Welcome to the series with the most important financial lessons our school system doesn’t teach. Articles in this Don’t Live Broke Series explore in depth each of the 7 golden rules of wealth accumulation.
Hello best life seekers!
In the Beginning Wealth Series we lay out the 7 rules of financial stability. Rule 2: The Midas Lifestyle & Rule 3: Make Money Work for You are the powerhouse of wealth and financial freedom in that they teach habits of living within your means and allocating to money-making endeavors that grow your fortune and freedom. Today we discuss a supporting habit that guards you from being blind-sided by most preventable emergencies while also helping you stay on your feet during more serious ones.
Rule #4: Stash Your Cash
Here’s how to protect yourself with deceptively simple Rule 4: Always keep at least one month’s amount of living expenses in your checking account. This will allow you to pay your bills on time but also keep you secure should a small emergency arise without you needing to dip into your investments or other financial accounts. Top it up as soon as possible after use.
Financial gurus love to harp about having an emergency fund of 3-6 months worth of income in savings for times when life really throws you under the bus. Usually they tell you to put that money in a savings or money market account – something easy to access. We at My Best Life Secrets don’t disagree about the amount, only with the method.
3-6 months of income can be some serious cash and to sock it away in low or no yield cash vehicles like a bank savings or money market account violates Rule 3: Make Money Work For You. To be financially stable and even to become financially independent requires making your money work for you at rates greater than what the banks pay in these accounts. That said, you need to have access to cash for unforeseen emergencies and not worry about delays that occur from account transfers or investment liquidations.
A nice hedge is to build up your checking account to always contain a month’s worth of money to cover all expenses on any given day. If you get paid once a month, keep an extra half month expenses in the bank. This is your emergency fund. Keep it topped up, then allocate any surplus income to your money-making investments.
A real world example:
Your monthly living expenses are $2500 and you take home $900 each week for a total income of $3600 each month. Deposit the full net income of the 1st and 2nd weeks, then $700 for the 3rd week so that your account now totals $2500. Put the remaining $200 of week 3 and all $900 of week 4 into money-making investments. As bills and expenses come, keep topping up from your income so that your primary checking account always reads at least $2500. This puts you in the 70/30 metric ($2500 is roughly 70% of a net monthly income of $3600).
If you are following Rule 3: Make Money Work For You, then you are putting a mix of money toward passive income, portfolio income and business investments. Automatically you will be accruing that 3-6 month buffer, and then some. At a certain point, your money-making machinery will exceed that recommended 3-6 month amount. You’ll have an emergency fund in a very real sense, even if you don’t call it that. What’s more, you’ll have multiple streams of money coming in every month you can use in unforeseen circumstances. You can also typically liquidate some assets in real emergencies, taking only what you need and leaving the money-making machinery in place.
We rarely face situations where we suddenly need to access $12,000 overnight. More often it is something unexpected like sudden car repairs. We can put that on the credit card for reward points, then transfer money out of our investment vehicles to cover the bill if it’s too much to pull from checking. If something more dire happens, like you lose your job, you can tap your investments or their income streams until you get back on your feet. In either case start shoveling money into those investments ASAP once you are back on your feet.
Still questioning not having a separate “emergency fund”?
Why Savings Accounts Suck
Currently, online savings and money market accounts are yielding between 1.75% and 1.90% for the most established banks. However, if you open a traditional savings account with a big bank like Bank of America, those rates drop to 0.03% unless you keep $20,000 deposited in your savings account, then the bank graciously doubles your interest to 0.06% (that’s $7.50 and $15 respectively earned a year on a balance of $2500).
Want to earn interest on your checking account? Bank of America and others will grant you 0.01% for balances less than $50,000. Carry more than $50,000 and you’ll earn a whopping 0.02% (sarcasm intended). First off, just picking up pennies from the sidewalk or foregoing one Starbucks latte will earn you just as much money over the year. Second, balances of $20,000 or higher are way too much money to be wasted in a low-yield account. Even safe haven government bonds yield more.
Does this sound like a scam? It get’s better. Remember, banks use your balances from checking, savings and money market accounts not to lend to others but to balance the books on their investments. They have to keep a fractional money reserve for any credit they loan out. They want you to open savings and money market accounts that will generate fees and also generate capital they can then use as the basis for their credit extensions. A bank that loans out $2 million dollars needs a larger amount of deposits than one with a $1 million balance in order to meet regulatory thresholds. Basically the banks make money out of thin air, using the total on deposit as an accounting maneuver. When the credit markets go south and banks implode like during the Great Recession, you don’t lose your money thanks to FDIC but you do wind up paying the banks via taxes when the government bails them out for their shoddy practices.
Haven’t we bailed out and financed the lenders enough? Stop subsidizing the banks and start paying yourself first. Don’t put your excess money in checking, savings and or money-market accounts. Put it to work FOR YOU in your investments under Rule 3: Make Money Work For You. You’ll certainly make more than the paltry 1.90% the banks offer you.
Benefits of a Small but Sufficient Stash
Stash only a month to a month and a half’s expenses in your checking account. As noted, why give the rest of your money to the banks so they can make money from it when you can use it to make even more money for yourself? Keeping that set amount of modest money in checking comes with powerful benefits out of proportion to its size.
Firstly, you don’t worry about there never being enough money in your account to pay your bills because you always have a sufficient amount but not so much you are wasting its earning potential. Let’s face it, most people live paycheck to paycheck. Emergencies arise frequently for most people because they simply do not budget for recurring expenses. But not you, best life seekers! You know your expenses and budget accordingly thanks to Rule 1: Know Your Wealth. Always keeping a reserve on hand for your monthly expenses means no more stress or anxiety over bills.
There’s a second benefit to keeping a month’s living expenses in checking. Some banks charge fees on your account if your balance is below a certain amount so if you keep a month’s expenses in your account you’ll likely always be above the fee threshold. Don’t pay the banks one dollar they don’t deserve!
Thirdly, having more than a few hundred dollars in your account makes you feel rich. Compare the security and pride you get from looking at your bank balance at $2500 versus $100. Who is going to feel more like a responsible adult who can handle what life throws at them? Who will be sleeping soundly at night?
Another great reason for keeping only a month’s expenses at hand is to prevent impulsive spending. Money in a checking, savings or money market account is too liquid, meaning you can easily spend it. Money invested in stocks, bonds or real estate isn’t something you will impulsively liquidate for that stylish jacket or motorcycle that catches your eye. The reason is psychological. Savings and money market accounts are associated with short-term buckets for your money. Being easy to access, we’ll dip into them much quicker and not replace what we take. Stocks and bonds, while fairly liquid, seem more permanent and long-term. We’ll think harder about selling them on a whim for something we just saw in the window.
Rule 4: Stash Your Cash Wrap Up
Thanks to Rule 1: Know Your Worth, you’ve budgeted your monthly expenses and under Rule 4: Stash Your Cash, will always keep that amount topped up in your checking account. Ideally this will equal 70% of your net monthly income and comprise your necessary and discretionary expenses. Having that amount at the ready will prevent you reaching the end of your money with too much month left to go. Remember, most people don’t do this. Instead, they live paycheck to paycheck and scramble to stay just over broke because of it.
Best life seekers, you’ll be ahead of the crowd by following Rule 4: Stash Your Cash. You’ll also be on better financial footing, less anxious about money and more confident about your goals. When a real emergency arises, you’ll have money ready to support you. Just remember that if you use the funds, start replacing them as soon as you get new income. If you’re constantly dipping into your hoard, that’s a warning sign you’re not budgeting properly or are living outside your means.
Next week we look at another important and protective habit to cultivate in the secret money formula, Rule 5: Don’t Dig Money Pits.
- Don’t Live Broke Series Introduction
- Rule 1: Know Your Wealth
- Rule 2: The Midas Lifestyle
- Rule 3: Make Money Work for You
- Rule 3: Debt Payoff Option
- Rule 4: Stash Your Cash
- Rule 5: Don’t Dig Money Pits
- Rule 6: Body of the Gods
- Rule 7: Hustle
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