In this post:
- My need to build more of an emergency fund
- Changes I am making to speed up my savings
- Why my changes will be enough
- Why more changes might be necessary
- What about debt repayment?
- What I am doing with credit card rewards
As the saying goes, the more things change, the more things stay the same. And, the main thing that is the same for me today as it was 10-12 years ago, is that I need to shore up my emergency fund a bit to prepare for…well…an emergency (whether it’s caused by a pandemic or anything else). So, I thought I’d post about how I plan to do this, and my thought process behind my plan, in the hopes that it might help someone else, as well.
Where Am I, Now?
In my last post, I mentioned that I had about 1.5 months of expenses in savings accounts, which is a bit less than the 3-6 months that most financial advice sets as appropriate. Now, I also have a couple of taxable investment accounts that would take me closer to 5 months. But, I’m not counting that here, for a couple of reasons.
- That money is invested mostly in individual stocks and exchange-traded funds (ETFs), whose value, should I need cash at some point, is not guaranteed to be what it is today. While I’m confident these investments will grow over the long term, things can be a little crazier in the short term.
- In the event that I need emergency cash, I would rather draw on a savings account than investments that should grow in value and produce dividend income in the longer term. (Basically, I don’t want to start over if I don’t have to.)
So, How am I Going to Speed Up My Emergency Savings?
While I’m not changing where the money from my pay checks is sent as it comes in – if I planned to invest the money before, I will continue to invest that amount of money now – I can make an adjustment to how the money goes out. Specifically, I am adjusting what I refer to as my “$200 = $0” rule, where I have a cushion balance in my checking account that I typically don’t spend beyond, in order to give my emergency savings a little boost. And, of course, my overall spending has been reduced by “social distancing” and “shelter at home” practices. (I don’t eat out nearly as much.)
First, let’s look at how my pay check is being allocated as it comes in:
- To my employer-sponsored 401k: 11% pre-tax + 4% employer match = 15% pre-tax
- To a Roth IRA: ~15% after tax
- To Emergency Fund: 10% after tax
- To Travel Fund: 2% after tax
- Note that this is essentially another emergency fund amount as long as travel is being limited by COVID-19.
- To Spending Account: Balance of after-tax income.
In my “Wealth-Esteem” post, I described how I was planning to handle any spending account money left over after the bills were paid. (I evaluate this at the same time of each month.) Here’s a brief summary:
- Balance above $400: This money will go into a taxable investment account. (Rare, because…)
- Balance between $200 and $400: Use for some impromptu fun activities.
- Balance $200 and below: Don’t spend until necessary. (Hopefully, I get paid again before I need this money.)
You may have seen a few places in the sections above where I can divert money for emergency purposes.
The first is in my travel fund. I am keeping the direct deposits going to the same accounts, but travel limitations essentially make this money a de facto emergency fund #2 until this COVID-19 situation runs its course. If I should regain a certain level of certainty in terms of earning power, and travel restrictions ease up, the travel fund will go back to its original intent.
The most obvious change, in terms of my behavior, comes from the spending account section. Specifically, I’m talking my spending account balances (after paying my bills) between $200 and $400. Since there isn’t a lot of opportunity to spend frivolously these days, I might as well divert that money to my emergency fund to earn a little bit of interest.
As for cases where I might have a spending account balance above $400 after paying my obligations, I will handle those situations as they come. That money could be sent either to my emergency fund or to a taxable investment account; which option I choose will depend on the amount available, what my situation is at the time, and, well, how I feel that day.
Is This Enough?
Every evolution of a financial plan should have a “why”. The reason I am changing my plan up a little is probably obvious. But, why I am making the changes that I am, and not more drastic ones, may not be so obvious. So, let’s examine my current employment situation, and also look at what might prompt more changes down the road.
I have worked for a health insurance company for a little over 22 years. During the financial crisis, my employer was hit a little bit after the rest of the economy hurt. It takes awhile for a struggling economy to show itself in the membership numbers of a company whose business comes from employer sponsored health insurance. While jobless claims have skyrocketed recently, I probably still have a little time on that front.
Also, I work in a department that had been approved for a staff of 6 employees before COVID-19 hit the US; we have 4 staff members. So, the area I work in is, at the moment, understaffed; word is that my manager is still in the process of interviewing candidates. Further, my job involves data analysis (Actuarial and Underwriting), so the volume of work won’t necessarily decline as much as in other areas of the company.
When to Change More…and Why
If I start to feel as if my employment might be in more immediate jeopardy (my opinion…always be a little more pessimistic than your employer tells you to be.), I can eliminate my contributions to my Roth IRA. I can still make contributions for 2020 until April 15th, 2021, so there is room there, if there needs to be, to still max out on 2020 contributions (even with a reduction from that 15% after tax number you saw earlier). In fact, I haven’t ruled out making this change to some degree in the shorter term just to give a thicker cushion. And, while I would still, technically, have some access to my Roth money (subject to some taxes and penalties, since I’m in year 4 of having the account and am younger than 59 1/2.), I prefer to keep things simple.
Temporarily pulling back on retirement contributions that are not employer matched would give my emergency savings another good boost.
If prospects of a loss of income were even more immediate, I would have to consider reducing my 401k contributions at least down to the level of my employer’s matching level, and further reducing my spending where possible.
What About Debt Repayment?
If you are in the process of repaying debts, you may consider a period of time where you reduce the amount you pay each month, as long as you still meet the minimum payment for each debt. How long you do this, and to what extent, depends on how you feel about the security of your income and how much more you feel you need in emergency savings.
I consider myself fortunate that I have managed to work my debts to the point where only a mortgage remains. For the past few months, I have been paying extra on my mortgage to achieve some arbitrary milestones surrounding the principal balance. Dropping the balance below a certain round number one month, and paying above a certain amount in principal the next.
As for whether I continue making extra payments on my mortgage in the coming months will probably come down to what my spending account balances look like when it’s time to make the payment. These extra amounts are usually only in the $25-30 range, with an occasional $100ish value thrown in here and there. An extra $30 won’t necessarily move the needle in terms of mortgage interest in the longer term or emergency savings in the short term.
When we face challenging times, I think almost everyone has to have these debates that seem to pit our short-term needs against long-term goals. And, unless you have a net worth well into the 7 figures (my opinion only), there are trade-offs we need to make to meet both long and short term goals as best we can.
Whether I decide to continue toward my goal of paying off my house before age 55 (I am 47), when I hope to make employment an option, or build up just a small amount more for an emergency? I’m willing to let that be decided month-to-month, at this point.
How About Cash Back From Credit Cards?
If you use credit cards that have a cash back feature, you might wonder where that money should go.
For me, the cash back I get from credit cards isn’t that significant; I redeem it once per quarter. So, I intend to send that to my taxable investment accounts just like I was before. If I were using this cash back to fuel an emergency fund (or some other savings goal), I would likely choose to continue that behavior, as well.
Hopefully, this pandemic will run it’s course soon, and some minor changes to finances will be all that most people need to make. (Not to mention, anyone who has lost their job over the course of this pandemic can start getting back to work.) Hopefully, this walk through some of my thought processes helps you to examine your own financial circumstances in order to make any changes to your plan that are necessary. Remember that you may not get it exactly right the first time; stick with the process, and make changes to your plan as life throws that need at you.
I appreciate you taking the time to visit.
Hope to see you back at Finunciate, soon.