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Making Over My Cash & Emergency Reserves Plan

January 4th, 2014 at 10:22 pm

Two years of living expenses in a savings account: that's what my cash reserves plan amounted to a few months ago. Then I started planning to write a blog post on the how and why of that plan. And in so doing, completely changed my thinking.

I've gone from a cash reserves plan to an emergency reserves plan -- and that has made a huge difference. Before, my cash reserves consisted of sums in checking, savings and CD accounts amounting to (as I said) 2 years of living expenses. Now, my emergency reserves consist of a 6-month food supply, $2000 cash on hand, gold and silver coins on hand, a year's worth of living expenses in cash deposit accounts, and $270,000 in personal credit lines from 13 different financial institutions. This madeover emergency reserves plan is much much broader in scope than my old cash reserves plan -- yet ties up less money. And the freed money can now be invested for extra income.

This emergency reserves plan works for me thanks to my own individual income and insurance framework. The plan's specifics are not going to be applicable to someone else's financial situation. But the thinking behind the plan may very well open some mental doors worth opening. You decide.

What are my reserves supposed to do?
My reserves are there to give me liquidity and solvency. I don't want to be forced to sell a chunk of my investments (at the wrong time!) because I need the ready cash (liquidity). I don't want to have to do without something I need (such as a car repair or a medical prescription) because I just don't have the money (solvency). I don't want my credit score to plunge because I don't have enough money in my checking accounts to pay my bills when they come due (liquidity and solvency). And I don't want to miss out on an investment/savings/great deal opportunity because I don't have the necessary funds when the opportunity presents itself.

BUT! In the first place, I don't need money in a checking or savings account to deal with some of those situations. And in the second place, there are plenty of situations where money in a checking or savings account (or available balance on a credit card) would not do me one bit of good.

To give myself true (or truer) liquidity and solvency, I've had to revise the elements of my reserve so that I will be covered in a much wider range of possible emergency situations.

What I learned about ready cash from Hurricane Andrew
There are a lot of things I'm never going to forget about the aftermath of Hurricane Andrew in Miami. And one of those things is the little convenience store that reopened up for business a few blocks from me just 2 days after the hurricane hit. There was no electrical power in that entire section of the city, so: no electronic cash registers, no credit card terminals, and no ATMs. Cash was King and prices were inflated. Almost 2 weeks passed before that little store had its electrical power restored. Same thing for the home improvement store half-a-mile in the other direction. If you were out of cash, you were out of luck. And that in a situation where you even had to buy your water because there was nothing coming out of the faucets!

So, Reserves Lesson #1 for me: have a ready cash reserve at home.

But for some people in the areas south of Miami, it was actually worse than that. There were no stores in good enough shape to open and NOTHING to buy. We all saw similar images repeat themselves a few years later in New Orleans. People standing in line for food-and-water handouts from the back of trucks. People completely at the mercy of... whatever.

Something like that can happen anywhere, anytime. Hurricane... earthquake... forest fire... tornado... snow storm... civil disturbance... security lockdown (think Boston)... you name it. The day could come when you have no open stores to go to. For days. If it's really, really bad maybe for weeks. All you'll have is what's in your pantry. (Best to go right through the stuff in your refrigerator the first day, before it all spoils.)

So, Reserves Lesson #2 for me: have a food reserve at home.

What I hope I never learn first hand about the fragility of fiat money
Emergency is the key operating premise in my approach to reserves. And what could be more of a financial emergency than your money becoming worthless, or just disappearing overnight from your accounts?

Last year, Cyprus tried to simply confiscate bank deposits above a certain amount. My Cuban friend lived through a day when -- overnight -- the paper currency was changed and no one was allowed to exchange more than a certain limited amount of the old no-longer-legal-tender money (or bank deposits) for the new paper. That scenario has been played many times in many different countries. And how do I know it won't happen here?

I hope it does not happen. More than that, I don't think it will happen. But even though I don't expect my house to burn down, I have homeowner's insurance in case the unthinkable happens. Even though I don't expect my vehicle to get totaled on the highway by some tipsy driver, I have automobile insurance in case the unthinkable happens. And, even though I don't expect some currency-collapsing crisis to happen here, I think I better have at least a little insurance in case the unthinkable happens.

So, Reserves Lesson #3 for me: have a modest stash of gold and silver coins at home. (And if nothing happens, it will just have been another investment.)

The rest is just a matter of hedging my cash flow
As I mentioned earlier, this emergency reserves plan works for me thanks to my own individual income and insurance framework. And that framework makes it very unlikely that I could get caught in a longterm cash flow crunch.

My Social Security income covers 110% of my basic living expenses. Dividends and interest income from my investment portfolio covers 180% of my basic living expenses. That means that my retirement income could collapse by 60% and I still would not have to fight Sassy, Scampy and Bear for their canned cat food. I cannot see a solvency issue in my horizon; just the possibility of a liquidity one.

And that is where my credit lines come in as a component of my emergency reserves plan. Except for taxes, electricity, and insurance, all my expenses could be paid by credit card if necessary. Having credit lines from 13 different banks gives me a way to bridge any short term lack of liquidity for more than half of my living expenses without having to be dependent on just one or two lenders. I can always pay off any borrowed sums with future cash flow from my Social Security and/or my investment income.

The other "cash only" half of my basic living expenses needs to be covered by, well, cash. So I have hedged that with a year's worth of those expenses in a checking and a savings account.

So, Reserves Lessons #4 and #5 for me: keep a diversified mix of credit lines open, and keep enough money in bank deposits to cover your non-chargeable expenses for a reasonably long while.

The only possible fly that could still be left in the ointment here would be unexpected medical expenses. But I think I have covered that too. I've focused on overall worst case medical expense risk to come up with a maximum possible expense number ($5000 a year) that I could most certainly handle under my emergency reserves plan.

So, more emergency coverage and more money in my pocket
With this emergency reserves plan in place, I have reduced my need for cash reserves by a lot. As a result of investing the freed funds, I have boosted my annual passive income by a goodly amount. And I have hedged against just about every kind of emergency I can think of.

What about you? What do your emergency reserves look like?

My Financial Independence Key: Separating My Wants from My Needs

December 17th, 2013 at 03:26 am

When I started planning in 2009 for a financially independent retirement, I was very clear about one thing. For me, this was all about time. About shortening as much as possible the time I would have to spend in a daily commute-and-work grind. About freeing as much of the time I had left on this Earth -- which is limited for all of us -- to do what I wanted to do and not what somebody else assigned me to do.

When I started this journey in 2009, I had "perceived" personal annual expenses of $33,280. Now, 4 years later, I am FREE... free with yearly personal basic living expenses of $15,000 net of income taxes.

It was my focus on the overriding priority and importance of time over other considerations that got me free. I reasoned that if this was about time then it was not about accumulating (or holding onto) unnecessary things... or about keeping up with the neighbors... or about indulging in lots of optional cost-ridden activities. And what I did to stay focused was to specifically and clearly separate and keep track of my basic living costs and the costs of my wants -- in writing and frequently. By doing this, I was able to so lower my financial freedom budget -- AND accelerate the growth of my stash -- that 4 years later I had reached my goal in January 2013. My time is now mine (and I actually have ended up with plenty of "extra" income to fund lots and lots of "wants").

The real key, though, is a mental one. I had to learn to tell the difference between needs and wants, which is not necessarily that obvious in our consuming-driven society. It was and is vital that I not mix and mingle -- that I not confuse -- my basic costs of living with the price tags for my discretionary toys and playtimes. Recognizing and acting on the difference cut years and years off my working life, and made attaining financial freedom much much more doable.

A Vehicle or a Status Symbol?
A House to Live in or to Show Off?

I need a reliable pick-up truck for a vehicle, and I have one in a paid-for 1996 Dodge Dakota that I've kept in great shape. Recognizing that I do not need to trade it in for a newer $30,000 truck (even if I wanted one) has kept my basic living expenses from increasing by at least $3000 a year -- and saved me from having had to work an extra two years to accumulate the capital required to fund that $3000-a-year expense.

A newer truck or two more years of my remaining life lived in financial freedom? For me, it's a no-brainer. How about for you?

I need a modest-sized house (1500 square feet for 2) with a garage and a workshop on a couple of acres or so (because I learned the hard way I need to not have in-your-lap next door neighbors). But in 2009 my wife and I owned a much larger house in a suburban community plus a 100-acre vacation property. At best, we used (needed) half the space in the house; the other half we just wanted for show. The vacation property we obviously did not need at all, and ended up wanting to visit it less than 12 days a year. An unexamined financial picture had kept us tied to both those places. Four years later, we've sold both properties and used the profits to acquire mortgage-free the right-sized house we really need in a more rural setting that's also more pleasing to us. Recognizing that we did not need the bigger house or the occasionally used vacation property reduced my basic living expenses by $8500 a year -- and saved me from having to work an extra five-and-a-half years to accumulate the capital required to fund that $8500-a-year expense.

A bigger house or five-and-a-half more years of my remaining life lived in financial freedom? To me that's also a no-brainer. How about you? And so it goes for me, even with the smaller expenses.

Basic Need Or Optional Want?
I no longer have a mortgage. I do need to spend money on groceries, medical and other insurances of many types, utilities, truck operation and maintenance, property maintenance and taxes, pet care, investment fees, and income taxes. After a year of judicious cost-cutting that did not require giving anything up, I was able to cut the total of those costs by another $3000 a year. And that saved me from having had to work another extra two years to accumulate the capital required to fund that $3000.

Unexamined living costs or two more years of my remaining life lived in financial freedom? Another no-brainer as far as I'm concerned. What do you think?

I can now cover all my basic living expenses on $15,000 (net) a year and still have a jolly good time enjoying my freedom to hike, bike, canoe, read, blog, movie watch, video game, listen to classical music, and more.

If I want to have even more fun, I'll spend more money -- other money -- on civil war tour trips, national park camping trips, eating at restaurants, snow birding in Florida for the winter, driving off into the country, tackling home or truck improvement projects, and whatever else may strike my fancy. But I am crystal clear that these are all wants. The money I spend on them is separate from what it costs me to meet my basic living expenses. I don't need the wants. And I don't let them morph into needs -- or even quasi-needs -- by letting them slip into my baseline living expense calculations or budget.

Even though my passive income is more than 3 times $15,000 a year, it gives me a tremendous sense of control and peace of mind to truly recognize that my personal baseline living expenses are $15,000 a year. The rest of my money spending is optional, discretionary, for fun and unnecessary. So I keep it separate -- and pay for it out of a discretionary FUND -- in order not to confuse myself into thinking that I actually need a lot more than $15,000 a year to be financially independent.

Have you thought of looking at it that way? How much income do you really, really need to declare yourself financially independent and start living free?

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