investing

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

August 16, 2021 by Walter Wimberly 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.

Financial Freedom Types: Investors

August 14, 2020 by Walter Wimberly 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.

Three ways to Financial Freedom

August 7, 2020 by Walter Wimberly Leave a Comment

If you read through many finance books each one will offer you a way to reach “millions” or “financial success”.

Of course, “their way” is the “only way” and all you have to do is follow their method. Unfortunately, the time it takes to write, edit, and publish a book, things often change and that exact way doesn’t work anymore.

With that still, you’ll find that they generally fall into one of three basic categories for helping you reach financial freedom, and I’d like to go over each of them with you.

I’ll then break it down a little further in follow articles talking about the pros and cons of each methodology.

The basics of these three ideas can be grouped into the Hustlers, the Investors, and the Savers.

Savers

Savers are the ones who can control how much they spend. They budget well, and know how to stretch it to get every penny’s worth from that dollar. They control their money, instead of letting it control them, and they do well because of it.

Let’s look at the savers, and how they get to financial freedom.

Hustlers

These are the people who look to earn more income, either through fast track promotions and raises, side hustles, or starting their own business. They’ll simply out earn the standard person and make their money that way.

Let’s look at the hustlers, and how they get to financial freedom.

Investors

Investors look to have their money make money for them. Either through the use of compounding interest (less likely) or investment in stocks, bonds, etc.

Let’s look at the investors, and how they get to financial freedom.

Inherit – is missing

There is two big reasons why inheritance is missing from this list. First, you can’t write about how to inherit money, you’ve generally got to be born into a family with wealth for that. The other option of course is to marry into that type of money, but there you are either in it for a long time, or your goal is to marry someone who is older and you expect them to die soon – this will often lead to legal battles and has various ethical issues which we don’t want to even begin to go into.

However, there is also another big reason you don’t see a lot of books for that – most millionaires (at least in America) didn’t inherit their wealth. In fact, according to Chris Hogan, the author of Everyday Millionaires, less than 10% of millionaires inherit their wealth. And over 70% inherited nothing at all. The rest had to earn it via one or more of these three methods.

That means reaching millionaire status, or some level of financial security, is generally available to most people.