What’s the point of making money if you can’t spend it? You can’t take it with you when you go…
Saving feels awful 100% of the time. I’d rather spend my entire paycheck on stuff like new TVs, beer, and trips to Vegas. Why can’t I?
Well, I can… but I usually don’t. It’s dumb to blow all your money. You have to save some. Why? Let me tell you a story.
It was April of 2015, I had my parents and in-laws over for dinner about a year ago. We’d just found out my wife was pregnant with our 2nd kid and we wanted to tell them all together. So I went to the local butcher and bought some steaks and wine. We grilled up a nice dinner and everything was going great. My daughter was walking around the kitchen, and she kept falling near the fridge. I looked over and there was a puddle of water. So I wiped it up. About 15 minutes later she fell again, another puddle. So I wiped it up, continued chatting with my dad and father-in-law, and doing the normal hosting duties. It happened again, she fell and another puddle. Crap… the fridge is leaking all over the floor. My father-in-law used to run a heating/cooling company, he knows a little bit about a lot of stuff. He said something that made sense, I don’t remember what it was. But basically he told me that the fridge is shot and I’ll need a new one.
Any idea what a new fridge costs? Not a lot. Any idea what a new fridge costs when you have a wife like mine? Everything has to match, all the appliances need to have the same finish, color, whatever. So, a new fridge costs about $1,000 and a matching dishwasher costs about $500… so a new fridge when you live at my house costs $1,500.
I used to listen to a lot of Dave Ramsey. He suggests having 6 months’ expenses in savings. It’s not a terrible idea, but it is a lot of money and takes a long time to build up. I had about 6 months saved up when my fridge died. I was able to go to the bank the next day and get $1500 out of savings. I took that money to Home Depot and bought new appliances. So it was nice to have some cash on reserve.
I’ve got another one for you. In June of 2015, I lost my job. I knew it was coming and I’d already lined up some interviews before the “we’re eliminating your position” meeting took place. But I was out of work for 6 full weeks. I never worried about it. We had 6 months of expenses sitting in the savings waiting for a situation just like this.
So within about 60 days I lost most of my kitchen appliances and my job. If I wasn’t painfully saving money for the 7 years prior to that, then I would have probably lost my car. Luckily we had a plan in place to save.
I think 6 months is a little extreme for emergencies. Home Owner’s/Renter’s Insurance is for emergencies. But you need some liquidity in your life for those other events. I think 4 months is plenty of reserves on hand. So where should you put that cash? Savings Account. Don’t be dumb and buy an annuity or put it in a 401K thinking you’ll be able to get it when you need it. You can get money out of those money markets, but cash in savings is king. Trust me What's Your Homes Cash-Flow?
But your emergency fund shouldn’t be your only savings plan. What about retirement? Vacations? New Big Screen TVs? You need additional savings that are more fluid. I’m not going to get into the details of all of these strategies, but here’s a checklist for you. If you don’t have these set up, call your bank, your employer, and your financial advisor (or you can just email me email@example.com) and get this stuff set up now.
What are your strategies for saving money? Do you have an emergency fund? Do you have a retirement plan?