Hello beautiful mama! A couple of weeks ago I became unemployed. I lost my W2 job at a company I had worked at for quite a number of years. It was a mix of emotions. After reflecting, I realize this loss has been a blessing. This is all because we’ve constantly done five things: lived below our means, paid ourselves first and automated it, had an emergency fund, had minimal debt, and bought assets that cash flow.
I now have an opportunity to explore new passions and delve into existing ones. I’m actually excited about the future. I’m not fearful of when my next paycheck will be coming in.
How can I be excited about a layoff during a pandemic with two little ones you might ask? Well, for one thing, we always knew this would happen. By this, I do not mean specifically losing my job. We did always know the big bad wolf would come knocking on our door at some point. Believe me, we’ve had our share of wolves, but I won’t get into that in this post.
Because we knew something terrible could always happen, we planned for it. We did this by doing the five things mentioned above, which I will share in more detail below. By doing these five things over time, we knew we could always handle a major financial setback. If you do these things, you can too.
Be honest with yourself, what would you do if you lost your job tomorrow? How will you live? How will you provide for your family? How will you pay your bills? Click To Tweet That is why I encourage you to implement the following five action items we took into your own life. I guarantee if you follow these recommendations, when you lose your job or another curve ball is thrown at you (don’t worry there is always one), you will not worry.
I must mention that if these recommendations are too much to handle at once or you feel overwhelmed reading this post, that’s perfectly okay. Don’t beat yourself up about it. In fact, you should pat yourself on the back because just by reading this you are educating yourself on how to be better with money. Click To TweetStart with one item, do it well, then move onto the next one. Implementing even one of these tips is better than doing nothing.
Don’t forget everyone starts somewhere so why don’t you at least start with one action step today to create a safety net for your family.
- Live below your means
- Pay yourself first and automate it
- Have an emergency fund
- Have minimal debt
- Buy assets that cash flow
1. Live below your means
This one is crucial so I recommend working on this one first. The larger the gap between the money you bring in and the money you spend, impacts your bottom line in two important ways: the more money you can save and the less money you need to cover your expenses.
For example, if you make $50k a year but only live on $30k a year, you are able to save $20k. In the event, you lose your salary, you only need to make up $30k and not the full $50k. This might be much more manageable for you.
We lived way below our means in a high cost of living area by tackling three major expenses: taxes, housing, transportation (another large expense is our food budget, but we are still working on ways to lower it). We also never let lifestyle inflation creep in.
To save on taxes, we have always optimized our tax advantage accounts. We did this by maxing out our 401k/403b for the year, our traditional IRAs, HSA and set up a 529 plan for each kid. All of these accounts had money that went in before taxes. This significantly lowered our tax bracket (For information on tax brackets check out my earlier post Mom Tips To Help You Prepare for the 2019 Tax Season). Essentially, we get to keep much more of our money rather than giving it to the government.
Eventually, we will convert all of the money in our traditional IRA’s, 401k, and 403b by using the Roth conversion ladder. Check out the Mad FIentist’s brilliant explanation on this tax savings strategy. Once we convert it into a Roth, our money will continue to grow tax-free and we will be able to take it out tax-free! That means we will barely pay any taxes on the money in these accounts (all legally!!!).
If you have access to an HSA, please max it out every year. For 2020 you can put in to $3,550 for individuals and $7,100 for families. The annual “catch- up contribution amount for individuals age 55 or older will remain $1,000.
I love these accounts because the money goes in tax-free, grows tax-free, and comes out tax-free if used on medical expenses. This is a wonderful way to hack long term care insurance because you can grow a nice sizable nest egg in an HSA all tax-free and use it for your medical needs when you are older.
Reduce Housing Expenses
To save on housing costs, we’ve house hacked for the past 12 years. House hacking is when you buy a house, live in one part, and then rent out the rest. I will talk about this in much more detail in a later article but essentially we were able to live in top-tiered neighborhoods, in high cost of living areas for only about $1k a month. This was so much cheaper than renting or buying a home and allowed us to save a significant amount of our income.
Reduce Transportation Costs
The second area of savings was transportation. We did this by buying two certified pre-owned Honda CRVs. This saved us a ton of money over time since we bought modest cars that still met our needs. However, they didn’t cause us to gain any debt or lock-in high monthly leasing payments. If you’re driving a really nice car, I’d encourage you to think about why. Be open to the idea that you can drive another car to get you to and from places that won’t put you in any or as much debt.
Avoid Lifestyle inflation
Finally, we continued to live on the same amount of money, as we received salary increases and bonuses over time. We then invested the difference. While our friends were buying new homes and nicer cars, we were house hacking and driving modest cars. We always believed in delayed gratification so that we could sacrifice the good for the great. Click To Tweet
Action steps: I encourage you to figure out ways to live below your means.
- You can do this by first tracking your spending for just one month. If you know where your money is going, you can control it. Mint is a great tool to help you do this.
- If you can’t attack the big-ticket items like housing, start small, but start somewhere. Maybe you really only need one car or maybe you can convert a room in your house to rent or even your garage.
- Remember you can’t spend the same amount (or worse more) of money you bring in. If this is you and you can’t cut any expenses, your only other option is to make more.
- Do this by increasing your current income or creating another income stream such as starting a side hustle.
2. Pay yourself first and automate it
This one may not seem like a big deal but it has a huge psychological impact on your brain and an impact on your finances. By paying yourself first before your bills, you are telling yourself that you are worth it and that your future is more important than the stuff that you are buying in the here and now. It is a magical way to trick your brain because paying yourself first and automating it forces you to only make the decision to save once but you actually do it consistently! This is huge!!
All you have to do is set it and forget it. You don’t have to constantly jump through mental hurdles every month on how much and when to save. For example, let’s say you have $50 and you see these awesome new shoes that are super comfortable and look amazing. You can take that $50 and buy the shoes you may or may not need or you could automate your savings so that every month, $50 is placed into one of your accounts.
Now, when you see those shoes, you don’t have to feel guilty about spending your money since you already saved. You can indulge in your wants and not worry about the ramifications. You no longer have to choose between saving and buying what you enjoy and value. You can have both. You are guaranteed to reach your goals IF you stick with your automation once it set up and don’t fiddle with it.
To make this process easier, we first wrote down all our MUST spending items. These were items like housing, utilities, basic food, and clothing, eventually, childcare came into play. One we looked at the required to live items, we then decided on a savings rate that would allow us to massively save yet still enjoy life.
For us, that number was 30%. So we took 30% of our money right off the top. Then we looked again at our required to live items to see if any of them were really nice to have. After that, we used whatever money was left on our wants. You know what? We never missed that 30% off the top. We just got used to it or I should say, used to not having it.
- Review your spending for one month and figure out what are the absolute must-have expenses.
- Next, come up with a savings rate that you are comfortable with.
- Then, go back through your monthly expenses and see if any of your needs are actually wants.
- Finally, take your savings right off the top of your paycheck and automatically transfer it into your savings and investing accounts. This way you won’t even know what you are missing.
3. Have a strong emergency fund that is easily accessible
This one was clutch for us now that I’m unemployed. Having an emergency fund that covers our basic needs is allowing me a two-year runway before I need to work. I can take my time figuring out my next steps in life and don’t have to jump into the first thing that pops up. I have options, which really translate into freedom. I don’t like to recommend a specific number for an emergency fund but I encourage you to be honest with yourself and really think about how much money you would need in the bank to sleep easily if you lost your job tomorrow. That’s how much you should have in your emergency fund.
- Use the time now in the pandemic to save money and start or beef up your emergency fund.
- If you need ideas, check out my previous post on how we saved an extra $1k last month.
- A thousand dollars may not seem like a lot of money for some of you but it’s a start if you have $0.
- If you don’t have a savings account or you are looking for a better one, check out Radius Bank.
4. Have minimal debt
This one may be difficult for many of you, especially if you have a lot of student loans. My husband and I were very blessed to come out of college with minimal debt and I was able to pay my way through grad school so I didn’t rack up debt then either. I do believe if you have debt with low-interest rates, continue paying your monthly balances (interest and principal) but keep saving and investing. However, if you have debt with high-interest rates (7% or more) pay it off as quickly as you can.
- Put together a list of all your debts.
- Next to each one, put down the monthly principle and interest amounts, the interest rate, and when the debt will be paid off if you continue paying your current amount.
- Now study this list, own it.
- Start putting more money towards those with high-interest rates to pay it off faster. I don’t care if you start with the highest interest rate or lowest balance, just work your way through it. Having no debt but a mortgage is extremely freeing, especially if you suddenly lose your job.
5. Buy assets that produce cash flow
This one is simple conceptually but very difficult to implement. I could write a book on this one item but I’m not going to dive into it too deeply since there are many assets you can invest in that cash flow. However, if you master the ability to buy assets that cash flow you will never have to worry about money coming in if your paycheck stops. An asset is anything that makes you money. If it doesn’t make you money, you are losing money, and that is a liability.
At a high level, you can invest in the stock market, real estate, businesses, or any other vehicle that pays you money every month (legally of course). For us, we believe in multiple streams of income. That is why every month we put money into these different buckets for different purposes:
- Retirement accounts,
- Health Savings Account (HSA)
- Kids’ college fund
- Emergency fund
- Savings fund for real estate/business
- A brokerage account that invests in low-cost index funds
- An insurance policy that produces income
This may seem intimidating to you, but if you follow the advice in this article, eventually you will have enough money to save to buy a variety of different assets. Please know in the beginning we only saved a few dollars a month into one or two buckets above. But over time, as we got smarter with our money, we were able to save more and more.
I really want to hit it home that Everyone starts their money journey somewhere, but you have to start so why not start now? Click To Tweet
- Identify one asset that you are interested in investing in and get educated on it.
- Learn about it through books, podcasts, videos, networking, asking questions, whatever it takes.
- Answer the following questions: how you make money with it, how much money you need to make any money, how long your money is tied up, how you can lose money with it, and ways you can protect yourself so you don’t lose your money. These are extremely important questions to know the answer too before you invest in anything.
- Once you know the answer to these questions and feel comfortable pulling the trigger, Buy things that make you money! Click To Tweet