Life Lessons 101

Everything you needed to know, but was never taught in school.

40% of Americans can’t cover a $400 emergency expense

by Leave a Comment

This was the headline of article written in 2018, before the global pandemic of 2020, 2021,….

In talking with many people since then then, I’ve found that they tend to fall into two basic groups.

First – with the ongoing risk from the pandemic, how can you ever have enough saved, and why should you bother.

It’s easy to get down when you’re standing at the bottom of a financial valley looking up.

However, the second group stands in the same valley and thinks, “I’ve got to be better prepared.”

Many people I know are looking to save not just $400, which I consider the bare minimum for an emergency fund, but even more.

As the pandemic has shown, you cannot control what happens to you, but you can control how you respond.

I’ve known many people who have lost their jobs, had hours cut, medical bills, etc. The ones who were better prepared, always came out better – maybe not unscathed, but better.

I recommend three levels of savings.

$500 Saving Level

I recommend a $500 cash savings, be kept on hand. Now on hand for us, is in a small safe in our house. It is meant that we can grab it at any time, day or night, and in the midst of a big emergency, we don’t have to wait for a bank to open, or anything like that.

$500 may seem like a lot, but it isn’t too big. This is where being a saver can really help. Take a few months, save up some money, or sell a few items, to get yourself ready for your emergency fund.

$1,000 Saving Level

That $500 may seem like a lot, until your fridge dies and you have to replace it. A cheap fridge is $700, with larger ones being $1000 to $1200. Need four new tires, or a new transmission – here’s where the $1000 comes in handy.

I don’t keep this on me (or at my house). Instead, aim to keep this in the bank, in a savings account. It won’t grow much in this economic environment, but it makes it a little harder to spend, but still gives you easy enough access five to six days a week.

A $1,000 may seem like a lot, but once you save your first $500, the next amount will seem easy as you’ve put in place ideas on how to slowly save and build up that emergency account.

6 to 12 Months Salary

This seems nearly impossible when starting, but the pandemic has shown just how important it really is.

Many people before the pandemic, before a job loss due to the economy shutting down, were told 6 to 9 months, while many people have said that the global pandemic has shown how fragile the economy really is, and said that 12 to 18 months is what is really needed.

Personally, I aim for 6 to 12 months, as it’s easier to obtain, and as we’ve seen, even with things shut down, there is always things that can be done. It may not be the best job, or the job you want, but it can help slow the financial bleeding.

This emergency fund will be a bit different however. Since you, probably, won’t need to access it all at once, you can save and invest in mutual funds, or other safer style investment engines to help you get there instead of just saving the money on your own.

For myself, it took several years and lots of planning to get to save 6 months. Surprising, even though my salary went up, getting to the next 6 months was easier, since I was used to living on a budget, and we put most of the extra money from raises to the saving.

While we’ve only needed to use this money once due to a job loss, it was comforting to know it’s there, just in case, especially with the job market the way it is right now.

What to do with that Stimulus Money?

by Leave a Comment

Here, and because of the COVID pandemic, many American’s have received a second, or like me are waiting to receive their second stimulus “check”. Ignore the fact that it’s actually, most likely direct deposit for you, or that many tens of thousands had their second “check” held up due to problems with the IRS putting wrong information in and nothing being done…

The real question here is “what to do with it?” Well, like so many financial questions, a lot of this has to do with your current financial and employment status. A year ago before the pandemic started, I would have said one thing, however, that was then, and this is … now.

So let’s break it down based upon several common situations.

I’ve been out of a job for a while

OK, this is the worst case scenario. Unfortunately I know several people who have been out of work for six to ten months at this point. Unemployment doesn’t or just barely covers the necessities. Here you can look at applying that money to the necessities – which I equate to food, shelter (including utilities), and (necessary) clothing.

Getting that money to make sure those bills are covered is essential. You don’t want to risk losing your residence or going hungry. Don’t do what someone I know did though and splurge on fancy foods. A delicious wild caught salmon might have made for a wonderful meal, but being able to add to your food budget for several weeks is even better.

While many states have enacted, or even extended, no eviction notices during this time, you don’t want to be staying in a place where you haven’t been able to pay your rent. As soon as they can, they will be coming for their back rent and/or evicting you. And if you list them as a previous place of residence, don’t expect a glowing review.

So focus on the real needs, and making sure you have what you need to survive.

Recently lost your job…or think your job’s a risk

The second category is you recently lost your job. I know several people who’s work kept them on for several months, but due to extended lock downs, etc the company either went out of business and/or had to start laying off people.

Maybe you got a severance (one person I know got several months salary) – maybe you didn’t.

It’s tempted to see that extra cash and buy the new PlayStation 5 or something else. However, since no one really knows what is going to happen or how long you will be unemployed, I would put this is savings in case you need it in several months. You can always splurge later on when you find a new job, however, just because you could find a job in 2 weeks prepandemic, doesn’t mean you can now. So be safe, and use that cash later on in one of the following scenarios.

Do you have an emergency fund?

You’re currently working, and feel your job is safe for the next six plus months. This means you see people buying from your company, other’s haven’t been laid off, etc.

But do you have an emergency fund. This isn’t the “lost my job” fund, this is you wake up and find out your fridge died over night, or you head to work and your tire hits road debris and needs to be replaced…

I recommend two sets of emergency funds actually. The first one is for $200. I recommend you keep this in cash in a safe place in your house. A safe, or a good hiding place is best. This is the “I need right money now, and the power is out so I can’t use my debit card” money.

The second I recommend another $800-$1,000 to be kept in the bank for one of those above mentioned emergencies.

Don’t touch that money unless it’s an emergency.

I have an emergency fund. Now what?

So your emergency fund is established. Typically I would recommend paying down any outstanding debts. If you have a small debt that could be covered maybe pay that off, so it’s one less thing hanging over your head.

However, for most people, I’d recommend putting it in the bank for a rainy day. I know several people who thought they’d have jobs even during this situation, or thought they’d be called back from furlough find themselves without.

I hate to admit it, but no job is completely safe, no matter what. So until this is over, keeping some money in reserve for a worst case scenario, might be the best option. Once it’s over then look at pay down your debts and/or creating a three to six month savings in case of job loss.

Typically three to six months is all that is needed, however, many financial advisors right now are suggesting nine to twelve months until the pandemic is under control.

Prepping for the (Winter) Storm

by Leave a Comment

One of the boring things we’ve got to do as an adult is be prepared for the storms in life. Some are big, some are unseen, and some we know about…

That’s the ones I want to talk about right now. The known storms that come into our life. Like an actual storm. We’re scheduled to get snow and ice tomorrow, so like an old, boring adult, I started to get ready.

I made sure we had wood for the fireplace in case the power went out, had dry goods that don’t require cooking – OK those were snacks, as well as making sure I had fuel for my camp stove in case I lose power and need to cook in it.

Batteries for the flashlights and cell phones are charged, as well as making sure we have gas in case we can’t get fuel in for a few days.

99% of the time, these preparations are not needed, and boy am I glad for that! However, it sure is nice being prepared for when that 1% hits.

I see too many people who are not prepared and that causes nothing but issues. And sure, there are things we might not foresee. But luckily we have weather stations and channels to help us with these storms that we can and do see.

Financial Freedom Types: Investors

by 2 Comments

The third type of financial freedom one normally finds, is in Investing. This is the Warren Buffets of the world, and many more who aren’t quite as famous, but still doing really well for themselves.

The idea of putting your money in a company or other entity by buying stocks and/or bonds, or other type of financial product, in an effort to see a positive return and have your money grow.

This is similar to the idea of putting your money in a savings account earning interest, however because savings accounts pay so little now a days, you have to find other methods.

There are various financial tools you can use for investing. Some have more risk than others. I’ve listed common financial tools from low risk to high risk below. Note that the lower the risk, the lower the reward, and that there is not a direct line from risk to reward, nor is everything risk free.

  • Savings Account
  • Certificate of Deposit
  • Treasury Bonds
  • Municipal Bonds
  • Bonds (high grade)
  • Bonds (junk)
  • Large Cap Stocks
  • Growth Stocks

Note: I didn’t include mutual funds as they are just collections of bonds and/or stocks usually. That means instead of buying a single stock, you buy into a “fund” which has dozens of different stocks. The idea being rarely would they all go up, or all go down. Some will go up, and some will go down, hopefully more positive than negative overall.

How much money you make is dependent upon two things. First the rate of return. On savings accounts, CDs, Bonds, they are typically fixed. However on stocks they vary quite a bit of their life time, sometimes having a positive rate of return and sometimes having a negative rate of return.

The other variable to how much you make, is how much do you invest. The more you invest, the more you can earn, or lose. The difference in money you at the beginning and end of the period of time of an investment is considered the return on investment. Your return may be positive (you make money) or negative (you lose money). Generally, the higher the risk, the more potential for return, as well as loss.

If you put those two elements together, you can see how your investment works, or doesn’t work. If you put in $10,000 and get a 2% return, you make $200. Put in $100 with a 20% return, and you’ll only make $20. So even though you had a much higher return, because you couldn’t invest as much, you didn’t make as much.

Pros

With the rise of Internet Investing firms, there are lots of low fee or no fee investment firms that allow you to buy stocks and bonds with little overhead.

Investing allows you to earn “passive income” i.e. to keep earning without direct constant input from you.

The rise of mutual funds allows you to not have to know as much about direct companies, investing itself, and provides some safety in investing.

Investment gains (especially through dividends and when bonds and CDs mature) can be rolled into more investment, to increase the amount invested.

Cons

As with some Hustler examples, you can lose money, especially as you take on riskier investments hoping to make better money.

You must have “seed” money. That is, you must have a certain amount of money to start with to invest, in order to make any money.

Many investments are long term, so you may not see a return on investment for a while.

Many books/articles on investment quickly go out of date because of changes in the financial environment between rules/regulations, market forces, etc.

Investing in an individual company can take lots of time to research and you may have found you pick a loser, and have to start all over again.

Certificate of Deposit

by Leave a Comment

A certificate of deposit (CD) is a financial tool most commonly sold by banks and credit unions (seller).

The purchaser, you for example, buys a CD for a set amount of time called the term. The term length is typically, anywhere from 1 month to 10 years. If you keep that CD for the whole time, you will be paid a fixed interest amount that was set when the CD was set up.

One nice things about CDs is that they are protected by the FDIC for your bank or NCUA if you get it from a credit union, just like your savings and checking accounts.

Because you cannot redeem your money for a (long) period of time, the seller will offer you a higher rate of interest than something like a savings account which while a hassle, allows you withdraw money at almost any time.

CDs are considered non-liquid assets, since you cannot easily turn them into cash without penalty – usually just losing any interest accrued.

CDs are considered a very safe investment, and because they are safe, and because of other interest bearing factors, the interest rates are very low for CDs right now.

The other factor that controls the interest rate of a CD is the term length. The longer the term, the longer you have to wait to gain access to your money again, therefore the seller will pay you a higher interest rate. That means a CD which has a 6 month term, will not pay nearly the interest rate of a CD with a 3 year term.

Even with the higher rates of a multiyear CD, you may not find it to give you enough interest to make it a worthwhile investment.