Pandemic Lessons For The Young: Start an Emergency FundCliff Broetz, CSA, Wealth Advisor
It is heartening to read some good news lately. There has been far too much news of the opposite variety during the COVID-19 pandemic, to understate the obvious. But talks of continuing to ‘flatten the curve,’ advancements in science, and gradually re-opening businesses are starting to creep into the daily news—and not a moment too soon.
One of the key financial advice takeaways I have from all this turmoil is the overwhelming need to have an emergency fund.
While it’s been many years since I took my licensing courses and exams, I do recall the recurring theme of having an emergency fund, suggesting six months expenses as the right amount. How many people actually follow through to save for an emergency?
I have read countless heart wrenching stories in the past six weeks or so about ruined lives and businesses as this shutdown has wreaked havoc with people’s finances. Mortgages won’t be paid, taxes won’t be paid, and rent can’t be paid. Going beyond that, there will be cities and municipalities whose finances may buckle and now seek big government help.
Not to minimize the pandemic and the pain it has caused on multiple levels, but why would so many people be utterly ruined by a month or two of lost income? — No emergency fund.
The absolute best piece of behavioural finance advice I ever read, and have ever dispensed, is to shift ones habits, at a very early age (I’d suggest on your first paycheque and every one thereafter) to save first and spend the rest. The notion of saving the ‘leftover’ cash each month does NOT work. And therein lies the problem. Allocating ones income to housing and autos and food and fun tends to use all the money. We simply grow our spending to match our income. Many do much worse by spending 110% of their income, then run up credit card debt and credit lines. We spend first and save the rest – that’s the tendency.
Reverse this right out of the gates and never be a victim to a market downturn or a life event that alters income. Save first, spend the rest. The notion of saving 10% right off the top has such power. Then grow spending with the remaining funds.
There are further strategies that flow from this saving first approach. Like allocating to retirement plans – but first, build that emergency fund. Forget that new flat screen TV, or that new mobile phone, or that upgraded new car—those things can wait. Emergency fund first, saving for long term future second, then go make the discretionary purchases.
If money comes off the top first and gets deployed properly, you will easily adjust to spending the leftovers. I know this is dull and boring, but if I was ever limited to giving only one piece of financial advice it would be this one. When it comes to personal finances, boring works. Over time, boring is powerful. It is empowering. It’s like being bulletproof.
There is little difference for a business owner. Businesses must have a cash cushion as there are many speed bumps along the way. It can easily be argued that if a business has zero cash cushion, maybe you shouldn’t be in business. Governments are an entirely different story, but they shouldn’t be. Running deficits in the good times does not allow for any wiggle room in the tough times. Governments need to be counter-cyclical and set money aside in the good times for spending in the tough times. Running deficits year after year is hugely problematic. A subject for another day, but suffice it to say we must all insist that our governments manage money (our money) better.
For now, do what you have to, early in life, to take control of your finances. Save 10%, allocate for emergencies and future retirement, tuck these funds away to make them harder to access, and make your money work for you (this is where your financial advisor comes in).
Stay disciplined, never waiver. This is key to living wealthy. I promise, you will thank me later, if you remember where you read this. Send this to your kids, or your grandchildren. We are still self isolating at our house. Having some of our freedoms and liberties removed does seem odd for sure, but our family is close, the weather has been great, and we have plenty to be thankful for. My only complaint is that I need a haircut. Looking pretty shaggy. Maybe I’ll pierce an ear to complete the look.
Stay well and we very much look forward to seeing you soon.