What would happen if you were forced to spend a couple hundred bucks? Last weekend we had a flat tire on our way to Palm Springs. Actually, it was two flat tires. There was many emotions going through our heads and most of it was frustration as we were wondering whether we can still get to our destination while helplessly waiting in the rain for the tow truck to come. As minutes turned into hours, we finally realized that at least we are still alive and the only thing we really lost was money and time.
Time we have, and good thing we have funds for emergencies like these.
Speaking of emergencies… Oh emergency fund… Thank you for allowing me to feel secured in times like these.
Lots of readers always ask me emergency funds but so many people just don’t have one setup. Some of the reasons I hear are:
- Not Enough Money to Start One – Haven’t we heard this one before.
- Savings Offer Low Returns – 2% at an online savings account just doesn’t cut it (Actually, one of the minor benefits of this stock market crash is that many people now think anything positive is a decent return)
- How Much is Enough? – Then there are others who always want to know how much is really enough, and when they cannot find out (there is really no right answer to this question), they end up not even starting one.
Torpedo the Account Nicknames
Let me tell you something that’s helped me. Forget about naming accounts based on what they are for. I don’t try to name accounts bill pay and another emergency fund and another spending. What I have are:
- Taxable Investment Accounts (Savings, Index funds, ETFs, Stocks etc)
- Retirement Accounts (I used to have a 401k too but that’s been rolled over)
Some of the categories might contain several accounts, but the main point is that I group them based on time horizon. For example, checking is used for bill paying and day to day operations, investments are to grow my money mid-term and retirement accounts are for long term.
Where’s the Emergency Funds Then?
Well, it should be obvious that my emergency funds are mainly in my taxable investment accounts. How much do I need for emergencies are irrelevant because how much I have in the accounts are strictly based on my savings goals and how well the investments do.
What if I Wanted a New Office Chair Fund
Many people have great success by setting up funds for what they want to buy. I used to do that, but I have since stopped because I don’t want to deal with so many different accounts. In order to accomplish this, all I do is setup metrics for me to hit. For example, say I have $5,000 in all my taxable investment accounts. I might say that I will buy that office chair when the total gets to $7,500.
Two Main Benefits of the Time Horizon based Classification
- Big Picture – One of the advantages of doing this is visibility. At all times, I can see how I’m doing long term without the short and mid term goals convoluting the picture.
- Simplification – This might be the best part because it’s so much simpler thinking about my money this way. No more emergency funds, vacation trips accounts, money to buy TVs, shoes and the like. It’s all really your money anyway right?
A Little End Note
If you think about it, this doesn’t say anything about how many accounts you have or how you will use the money. The visibility of my progress helps me achieve my goals.
Do what works best for you, but always remember the big picture.
Editor's Note: I've begun tracking my assets through Personal Capital. I'm only using the free service so far and I no longer have to log into all the different accounts just to pull the numbers. And with a single screen showing all my assets, it's much easier to figure out when I need to rebalance or where I stand on the path to financial independence.
They developed this pretty nifty 401K Fee Analyzer that will show you whether you are paying too much in fees, as well as an Investment Checkup tool to help determine whether your asset allocation fits your risk profile. The platform literally takes a few minutes to sign up and it's free to use by following this link here. For those trying to build wealth, Personal Capital is worth a look.