Friday, March 16, 2018
The Real Reasons for a Rainy-Day Fund
I speak about it all the time but there is a reason for it. Before I got into the financial industry I saw the effects first hand. Not having money for a rainy-day was a bad place to be. It wasn’t a big deal to me when I didn’t realize I needed it. Suddenly when I needed funds and they weren’t there, it became a huge deal. Stuff would consistently come up and I was always unprepared for it. Debt piled up and the cycle continued. You know you are in a bad spot when you become an expert on adding a positive number to a negative number, meaning you add your paycheque to your overdraft. It never would get above zero. Now that I am in the financial industry I see it even more. People are terribly unprepared for life’s curveballs and it is very scary. We are concluding Back to Basics Week at Budget Boss and I felt it was important to end the week with this post. Today, I am going to tell you the real reasons for having an emergency fund and why having one will change your life dramatically.
How often do you go out or walk into a store and know you have no money to do what you are about to do? I remember the days of playing credit card roulette. Being in the restaurant industry for many years I saw a lot of it as well. Being declined for a $17 bill is rough. I always would think: Why would anyone go out if they had less than $20 to their name? This is why having an emergency fund is so important. I make the decision to go out before the night has even started. I assume every time I get invited somewhere it is going to cost money, possibly a lot of it. Once I am out, I do not worry as much about spending. The decision is made beforehand as I evaluate if I have the cash flow to that week/month to do it. When you have an emergency fund the decision becomes whether you want to dip into it. When you don’t have one, the decision becomes whether you want to celebrate your poverty. I have set my rainy-day fund at a certain number and to use it for anything other than an emergency would be blasphemy. If I do choose to use it, I replenish it as soon as possible. By having this sort of system, you will never miss a fun night. I do warn you, however, when you get to that point, fun nights won’t interest you as much. It’s a good thing, embrace it.
Medium sized purchases
Large purchases always pack a punch. The good thing about them is that you usually see them coming. To me, it is the medium sized purchases that really kill you. It is like death by a thousand papercuts. A thousand dollars for this. Three grand for that. Five hundred for something else. It never ends, and it really stings. Almost every day I hear of someone complaining about a medium-sized purchase pissing them off. Having the rainy-day fund to cover those $500-$5000-dollar emergencies is crucial. A broken transmission should not ruin your life. It should not ruin your year either. At worst it should ruin your month. If you are consistently saving and adding to your emergency funds, all a medium-sized purchase will do is set you back a few months. Yes, they will still piss you off, a lot. But now you will grit your teeth, write the cheque, and move on. I promise you this: If you cashflow medium-sized purchases out of an emergency fund, a year later you won’t even remember it happened. It will have been just another blip on the radar.
Yesterday another “shocking” report about Canadian Household Debt came out again. Seems like not much has changed and we are still in over our heads. Ever wonder why that is? Some will say it is because wages are low. Others will say it costs too much to live. I say this. We cannot control what things cost. We cannot control what someone is willing to pay us. What we can control is what we spend. What people don’t seem to understand is that the less money you earn, the less debt you should have. Sounds simple right? I would rather make 200K a year and have 200K in credit card debt than make 40K a year and have 4K in credit card debt. Society has taught us that it is normal to live lavishly even if we are poor. This is not true. When you have a lower income, it becomes crucial to have a rainy-day fund and not go into debt. Someone who makes 15K a month can chill out for 3 months and save 20K. Someone who makes $2500 a month cannot. Having the emergency fund will allow you to borrow from yourself and not from credit. If you have no money in your bank account, your mission should be to build your account at a vicious pace. Sacrificing a year of your life to do that will allow you to not sacrifice several years of your life to pay off debts. It is that simple.
Catch up on opportunities
Some people have all the luck. I always think the early investors in companies like Facebook, Amazon or Google. These people invested money and hit the lottery. If I told you that if you gave me 10K right now, in 10 years I will give you back 1 million, you would say “where do I sign?” The question is: Do you have 10K? If you don’t, you can’t participate. “That example is so rare, it will never happen to any of us.” True, it probably won’t. What if I told you that you could give me 5K for your RRSP and I would give you a better tax return come March. Or what if I told you that you could give me 25K and I could give you a rental property that would give you income for life? Or what I told you that if you gave me $250 a month for 30 years you would have a million dollars? These are all opportunities. They might not feel like them because they don’t have that “Facebook” or “Bitcoin” feel to them. Those opportunities are one in a million. These opportunities are ones we all have. Having an emergency fund will allow you to take advantage of the everyday opportunities that are all around us. Don’t you hate saying, “If I only had the money?” Yep, you do. Don’t say that anymore.
The number one reason for having an emergency fund is……
Think about how stressful the last 4 things I talked about were. Deciding whether or not you can afford fun. Having to make emergency purchases. Controlling debt levels and taking advantage of opportunities. Think of all the thinking you have to do with that stuff. Think about this or think about that. You know what is better than thinking? Not having to think. Having a rainy-day fund means you don’t have to think about the small stuff. You don’t have to worry about every little thing that comes your way. I remember I would stay up all night worrying about a hydro bill. When you have the emergency fund, you write the cheque and go to bed. What is the dollar value of that sort of peace of mind? Priceless. You cannot equate in dollars how good it feels to have a bit of money in your accounts. Over the past year, I have had people come up to me and brag about saving their first $1000 or having grown that to $5000. Nothing makes me happier. I feel so happy for them because I know what it was like for me when I hit those milestones. I felt like the King of the World. Comfort is what we all strive for. Having the emergency fund will give you a level of comfort that will put you in another realm. That is the real reason for it. That is why people with money are always smiling.
I feel a bit like a broken record when I speak about saving for an emergency fund. I speak about it a lot because it is just that important. My main man Dave Ramsey created his 7 Baby Steps to financial peace and millions have used them to get what they want in life. Step 1 and 3 are both dedicated to emergency funds. Step 1 is saving $1000 as a mini-emergency fund. Step 3 is saving 3-6 months emergency savings to cover expenses. Why are step 1 and 3 dedicated to this task? Step 2 is pay off all debt, step 4 is save 15% of your income for long-term growth and step 5 is starting an education savings fund for your children. Emergency savings helps you pay off debt, save for the future and save for your loved ones? It certainly does, and I am not the only one who thinks so. The comfort and strength it gives is the exercise you will need to accomplish anything in life. The money is just a number, the mentality is where you become rich.
“The newness effect of a new thing wears off in nine months to a year, but financial security can last a lifetime.” – Dan Buettner
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