My dear child:
My readers come in all shapes and sizes. Many are seasoned investors, and some are just beginning their journey.
This is one of those fundamental lessons. If you already have an emergency fund, skip this one. Otherwise, read on…
Something is going to break this year. The car, the furnace, a tooth, maybe you. I don't know which, and neither do you, but one of them will.
The Fed has asked American households for years how they'd pay a surprise $400 bill. In the report that came out this May, 63 percent said cash or something close to it, meaning savings or a card they'd pay off right away. The rest would borrow, carry a balance, or sell something, and about one in eight couldn't pay it at all.
Most of them have a job, a car, and a life that costs exactly what they make (which, as far as I can tell, is what most lives end up costing). That's the whole problem. When every dollar has a job before it arrives, there's nothing left for the thing that never has the decency to make an appointment.
You've got investing on your mind, and good. But before I owned a single share, I kept a cushion. A few months of ordinary life, sitting in a boring account, earning very little. Like I alluded to above, it's called an emergency fund, I'm sure you've heard of it. What it buys you is the right to have a bad month without it turning into a bad year.
My point is this: the dullest money you own is what keeps the rest from being sold on the worst day of the year.
So tonight, open a separate account and give it a dull name. Pick a fixed amount and set it to move every payday, automatically, before you can get clever with it. One month of bills is the first target, three is the real one. Don't invest it and don't apologize for how little it earns. Its only job is to be THERE.
If it gets used, it must get filled back up. Three to six months of essential living expenses. This is non negotiable for the SWAN factor (Sleeping Well At Night).
Then when the furnace goes, you can write the check and go back to your dinner. That's the whole return.
One thing I'd tell my younger self: The dull account comes first, the exciting ones second.
From the bookshelf: "The Wealthy Barber" by David Chilton. Pay yourself first, automatically, and let the rest of your life run on what's left.
A tool on my bench: A cushion is easier to size when you know what a month really costs you. PocketSmith puts your bills and accounts on one page so you can see the number. (Affiliate link. The letter earns a small commission if you subscribe.)
Yours sincerely,
