This post is a guest post. The author is a friend who cares deeply about financial preparedness. I was more than happy to publish his thoughts here, and I believe you will enjoy this article. Above all, I hope it helps someone out there! The author would like to remain anonymous, but if you have feedback you can reach him through me. Let’s get into it!
This article contains affiliate links.
Introduction
Many people who care about disaster preparedness—or, as your great-grandparents would have called it, “living”—first encounter the concept online. Thousands of blog posts and videos are devoted to such topics as building a bug-out bag for surviving in the wilderness and building Faraday cages to protect electronics from the next catastrophic solar flare.
Some of them are written by genuine experts in their fields or those with extensive personal experience, while others are authored by people with, shall we say, less credibility or experience. A surprisingly large number of them, however, focus on the absolute most extreme scenarios: the post-nuclear winter from Cormac McCarthy’s The Road or some other form of complete societal collapse.
Here’s disaster scenario that I think you should place at or near the top of your list: a sudden loss of income.
There’s nothing inherently wrong preparing for those sorts of scenarios, if you have the money, time, and inclination. (For some reason, the solution to almost every possible disaster scenario that Americans might face appears to be buying more and more stuff, but I digress.) However, preparing for the extreme scenarios, in my mind, should come long after you are sufficiently prepared for more likely scenarios.
Here’s disaster scenario that I think you should place at or near the top of your list: a sudden loss of income. In my eleven years of “real” work, my employers have had layoffs three times. Two times, due to the structure of a contract, my position was one of the ones eliminated. In contrast, I have not yet wandered down a post-apocalyptic highway with my children, a dozen soup cans, and my Heckler & Koch in a grocery cart.[1] Accordingly, I would like to provide some thoughts on financial preparedness and protecting yourself from a likely disaster.
My Epiphany
About a decade ago, I had a moment in which I realized that my finances needed to improve. After my wife and I bought a house several years earlier, we had not yet replenished our small savings account. Even though we both worked full-time jobs, we didn’t seem to be saving much money. Anyway, my epiphany occurred when my wife’s sedan needed tires.
Sitting at a stoplight on the way home from a mechanic’s shop, I was full of dread. Those tires would really hurt our savings. Moments later, I realized that I should not have been full of dread for an entirely predictable and not catastrophic expense. That’s when I realized something needed to change.[2] So we started becoming more financially prepared.
Getting a Handle on a Budget
In order to replenish the savings account to serve as a real emergency fund, we needed first to understand how to budget better and control our spending and savings. I started browsing the nonfiction stacks of our local public library. Within a few months, reading widely about personal finance helped me budget more effectively. It took significant searching to find the right resource, however.
Many budgets that I encountered during my reading featured too many categories or didn’t allow for enough flexibility. However, eventually I encountered one that
- used a small amount of categories
- enabled easy monthly adjustments
- provided for money to spend non-necessities
- and, most importantly, instantly provided perspective on whether I needed to make major changes.
This was a budget that I read about in Elizabeth Warren[3] and Amelia Warren Tyagi’s All Your Worth. It was simple—only three broad categories.
- Must-Haves: housing, transportation, utilities, food, childcare, student loans, credit card debt, gasoline, life insurance, and anything else that you are contractually obligated to pay.
- Savings
- Wants
That’s it. The key to making this budget work is determining how much of your income is allocated to each category. Warren and Tyagi propose that you should allocate no more than 50 percent of your take-home pay to Must-Haves, 30 percent to Wants, and 20 percent to Savings.[4]
Establishing a Benchmark
So how do you determine where you are? The authors use a series of questionnaires and forms, but here’s the rough idea. For a month, write down your monthly expenses as you pay them. Categorize them into one of the three categories. At the end of the month, total each category. Divide each category by your monthly take-home pay.
So, for example, say that you make $4000 a month in take-home pay after taxes and deductions from your paycheck.
- You find that you have spent $2800 a month on Must-Haves. By dividing $2800 by $4000, you find that your Must-Haves are 70 percent of your take-home pay.
- You spent $1000 on Wants. Your Wants are 25 percent of your take-home pay.
- You had $200 for Savings. Your Savings are a paltry five percent of your take-home pay.
So, in sum, your budget is 70 percent Must-Haves / 25 percent Wants / 5 percent Savings. That is a problem.
Here’s the point: you need balance, as the authors note repeatedly. 50 / 30 / 20 gives you balance and flexibility to deal with potential problems. Your hypothetical budget, though, is 70 / 25 / 5, which leaves almost no slack in the system for dealing with an emergency. If your budget is unbalanced, you should make the goal to improve it. If you’re starting from 70 / 25 / 5 or a similar proportion, perhaps 65 / 20 / 15 would be a good goal. You don’t have to reach 50 / 30 / 20 in eight or ten weeks, but incremental improvement is better than no improvement whatsoever.[5]
Getting There (Part 1)
If you’re not there—and we were not at the beginning of all this—you have basically two options. First, you can find additional income. Side hustles are helpful for that. Side hustles in which you employ yourself are more helpful, since you keep more of what you make without a middleman. Perhaps you can write freelance articles or do landscaping or minor home repairs. If you do a good job with your first few customers, you’ll find that they will often recommend you to others. You can grow quite a side hustle that way.
Right now as I write this in late 2021, though, the best way to increase your income is to leave your current job and find a new one. Employers in many industries are looking for employees, and it is highly likely that you may be able to land a hefty pay increase right now. It’s unclear how long this situation will last, but if you’re fortunate enough to work in a field where demand is high, start looking. Increasing your income without increasing your expenses[6] can fix a budget very quickly.
Getting There (Part 2)
Second, you can decrease your expenses. Since you have a great deal more control over what you spend than over what you earn, decreasing your expenses is usually—in theory—easier.
If your Must-Haves are reasonably close to the proposed amount, say 60 percent of your take-home pay, you can find relatively quick and easy ways to do lower this category without majorly changing your lifestyle. Shop around for home or car insurance if you haven’t in years. Research cheaper cell phone services. Buy essentials used (secondhand clothes are a good way to reduce expenses, especially for kids). Turn the thermostat from 80 degrees Fahrenheit to 65 degrees during the winter.
If your Must-Haves are really high (60 percent or more), you should focus, according to Warren and Tyagi, on the largest expenses such as housing or transportation. Maybe moving to a smaller house or trading an F-350 for a Civic would help bring that needs number down. Those changes, and not saving a couple of dollars a week on your weekly coffee, are going to have the most sizeable impact.
Warren and Tyagi strongly favor reducing expenses by paying debt. I should note that the way that my wife and I managed to control our Must-Haves category was paying down five student loans and two car loans using money from a side hustle. Warren and Tyagi describe in details ways of eliminating debt. One of these ways—referred to as the “snowball method” elsewhere—is a simple and powerful tool for regaining control of your Must-Haves. (I tend to think much of Dave Ramsey’s advice isn’t very flexible, but he does have a good article on the snowball method here if you would like an overview.)
What to do When You Arrive
Once your financial life is functioning more smoothly and your budget is balanced, you can take some major steps toward preparedness in situations other than a loss of employment. Here are a few options to consider.
Buy a bunker and stock it deep with pallets of ammunition. Okay, I am joking. After a few months of living sealed in a bunker with only your immediate family watching Frozen for the ninetieth time using the limited electricity that your solar panels generate, you might find yourself wishing the nuclear fallout had gotten you.
Anyway, if you have read this far, I do have some serious suggestions.
Build a legitimate emergency fund.
Take your monthly needs, add half of your wants, and multiply that sum by three. That’s what I would consider a bare-bones emergency fund. Multiply by six or twelve if you want a better cushion. That emergency fund is for true emergencies, such as your furnace failing in the middle of December, a major leak in your roof, or your company “restructuring.” You will feel good about this when you accomplish it. You have my word there.
Finish paying your debt.
Maybe your Must-Haves are under control, but you still have some outstanding debt. At the very least, pay off all your credit card debt, your student loans, and your car loans. And, if you’re really wanting to feel prepared for a job loss, save up and pay your mortgage in a lump sum.[7] The point here is that the less debt you have, the more flexibility you have in the event of an emergency.
Devote a monthly stream of funds to practical preparedness.
Our gracious host has written extensively here and here about that topic. At the very least, use those funds wisely to store some water, water purification supplies, and food in a deep pantry.
Devote some funds to learning a new practical skill.
For example, my wife and I started gardening six years ago. It’s not a terribly expensive skill, but we purchased high-quality tools and materials to make some raised beds. We also bought canning supplies to preserve some of the harvest over the winter. Again, these were not expensive, but they weren’t terribly cheap, either. Alternatively, you could take a course in emergency medicine or wilderness survival, if those interest you.
Final Thoughts
If any of this sounds worthwhile, I encourage you to check your local library for a copy of All Your Worth. Warren and Tyagi explain these concepts in greater detail and provide more specific advice for particular types of situations. Regardless, the point is simple. Get your finances in order, and you’re well prepared to handle financial challenges. From there, you can devote more resources to other forms of preparedness. And if you do a really good job of saving money and buy a bunker, spend a month down there with your family ahead of time and let me know how it is.
Footnotes
[1] I’ve read enough history to realize that, to paraphrase the historian Patrick Wyman, “Things can and do get worse.” My point isn’t that the soup-cans-in-a-grocery-cart scenario is impossible but that it is less likely than other disasters.
[2] I should note here that this essay is intended for audiences who have relatively stable, middle income jobs. My experiences reflect those baseline assumptions. Some of the suggestions may indeed help others, but I can’t say for certain that they would help everyone.
[3] For those of you disinclined to read further due to the author’s name and political beliefs, I should note that she wrote All Your Worth years before she entered politics and that discrediting the framework based on its author would be a mistake.
[4] Since first reading All Your Worth, I have seen this budget suggested elsewhere as well.
[5] Once you hit 50 / 30 / 20, you may be motivated to push the savings higher and hit 40 / 20 / 40 or something without drastically affecting your quality of life. And if you can do 30 / 20 / 50, you’re well prepared for an array of common financial problems.
[6] This “without increasing expenses” is the key phrase here.
[7] First, I realize that many people are not in the position to even think about this, especially in high-cost-of-living areas. This is an aspiration. If it doesn’t work for you, ignore it. Second, there are a lot of arguments about why you might not want to pay the mortgage. One of them is that the value of the payment decreases with inflation over time. The other is that you can borrow money at three-ish percent (currently) and earn eight-ish percent in the stock market over time. Each argument has its strong and weak points. You can decide what is right for you.
