I have been thinking about this post for weeks but have been hesitant to write it, primarily because nobody likes to hear “I told you so.” Over the years I have heard lots of people talk about how it is best to live a highly leveraged life to maximize returns, to avoid having any cash around lest it cause a drag on returns, and to not worry about their “doctor income” because it is so stable. I have tried to provide consistent, gentle, but firm warnings against these mindsets. It is always best to learn from the mistakes of others, but some of us just have to learn these lessons on our own.
The Role of an Emergency Fund
A classic emergency fund consists of 3-6 months worth of household expenses stored in a relatively liquid asset with stable principal such as a money market fund or a high-yield savings account. (Funny how 1% is considered high yield these days isn't it?) I can't believe how many thank you emails I have received from readers/listeners over the last couple of months thanking me for telling them to put some money aside for a rainy day. It's not complicated to build an emergency fund, but when you need it, nothing else will really do.
It's not popular to point out on social media that most Americans don't have any savings. While I believe that just about anyone can save something, there is no doubt it's harder to have significant savings on a low income. But for my readers, who typically already have or soon will have a six-figure income (more likely $200-400K+ in household income), there really is no excuse to not have significant savings. I hope if you didn't learn this lesson before the CoronaBear that it is now imprinted on your psyche in such a way that you will never forget it and pay it forward to your family, friends, and colleagues in the future.
The local plastic surgeons are sending faxes to the emergency departments about their new 24/7 wound care clinics. Dentists are advertising that they are still open for emergencies. Many Americans are worried they can't wait a few weeks for their $1200/person stimulus payments to show up. 1/3 of rent was not paid in April, just two weeks after stay at home orders were given. Businesses are applying for federal and state disaster loans. Within 2 weeks of the quarantine starting, 1/7th of the restaurants in Alaska had gone out of business permanently. There is a severe lack of savings in our society. As Steve Martin famously said in the classic Don't Buy Stuff You Cannot Afford, “But where would I get this ‘saved' money?'” It only comes from one place–making more than you spend and setting it aside. Simple, but not easy.
I took out my first debt as a college freshman at 18. I paid it off at 35, about the same time I paid off my “time-debt” for medical school. After that time our only debt was the mortgage on our home, which we paid off after 7 years in 2017. Since that time, we have run our lives without any debt beyond the typical rewards credit cards paid off automatically at the end of each month. This minimizes our fixed monthly expenses (no mortgage, no rent, no student loan payments, no car payments, etc) and allows us to immediately and dramatically reduce our personal expenses in a time of lower-income. This, in turn, lowers our personal stress and allows us to make better long-term decisions and even be opportunistic in a downturn with our purchases and investments. When others are forced to sell, we're in a position to buy.
The Pay Cash Mindset
As part of that debt-free living mindset, we also pay cash for what we buy. If we don't have cash, we don't buy it. So before we buy anything, there is a period of time where we save up for what we are going to buy. This includes everything–cars, boats, furniture, vacations, home improvements, WCICONs whatever.
Many of you may recall that we have been doing a major home renovation in the last few months. Before ground was broken on it, we had the money in cash ready to pay for it. Over the course of 7 months, approximately 250 people have been over to the house to work on it at one point or another. When the time to pay them all finally arrived in the midst of the CoronaBear (3/4 of the total cost was due in the last couple of months), there was no need to sell stocks low or worry about our dramatically decreased income in order to pay them. The money was sitting in cash; all we had to do was write a check.
Was it easy to leave that money in cash while the market was zooming upward in mid-2019? Perhaps not, but it was the only option for us because we were committed to paying cash. When the bills were due and stocks were selling at 2016 prices, it turned out that was the right decision. Stocks are for long-term money and debt is only for true necessities. Cash is for everything else.
What do you think? What have you learned during the CoronaBear about the importance of cash savings, living debt-free, and using cash for purchases? Comment below!
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