Even typing out “2022” feels weird, I can’t imagine what it’ll feel like in a little over 4 months! I figured it made sense to start practicing before January, as to not spend the entire month typing or writing 2021. Nonetheless, an important phase of the Order of Wealth is the “Control Phase.” If you aren’t familiar with the Control Phase-- or the Order of Wealth-- I suggest going through it, it’ll make more sense that way! A crucial step inside of the Control Phase is the third step where you build your emergency fund.
If an emergency fund is unfamiliar territory, you’re not alone. In a recent study conducted by www.bankrate.com, 51% of Americans have less than three months of expenses set aside in an emergency fund. In the same study, nearly 25% of Americans don’t have an emergency fund at all. In my experience, people either don’t see the importance of liquid emergency savings and are “investments” heavy and/or don’t have the cash flow to beef up their emergency savings.
Wherever you may lie, I want to offer up a few ideas on how to beef up that emergency fund so you can move on to the “Capitalize Phase” of the Order of Wealth and sleep a little sounder at night knowing you have a fat emergency fund available when you need it!
Audit Yourself/Get Laser-Focused on Your Budget
Before I get in depth with this, if you aren’t on a budget, get on one—now. If you are on a budget, you should be revisiting it on a monthly (or quarterly) basis. Revisiting meaning, to be as effective as possible, you must be constantly changing and making improvements to your existing budget. In fact, that’s really the only way to effectively stay on point as far as budgets are concerned—constantly revisiting them and adjusting them.
If you aren’t a fan of sports analogies, you’ll hate this one:
Budgets are a lot like halftime adjustments during the big game: if things aren’t going well, it’s probably a good idea to change the game plan rather than continue running the ball when the opposing team is stuffing the run at the line of scrimmage, just saying.
Sports analogies aside, analyzing where your budget is, where you want it to go, and actionable steps to get there is vitally important. Budgets aren’t meant to be set in stone—that’s one of the main misconceptions of budgets. Budgets should be flexible, dynamic, and ever-changing based on the climate of your own personal economics.
For instance, one of the slowest parts of the year for me is in between Thanksgiving and New Year’s Eve. Why? Because people are reactive by nature, rather than proactive and that part of the year is the most expensive for most households. Because of that, it can be difficult to discuss finances during that time, so many people out of shame or guilt would rather not talk to their financial professional, thus my schedule is usually lighter than I'd like it to be around that time of year.
Proactively budget around the undulating flows of life and you’ll have nothing worry about! After all, the idea is to free up cash flow for your emergency fund, right? Budget for it.
Analyze Your Investment Contributions
This is an unpopular opinion, but more often than not, I’ve analyzed someone’s financial situation many times where contributing to a 401k or Roth was what’s holding them back on a month-to-month basis. Meaning, because of their contributions to their retirement account, consumers find themselves broke at the end of each month.
Of course, there's exceptions to the rule—if you’re budgeting to zero every month and this is your form of “paying yourself first,” then go crazy! Most people are simply turning on an “out of sight, out of mind” concept where their paycheck automatically contributes to their retirement account, and they don’t know the difference, thus they are confused as to why they can't overfund their debt pay down or don't have any money leftover to go out to eat.
If you’ve read any of my blogs, you know I’m a fan of cash flow. Cash flow in the sense that you are being disciplined with your dollars and you have a windfall at the end of each month. In many cases, there’s an argument to be made that cash flow to go towards debt and/or your emergency fund instead of your investment accounts makes sense.
Keep in mind, I’m not anti-market or anti-investments by any means—I’m pro cash flow. If turning off your contributions to your investment accounts put you in an advantageous place in the long run, it’s a good move.
After all, don’t all the fund managers and financial advisors constantly preach, “short-term sacrifice for long-term gain.”
Yes, they do.
The lesson here is simple: don’t go into debt—use a credit card-- to get out of trouble when you don’t have an emergency fund-- but on the back end have an investment account that is still a speculative asset at best. Your emergency fund should give you peace of mind-- your investment account shouldn't be a stressful contribution, but an exciting one!
Pay Yourself First
One of my favorite quotes I’ve always tried to live by is “when there is a problem, lean into it—then go through it.” Meaning, if there’s an issue in your life, it’s better to go directly at it and attack it head on than to skirt around it. This is loosely how the pay yourself first concept works.
Traditionally, the pay yourself first concept would include paying toward a retirement account or saving up for the down payment on a house, for instance. The idea is the same here, you are just putting it toward your emergency fund.
The best way to do this is to reverse budget and decide how much you can put toward your emergency fund to reach your savings goal. So, for instance, you’d decide a percentage of your income you’ll “pay yourself first” before you pay any other bills or expenses. You take 20% of the $4,000 you’re bringing home monthly and “pay yourself first” for a year, you’d have $9,600 in your emergency fund. Which, coincidentally, is right at about the $10,000 mark—the mark that we generally will say “okay, it’s time to start investing now.”
Nonetheless, the pay yourself first method should be something you adopt for life. However, if you haven’t already, this could be your opportunity to not only beef up your emergency fund, but also practice a new habit that will positively influence your entire life moving forward.
Wrap Up
Hopefully this gives you a few actionable items that you can practically apply to your current financial situation! There’s never been a better time than today to start taking your personal finance seriously and drafting a plan to dominate your short-term goals.
Remember, most people think about the end goal—a fat retirement, complete debt freedom, ten investment properties—but hardly anyone gets there because they get so overwhelmed by the work that goes into it. It takes the small, seemingly overly simple actions to get towards your goal(s). Keep that in mind as you consider the next few days, weeks, and months ahead.
What you do today matters more than you know. Don’t wait for the “perfect time to start”—that time will never come! Start today and you’ll thank yourself tomorrow.
For more information go to www.lyvfin.com and set an appointment with a professional.