What If?

By | June 26, 2022
What If?

Recently, I had a health scare. Up to now, I’ve been operating on the notion that I was going to live until I’m in my 90s. At the very least, I was going to make it to retirement and then enjoy life. So, I designed my financial plan with a few assumptions specific to my personal finances. One of those assumptions was that I had a stable job. Therefore, I didn’t need to worry about having a fully funded emergency fund. In fact, I’ve read for years that one should get an emergency fund, but I ignored it. I did so because I thought it didn’t apply to me. Since my job was stable, I reckon I didn’t need very much beyond a starter emergency fund. However, after my health scare, I began to ponder the question, “what if?” What if I lost my job? Let’s dive in to discuss.

Emergency Fund

The fact of the matter is I don’t have an adequate emergency fund. Most experts recommend 3-6 months of an emergency fund. I don’t have 3 months of an emergency fund!

Dave Ramsey suggests, in the first of his baby steps, to have a starter emergency fund of $1000. I am happy to report that I currently have a starter emergency fund of $1000. This is in part because I routinely set aside $50 a month towards my emergency fund. I don’t have a debit card associated with where I hold my emergency fund. That’s because I don’t want easy access to the cash. So, I definitely would have to wait a few business days to transfer the funds in order to access to it.

My emergency fund is with a separate bank than the one I normally use. At the time of this writing, the balance of my starter emergency fund is: $1288.92. But, that is not close to what I need for my 3-6 months of an emergency fund.

3-6 Months Expenses

Although I track my expenses on a spreadsheet, it’s sometimes hard to figure out what I should count towards my expenses. For example, on the spreadsheet I track, I include investment contributions as expenses that I have to meet. But, since I also need to eat and live somewhere, as well as pay utilities, etc, I include those as mandatory expenses as well. Nevertheless, for purposes of this post, I’ll be focused on the traditional definition of expenses, such as food, clothes and shelter.

expenses

I’m also not sure if I should include the mortgage from my rental properties. A conservative estimate would include these as mandatory debt payments I need to make. Otherwise, I risk ruining my credit and future investment opportunities. So, for purposes of this discussion, I will include all of my debt payments , including mortgages on rental properties as part of the money I need to meet my 3-6 months worth of expenses.

The rough estimate of my monthly expenses is $3067.88. So, three months of expenses is approximately $9203.64. For easy math, I’ve rounded that number to $10,000. So, 6 months of expenses would be approximately $20,000 (rounded up).

The one thing that the above does not include is the monthly payments for my vacation rental. I’ve decided to keep that income and expenses separate.

Fun Fact

Here’s a fun fact. I can’t remember the last time I actually did the calculations on what my true monthly expenses are. Crazy huh!

Well, if I take the rounded number of $10,000 needed for every three months, that would mean that my monthly expenses equates to $3333.33 a month. The yearly expenses would be $40,000. The 4% rule of thumb suggests that if I multiply my yearly expenses ($40,000) by 25, which would be the amount of money I can expect to withdraw from my investments and that is expected to last about 30 years. So, in this case, I would need exactly $1 million ($40,000 * 25) in the bank to safely withdraw $40,000 a year for the next 30 years.

Of course, the 4% rule is simply a rule of thumb. A qualified personal financial adviser can help give financial advice to your individual circumstances. But for a do-it-yourself investor like me, using the 4% rule is a good place to start my research. It’s not the end-all be-all of my retirement strategy.

But, having a cool $1 million in the bank is the bare minimum I would need to meet today’s level of expenses.

I haven’t taken into account inflation or the value of money when I retire, but as I said, the 4% rule of thumb is a good place to start.

The Emergency Fund Plan

As previously mentioned, I contribute $50 a month towards my emergency fund. I do try to keep some extra funds in my checking accounts to account for overdrafts, and the like. More specifically, in at least one of my accounts, I keep an extra mortgage payment just in case my roommates do not pay on time. But, unless the funds are in Capital One 360, which is where I keep my emergency fund, I won’t count it anymore towards my emergency fund.

My initial plan was to get out of credit card debt. I recently wrote about the fact that credit card debt is a thief. As indicated in my last post, I sold all of my bitcoins, and used the proceeds to payoff my credit card debt. Now that my credit debt is paid off, I will focus on establishing a 3-month emergency fund by the summer of 2024.

Huh? Why so long? Keep reading.

Pay Back Private Personal Loan

Although I was excited to payoff my credit card debt, I still have one more lingering loan. That’s a private loan that I was able to obtain from an individual. The amount owed is $6000 at 0% interest rate and I can pay this back anytime (this year, next year, in 5 years, etc). As you can see, this is an individual I know very well. Although I have a flexible payback schedule, I plan to prioritize repaying these funds.

So, because I’ve decided to prioritize this loan payment over establishing my emergency fund, I will have to put building up my 3-6 months of emergency fund down on the list.

This is going to be VERY tough, but the plan is to pay $1000 a month for the next six month starting in July. So, by December, I should be able to completely eliminate this debt.

What I am really hoping for is to be able to put more than $1000 some months. But, worse case scenario, that’s the minimum. For what it’s worth, because of the 0% interest rate and flexible term limits, I don’t plan on selling any of my investments to pay back this loan.

I could pay back $500 a month for 12 months, but I would feel more comfortable paying this back as soon as possible.

What About Contributions To Dividend Portfolio?

So, what about my other investments? I sold out of my dividend portfolio to buy a vacation rental. I sold my bitcoins to payoff my credit card debt. As you can imagine, I am VERY eager to rebuild both portfolios.

Anything above the $1000 minimum payment to my personal loan would go towards either my dividend or cryptocurrency portfolio. In general, I will prioritize the dividend portfolio over bitcoins.

As indicated, it’s going to be very hard to generate the $1000 extra to pay the loan, let alone more than that to invest.

One strategy I am actively considering is to use the income from Uber and Lyft strictly for investing in my dividend and crypto currency investing. So, regardless of whether I am able to pay the extra $1000 from my own paycheck at work (by reducing my spending for that month), money from doing rideshare would never be used to pay back the personal loan. This helps me to prioritize and gives me extra motivation to drive more and spend less – something about personal finance being personal.

Moreover, and taking this a step further, I plan on instituting a money management approach to the income I receive from doing Rideshare. For example, 30% of my income would be saved for taxes, 50% would go towards my dividend portfolio, and 20% would go towards buying bitcoins. So, out of every one dollar, $0.30 would go towards taxes, $0.5 towards dividends and $0.2 towards bitcoins.

The percentages don’t matter – that’s just whatever I feel comfortable with. What matters is having the discipline to a) drive for income and b) split the proceeds accordingly.

Don’t get me started on the cost of gas or the profitability of doing rideshare anymore. One problem at at time.

Conclusion

Personal finance is hard sometimes. Budgeting is hard, and remaining disciplined is hard. If it were easy, everyone would do it correctly.

Despite knowing what to do (e.g. save an emergency fund), I still found it hard to do it. Instead, I tell myself that I can always rely on the credit cards should an emergency occur. What I didn’t take into account was just how expensive that notion was.

Truthfully, I got into credit card debt of over $10,000 recently. I would be lying if I said that the debt was all due to emergencies. Most of the expenses were necessary, but not all were. The debt grew to such a high amount simply due to my undiscipline and overspending.

Although I provided no evidence to the contrary in this post, I am fully confident that I won’t be getting back into credit card debt any time soon. Of course, life is what happens when you make plans, but in the mean time, I will stick with my money management budget as detailed above.

The idea of me losing my job was not really seriously considered until my recent health scare. It forced me to ask the question, “What if?” What if life doesn’t work out the way I planned. That has lead me to tweak my plans for the future and to reassess my goals and priorities. What do I want to get out of life? What makes me happy?, etc. These are by no means easy questions to answer and I will likely spend a lifetime trying to figure them out. But asking the question “what if” is a good question to ask every now and again. It makes you stop and think, and maybe even dream a little.

What do you think of this post? Let me know your thoughts by commenting below.

One thought on “What If?

  1. Pingback: $50000 Savings Goal - Dividend Portfolio

Leave a Reply

Your email address will not be published. Required fields are marked *

CommentLuv badge