Life will always try to catch you with your pants down. What better way to be ready for it than to have that reliable and comfortable underwear to keep your important things in order at any and all times? In finance, your everyday savings is that base layer that goes unseen, and is often (and should be) forgotten about, but is always there when you need it and helps keep things where they’re supposed to be.
It’s true that every day underwear aren’t really that fun or exciting but they keep you operating smoothly. Good underwear will make you feel secure and supported. And that’s exactly what a healthy savings will do for you as well. Not having adequate savings can be nerve wracking. You’re exposed, very little separates you from the rest of the world, and often it is just downright uncomfortable.
So what is a proper savings strategy? It’s one that makes you comfortable. Conventional knowledge proffers that you should carry between three (3) to six (6) months of your non-discretionary expenses as a rainy day fund. This is fairly sound advice, but fails to factor in personal aspects such as your outlook on the world or your job security. Are you the go-to expert in your field and companies constantly fight to hire you? You’re probably in the three month range. Do you have more robot coworkers than human and you’re a doomsday prepper? If yes then you might want to bump that number up to 6 months…maybe 9.
As far as “non-discretionary expenses”, these are the things that you have to pay each month. Your mortgage, health insurance, car payments, food bills, etc. These are the things that you absolutely have to have in order to not just survive, but keep working. Add all of those bills up, times it by 3 or 6, and that’s the number you’re supposed to have stashed away. We prefer to take that figure and add 10%. That way if something unexpected pops up like a car repair or medical bill you’ll still have a solid balance.
Saving isn’t sexy (and it’s not meant to be)
In the world of finance certain investments are like sexy lingerie. They’re exciting, risque (/risky), and everybody fantasizes about them. As fun as valentines garments are they don’t really do a lot of heavy lifting in your day to day life. Certain investments are meant for the long term, and to be used sparingly until then. Your everyday savings account, the boxers, briefs, bras, and panties of your financial wardrobe, are the true heroes that keep things where they’re supposed to be.
It’s true that every day underwear aren’t really that fun or exciting But, they keep you operating smoothly. Good underwear will make you feel secure and supported. And that’s exactly what a healthy savings account will do for you as well.
Know your expenses
As far as “non-discretionary expenses”, these are the things that you have to pay each month. Your mortgage, health insurance, car payments, food bills, etc. These are the things that you absolutely have to have in order to not just survive, but keep working. Add all of those bills up, times it by 3 or 6, and that’s the number you’re supposed to have stashed away. We prefer to take that figure and add 10%. That way if something unexpected pops up like a car repair or medical bill you’ll still have a solid balance.
That won’t happen to me
When people tend to think about their aspirations and goals it’s mostly positive. Rarely in the story of your future do you include traumatic events like an unexpected housefire, or your employer going bankrupt. Those sorts of events make for good movies, but in your version of the Titanic the ship made it to America, right?
We understand that it’s not fun to think about all the bad things that could happen to us, but the truth is that they do. Bad things happen to people all the time; sometimes for good reasons, but oftentimes for no reason at all. When these events occur they’re often very traumatic, emotional, and difficult to get through even without the added burden of financial hardship. So rather than rolling the dice and hoping it’ll all work out you should start preparing now. That way when the inevitable finally occurs you’ll be able to meet it head on.
Where to keep it?
Emergency funds should be kept somewhere safe and liquid. Liquidity refers to an asset’s ability to be converted to cash quickly. Your house, for example, is highly illiquid. Depending on the area you live in it could take between 50 and 180 days to sell your house. Clearly that’s not a viable option if you’ve got bills due in the next two weeks. Real estate is generally a pretty safe place to keep your money (not too many thieves take the whole house), but it’s pretty lousy in regards to liquidity.
So what about your retirement or investment accounts? Most equities can be converted to cash within a week. While it’s true that securities are rather liquid, they’re not exactly safe, at least for short-term needs. Imagine that the market just took a huge crash, and your employer went out of business in the resulting recession. That’s the scenario millions of people found themselves in during 2008 and even right now in the COVID-19 Pandemic (although the pandemic being a little different). They were pinned between a rock and a hard place and had to sell off their investments when the market was low, not a great strategy or sell of investments and miss out on potential big gains.
One of the best places to keep your accounts is in cash and cash equivalents. We don’t mean a bag that you stuff in your mattress (unless you really want to…), but more-so higher interest bank accounts, Certificates of Deposits (CD’s), Treasury Bonds, and money market accounts. These accounts are all known as cash-equivalents because they’re extremely safe, extremely liquid, and almost the same as cash. The upside of these accounts is that they offer a nominal growth rate so your money is going to work for you, but don’t expect these seedlings to turn into redwoods anytime soon.
Build your ‘base layer’
After you’ve decided your strategy the next phase is to start building. This will take some time so don’t sweat it if you’re not there, Rome wasn’t built in a day. Also don’t forget to splurge every now and then. We don’t mean go buy a new car, but maybe go out to dinner somewhere nice every now and then. Once you’ve built your ‘base layer’ to its proper size you should feel accomplished – you’re walking around the world with fresh undies friend. After that it’s time to start shopping for the sexy stuff.