Life Lessons 101

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

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

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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: Savers

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The first type of financial freedom I want to look at is savers. Mostly because this is the easiest one to implement. However, some may also say it also takes the longest to achieve financial freedom and won’t necessarily make you “rich”.

The saver is the person who creates a budget and sticks with it. This lets them control money instead of letting it control you.

By using a budget, they have money they can put into their savings account and use for either a rainy day, or to make that bigger purchase they want, like vacations, etc.

Because they budget and pay cash (i.e. not take out a loan) for most items, they pay less overall since they are not paying interest on their purchases. This means they typically have strong wills, forgoing impulse buys, because they are delaying their gratification to save, knowing not today, but tomorrow will be better because of it.

They will often shop sales ads, clip coupons, and know what items normally costs and it’s associated value. Because they know the value of an item, they often buy higher quality goods that cost more, knowing purchasing something once is almost always better than buying it again and again when it breaks.

This methodology is often touted by the likes of Dave Ramsey and his crew, as well as books like The Millionaire Next Door, people who belong to the FIRE (Financial Independence, Retire Early) movement, and others.

Pros

The great news is anyone can be a saver. You don’t have to earn a certain dollar amount a year to get to that point. Additionally, you don’t have to have a certain skill, possibly outside of basic arithmetic.

The other pro, is that you can start at any time. My wife and I sat down and budgeted our honeymoon before we were married, so we didn’t go into debt over it. It meant we didn’t go on a fancy trip to Paris, or Hawaii, but we stayed someplace nice, that we could afford, and still had a great honeymoon. It was a nice early on step, and while we only had a little saved, we worked at it, got better, and before long were able to save more.

The more you do it, the easier it is. If you’ve never had a budget, writing one and following one will be hard. But with each month, and each year, it gets easier and easier until you don’t even think about it. It’s just natural. With the other methods, you see coming up, there tends to be some up and down motions that you can’t control.

With each year, because it’s easier to follow, you’ll notice your savings will increase. Sure, a large expense will come up, just as it would with any person, however, you have the money ready for it.

The more money you make, the more you can save. This is where if you are also part hustler, or you have a good paying job, get an unexpected windfall, you are just that much further ahead. But it still works even if you only have smaller salary than others.

Saving is a perfect choice for someone who is risk adverse. As we’ll see in with Hustlers and Investors, they all take risks…risks that could cost them their money and they can’t recover. Saving money by buying frugally and budgeting takes no risks.

Cons

Let’s face it, not everything can be a pro, no matter how much I like it. (And as a saver myself, I like it and have my biases.)

Clipping coupons means you can live within your means and being financially free, but is rarely a way to being wealthy.

Some of your friends might make fun of you for not being willing to splurge on expenses today, because they don’t see a reason to live for tomorrow.

Because you are saving your money, it only grows slowly, especially at first, and especially as you have to pay down and finally off any outstanding debt.

Shopping for the best deal can take time. It takes time to clip coupons, comparison shop, and prepare a weekly meal plan, time that some people don’t want to put into it.

An unexpected major expense can side track your goals. As much as I hate to admit it, bad things sometimes happen. And sometimes they are outside of our control. One bad illness, losing your job, etc, can cause a financial problem that you can’t just budget around. Now as a saver will have a good budget, they should have insurance to help protect and cover problems like a car accident, or getting sick, but that doesn’t necessarily solve all of your issues – but they can minimize them.

The biggest con I see to be a saver, is for those people who take it to an extreme. I personally see this with some people in the FIRE movement, where their sole focus is on saving money, and to keep from spending anything. It causes them to sometimes be too focused, and they forget to have fun, and relax as they’re so focused on having money to retire early. You need to make sure you’re willing to live your life.