The Emergency Fund

After I turned 16 and obtained my driver’s license, I received an unexpected gift.  No, not a new vehicle – like most farm kids, I would now get to borrow the ‘farm truck’.  Assuming, of course, that my chores were done, and that my grades and behavior still allowed me vehicle privileges, I could take the truck and head out for a Saturday night with friends.  The gift itself was simply a twenty-dollar bill for my wallet.  I was told to tuck that $20 away; not spend it, but save it in case of an emergency.  I could get stuck on the side of the road or maybe even require emergency fuel.  But even if I did need to use it; the $20 should be replaced so that it would be there for next time.

It was a different era 30 years ago – ATM machines and bank cards were just starting to show up in rural areas and $20 went a lot further.  There were no cell phones, so the possibility of becoming stranded was a reality.  Just think of the panic that sets in today whenever someone realizes they have left just their phone at home!

But with that gift of $20, and at that early age, the practical value of having an ‘Emergency Fund’ was born.

As I grew through my late teens and moved off to university, the concept of an emergency fund only gained importance.  Student Loans were arranged at the start of the school year, so then I was responsible for budgeting and managing my own cash flow throughout the year.    Like most students, it was easy to get ‘sidetracked,’ not worrying about running out of money later in the year, and splurge on fun things like a killer new stereo for my dorm room.  (Editor’s note – some of us did budget VERY carefully because we did worry we wouldn’t have enough to make it through the year.)  My second year brought my own vehicle to also budget for – but also a ride to go on dates with my cute new girlfriend!  (26 years later, she’s still pretty hot!).  As I evolved through the different stages of life most kids go through, my need for an emergency fund increased from simply a $20 in my wallet, to include the unexpected costs of vehicle repairs and maintenance, while also trying to manage school costs.

I have been very fortunate to always be aware that my parents were there to help, and that home at Dora Lee was always a haven of quiet and comfort (something we have tried to emulate here at Applecross).  Like most college kids, coming home on the weekend for a visit and meals (and laundry! and farm fuel!!) was always a pleasure – and an escape from the responsibility of being an ‘adult’, if only for a day or two.    And it was comforting to know that if I had a financial emergency, my parents would always be there to help.  So they did help – and always ensured that ‘us kids’ knew that they could help if we needed it.   But at the same time, while it was amazing to know that my parents were always there to assist, I knew it was incredibly important to me to build my own emergency fund.  Maybe this goal was a product of my own independent streak, or the (sometimes) uncomfortable questions that I needed to answer about my current situation.  But in any event, despite knowing that they were in a position to provide support, it simply reinforced the need for having my own contingency plan.

There is an old adage about lending money to friends (or family): be prepared to lose either one or both.  Money issues are the number one cause of family relationship stress, and a leading cause of divorce.  Parents, kids and siblings can all argue over different interpretations of a ‘helping hand’.  What was the intent: is it a gift?  a loan?  Did a sibling get treated better?  What is fair?  What is equal?  From a friend perspective, if a loan doesn’t ‘work out’; the situation gets awkward in a hurry…for the lender, if the loan isn’t repaid as expected, it is something that always gets remembered.  For the borrower, constantly knowing that you haven’t been able to repay the loan from a friend is also an issue.  This awkwardness often leads to the loss of friendships.  While family ties are not something that will break as quickly as a friendship, there are certainly plenty of family situations where members may not talk to each other for years.  It can be a tremendous asset to know that friends and family are there for financial support if needed, but it always seemed uncomfortable to rely on them as a backup plan.  Developing our own, independent solution seemed to be a better option.

Debt is another tool that people often rely on for emergency funds.  The majority of farmers have an operating loan of some sort, and personal credit lines / VISA cards can also provide emergency access to capital.  The challenge with debt though, isn’t only that it has to be paid back; it also may not be available when times become challenging.  The first thing a lender looks at when it comes to increasing credit facilities is a client’s ability to repay the loan.  If there is an ‘emergency’ and little to no income being earned, then how does the loan get repaid?  This was the case for a lot of people in Alberta who have experienced job interruptions during the current downturn in the oil & gas sector…going to the bank after a job loss and trying to qualify for additional credit, without income to support, is going to be a challenge.  And that is the banking conundrum.  Banks are investors in your life or in your farm – and they make that investment as long as they are comfortable they can get repaid as agreed for an acceptable return.  There is some truth to the statement that it is easy to borrow money when you don’t need it – and tough to borrow it when you do.  Reality is a more complex matter, as any lender who understands agriculture is aware of the cyclical nature of farming, and that there may not be profit earned every year.  So banks (and bankers) certainly make a reputation on whether they support their farm clients during ‘good times and bad’.   But regardless of the trust you may have with your advisor or financial institution, debt may not be the most reliable source of funding in an emergency – especially when it may be needed in a hurry!

There are other challenges with debt, or having someone else as an investor in your life or farm.  Usually as a condition of their investment, they negotiate terms.  It could include interest rate, collateral, credit limits and a schedule on repayment.  There may also be other terms and conditions that need to be followed, such as providing annual financial information in a certain format, or achieving specific results.  If the terms of the agreement aren’t followed, then the loans (and limits) can be reduced or due in full.  Or, potentially even cancelled outright if they aren’t being utilized.

This last situation happened to Jeanne and I when we were first married.  Having just graduated from university, Jeanne was excited to get accepted into teachers’ college.  I had just started as a banker, and we both had our fair share of student loans (we joked that there was no use having a pre-nup as we had a negative net worth when we got married!), so while Jeanne was going to school, we knew cash flow would be in short supply.  I wasn’t worried, as I had a credit line from my time as a student that we had been able to pay down to zero, and I figured that if we got tight, that we could just tap into that.    What I didn’t realize at the time, was that because it was a student loan, and I was no longer a student, since my loan had a NIL balance, it had been closed.  So several months later, when we went to use it, we had a bit of a surprise!  We were welcome to apply again for a ‘regular’ credit line (that we might have access to ‘in a week or so’), but not having ready access to our ‘emergency credit line’ did create some short term panic.  It certainly was an early life lesson, when the banker didn’t even know the terms and conditions of his own loan!

So again, as a person with an independent streak, it seems only prudent to have at least some of our own resources available to provide some flexibility in the case of emergencies.  Agriculture is big-business though – so I don’t know how realistic it is to tuck away a huge amount in an emergency fund – but at least having some money put aside does provide some time and space until more fundamental changes can be made.

The question becomes: How much money should be in an emergency fund?  The general rule of thumb is 3 months worth of expenses – which can be different than 3 months of income!  In our case, as we both have off-farm pay-cheques, having a 3 month buffer suggests that we could both be unemployed for 3 months or, more realistically, one of us could become unemployed for 6 months, and we would still have sufficient funds put away that we would have some flexibility to make alternative plans.

Sounds easy, but what about farmers who can have such variable income streams throughout the year? I still think 3 months (or 25% of annual cash expenses) would be a good number – the challenge, of course, is remembering that an ‘emergency’ fund should be treated significantly differently than day-to-day cash flow management.  Emergency funds are just that – to be used in the case of an emergency, such as a crop failure or drought, that puts an ‘extra-ordinary’ stress on cash flow.  Agriculture can be so variable and cash flow depends on both weather and markets – both of which are outside of farmers’ control.  It can be easy to confuse market cycles with ‘extraordinary events’, and get tempted to dig into that emergency fund.  (We have a saying in banking: if ‘extraordinary events’ happen every year, then they really aren’t that extraordinary!)  While an Emergency Fund is supposed to provide time and space, it also starts a clock ticking.  Once funds start getting utilized, it does add pressure as to what happens when the emergency fund runs dry.  But the alternative option, of not having reserves at all, can create substantially more stress, and lead to knee-jerk reactions that may not have been the preferred approach if a little more time and space was available.

The other big question is how to establish an emergency fund.  I am a firm believer of the pay yourself first concept.  By taking a small amount (10%) of money off each pay-cheque as soon as it hits the bank account, saving can be relatively painless.   My understanding of this methodology dates back to an early read of ‘The Wealthy Barber’ in my late teens – it was a bit of a slog at that age, but it certainly helped shape my habits. And since it was a gift from my favourite uncle (thanks Uncle Jim!), it actually got read!  Being surrounded (and influenced) by people who have good financial habits is a huge help – especially as habits can be started so young!  The concept I recall is partly based on an understanding of human nature.  If there is money in a bank account, (or room on an operating line), it provides a sense of comfort – and that comfort often means that money simply gets spent on ‘stuff’.  By paying yourself first and transferring funds right off the top to a separate savings account, the primary chequing account may stay a little ‘tighter’ than what would be preferred (which does help with spending habits), and the savings account will grow over time.  This same concept can be utilized by farmers.  By taking a small percentage of sale proceeds (the grain cheque / cheque from the auction mart) and transferring it directly to a savings account, an ‘emergency’ fund can slowly be built.  As my dad would say ‘Rome wasn’t built in a day’ – so an emergency fund is something that can be built gradually over time.

One other point to make on an emergency fund is making sure the funds are available when you need them.  Financial Institutions typically pay very poor interest rates on savings accounts, but regardless, this is typically where your emergency fund should be located.  There are (slightly higher paying) options like ‘e-savings’ that may require electronic transfers, that are also great options. However, I would hesitate to lock an emergency fund into a GIC or other fixed term investment just to generate a little more return – in case it was ‘locked in’ right when you needed it. Emergency funds are just that – for use in an emergency – you never know when you may need it, so keeping that deposit ‘liquid’ so it can be accessed is more important than a little more interest.

A contingency fund provides time and space.  As readers of this blog would be familiar with, ‘time, space (and communication)’ is my favourite problem solver.  Whenever there is a shock to the system/operation, having emergency reserves allows for adequate time to allow the best decisions to be made.  This is something the recent COVID outbreak really brought home.  As a banker (and consumer), I was astounded by how many people and businesses needed payment relief within 2 weeks of the outbreak shutting down our economy.  And to be clear, the financial impact of COVID has been devastating.  Fortunately, the agricultural community has (so far) been spared from the worst of the impact.  But it does say something about our society, when a significant portion of the population is running that close to their financial edge.  Farmers are rather used to the concept of disaster striking – so having reserves that provide some time and space, so the best plan to move forward can be determined, just seems like prudent planning.

At the risk of diving into political theory, self reliance is a powerful concept!  It is so important to know your own family/farm financial position, and then take responsibility for managing it!  Understand that those marketing jingles that include any sort of idea that you ‘owe’ it to yourself (or your family) to purchase whatever trendy item or experience that is being marketed can safely be ignored.  We don’t ‘owe’ ourselves anything – except taking responsibility for our own financial position, and making sure that we know exactly where our money is being spent.    ‘Don’t pay a cent events’ on furniture / electronics, a new vehicle, well-deserved (!) vacations, the latest phone, and dining out are all luxuries.  And in farmer speak, luxuries are luxuries whether they are tax-deductable or not – farmers sometimes focus so much on NOT paying income taxes, that the ability to ‘write things off’, doesn’t necessarily make a discretionary financial decision a good one.  Yes, farmers work hard – and this is a unique industry with extraordinary challenges.  And I would suggest that it is equally important to ‘live a little’ and not be solely guided by a profit and loss statement.  But, the point is, we should all know our financial position BEFORE proceeding with discretionary purchases, so we understand the consequences to our bigger financial picture.

The last point (I promise,) that I’d like to make on the concept of emergency funds, is the importance of being on the same page as your significant other.  I am extremely blessed to have met Jeanne early in life (editor’s note: correct).  And even more fortunate that she is more frugal than I am.  Everyone has a unique upbringing and, as mentioned earlier, habits start young.  So being aligned in the household on the importance of saving (and having an emergency fund), was something we discussed in our pre-marriage counselling, and a topic we have certainly had to revisit over the years.  It takes discipline to be financially prudent – and we have certainly been tested along the way.  And frankly, purebred cattle is a crazy industry when you think about the logic behind spending (tens of) thousands of dollars on ‘genetic potential’.  Finding the right partner, and having an open, honest and collaborative conversation on finances is just such a huge advantage when it comes to managing the bumps on life’s journey.

So, my long, rambling message is actually pretty simple.  As tough as it may be to begin, set aside some money.  Start small, but make it a regular habit.  If you need to dip into the emergency fund, make a plan for replacing it (note to self: not exactly an emergency to ‘buy just one more heifer’).  Sacrifice a little discretionary spending today, for a little extra cushion in case things don’t go as expected.  Have a candid conversation with your spouse/significant other about money (and where it goes) in both your household and farm operation.  Give yourself some time to manage the curves that life throws at you.  And balance the needs of today, with the promise of (an uncertain) tomorrow.

Until next time,

Dennis