Living Without Reserve (Funds)

A recent headline from the Associated Press laments that almost half of U.S. households are living paycheck to paycheck with less than 3 months of living expenses in reserve. This is a precarious position. I have been there myself and I will never forget the vulnerability I felt as a young, itinerant road musician, wondering when the next unmanageable expense would descend on me.

In my book I discuss this dilemma at some length including how to manage medical expenses during a period of unemployment. Here I will offer some additional comments on what to do if you are in this situation, and an amazinly simple technique to avoid being in if you have not yet fallen into this trap.

If you are out of work, or were unemployed previously and have not rebuilt a new financial buffer, you must start building that buffer now. This means that you first start with cutting your expenses. You may not have control over your current income, or even some of your mandatory expenses such as housing or a car payment, but you have control over other discretionary expenses. And you may not realize you have some control over your housing and car payments, too.

A young couple I talked with recently has no money set aside and no credit, but they have a passable income when the man's hours are not reduced. However, the tires on their sole automobile will need replacing in about ten thousand miles, and their washer and dryer are showing their age. Their comment was, "We don't have any money, how can we save anything for an emergency?"

They were so close to their choices they did not see the choices they had made, or the options available to them. They were spending about $5 each day on cigarettes, which is $150 each month, or $1,800 per year on this habit. Additionally, they were spending a bit over $100 each month on broadband Internet and cable. Rather than make lunch at home, the man was spending about $7 a day on food at his workplace. With 22 workdays in a month, lunch was costing another $150 per month. So, in just these areas they were spending $400 per month on cigarettes, cable and lunch-out. They have control over these expenses. Even if they cut these costs only by half, this would save them $200 each month. And a couple months of these savings will pay for a decent set of tires in the near future.

At some point it is prohibitively difficult to further reduce expenses, but most people have lots of fat they can trim away. As a personal reference point I can share that I would love a brand-new pickup. I bought one once - twenty years ago. Of the very few other vehicles I have owned in my entire life, that was the only new vehicle I ever purchased. My wife and I agreed to buy used cars and put the saved money into college funds for the children. It's just a matter of priorities.

If you are working but do not have the recommended six months of essential living expenses set aside, do not wait another day. Start somewhere, start anywhere. But start today. My wife and I started with $25 every two-week paycheck. When I got my first raise, we bumped our savings to $50 every two-week paycheck. We adopted that most exquisite of financial success plans: "Pay Yourself First". We still follow that plan over 30 years later.