Which Comes First?

Most of the stories of my years advising clients on tax and financial matters have happy endings.

But recent conversations and requests for advice by some reveal that the primary problems facing Middle America are the same ones faced when I was in the business, only much worse.

Too many believe that managing their money is unpleasant and arduous. The opposite is true. The management and enjoyment of money are not mutually exclusive. In fact, the only way to truly enjoy your money over a long period is to manage it wisely. Otherwise, you may go through life enduring one crisis after another. 

Most financial problems can be traced back to one fundamental mistake—the failure to build and keep an emergency (or comfort/safety) fund. A comfort fund lays the foundation for the rest of your financial life. You must save before you invest for complete financial freedom. 

Why do we need a comfort fund? Because things happen—always have, always will. Cars and appliances malfunction, tires wear out, plumbing breaks, accidents, injuries, and surgeries happen . . . and jobs are lost. That’s a partial list of things guaranteed to happen—and most happen when least expected.

If you don’t have the available funds to handle these inevitable events, the problem is always intensified. If enough of them happen, they can cause financial disaster. You may start “flushing” money on late fees, interest, penalties, and you can ruin your credit.

So how do you build a comfort fund? The cliché is that people are penny-wise and pound-foolish. They pinch pennies while spending dollars lavishly. I found the opposite to be true with many middle-income clients who are rational about their money. 

Couples who seem to be living a barebones lifestyle usually have “leaks” (expenditures for little things) that keep them from saving. They don’t drive fancy cars or live extravagantly, are neither shopaholics nor abusers of credit cards. Their money dribbles away a dollar or two at a time. The leaks are hard to find, because they are usually paid for with cash. 

With credit cards, a “day of reckoning” comes when the bill arrives. For cash leaks, there is no such day. Most don’t even know they’re wasting money. 

“It takes every cent we make to keep things going.” Rarely is that accurate. If you are not saving at least 10% of your take-home pay, you are living beyond your means. So how does one do what seems impossible? Here are a few hints.

Withhold only enough cash for emergencies when you deposit your paycheck. 

Set up a separate account for your comfort fund. Put 10% into that fund before you put a dime into your checking account. Think of your checking account as a bottomless well and your savings account as a locked treasure box.

Saving is a reward, not a punishment. You reap huge benefits from doing it.

Set priorities on expenses. Is it a need or just a want? Does everyone in the family really need the latest smart phone? Which is more important—a new car or saving for a down payment on a nice house? Ever see a $50K car in front of a dilapidated house?

Know the balance in your accounts at all times and reconcile them monthly to see where your money is going. 

Tobacco? Quit. A tobacco habit wastes enough money to educate two children.

Alcohol?  It’s very expensive, usually exacerbates your financial woes instead of drowning them.

Stop saying, “It’s only.” Confession: I like Cokes. I used to drink at least one a day. Soft drinks from a vendor or restaurant usually cost more than double their cost at the grocery store. If a family of four consumes just twelve (3 each) $2 soft drinks a week, that’s more than $12K in ten years for drinks that are harmful to your health and your pocketbook.

Bottled water costs roughly 2000X the cost of tap. In many cases, it isn’t any better.

So stop with “It’s only.” Everything counts.

Does this mean you can’t enjoy life’s little pleasures? No. Just be discriminate and you will actually enjoy more big and small pleasures that come with financial security.  

Always buy from a list, never on impulse.

Keep a want list for things you want but don’t have to have. Most wants go away in a month.

Take care of your stuff. Maintenance now saves big later.

For each major purchase consider  where it will increase your net worth, help you to be more financially secure, make you smarter, advance your career, improve your life in measurable ways. If not, pass.

Will the purchase hold its value or even grow in value (stocks, bonds, real estate) or will it rapidly depreciate (cars, furniture)? 

Will skipping the purchase have a serious negative impact on your life?

Start with a goal of one month’s salary in your fund. Keep building until you have a year’s salary. Don’t use it unless you have to. Replenish if you do.

Nobody wants to be a skinflint or tightwad. You don’t have to be. Just be frugal—it’s wise. Plus, your children will learn from watching what you do. Also, conservative folks are much more generous with good causes than spendthrifts. Listen to a story about a man who spent his life working at low-paying jobs, yet accumulated $8 million. 

Yes, I am keenly aware that clueless politicians and bureaucrats punish savers by overtaxing and by keeping interest rates artificially low. This arbitrary manipulation of rates causes bubbles and busts much more than letting the free market set rates. But until we can get new leadership, we still have to save. 

One more thing. A lot of these inept folks who have never started a business, never created a job, never competed in the private sector, believe that consuming drives the economy and creates jobs. Wrong! It’s production of goods and services that does both, not consumption. Think about it. Which comes first?

Yes, someone has to buy those goods and services, but even retail jobs are created by someone producing a product to meet a need or want that we often don’t even know we have (think smart phones). 

And saving and investing is what fuels production. When you put your money in the bank or into a stock or bond, then money is fed back into the economy and used to produce products and create jobs. So you’re not only helping yourself, you’re helping America.