You’re ready for the unexpected

In this episode, hosts Whitney Reagan and Dan Sharkey discuss the importance of planning for the “unexpected”—from sudden household emergencies to major life transitions. Moving beyond the traditional scope of budgeting, they emphasize the necessity of performing an audit of your fixed, mandatory expenses to determine your true liquidity needs.

Learn why maintaining a dedicated, accessible emergency reserve is essential to weathering life’s inevitable speed bumps without derailing your long-term financial strategy or adding unnecessary stress to your personal life.

Transcript

Daniel Sharkey: Today we’re here to talk about the unexpected. And you’re going to love what you hear next.

Whitney Reagan: Welcome, welcome. Thanks for joining us. It’s another episode of Your Life Simplified. Today, I am joined with my best work buddy, Dan Sharkey. And we’re going to talk about how you know you’re ready for the unexpected. Dan, how are you today?

Dan: I’m great. How are you doing?

Whitney: This has been quite the week for me, and it’s very timely that we’re talking about the unexpected. Or maybe in case of emergency, we could call it. I was attacked by a bat in my backyard. And when I say attacked, I am embellishing a tad just for the story. But we have bats in our backyard because we have a pool, and bats are really great to have around if you have a lot of mosquitoes. They never bother humans. There was one, however, that there was something not right with it.

And we were avoiding that bat because I think that he—I say he, I act like I knew this bat—and I think that the bat was possibly dying because it was going way low to the ground and flopping around. Anyways, all the kids were back inside. I was back inside. I had to run back out to grab something. And this bat landed on my back and started flapping around in my hair, and I thought that it was stuck in my hair.

I was petrified, but I didn’t necessarily get bit. I did go through a rabbit hole and just like a tailspin of Google. So don’t Google after you like have a run in with a bat.

Dan: Subreddit trying to figure out how to not get attacked by bats. We are a full-service wealth management firm here at Mariner. So, if you’re going through a job change or a huge life event, or if you get attacked by bats in your backyard pool, we’ve got you covered.

Whitney: So, the real reason that we missed our recording session last week is because I had to take precaution and head to the ER to get a rabies vaccine, just to be safe.

And then I woke up this morning with no power in my house, another unexpected event and had to get ready in the dark.

Dan: You’re just hitting home runs this week.

But this does bring up a very important topic. And we’re using you at your expense to highlight something that is important. And you touched on it, is that planning for the unexpected—no one plans to have their power go out, no one plans to be attacked by bats—Batwoman—in your backyard.

Whitney: You had to slip that in there?

Dan: Oh, of course, but it does bring us to something that I think is important. And that is, these things aren’t things that you plan for. They’re not things that you can really predict. You never know when they’re going to happen. And they could be something as—I mean, obviously what happened to you is serious, and you’re obviously going to get taken care of.

It’s not nothing, but it’s not as serious as, you know, losing a loved one or a job or getting into a car accident or something happening with your kids or something happening at home that needs an immediate repair. So, at that lovely story at your expense, we do want to talk about what you can do to prepare for those things. How you should be thinking about them?

And what are some of the items that we walk clients through to make sure that they’re not being overlooked? You read stories all of the time, whether it’s on CNBC, The Wall Street Journal, whatever your news source is, that a large percentage of Americans couldn’t find $500. And I think part of working with Mariner is to make sure that you are prepared for those scenarios.

So that’s what we want to walk all the listeners through today.

Whitney: Yes. I’ll just start by asking you a question, Dan. If you start a relationship with a client, how do you bring up the conversation in preparing for the unexpected?

Dan: The first thing is to try to—and this is going to sound obvious, but to really enforce that you don’t know what that event is going to be. By nature, these things are completely unpredictable. They may never happen, and people often solely focus on what the status quo is and never expect anything else will change.

It’s not necessarily because they’re doing anything nefarious, or because they’re ignorant to the fact that the unexpected could happen, but it’s not something you can know or predict. And I think that just puts people into a false sense of security. And I think it really can be detrimental to the long-term financial health at least.

Whitney: So just starting with awareness of it, bringing it to attention.

Dan: Correct. Just knowing that it exists, even if it’s not currently present. Whether you’re talking about your portfolio or whether you’re talking about things that will happen in your personal life or unexpected spending needs for whatever the event may be, the risk is still there, even if it’s not currently present.

And I think that’s a really important point, is that risk doesn’t go away. It just sits under the surface. And you have to be very much like a Boy Scout. You have to ensure that you have enough firewood to see those situations through. Because I think one thing that is often misunderstood and poorly executed by individuals who don’t work with someone is the poor recognition that, what is my next step in the event that something does happen? Where is the money going to come from?

And sure, in some cases it can come from your portfolio, but we find there’s a gap between what people think that they have and what they’ve actually planned for.

Whitney: Can we dig deeper on that? Maybe unpack that a little bit? What do you mean—they don’t know? Maybe they have less? Or is it that they don’t have that actual liquidity that they need? Because a lot of times people’s net worth or a lot of their net worth is in their retirement funds, and maybe they can’t access those yet.

Dan: And we talk about this all the time, the two primary reserves that people have. And I’ll use people younger in their career who haven’t built up the net worth in which these things become a little bit more easier to address. Think about people our age and younger. We’re not going to comment on how old we are, but, you know, mid-career and early career to use a broad term.

Whitney: We’ve said it before. We’re both 40. Don’t be scared.

Dan: I know, I just don’t want to think about it. It makes me sad. So, people mid-career, early career or still kind of building their wealth along the way. Maybe they have small kids at home, two spouses working and still really building all of that career capital and personal capital to make sure they’re addressing those things.

So, a couple things to think about that are really helpful to understand and to really gain awareness of. The first is simple, is what are your fixed expenses versus what are your variable expenses. Right? So fixed expenses—your mortgage, debt payments, insurance, any healthcare related costs, anything that you are required to pay for every month.

And I want to be strict on that. And I would probably include cell phone and utilities and home internet at this point because I don’t really think in the modern world you can live without those things.

Whitney: Well, this morning I did, just without my power.

Dan: Well, you’re going back to caveman days, getting dressed by candlelight. But those things are—you have to pay for those things every month. But what percentage of your total household income do those things occupy? Is it 50%? Is it 80%? Just some sense of knowing what you need to live on every month to get your basic necessities met and be strict on what those necessities are.

You have to get to and from work. You have to have child care. You have to pay all your liabilities that we talked about. You don’t have to go out to eat. You don’t have to go to the movies. You don’t have to do those other things. So be strict on what those are and what percentage of your total income does that actually occupy?

Whitney: Sorry. I’m just making sure we emphasize this. So those are your fixed expenses. And maybe we can call those like your mandatory things.

Dan: Absolutely. Things you must pay for every month. And we’ve talked about this a million times, but the higher that number gets, the less margin of error that you really have. So that’s an important—everyone should know that, but for this topic in particular, having a good sense of what that is the first step.

And the reason that that’s the first step is because you need to have a reserve in the case that something were to happen. And for two income households, typically I would recommend six months of expenses reserved away of that number. Right? For a single income household, I would say at least nine months of expenses.

And the only reason that there’s a difference there is if you think about it from a probability standpoint, unless you work for the same company or have some other way that that that income is intertwined, the odds of both people losing their job or getting sick or doing something like that is rather low, so you don’t need to overdo it.

But these are the data points that you need to understand what you need to have set aside. What you need to have access to. And that runs the gamut from something as serious as losing a job or getting ill, to having your air conditioner unit break, or your roof break, or getting into a car accident or something that’s going to require a significant amount of capital outlay.

Now, there are always things that you can do in an emergency, such as relying on credit cards, but that’s not a plan.

Whitney: That’s a kick the can down the road.

Dan: Exactly. That’s just kicking the can down the road and just creating more problems. So, from us, we really want to make sure we have that set aside.

As soon as those fixed expenses—and the reason that we brought that up first, because it’s so important—as soon as those get more than 50% of your monthly income, you must have a plan, because those expenses are by definition, are going to need to be paid every single month, or you’re going to experience a very significant issue in your life financially.

And what I was saying earlier is that I know the majority of people that listen to this podcast are here to get financial tips or thinking about their personal plan or how they could manage their wealth. But I beg you to not ignore the social stress, and I’ll use that word social, for lack of a better word, that will be caused by having money be very, very tight.

And for people that have the ability to do this and have just ignored it or not made it a priority. That social price that you will pay, whether it’s stress with your partner, whether it’s stress that you have with your children, whoever is on the receiving end of that stress lever, it’s one of the biggest reasons for divorce. It’s one of the biggest reasons friendships dissolve.

Money has a common thread through all of these things. A hugely important point that I would make is there is a tertiary impact that you will face if you don’t take these steps now and at the expense of being perfectly efficient. I know we talk a lot about cash, and we don’t want cash dragging portfolios and all this perfect portfolio optimization.

You need to view the money that we’re talking about totally in isolation. It’s not your long-term portfolio. It’s got nothing to do with your long-term portfolio. Yes, having very little cash in your long-term portfolio is a very good idea, but don’t try to overly optimize your entire balance sheet to such a degree that you leave yourself no room for error.

That’s really where people get jammed up.

Whitney: So, when you say it’s isolated, is this your emergency fund?

Dan: Yeah, exactly. Emergency fund. Liquidity fund. Liquidity buffer. There are tons of different terms for it. But immediate access to capital where you can get it. And how much do you actually have? The other thing I’ll mention, the reason I say six months, just going back to the two income households, is because that gives you enough time to not totally disrupt your life.

Meaning that you don’t have to take your kids out of daycare. You can still go look for a job. You can still put gas in the car to go to interviews and things like that. You’re buying yourself even more time to take a breath. Assess where you are. Figure out what comes next. And that wiggle room, I think, is incredibly important because again, when the clock is ticking and you have a very compressed schedule, it can get even more stressful.

Whitney: That was a good tip for this episode. I don’t think that we need to go any deeper, but I think it is important for people to understand this isn’t just thinking about budgeting. It’s really taking an inventory and an audit of your fixed expenses or your mandatory expenses and figuring out what you need to live. And to get by.

Dan: 100%. This is not budgeting at all. Budgeting is trying to determine how much of each thing you want to own per month. I love the word that you just said—is audit. Audit what your liabilities are and expand it beyond debt. Right? What do I have to pay for every month relative to my income?

But that’s a crucially important step, and I think that’s the perfect word to use.

Whitney: And that’s when you know that you will be ready for the unexpected.

Dan: Exactly. So, the next time you get attacked by bats, you said, you know what? Thank God I listened to Dan and Whitney because I got everything cleared away.

Whitney: Great ending. Okay, thanks to everyone for listening. We hope that you liked what you heard, and if you do like, subscribe or follow on wherever you listen to your podcasts. We hope you have a great rest of your week.

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