The Simple Dollar (5 page)

The solution is simple: Keep a big, healthy emergency fund in the bank. With each paycheck, contribute a portion of it directly to a savings account for the unexpected opportunities that come along in life. Such an emergency fund prepares us to take risks and jump on board life-changing opportunities.

Daniel Koontz of Bloomingdale, NJ, a financial services worker and author of
The Casual Kitchen
, migrated from paycheck to paycheck living to an emergency fund that covered
two years
of living expenses. “After I had reached this goal, which took a couple of years of disciplined saving, I began to think of my responsibilities and opportunities at work as totally divorced from my compensation. I no longer ‘needed’ my next paycheck, or for that matter, the next two years of paychecks. I started to feel more confident at work, I no longer had any fear of losing my job, and as a result, I began taking on higher-profile projects at work, and later, making decisive and aggressive job changes to further my career. I never would have guessed that saving two years’ worth of dough would provide such significant non-financial benefits.”
²

On the flipside of good opportunities are unfortunate situations—ones where something unexpected happens to your life and drains your finances. A job loss. An unexpected death of a loved one. A serious car problem. An unexpected irregular bill.

Much as with unexpected good things, the modern world has made the unexpected bad things more frequent. The well-documented breakdown in long-term relationships with employers, the advent of globalization, and the rapid developments in communications have made job turnover far more rapid than before.
Our reliance on more services has opened us up to more crises due to the failures of such services, like a cell phone cutting out at a key moment or a flight canceled due to bad weather.

In short, as the world gets more complex, we’re exposed to more bad events as well as good events. We are simply more exposed to large-scale phenomena than our parents were.

Just as with opportunities, the best protection against unexpected negative situations is an emergency fund. Cash regularly saved from a paycheck and put into a safe and reasonably easy to access place (like a savings account) ensures that such disasters do not destroy our long-term plans and dreams.

Kerry Taylor, an organic farmer from Vernon, British Columbia and author of
SquawkFox.com
and
397 Ways to Save Money
, experienced the value of an emergency fund when she required emergency knee surgery: “My emergency fund saved my butt when I needed knee surgery. Over the course of five years, I saved $125 a month and slowly grew my emergency fund to $7,500. This money became my lifeline when I faced a possible diagnosis of cancer and had to take time off work for various tests and a surgery. When my tests were clear, I was relieved to be healthy and not have debt, thanks to my emergency savings.”
³

Kristen Cross, a stay-at-home mother in rural Maryland, shares a similar story: “My husband found out at the end of March [2009] that his company was outsourcing the entire IT department where he works
and that he’d be laid off in about 90 days. Naturally, we were a little bit freaked out at first, but we had a decent amount of savings, and while he was still employed, we worked really, really hard at padding that fund some more. We saved everything we could, cut back even more (and that’s saying something because we’re pretty frugal…we spend about $80/week to feed our family of six). We also calculated how much money we’d need to live off of each month if my husband didn’t manage to find a new job before his old one ran out. We could squeeze by on about $2400 a month, and we’ve managed to save up about $12,000 in our emergency fund. Mercifully, my husband just found a new job, so we won’t have to actually use our emergency fund, at least for now. But I can’t even really put into words how wonderful it was to know that we could survive for a fairly decent amount of time without having to incur debt. It really gave us a ‘we’ll be all right’ feeling in the midst of an unsettling situation.”
⁴

It’s clear that the modern world increases the chance of random events having a strong impact on our life, even if we don’t see them in hindsight. However, we exacerbate the problem constantly by the day-to-day choices we make, putting ourselves even more at risk of missing out on great opportunities and falling flat when crises come our way. Here are five major avenues of personal risk that we invite into our life:

•
Credit card and other consumer debt.
A credit card can be a very powerful tool for facilitating routine purchases, but it has a dangerous side. Credit cards detach you from the money itself and make it incredibly easy to spend more than you think, leaving you with escalating debt. That debt manifests itself as another monthly required payment, which adds risk to your life because it increases the danger from job loss. The solution? Pay off that debt as rapidly as possible (see
Chapter 7
, “Minding the Gap,” for help).

•
Car loans and leases.
Yes, many people
need
a car for their career, but they choose to buy a car that exceeds their needs without the cash to pay for that
want
. That car loan (or lease) becomes a personal risk—yet another required monthly payment that keeps you from jumping on opportunities and hamstrings you when a crisis occurs. The solution? Drive a string of low-end used cars until you can afford to pay cash for the car you want.

•
Mortgages.
A mortgage is the least problematic form of debt you can have, as it gives you shelter and does build equity over time (albeit at a slower rate than real estate charlatans might tell you). However, it does include the same risk as other forms of debt. The solution? If you’re going to live in an area for less than five years, rent your housing. If you don’t have a 20% down payment, rent your housing. If you’re still in the game, break out the calculator and compare the amount of money you’d be paying in mortgage interest versus the amount you’d be paying in rent. For more details, see
Chapter 8
, “Frugality as Framework.”

•
Monolithic careers.
A monolithic career is one where your skills are limited to the career you’re currently in. If you lose your job, your skill set doesn’t leave you with many career options. The traditional mindset has been that if you have skills that others don’t have, you’ll always have a job—but in the era of globalization, there’s a lot more competition out there for your job, and there’s more opportunity for people with your skill set to be living halfway around the world and willing to work your job for much less. The solution? Diversify your skills. Build your social network. Start a side business in an area you’re passionate about. For more ideas, see
Chapter 9
, “Cultivating People and Opportunities,” and
Chapter 10
, “The New Career Rules.”

•
Poor health choices.
A few simple dietary and exercise choices can help everyone, regardless of their personal shape. Moving toward a healthy body shape and a basic level of physical fitness improves your career opportunities and reduces your health risks. Have a quick chat with your doctor during your next checkup and see what he or she recommends. Some good rules of thumb: Eat mostly plants and move around actively for an hour each day.

Minimizing your risk in these areas reduces the chances that life can derail you and maximizes the chances that you can jump on board a great opportunity.

In the movie
The Incredibles
, Edna Mole sums up the role of luck in our lives beautifully and succinctly: “Luck favors the prepared, dah-link.”

Luck has very little to do with a four-leaf clover in your pocket. Instead, luck is simply finding ways to take maximum advantage of the numerous random positive events in your life, as well as opening yourself up to more possible random events, from noticing a great sale to having a powerful idea. Being prepared for these positive events in advance helps you cultivate these opportunities into a beautiful garden:

•
Keep a notebook or voice recorder with you at all times.
Whenever you have a useful idea or spot a useful piece of information, record it as soon as you can; then review those notes once a day or so. Quite often, little positive events—like a good idea or a valuable piece of data—slip through our memories without being utilized, causing a useful random event to go completely to waste.

•
Keep a healthy but reasonable amount of cash with you at all times.
Cash is often the quick answer to many opportunities that present themselves to us. We stumble upon a going-out-of-business sale that has nice shirts for $1 each. We bump into a friend who is scavenging for taxi fare. We find an amazing deal on a particularly valuable collectible at a yard sale. Cash in your pocket turns these potential missed opportunities into money in the bank.

•
Be aware of market values in areas of personal passion.
If you’re passionate about a certain area, keep up-to-date with the market value of items in that field. For example, I still keep up with the prices of video games (especially vintage ones), trading cards, and comic books. Thus, if I’m ever at a yard sale or a small-town “junk” shop, I might be able to turn a huge profit because I know what such things are worth. This doesn’t take much additional effort if you’re already passionate about that area.

•
Shop at places where extreme bargains can be found.
Instead of shopping for new clothes at the expensive shops, start your journey at a secondhand shop or a Goodwill store. You might find exactly what you’re looking for for just a few dollars instead of the high prices found elsewhere.

The final key is perhaps the most important:
Build lots of positive relationships and minimize negative ones.
Chapter 5
, “Running to Stand Still,” and
Chapter 9
are largely devoted to the roles that relationships fill in our personal, professional, and financial lives.

Another key component of battling randomness is enforcing order in our lives where we can by simply reducing the opportunities for random events to derail our plans.

The clearest expression of this is to automate as many payments as you can, including your savings for an emergency fund. If such savings and payments go off without
requiring your personal interaction, it’s harder for unexpected events to alter your plans. This ensures that your emergency fund is there when you need it and isn’t altered by an impromptu moment or by forgetfulness.

Another clear expression of reliability comes from strong, cultivated relationships with other people. When times are tough, we have a much easier time getting through when we can rely on powerful relationships with others around us.

Reliability also comes in the form of careful purchasing. By taking appropriate time and care in advance of a significant purchase, you can avoid unreliable products and instead enjoy a lower rate of unexpected mishaps due to the malfunction of the things you own. If you buy a reliable car, you have a lesser likelihood of being late for work due to car trouble. If you buy a reliable water heater, your basement has a lower likelihood of flooding.

In each of these cases, choosing the more reliable option reduces the opportunity for random negative events in our lives or reduces the negative impact such events can have. This results in a more secure, more reliable you.

Here are five key steps for getting started on maximizing the impact of positive luck on your life—and minimizing the impact of negative luck:

1. Start an automatic emergency savings account.
   Contact your bank and schedule a weekly automatic transfer from your checking account to your savings account. Start with a small amount so that you don’t derail your life; then gradually increase the amount until you reach a comfortable level. Remember, there is no real upper limit on this account—just leave the automatic transfer in place no matter what happens. Murphy’s Law seems to dictate that the unexpected events happen in bunches, so the more money you have, the more prepared you are to protect yourself and take advantage of opportunities.
   
2. Seek out—and utilize—online banking.
   Banks that allow you to manage your finances from any Internet-connected computer and also allow you to schedule payments in advance go a long way toward reducing the impact that unexpected events can have in your life. If your bank does not offer this feature, seek a bank that does—advice for switching banks can be found in
   Chapter 12
   , “Managing the Gap.”
   
3. Take simple steps to prepare yourself for the unexpected.
   Start carrying a notebook with you and jot down ideas and things that come to mind; then review them later in the day. Keep a reasonable amount of cash with you as well. If you’re job hunting, carry a resume with you at all times.
   
4. Make a strong long-term goal of eliminating your debt.
   Debt does nothing more than increase the effect of negative random events and decrease the effect of positive random events, so get rid of it. Start a strong debt repayment plan (see
   Chapter 6
   , “With or Without You”) focused on short-term goals that lead to bigger ones.
   
5. Devote energy to cultivating relationships and finding community in your life.
   Relationships are a powerful barrier against the unforeseen, as they can provide support and resources for those times when you most need the help. See
   Chapters 5
   and
   9
   for more information.