Do You Have a Rainy Day Cash Fund?

Everyone should have a rainy day cash fund.  Not an emergency fund.  Although, you should have one of those as well.  No, a rainy day cash fund should be exactly that.  Cash.  Easily accessible, and easily spendable. Ahhh!  Did he just say “easily spendable”?  Yes.  I did.  Why would I say something like that?  Common advice is that you should put your money in an account where it isn’t easily spendable.  Especially your emergency fund.  You don’t want any everyday “emergency” to drain your emergency fund dry.  It’s for real emergencies.  An engine in a car that stops working and needs repairs.  Although, some would argue that’s what a car repair fund is for. Those quasi “emergencies” aren’t what a rainy day cash fund is for either.  Sorry.  I’m sure some of you wanted me to tell you that it was smart to have a little stash of cash that you could hide away for those tools you really, really, “needed”.  But, it’s not for that.

What is a Rainy Day Cash Fund for?

Rainy Day Cash FundIt’s still for real emergencies.  Just not the kind that your emergency fund is for. Consider.  A major power outage happens.  You really, really, need a tank of propane to light up to heat your house until the power comes back on.  You get to the gas station, or wherever you buy the propane from, except they don’t have any power either.  Their credit card reader isn’t going to take your debit card.  In fact, they’re writing down transactions and calculating change with a calculator.  Without power, it’s a cash only transaction.  If you don’t have any cash, you’re headed back to your cold house without any propane to heat the house with. Taken to an even farther extreme (a Prepper extreme, you might say) you could find yourself in a situation where regional or national economies fail entirely.  Of course, having cash in that regional or national currency probably isn’t going to do you much good.  That’s why you hear all the stories about preppers stockpiling gold and silver.  They believe that in a situation of economic collapse, everyone will revert back to gold and silver for bartering with each other.  In the show, Revolution, which is about the total loss of the power grid and the destabilization that follows, you’ll often see people paying each other in diamonds. I’m not saying that you’ve got to have a couple of coffee cans full of gold coins out under the tree in the backyard.  For most of the situations you’ll find yourself in, a little of ol’ greenback will do you just fine.

How Much Cash in a Rainy Day Cash Fund?

Thousands.  Then, please send me a note with your address, and the exact location where the cash is stored. I’m only kidding.  Much like anything else, your rainy day cash fund is a bit variable.  It will depend on what you can afford to just put away in cash.  Although, for most, the rainy day cash fund is well within budgetary limits.  Really, what we’re talking about is having enough cash available that you can afford a tank of gas, or a loaf of bread should you be unable to use a debit card. In almost every case, something like $100 should be plenty.

Where to Put the Rainy Day Cash Fund?

The short answer is, wherever you want.  Just make sure that it’s reasonably secure, and easily accessible.  Buried in a can in the back yard is probably not the best idea.  Your wallet isn’t a very good idea either.  If you’re creative enough, you can find plenty of places to hide that small stash in your house.  If you’re not so creative, there are plenty of pre-devised ways to stealthily hide your money.  Here’s a few easy ones:

  • Tape the bills lightly (you don’t want to rip them taking them off) to the back of a framed picture in your house.  Most people won’t look there, and you’ve only got to take the picture off the wall to reach them.  Just don’t forget they’re there if you decide you don’t want the picture anymore.
  • Under your mattress.  Yes, really.  It’s an old joke, but it’s also a convenient place that’s easily reachable and that most people aren’t going to casually look in if they’re being nosy.
  • In a book.  Pick your favorite book, and your favorite page and place the bills in the books there.  Again, easily reachable, and less likely to be found.  Just make sure that if you ever decide that you don’t need that book around, that you take the money out first.
  • In the freezer.  This is another old one.  Throw the bills into an envelope and place it at the back of the freezer.  Easy enough to get to if you really, really need it, but not so easy that guests (welcome or not) will easily find it.
  • Behind the furnace.  Put the bills in an envelope, along with a decently strong kitchen magnet.  Attach the envelope to the back of your furnace or any metal surfaced appliance so long as they won’t be exposed to flame or extreme heat.  Easily accessible, but who’s gonna go poking around your furnace (or the back of your fridge) looking for loot?

That’s just a few ideas.  What it really boils down to is putting a little cash away for a rainy day when you need it, and placing it somewhere where it won’t easily be found by prying eyes. What do you think?  Should you have a little rainy day cash fund?  How much would you put in it?  Where are some other good places to put the cash?

The Smell of Napalm

Napalm is a sticky, flammable substance that was invented in the 40’s, and used in several wars.  Because of it’s stickiness, it attaches itself to everything, then burns at somewhere over 800 degrees.  When it’s done, there’s no more jungle.  No more enemies walking around.  It’s vile enough, that it’s use on concentrations of civilians was declared a war crime by the UN in 1980.

By now, you’re probably wondering why a site about personal finance is discussing Napalm. Well.  Here’s the thing.  Debt is a funny thing.  Most of us have it.  Some of us have quite a bit.  And most of us would like to get rid of it.  In fact, most of us would just love to Napalm our debt.  One fell swoop.  Drop some sticky burning substance on it and have it gone in a few short minutes.  We’d like that so much that we buy lottery tickets, raffle tickets, and buy books and products that promise some get rich quick scheme.  People with debt are always looking for the debt Napalm.

We like to fantasize about what we would do if we won a couple million in the lottery and set our debt on flames.  Erasing it, with one fell swoop, while getting rich at the same time.  Much like Kilgore in Apocalypse Now, we love the “smell of [debt] napalm in the morning.”

Napalm: War on debt Crime

Instead, we’re given the “debt snowball“, or the “debt avalanche.

The truth is that debt is so easily gained, we want to find a solution to it that is just as quick.  An afternoon with a credit card and a shopping mall can add thousands to the total. Thousands that could take us years to pay off.  We wish we could find the Napalm to incinerate our debt.

Some people think that bankruptcy is that Napalm.  But, as quickly as a bankruptcy can eradicate your debt, it doesn’t leave you without any scars.  For many years afterwards, you, and your credit score, will suffer the consequences of the bankruptcy.  Credit will be nearly impossible to attain.  Prospective landlords and employers are even running credit checks before renting or hiring people.

We need to stop looking for the Napalm.  We need to stop assuming that all is lost.  We need to take some responsibility, find ways to make more money, save more money, and pay down more debt.  We need to stop adding more debt.

If you want to get rid of your debt, it’s a slow burn, not a Napalm strike.  Even in the world of personal finance, Napalm is a war crime.

Original image credit: korea by the U.S. Army, on Flickr

Saving vs Investing: Investing for Income

Saving and investing go together like milk and cookies, sweet and sour, and Elvis and banana peanut butter sandwiches, right?  Right.  Well, almost right.  It’s easy for us to say that saving and investing are important parts of a personal finance plan.  It’s easy for us to say that and then move on.  After all, we just said they’re important, right?  Not so fast.

Saving and Investing ARE important

They just aren’t equally important.  Heck, it’s another whole post, but even the different types of investing aren’t equal.  Just as important as saving and investing together is the concept of when to use which, and how much.  The mix of liquid savings in the form of cash accounts and CDs with the amount of your money that’s invested can be one of the most important parts of your overall personal finance plan.

Traditional advice tells us that cash accounts and CDs are the super safe way to keep your money with you, and investing, in it’s varying forms is all kinds of risky.  Investing in stocks?  Risky.  Investing in pork bellies?  Risky.  (unless you really like bacon.  Just kidding, still risky.)  But, is the amount of risk involved in investing more or less risky than leaving too much of your money in the bank to rot away at current interest rates?  How about you ask the people of Cyprus if they still feel safe having their money in the bank?

Saving vs Investing : Investing for IncomeSuccess is risky.

Few who accomplish success do so without some element of risk.  In fact, the easier the path to success is perceived, the less chance there is of truly obtaining it.  I don’t say that to seem philosophical.  I want to make a point, however.  You’ve got to have a little risk, if you want to succeed.  You’ve got to have Investments if you want to succeed financially.  And, I think the ratio of investments to savings should probably be much higher than most would suggest.

Investing for Financial Independence

One of the key tenets in a financial independence plan is that you need to replace your income in order to free yourself up to be independent of a job.  Not independent of work, but of a job.  There are, obviously, many ways that you can go about replacing that income.   Decreasing your expenses is usually a part of most plans.  But, most people’s expenses will only decrease so far.  Sure, you can go extreme, and get them lower, but for many that isn’t what financial independence is about.  Even with your expenses decreased as low as you’re willing to take them, you’ve still got to replace the income to pay those expenses.  Investing can be a very good way to get started towards replacing your income.

Investing for Income

In order to replace income with investing, you’ve got to invest for income.  You probably try and do that by becoming a super successful day trader and making up the income in profits from all the great deals you made.  First, find yourself a few super successful day traders who have done that.  Come back when you’ve given up.  If you’re going to invest for income, it’s got to be reliable.  It can’t rely on your ability to find a good bargain and then sell it at a massive profit a few days later.  There are traders who are still waiting on Facebook to make a comeback so they can even get their money back.  Reliable income is the key.  For this, we need investments that are steady, don’t require the continued increase in value of the stock, and also don’t require us to sell like a fiend in order to create the income.  What are these mysterious investments, you ask?  Dividend stocks.

Dividend stocks are stocks that pay a dividend on each share of the stock that is held.  The amount of the dividend can vary, but there are many that you will find that pay dividends in the range of 2-4%.  Depending on the policy of the company, they usually pay quarterly, but there are some that pay monthly and yearly.

Dividend stocks aren’t the only way to invest for income, however.  Investing in peer-to-peer lending in a program like Lending Club is one.  Rental real estate is another.  A business can even be a way to invest for income.  Each has varying levels of passivity, or the amount of direct interaction on your part to earn the income.  A business that you run can mean well over 40 hours a week of direct interaction to create the income.  Something like Lending Club or rental real estate can be brought down to a level that borders on passive income entirely.

Savings vs. Investing

With any investing tool, whether it be dividend stocks, lending, real estate, or some other instrument, there will be risk.  With risk usually comes reward.  I’ve been earning over 14% return on my Lending Club portfolio.  Dividend stocks can lose value, or even stop paying dividends.  The real estate market can dry up, and you can have problems finding renters.  Risk is inherent.  Unless you want to directly trade your time for money (call it a job), you’ve got to take on a little risk and begin setting yourself free.

Savings shouldn’t be shunned completely.  I still believe that an emergency fund is an important tool.  I still covet a debt free lifestyle.  But, once my debt is paid off, and my emergency fund is full, you can bet the rest will go towards investing for income, and building my wealth towards financial independence.

How about you?  What is the role of savings in your personal finance journey?

Original img credit: Two men with pipes posing as boxers / Deux hommes, pipes à la bouche, prenant une pose de boxeur by BiblioArchives / LibraryArchives, on Flickr