This time of year, many people start considering vacation ideas and designs for the next year or a new TV or appliance for the home. It is understandable why people shop for these things this time of year. You’ve worked hard the whole year, there are holiday bonuses coming, you want to reward yourself and your family. There are many justifications for the spending. These justifications are met with encouragement; the holidays are when over 70% of consumer spending happens during the year, so substantial discounts lubricate the decision-making gears, removing resistance from buying.
Now, imagine owning a home and having a terrible storm come through your community. Your house is fine, but the roof is damaged, and after insurance you still have a bill of $5,000 to pay. Or you are driving and accidentally run over some debris on the road and you need to replace a couple of tires and a bent wheel, costing you another $600? What if you got sick and had to be out of work for an extended period of time, with medical bills and lost wages for a month or two to recover from your illness? Maybe the market hits an unexpected downturn, causing a layoff at your work, and unfortunately you are laid off.
How would you pay for it? Would you be able to pay in cash, or would you need to use a credit card or get a loan from a friend? If you have to borrow the money, how quickly could you pay it back? How much in interest would you be paying? If you had to withdraw money from a retirement account, think about the potential taxes and penalties you would be paying, let alone the lost growth of those assets.
Now, what would happen if two of these things happened within a month of each other? Or three? Or more? Without income, could you pay your monthly expenses? Put yourself in these shoes for a moment and be truly honest with yourself – would you be carrying debt, accruing interest, and stressing out as the costs mount?
If this sounds like you, I’ll be blunt – you need to get your priorities in order. You need to think about what being comfortable truly means. Is it about having the latest iPhone, Apple Watch, Nintendo Switch, or large-screen 4k television? Is is about going on an Instagram-inspired adventure costing you thousands of dollars? Or is comfort knowing that you have the resources to tackle any problem, any situation, and be able to afford it? Protecting yourself, protecting your family, maintaining a healthy and happy life, is far more important. When I question people about this, I never get argument about which someone would choose – a television or their child’s education, a new iPhone or having an extra $20,000 or more at retirement. And yet time and time again, we put what we want now ahead of what we will need later, and it kicks our butt over and over and over again.
Aren’t you tired of getting your butt kicked by Murphy rearing its ugly head in your life? If you are, I have a few thoughts for you on what to do with that holiday bonus.
1. Take that holiday bonus and instead of spending it, save it in your emergency fund. Your emergency fund should be 3-6 months of expenses – not income, but expenses. The idea here is that even if jobs are cut, wages are cut, the market drops and bad things happen, the regular expenses of your household are covered for an extended period of time.
2. When you buy gifts, be deliberate about how much you want to spend, on whom, for what. This means being brutally honest about not just what you can pay for, but what you can actually afford to give. No family member or friend should ever want to see you financially suffer just to hand out bigger gifts. It is not worth it. You are worth it to be disciplined about this.
3. A recent study from Virginia Tech talks about the “paradox of gift giving” – that more isn’t always better. Better to give one concentrated gift than a number of small gifts – the value of the one gift is perceived to be greater than what opening lots of small things feels like, because we remember the lows of the small gifts, not the highs of the bigger ones.
4. When saving for your emergency fund, do not try to get cute with it putting it into a risk-exposed asset like stocks or bonds. Your emergency fund is meant to defend you from life risk, so it is counterintuitive to expose it to risk. A combination of checking and/or high interest savings is fine, so long as it is easy and immediate to access and doesn’t require selling an asset to do so. As you build wealth, your emergency fund will represent a very small portion of your overall assets. Being clever can threaten the integrity of those savings.
Murphy never schedules in advance, and never forewarns us when it wants to rear its ugly head in and cause pain and suffering to ourselves, our families, and our finances. By giving yourself the gift of an emergency fund at 100%, you won’t take away the pain of writing the check when something breaks or goes wrong. But you will be able to sleep very well at night, knowing that even if that happens, you can cover it without taking on debt and without worrying if something else goes wrong tomorrow. That’s a very liberating and valuable gift if you ask me.