Margin – We all need it
We have all heard the term “margin” used in different situations. Margin of error, how much room do we have to be wrong. Margin of time, when do we have to leave to be there on time, or fashionably late. Profit margin, how much money is someone going to make on their sale. The concept of margin is the difference or gap between what’s absolutely needed and what we really have.
In the world of personal finance, margin is the gap between how much I need each month to pay my expenses and live, and how much I bring in. For 75-80% of Americans, this margin is negative. In other words, they are living paycheck to paycheck and usually run out of money before they run out of month. If something goes wrong, they have a flat tire, the air conditioner doesn’t work or the water heater breaks, or an unexpected illness occurs, it becomes a financial emergency, usually covered by going into debt with a credit card. Unless…
You have an emergency fund. An emergency fund is a pile of cash set aside for, wait for it…emergencies. Emergencies are unplanned, unwanted, and urgent situations that we all have from time to time. Having a small pile of cash set aside makes the emergency less of an emergency and more of an unfortunate situation. Having an emergency fund creates margin in our lives, even when we are living paycheck to paycheck.
We’re going to give you some basics about an emergency fund in this month’s newsletter. How much you need, where do you keep it, and how do you build the fund when things are already tight.
As a Dave Ramsey trained Master Financial Coach, I’m going to give you the basics that you can find on Dave’s website (www.daveramsey.com/blog/quick-guide-to-your-emergency-fund ), and add my own experiences in coaching others as examples.
To start with, you need to find a way to put $1000-$1500 in a checking or savings account. This creates some initial margin for you to deal with the day-to-day “emergencies.” We will deal with how to get that money in a few minutes, but this fund is to stop you from needing to use debt (credit cards) to pay for the unexpected. Think about it, if you had to pay $100 to replace a blown out tire, using your credit card that tire could cost you $120 or more based on the interest rate and when you pay the debt off. Having the emergency fund allows you to pay for the tire, and get back on the road so you can work on replenishing your emergency fund. That’s right, when you take out of the fund, you must immediately work at putting the money back. The good news is you are “borrowing” from yourself and not worried about unreasonable interest rates.
Eventually, you will want to save three- to six-months of living expenses in your emergency fund. WHAT? Yes, three to six months of living expenses. This is for the true emergency like a world-wide pandemic that causes job loss, or a catastrophic illness that keeps you out of work. When you have that money in the bank, you are not as stressed about how you will eat and pay the bills. You will be able to focus on finding a new job or recovering to full vitality.
There have been two times in my life when I have lost my job. The first time was before I had an emergency fund and things were stressful as I searched for new work. The second time, I had a six-month emergency fund and I was able to take some time to focus on what I wanted to do and not take the first thing that came along. In both situations, I worked some “part-time” roles to help me stay focused, but the second time was more relaxed.
To determine how much three to six months of expenses are, simply look at your checking account bank statement and look at how much goes out each month (debits and checks total). Look at the last year of bank statements, total that outgo and divide by 12 to get the average monthly expenses. Now multiply by three or six to get home much you need in your emergency fund. Most of us should look to have a full six months in there (married men, this is what your wife wants, just sayin’).
Alright, so now comes the tough part. You are saying, “This is a great idea, but how am I, living paycheck to paycheck in a tight budget, ever going to put $1500 in a cash fund much less $20-$30,000.00?” Here’s the answer: hard work, discipline, and perseverance.
There are three really simple ways to do this; not easy, but simple.
- Generate extra cash.
- Curb your lifestyle.
- Build a budget (spending plan if you like that term better) and stick to it.
You can generate extra cash in two ways. First, sell some stuff you have but don’t really need or use. All of us have things in our garage, our closest, and our yard that we really don’t need (notice I didn’t say we didn’t want those things). If we are living paycheck to paycheck, do we really need the jet ski, the fishing boat, the bowling ball, the paintball gun, etc.? Second, find a part-time job in your off hours that can generate some cash. Pizza delivery, part-time at the grocery store, part-time at your favorite recreation activity center, etc. You don’t need to do these things forever, just long enough to create some margin and build your emergency fund. You would be surprised how fast that fund can grow when you are truly motivated.
Curbing your lifestyle will also generate extra cash and help you with building your spending plan. I have coached many people who believe they need to have the latest iPhone on the most expensive network with unlimited data and it is costing them a fortune. They have to have cable TV and all the premium channels for entertainment purposes, and it is costing them a fortune. The need to go out to eat every weekend with friends and it is costing them a fortune. Keeping up with the Jones, or the neighbors, or the social culture around us will not help create margin. I recently updated my android phone on the Google Fi network. I paid cash for a mid-range phone with the latest technology, on sale for $199 and got a trade in rebate of $38. That phone, with data costs me about $26 per month, partly because I only pay for the data I actually use. There are a lot of these low-cost cell phone companies, you need to check them out. One of my other favorites, my wife’s plan, is Republic Wireless. We also cut the cable and went over the air digital and streaming services (like NetFlix and Amazon Prime) and saved a bundle. Do you really need the $5 latte from that Seattle company or will coffee from home do? Do you really need to go out to lunch at work every day or will bringing your lunch do? All of these lifestyle choices will impact your margin.
Your budget (some people prefer to call it a spending plan because it gives you permission to spend, Yay!) is the key tool to making all of this happen. Most people don’t like budgets, and many don’t even know how to budget, but it really is a rather simple exercise to determine how much you plan to spend each month on the various categories of living. There are a number of great tools out there, and one I recommend is EveryDollar from Ramsey Solutions. There is a free version and the tool walks your right through how to build a good budget. Be sure to include savings for your emergency fund in the budget. In fact, that is a key concept of successful budgeting, pay yourself first, then everything else.
Are you ready? Ready to create margin in your financial life? To reduce the stress and anxiety of living, at least from a financial perspective? Start building your emergency fund today. I know you can do it. If you need help, we are here and ready to come alongside you to ease the burden and help you reach a better future.