Happy day to you. This is Ken Kaufman CFO and I’m thrilled you’re here for episode number 22, Roadmap for Cultivating your Assets, Part 2. Well, actually I’m gonna change the title. I’m not interested because this cultivating assets concept and roadmap is gonna go on for a while and I think we should give each one just its own unique title as opposed to part two, part three and part four. So what I’m gonna change the title of this to is Saving for the Non-Routine.
So, this roadmap to cultivating assets, it’s still gonna exist. Just each episode’s gonna have its own unique name. Now, I do have a confession to make. I need to come clean on a way that this podcast is being used and a huge benefit that I’ve gotten out of it without knowing that this benefit would exist. I have a four-year-old son and this kid is full of energy all the time. He is non-stop go, go, go. For some reason, in the evenings usually my wife… Sorry, I need to give a little back story. My wife does a read aloud with the kids where there is a book that they’re all reading together. And my four-year-old will often kinda snuggle up to her and while she’s reading he’ll eventually fall asleep.
Well, as I started the podcast I wanted to share the episodes with my family and hear what they thought and just kinda get an overall reaction from them. And what happened after the first couple of times I did it is my four-year-old started to request, “podcast, podcast, podcast.” And we’re now to a point where each week when I’ve got a podcast episode ready he will come and lay next to me and listen to the podcast and that’s how he falls asleep at night. A huge benefit because this kid, the sooner he can fall asleep it’s the less destruction he’s going to create in the world. I’m just kidding. I love this kid but he has so much energy.
And I just needed to come clean and full disclosure with you that not only is it every week but now I’m going back and replaying old episodes for him when he requests the podcast so we can get him settled down and to bed at night. Not every night and yes, I also… It’s really hard for me to hear my own voice and all the mistakes and the ums that I say and everything else but just need to be fully transparent with you as listeners. Hopefully it doesn’t put you to sleep but it sure works to do that on a four-year-old.
Now, let me jump into the topic today and set the stage. Last episode we established that the very first part of cultivating assets is just learning to save. It’s starting the process. And I even gave you the first two steps of that process so that you can start seeing some cash pile up in your bank account. Not rushing to pay off debt or to do anything else. We’re just gonna start to learn and get in this habit of learning to save and making it a consistent part of our financial lives and making a part of our waterfall.
So, the first two steps. The first one as you recall I said let’s cover that credit card float which is…which means you’re setting cash aside as you’re spending on your credit card so it negates out any change in your net worth when you spend on a credit card. And the second way is to actually learn to live on last month’s income. So, what you made last month is what you use to live on this month and what you’re earning this month is just piling up in your bank account and ready for you to use next month.
I want to add a third concept to this and it’s a way that builds up more cash and this is the type of cash that can go and sit in a savings account for sure. Some of the last month’s income piling up until this month, that can be in a savings account as well, preferably at the same bank because I’ve brought that up before. Now, this third concept is saving up for the non-routine. Let me present three scenarios to you. First, have you ever had an unplanned car repair ruin your financial plan or your budget for a month? I think all of us have had something like that happen. How do you solve that? I call it goal for the month or I’m sorry, goal per month.
Second, have you ever had an unexpected birthday, car registration or some other bank account draining event like Christmas or other things that sneak up on you? You knew they were there, but you just hadn’t really written it down or planned for it in some way and that shows up and that ruins your plan to save money for the month or to do whatever it is that you were planning to do with your money. This can be solved by something called balance by a specific date.
And then third, have you ever had a medical emergency that required you to pay your health insurance deductible and it wiped out all the money you’d been setting aside for some other purpose? Maybe you were gonna be buying a new phone or you were going to be paying kids’ tuition at college for the next semester or go ahead and, you know, make the list of whatever it is that it had to take the place of so that you could pay your medical bills. This can actually be solved with something that I call a balance goal. Now, this concept of saving for the non-routine is broken up into these three buckets, if you will, of savings. This first one I identified as goal per month. This is where you tell yourself, “All right, I am going to save a specific amount of money every month toward this and it’s just gonna keep piling up there and saving up.”
Now, let me tell you the two main ways that I use this. Auto maintenance and house maintenance. In our budget, our household budget, we every month allocate a specific dollar amount toward auto repair and toward home repair and some months we use it. And some months we don’t. And I allow that to just keep piling up and accruing because at some point I’ll need to replace a car or I’ll need to replace a roof on a house or you can go, you know, down the list. But it’s this bucket where I’m just putting this monthly amount in and I’m pulling out from it from time to time when those expenses come up. For example, the four-year-old has flushed a Lego down the toilet. It stuck and we can’t get it plunged and the toilet’s… We got all kinds of problems and we need to get a plumber to come. All of a sudden, I’ve got my household maintenance category that’s been piling up every month and so, unfortunately, we have to draw some out of it to pay the plumber to come out and make it so that the toilet works again.
I wish that experience of that toilet being clogged, I wish that it’s only happened once. There’s too many toys and who knows what else has been flushed down our toilets through the years. With eight kids and with all the curiosity that goes around how water and toilets and everything else function and work.
Anyways, let me get off that tangent. So, this concept of a goal per month. It’s any miscellaneous issues that you don’t know when or how much but you know something’s gonna happen and you know when it does it’s gonna wreak havoc with your financial plan. And you wanna start saving for it and you’re okay with those balances getting bigger and bigger because at some point, you know, if you’re not using it…because at some point if you saved up for auto maintenance for example and you’ve built up several thousand dollars there, now all of a sudden you have a down payment on a car or maybe you buy an entire car with that.
So, that first concept, it’s called goal per month. Now, the second concept is balance by a specific date. This is where you know that something is coming in the future. It’s going to require you to spend money on it and you plan ahead of time and say, “I want to have this much money set aside for that by this specific date.” Let me give you some examples of how this works. The first one that hopefully comes to mind for everybody is Christmas. All year long we’re saving a certain amount of money so that by the time Christmas comes… And by the way, I make sure that I have the money by November because my wife and I…I don’t know why it is. We just have found the day after Thanksgiving we love getting online and making all kinds of purchases for Christmas and kind of organizing our whole month of December and Christmas. It’s something we’ve done for the last several years. We just kinda… On that day after Thanksgiving we lock the door to our room and we get out the computers and we just start going and we just have a lot of fun with it. We enjoy doing that for some reason.
So. I make sure that we’ve got all of our Christmas budget saved up by November so it’s all there ready to go. This is a balance by a specific date. Another one is an annual vehicle registration. Why not just be saving and if it costs a couple of hundred dollars to re-register your vehicle every year. You know, let’s say it’s a $120. Well, you can just save $10 a month toward it or just fund it completely and then the money’s there waiting. And then after you use it up then you start saving for it again the next year. In our household we have three vehicles and so I’ve got three different registrations I’m keeping track of and making sure I’ve got money set aside for it.
Another one is birthdays. With eight kids, two adults and other things going on I make sure that we are saving for birthdays. Our policy in our house is there’s $200 set aside for somebody’s birthday and that’s gotta be all inclusive if they wanna go do an activity and presents and all those other things. Now, we’ve definitely blown that budget before but that’s the baseline to make sure that we’re saving. And I’ve got months where there are two birthdays in a month and so the way that I set that up and organize it is I make sure that by that month I’ve got $400 set aside ready to be used for birthdays.
Another one here is auto insurance. If you take a look, and you wanna look closely at this, a lot of times your car insurance provider will allow you to pay monthly and they draft it out of your bank account or get your credit card. That’s great but a lot of times if you will pay six months at a time you can get a massive discount. Far more than you could earn by having the money in a bank account or, you know, trying to invest it and make money. There’s a pretty significant variance. And so I like to pay my car insurance every six months because I get the best bang for my buck and I’m not paying all these extra fees and all these extra things that make the cost go up for the overall insurance program. This is a benefit that once you start saving for this and you get this put away now you can start to win the money game because you’ve got the cash and you’re able to pay for six months of insurance and you get a cheaper premium than everybody else in your exact situation. So balance by specific date. You set that up and we reset that every six months.
I actually track Amazon Prime because that’s a membership. I know I’m gonna pay for it and I know it’s coming. And I should make sure to mention. All of these things today, these three different concepts of goal per month, balance by specific date and then the balance goal, these are for expenses that aren’t monthly, that aren’t, you know, part of that regular budget cycle of, “I know I’ve got this much coming out for my gym membership,” and so on and so forth, “and my utilities and my house payment.” These are the non-routine things.
Another one here is life insurance. And I’ll be talking about life insurance at some point down the road in probably several episodes. But we pay an annual premium for life insurance and so we wanna make sure that that premium is set aside and it’s ready in that month and it doesn’t blow the rest of the budget that month.
Taxes is another one. If you’re self-employed and you have a need to pay quarterly estimated taxes, balance by a specific date is critical. So, I’ve set this up so that I’m building up the funds there out of business earnings and then it’s ready to be able to make that estimated tax payment when the time comes.
Also kids’ tuition and housing if you’re helping kids out with school right now and really anything else that you know is coming somewhere down the road. And you know what the specific date is and you know about what it’s gonna be. This balance by a specific date solves for that.
And then the last one is the balance goal. This is where you’re telling yourself, “Okay. I want to save up for something and I don’t know when I’m gonna need it or when I’m gonna use it, but I want to save up and I know about what amount it is that I wanna have saved and set aside for that.”
Let me give you a couple of examples. If you have health insurance with a deductible, say a $2,500 or a $5,000 deductible this is a great thing to save for and then all of a sudden if you have a medical emergency and you hit your deductible and you’ve gotta come up with those first dollars out before your deductible kicks in, say that $2,500 or $5,000, you can have that money set aside and it’s earmarked for that deductible. Or you could also look at your car insurance, your homeowners insurance or renters insurance and look at what your deductibles are on those things and save up enough to cover your deductibles. So, I have a balance goal, a little account in our budget and we are saving and making sure that we have money set aside in case for some reason we are hitting a deductible and then it doesn’t completely ruin your financial life as a result and your plan.
Another one is technology or other large purchases. So, I know I’m gonna get a new phone every couple of years, computers and then there are those things in the family and so I’m just saving and I have a balance that I wanna make sure I’m trying to maintain so that at any given time I’m ready for when that next purchase need is going to happen.
Also any other large purchases. It could be a down payment on a house. It could be, you know, purchasing a car and you know about how much money you wanna save or how much you need to get to. This is another great example of having a balance goal and saving for it.
The other last one I’ll mentioned here is income protection. This is basically you looking at yourself and saying, “Okay. If I were to lose my job how much would I need to keep up with my regular bills?” And you can set aside three months’ worth or six months’ worth. There’s lots of advice and people who will say what it should be for you. But here’s the key thing I wanna highlight right now. As I’ve talked about this balance by a specific date, balance goal and the first one was goal per month. This concept of income protection is the last piece to solve for you never having to have an emergency fund. Now, stop and think about this for a second. If you were to build up this big emergency fund and you say, “Well, it’s in case, you know, my car breaks down or I’m gonna use some of it for Christmas or in case I lose my job or I lose some of my income for some reason then I’ve got this emergency fund out there to help me.”
I believe that this is why the emergency fund makes absolutely no sense. It’s this great, big huge amoeba that’s out there with no real purpose, no real need other than, “Hey, it’s there in case there’s an emergency.” I like to actually try to think about and plan for those things and these three categories that I just talked about is how you plan for any of these “emergencies” or these costs that might come up for any reason. And so as you’re saving for all these things this concept of setting that goal per month for auto maintenance and house maintenance and so on and so forth or balance by a specific date where you’re saving for birthdays, vehicle registrations, Christmas, memberships that are annual or, you know, HOA dues that are annual, life insurance, taxes, kids’ tuition. You can go on and on. You need that balance by that specific date or you have a balance goal where you just know, “Hey, I wanna get to this balance and I wanna try to maintain that balance as best as I can.”
When you do all of this, this amazing thing happens. Cash starts piling up in your bank. Now, move as much of that over to savings as possible or to your high yield savings account. But I’ll tell you what. That is so powerful and so much more powerful than having this “emergency fund” that who knows what it’s for or it’s not even earmarked for a specific purpose. Now, if you had a huge emergency and you said, “Well, I need to reduce some of these balances and I need to not save my life insurance for 10 months from now but I need to, you know, ke that money and I know that I’ll be able to get it paid back by 10 months or in 10 months when my life insurance premium’s due.”
All of this piling up of cash in your bank account, what it does is it frees you up. You’ve got money set aside and allocated for very specific purposes. You know what it’s gonna be used for and your bank account is just getting bigger and bigger and bigger and it’s a fantastic feeling because you’ve broken out of that paycheck to paycheck cycle, you’ve broken out of the credit card float and now you have planned by saving for all of these non-routine potential expenses or emergencies that could come up.
So the more specific you can be and keep track of all this well, actually the better it is, the more predictable all these things become even for what right now you’d call the unpredictable in your financial life.
So as the initial part to cultivating assets, this part where we’re learning to save, I’ve now given you three ways that you should and could start saving immediately. And these savings are to be held in a combination of your checking and savings account, preferably at the same bank so that you can transfer money back and forth as quickly as possible. And you wanna try to keep as much of the balance over in your high yield savings account as possible. And if you’re not sure where to get a checking and a high yield savings account that’s at the same institution so you get these immediate transfers and all those things…I did a podcast episode. It’s episode 19, “Where should you bank?” Go back to that and have a listen to that and hopefully that will help you start to think about how to organize where the money is at along with all these buckets. And I will also mention that you need a budget software. It’s fantastic for setting up these buckets, saving and filling them up whether it’s the credit card float. It can automatically do that for you. As you spend it’ll set the money aside to pay that credit card statement when it comes. Living on last month’s income. It’s great at doing that and then it’s great at setting up all these buckets where you can just start saving money for all these non-routine items that can be financial havoc wreckers on your life and now all of a sudden that noise and that unexpectedness, it goes completely away. And your financial life starts to become very boring and very predictable which actually then sets you up so that…and that’s really what the next episodes are now gonna be on is now how do we start saving for mid-term and long-term savings and all the way down out to retirement and how should we be thinking about… You know, should we invest those things and how does all that work?
So, please subscribe to the podcast to make sure that you don’t miss any of that future content. I think you’ll find it very beneficial. Many, many thanks to you for joining today. This is a wrap for episode 22. Happy day.