In my last post, I walked you through how we setup our budget to be simple to maintain, automated to the fullest extent possible, and flexible to our changing priorities. As I’m writing this post, COVID-19, a new and novel strain of Corona Virus is ravaging the globe. Thus far, there have been 2,276,473 confirmed cases, and 156,119 lives claimed from this pandemic (sadly, this number will change by the time you click this link). Governments worldwide are working to contain the virus by closing borders, limiting travel, and encouraging social distancing. These policies are placing a strain on the economy, and will have ripple effects for years to come.
To prepare for events such as this one, many people in the personal finance space such as Dave Ramsey advocate having an emergency fund of 3-6 months. Its sole purpose is to serve as an insurance policy against unfortunate events. The real problem everyone is trying to solve is all about CASH FLOW. Emergency funds, cutting back, finding extra work, etc… are all mechanisms put in place to guarantee a certain amount of cash flow you’ve determined to be necessary.
What is the amount of cash flow I should have?
So, this is a really personal question, hence why it’s called “personal” finance. The level of cash flow you need is directly proportional to the type of lifestyle you want to live. Oftentimes, people confuse their lifestyle expenses with their needs, which is simply not the case. Depicted below is an accurate representation of the relationship between your needs and your lifestyle.
You can look at your needs as the basic necessities needed to live out your life. The most basic needs are housing, transportation, and sustenance; in our household we like to expound on these and add health insurance, life insurance, debt (promises), and taxes. There are many variations of how these needs could be met, for some, living at home with their parents fulfills their housing need. For others, they won’t feel comfortable if they’re not living in a five-bedroom, three-bathroom house close to downtown. This is the effect that your preferred lifestyle has on your needs, and any other expenses you may have — wants.
Structuring Your Expenses for the Worst-Case Scenario
So in our last post, we broke-down all of our fixed expenses into four broad categories: (1) Lifestyle (Consumptive Expenses), (2) Protective Expenses, (3) Productive Expenses, (4) Destructive Expenses. If you noticed on our table, we further subdivided these expenses into three (3) distinct group’s needs, needs/wants, and wants. The table below depicts how our budget is viewed in this paradigm.
Our Worst-Case Scenario Plan
This pandemic showed the importance of having a secure financial plan in place should things get tough. Fortunately for Mrs. Dollarman & I, we’re both in industries where our positions are relatively secure (healthcare/military). However, should one of us ever lose our jobs unexpectedly, this would be our plan:
- Aggressively apply for a new job
- We regularly update our resumes should it be needed for anything. We also make sure we’re staying relevant in our current professions by investing in professional development such as certifications to advance our careers and expand our knowledge/skill sets.
- Unemployment insurance/benefits
- This wouldn’t entirely cover all of our lost income, but it’s another layer that we could tap into to serve as a buffer from having to make modifications to our lifestyle.
- Unemployment insurance is definitely not a benefit to depend on, especially during this pandemic where a whopping 22 million people are out of a job.
- Reducing expenses
- Since both of us are working, it allows for us to be more flexible with the amount of expenses we have to scale back on should one of us lose our job.
- If things were to get a bit more restrictive, we’ll look at what lifestyle modifications are needed to be made in order to get by.
- There’s over $5,000 worth of expenses we could easily cut from our budget that wouldn’t really impact our lifestyle. A bulk of which are retirement contributions (~$4,089.43/mo).
Lessons Learned from This Pandemic
For the longest, I’ve been in the “no emergency fund camp”, and Mrs. Dollarman has eagerly advocated that we establish one. Once our remaining debt is paid off, we plan on building a significant amount of emergency savings; potentially 6 months to 1-year worth of living expenses (needs) in order to be prepared for times like these should we lose our incomes.
So, in a nutshell, that’s our plan for financially surviving the pandemic & more. We’ve learned a great deal this past month. We’ve seen millions of layoffs, the stock market plummeting, and have heard stories of people not knowing how they’re going to feed their families. It has really re-emphasized the need for us to complete our 2020 goal #5; Pay off remaining debt (non-mortgage). It has also showed us the benefits and purpose for having an emergency fund.
Until next time, hope you all are staying safe.