Life moves along smoothly—and then something happens that changes everything. For Gerardo and Mary Alice Avalos, it was when their then six-year-old daughter Isabella was diagnosed with acute lymphoblastic leukemia (ALL), the most common type of cancer in children. As you might imagine, it turned their lives upside down. Fortunately, they didn’t have to worry about money, because in addition to having health care insurance, they had planned for the unimaginable by building an emergency fund.
Mary Alice says Isabella’s diagnosis was the scariest moment of their lives. Until then, they had always felt that nothing like that could possibly happen to them. But once they got past the initial shock, they were able to rally and stay focused on helping Isabella heal, in large part because they were financially prepared. “I was so relieved that all my energy could go toward Isabella,” Mary Alice says. “Because nothing is more important to me than my family.”
Making saving a priority
Over 15 years of marriage, the Avaloses had made saving for the future a priority. It wasn’t always easy. Before they married, Mary Alice had incurred a fair amount of debt. But once married, the couple immediately started paying down her outstanding obligations and putting money aside. Gerardo paid close attention to their finances and anticipated expenses, guiding Mary Alice to understand the importance of saving. The couple still lives in the house Gerardo bought in 1994 when he was single.
Before Isabella, now 11, and Benjamin, now 8, were born, the couple had started saving for retirement through Gerardo’s company 401(k), stock ownership plan, and company stock options. Mary Alice funded a State Teachers Retirement Account. She is age 45 and Gerardo is 47, so they still have time to benefit from the power of compounded growth.
The Avaloses also chose to save for their children’s education through 529 college savings plans. They picked these plans for several reasons, including the tax benefits in their state, the low impact on financial aid, and the fact that contributions are not limited by the income of the account holder. Another great benefit is the ability to change beneficiaries within the family.1
Saving for a rainy day
Fortunately, the Avaloses began putting funds aside for emergencies as well. When they started their emergency fund, it wasn’t earmarked for any special purpose—they just wanted to be prepared for whatever might come along. There had been periodic layoffs at Gerardo’s company over the years, so he knew he could find himself out of work at any time.
Having a cash-reserve can help protect you against unexpected financial difficulties that can have lasting consequences, even if you feel you are in good shape today. A recent study published by the National Bureau of Economic Research and the Brookings Institution found that 50% of Americans—and nearly 15% of households earning $150,000 or more a year—couldn’t come up with $2,000 in cash to cover an unexpected auto emergency, medical bill, or home repair.2
How much do you need? Fidelity believes a good rule of thumb to follow is to have three to six months of living expenses tucked away in an emergency fund. One size, however, does not fit all. And the type of account may also differ. You will need to take into account your expenses, liabilities, liquidity needs, and other individual circumstances in order to get a dollar figure and an account that suits your needs.
Discovering the unexpected can happen to anyone
Having an emergency fund gave the Avaloses the flexibility to do what was best for Isabella, who was hospitalized immediately after the diagnosis and missed two-thirds of the school year while undergoing chemotherapy. Mary Alice took a leave of absence from her teaching position, losing a good portion of income for the year. Then three years later, Isabella relapsed and her leukemia returned. This again resulted in loss of income, and this time it lasted longer because Isabella required a bone marrow transplant.
A significant portion of the Avaloses’ savings went to out-of-pocket health care costs, so they know how expensive medical services and prescriptions can be. But as a result of Isabella’s illness, they learned how to lower these costs and get better value for their health care dollars. (For health care savings strategies, read the Fidelity Viewpoints article on how to save on health care costs.)
Isabella’s healing process took five years, but now the family feels they’re in the safe zone and Isabella is doing well. The doctors have given Isabella a good prognosis, and say her therapy is working perfectly. Isabella is strong and confident, and the family feels blessed and happy. Benjamin, who was affected deeply by Isabella’s illness, has resumed his role of keeping the family laughing.
Seeing their plan in action
Gerardo, who manages the family finances, says Fidelity made it easy for them to see their whole financial picture, even including the accounts that weren’t held at Fidelity, like Mary Alice’s State Teacher Retirement Account. So when Isabella was diagnosed, they knew they could get along without Mary Alice’s income. Knowing this gave the Avaloses a tremendous sense of peace and comfort, says Mary Alice. She adds that she no longer secretly wishes for a larger house and knows that all the compromises and sacrifices were the right choices.
Although the Avaloses didn’t go into debt, they did exhaust their cash reserves, so they’ll have to build these up again. Now that Isabella is well, the Avaloses’ retirement savings can again be a top priority. Also important to them is teaching the children about money.
Now the entire family has a monthly planning meeting to discuss their expenditures. They sit around the table with a calendar and make decisions as a family about how they will spend their discretionary budget for the month—from going out for ice cream to visiting the zoo. It’s an easy visual way of seeing what’s happening. Everyone knows what the upcoming expenses are, so there are no surprises. Mary Alice says, “Sometimes we can afford something one of the kids want, and other times we have to put it off. But it’s always a discussion and the prioritizing includes the kids, so they understand why they have to wait.”
Isabella and Benjamin say they enjoy the meetings. Of course, initially there was some bribery involved. But Gerardo and Mary Alice say it was worth it because giving the children a chance to offer their input also gives them a feeling of participation and includes them in the process. And it’s a great learning experience that teaches Isabella and Benjamin how to manage their money and avoid falling into debt.
Repaying kindness going forward
For years, the Avaloses contributed to charities and participated in fundraising events. When Isabella became ill, the tables were reversed and they found themselves on the receiving side. Now they have firsthand knowledge of the work these charities perform and the difference their support makes during critical times. The family feels a calling to pay this kindness forward by supporting the organizations that were there for them. Isabella received her bone marrow transplant at St. Jude’s Children’s Research Hospital in Memphis, Tennessee, so that’s at the top of their list of “pay it forward” charities they plan to contribute to. Another is the Make-a-Wish Foundation, which sent the family to Hawaii. There’s also the Bone Marrow Registry, where they found Isabella’s donor in less than 24 hours. Nor will they forget the individual people like the hairdressers who provided free haircuts, college kids who entertained the children at St. Jude’s, and all those who provided the simple things that everyone takes for granted.
It pays to be prepared
The Avaloses know from experience that no one knows what tomorrow brings. It could be something simple, something small, like missing a few weeks of work or fixing a car, but if you don’t have a cash reserve, even these events can be traumatic. Their motto is, “Always be prepared, then no matter what comes your way, you’ll be able to overcome it.”