (first-time home purchase, qualified education expenses, certain medical bills), but these should truly be last-resort options.
The key insight: spending five minutes thinking about funding order can save hundreds or thousands in unnecessary taxes and penalties when you're already dealing with unexpected expenses.
Mark Your Calendar
The middle of summer is quiet for tax dates, so no real updates here.
September 15th: Q3 estimated tax payments are due, plus final deadline for calendar year S-Corps and partnerships to file 2024 returns (with extension).
October 15th: Final deadline for individual returns with extensions.
This is also a good time to start thinking about year-end tax planning strategies, especially if you've had to tap into investments for any emergency expenses this year. We can help you understand the tax implications and plan accordingly.
Maine Wildlife Facts
After our dogs' latest porcupine encounter, Will and Frank have become quite the porcupine experts. They're one of the largest rodents in North America, weighing 12-35 pounds. Porcupines are excellent climbers and spend much of their time in trees feeding on bark, twigs, and leaves. They're generally slow-moving, peaceful animals who just want to be left alone.
To reinforce this point (get it?), North American porcupines are covered in about 30,000 quills that are actually modified hairs with microscopic backward-facing barbs. When threatened, they don't shoot their quills (that's a myth!), but rather back into predators with their tail raised, easily detaching quills on contact. What makes the quills so difficult to remove are those tiny barbs - they're designed to work deeper into tissue over time, which is why immediate veterinary care is so important (and expensive).
Maine porcupines don't hibernate but become less active in winter, often spending weeks in a single tree just eating bark. Their natural predators include fisher cats, mountain lions, and occasionally coyotes - all much smarter than my dogs about avoiding the business end of a porcupine.
These Maine wildlife facts have been brought to you by Will (7) and Frank (3), Flying Point Advisors' on-staff naturalists.
Questions about any of this? Just reach out - I read every email and love hearing from you. Thanks for reading. You'll hear from me again in about two weeks.
-Mike