Adobe Stock
The singer-songwriter Max Stallings has a song called “A Night's Pay in My Boot.” The song tells the story of a friend of the singer who works in a big corporate job in Dallas and kind of makes fun of the singer working as a musician. The friend, though, later goes broke after losing his corporate job, and the singer responds by saying, “That’s why I have a night’s pay in my boot.”
Wes Shannon
If you are of a more romantic flair you may want to do a Tony Soprano and have a bowling ball bag with $50k, a fake passport, and a .45-caliber pistol. This is what is referred to as “cut-and-run” money.
Seriously, however, sound financial planning starts with the creation of an emergency fund of savings. The rule of thumb is a single-income household should build up savings equal to six months of expenses, and a two-income household should save up three months of expenses. If a person is on a guaranteed fixed income for life (like a pension and Social Security) the three months of expenses will be sufficient.
This reserve can protect the household from a job layoff and unexpected expenses, such as medical or major uninsured damages. It is the foundation of any successful plan. One of the more popular financial media persons preaches paying off all debt before saving and investing. That is an easy philosophy to have when the one espousing that philosophy has no fiduciary responsibility to any one individual.
Actually, that is a poor philosophy when put into practice. The first priority is to build the emergency fund. While doing so I recommend servicing debts with just the minimum payments until the emergency fund goal is met. After establishing an emergency fund then a person can focus on paying off debt.
Remember that all debt is not the same. There is good and bad debt. Good debt is used to purchase an asset that appreciates. As an example, a home loan. Student loans are good debt because they allow a person to make more money with the education they acquired. Bad debts are those acquired for financing expenses. Also, a good rule of thumb is if the interest rate on a debt is less than 6% don’t pay it off early. Invest the excess you would pay on that debt and over time you should earn more than 6%.
Today, emergency funds can earn 4% to 5% in high-interest savings accounts, money markets, Certificates of Deposits (CD’s), and Treasury bills.
A huge psychological benefit of having an emergency fund is the secure feeling one gets from knowing that if an unexpected financial expense or opportunity presents itself, it can be covered. One doesn’t have to worry about going into debt. Also, having an emergency fund usually makes a person frugal with their expenses when they consider how long a sacrifice it was to build up the savings.
After the emergency fund is built and the bad debt is paid off, a person can then focus on saving for long-term goals, such as retirement, big vacations, or starting a business.
An important thing to remember when it comes to emergency funds is that they must be liquid. You should be able to get your hands on the money in 48 hours or less (the bowling ball bag). Every investment and savings above the emergency fund can be tied up for long periods of time but not the emergency fund.
Whether you are a musician, lawyer, doctor, business owner, or even a gangster, having 180 nights of pay in your boot is a sound idea. As always, the best professional you can find to help you with this basic financial strategy and all other strategies is a Certified Financial Planning Practitioner™.
Wes Shannon CFP® is a Certified Financial Planning Professional for Brazos Wealth Advisors.