Lazy Man and Money

End of Your Rope? Tie a Knot and Hang on Tight.

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If you ever feel like you’re at the end of your rope… tie a knot baby, and hold on tight!

– Steven Tyler, Aerosmith

It seems that the quote comes originally from Roosevelt, but I remember it from an Aerosmith concert in the mid-1990s. Google didn’t exist yet, so, to me, Steven Tyler owns the quote.

Livin’ on the Edge!

Yesterday I explained how I got an e-mail from a woman who lost her job and the feelings that I went through in a similar situation. Today, I’ll detail what I did about it then and what I’d do about it today.

(* This was originally written in 2007 but, with few edits, it is still applicable today. As COVID-19 continues to make 2020 terrible, this may help you or someone you love.)

First off, I’d break your plan of attack into three phases:

Phase 1 (Immediate Term) – Desperation mode

Before you even begin this phase, I hope you have an emergency fund.

Step 1 – Cut costs

Look around at everything that costs you money. Try to either eliminate it or bring the costs to a minimum.

  • Extras – I would quit most any subscription service… Netflix, Cable TV, Vogue Magazine… all gone. (In COVID-19 world, this advice may not be the best, it gets better.)
  • Food – I’m not entirely joking, but I’d go on the Survivor diet – lots of white rice and water. Perhaps some Ramen noodles if you want to splurge. I’d mix some beans in as they are a great source of protein and fiber and are relatively cheap. Eggs can be a good cheap option as well. Chicken is extremely cheap as well. We are lucky that food costs in 2020 are low if you are flexible on nutrition for the short term.
  • Insurance – Use COBRA to get health insurance unless you have a better option such as a spouse.
  • Housing – The woman in the email had a home and mortgage payments. If you own a home, can you get a roommate? Is AirBnb an option? Is it possible to sell it and downsize or rent?

Step 2 – Earn an income

It’s impossible to make payments on your home without money coming in.

  • Look into Unemployment – This is an obvious first step, I hope. When I was jobless, my unemployment benefit was quite large as I was downsized from a high paying job. The downside of this is that it discouraged me from looking for work. With unemployment, if you make $50 that week, you report it and then you get $50 less for the week. This extends your time on unemployment though, so if you are still unemployed when your unemployment would have run out, you’ll still have that $50 to get the following week. This was poor motivation for me to take any available work, which would normally be my instinct. For example, if I took a minimum wage job, I would be working 40 hours a week for literally no money. It’s a strange system in my opinion.
  • Make Extra Money – See if there some ways you can make an buck on the side. There’s another great example at Get Rich Slowly.
  • Think about small jobs – Don’t be afraid to work double shifts at McDonald’s or some other fast food place. I used to work at a fast food place and I actually thought it was fun (in high school at least). The bonus is that if you work the night shift, you can often bring some leftover food home. It wasn’t uncommon for me to bring home 12 calzones a night that would have otherwise been thrown out. They went into the freezer and our family had food for months.

    Focus on what skills you have. Maybe you can teach a class on something better than most people. Maybe you can create logos on Fiverr. One benefit of 2020 over 2007 is that we have a robust gig economy. I make money dog sitting.

  • Talk to Friends – Tap your social network and see if you can find a job there. I once found a job for a friend through another friend… and none of it happened through a social network. It was talking to people in real life.
  • Look for Jobs Online – Look online at Monster, CareerBuilder, and Indeed. LinkedIn is an obvious way to go.
  • Blogging – Blogging for money is possible, but expect to earn somewhere around 5 to 10 cents per hour spent for the first 5 months. It took me a year of 2 hours a night (on average) to make a thousand dollars a month… but it was much, much easier in 2007. Most people spend their time on social networks, not independent blogs. Thirteen years later and it’s a struggle to grow beyond a thousand a month… and I know a lot of bloggers who would love to make a couple of hundred dollars a month.

    Nonetheless, if you are looking into blogging as a longer-term solution here are ten reasons to be a personal finance blogger. And here is a little guide to being a successful blogger. (Note: These articles are in need of updating. They are good motivation, but there is better practical advice out there.)

  • Consider selling things you have of value – This is a tough decision and must be made on an item by item basis. You may have a few hundred dollars in stuff from eBay, Craigslist, Facebook Marketplace, or a garage sale.

Step 3 – Take Care of Yourself

It’s more important now than ever. I originally meant that because losing a job or dealing with any kind of financial hardship is tough. Coronavirus turns it up a couple of notches.

  • Pay Attention to Your Health – It’s easy to get depressed when in this desperation mode.
  • Be Social – When I was laid off in 2001, I was lucky enough to live with roommates. They pushed me to be social when I worried about the expense of the restaurant meal or drinks at a bar.
  • Exercise – My apartment building also had a gym, so I scheduled a block time there every day. If you are on the cheap diet I mentioned above, you should be working out. Exercising releases endorphins which will make you feel better. Studies show exercise works as well as (or even better than) some anti-depressants.

Phase 2 – Recovery

Hopefully, you won’t be without a steady income for a long time. I had to go for two years until software engineering jobs came back. That’s a long time to try to get by on emergency fund.

If you took my advice and ended up getting two minimum wage jobs, chances are you are going to burn out before too long. It’s almost like treading water, you just want to prevent yourself from sinking. Once you’ve stopped the bleeding, it’s time to begin the recovery phase. The recovery phase is where you will need to spend any spare time looking for one job that used to pay like the one you previously had. That means making a huge effort to apply for new jobs in your industry. You may find that you need to learn new skills or require additional education. It will be hard to do this while you are working two jobs, but it’s necessary to get back to where you were.

Phase 3 – Prevention

If you’ve been able to secure a salary near what you had before the job loss, you are ready to enter the third phase – prevention.

You want to prevent this situation from happening again. You want to build back up that emergency fund. I prevented a total loss of income by building passive income streams. That way if I lose one, the others can keep me afloat. Looking back at this 13 years later, my wife and I have a very solid net worth, great retirement income, some rental properties, equities, side hustles (blogging, dog sitting). We can be financially independent in a couple of weeks by eliminating extra education costs.

Originally published May 15-16, 2007

For fun here are a couple of the outdated references I removed:

– Vonage’s cheap per minute VOIP home line instead of a traditional landline
– Advice of getting rid of your cell phone. Now just get a cheaper phone and a cheaper plan.
– Use HotJobs as a source to find new jobs

Many Americans Can’t Afford $400 in an Emergency

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Earlier this month, Lazy Man and Money quietly turned 10 years old.

The economy has changed a lot in that time. If I had to pick one highlight, it would be when the entire banking system collapsed when I went on vacation to Australia/Thailand for a month. (Just this one time, I’ll purposely confuse causation and correlation, because it makes for a better story.)

However, one thing hasn’t changed… many Americans are unprepared for relatively small unexpected emergencies such as a car repair.

The latest information is highlighted in this article in The Atlantic. The article cites that the a Federal Reserve Board survey shows that 47% of Americans said that they’d cover a $400 expense by borrowing or selling something.

That sent shock-waves around the news sites that I follow on the Internet.

However, it shouldn’t have been a surprise to long-time Lazy Man and Money readers. Last year, I wrote How Much Emergency Fund Should You Have? where I cited this research that 64% of Americans don’t have the money for a $1,000 emergency expense.

(I hope that someday, someone will ask about $500 which should come in at over 50%. That way I’ll be able to make a simple statement of “Most people don’t have $500 in emergency cash.”)

The easiest solution is to Dobot, which is a free service that periodically squirrels away small, unnoticeable amounts of money in separate bank account. I have saved $1100 in my Digit account. You can read my Dobot review here.

Seriously sign up for Dobot now. Don’t make me figuratively hit you over the head with this.

However, if I can help 47% or 64% of Americans be better prepared for the inevitable emergency, it’s worth a couple of paragraphs, right?

There’s much, much more going on in the The Atlantic article. I’ll be referencing The Atlantic article all week (maybe even two weeks) as it covers.

Tentatively, I plan to write about the author’s obstacles to secure his financial future. I also hope to cover the story of a local (to me) high school student who may change the future for my state.

The Roof, the Roof, the Roof is on Fire!

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We don’t need no water… well you know how the rest of it goes, right?

I got news a few weeks ago that the first property I bought, a condo, has major design flaws. You’d think this would have been uncovered in the first 40 years of its existence, but it wasn’t.

Every owner has to pony up an estimated $15,000 for the project. One of the reasons I love condos is that the cost of snow removal, roof repair, repainting, etc. is all wrapped in the HOA fees… except that it clearly isn’t. It’s a good thing that the average American keeps tens of thousands of dollars in an emergency account to deal with these things… except they don’t. Most Americans can’t afford a $1,000 emergency expense.

(Please excuse the sarcasm. It’s a little therapeutic for me given the news)

The condo association put together a few different payment plans. Each owner can:

  1. Pay the $15,000 up front (funding from whatever source you happen to have available).
  2. Use a credit line they were able secure at a 4.7% fixed rate over 15 years. In this case we’d pay an estimated $130 per month.
  3. A couple of different combinations of 1 and 2 where we’d pay half the money up front and reduce the monthly payments.

I think this presents an interesting financial situation/challenge.

The association points out that if you get your own home equity line of credit, you might be able to deduct the interest of the loan. However, if you take their credit line you wouldn’t be able to. Of course, since it is an investment property, I wouldn’t be able to deduct the interest anyway…

… or could I? If I got a home equity line of credit on my current home and paid the $15,000 to the association, I’d be able to deduct the interest on that line of credit. It could be a good plan, but I tapped our home equity for our solar panel purchase.

We were working on paying that down with this year’s tax refund and hoping to make another huge dent with the solar tax credits next year. We’d clear up around $15,000 just to put it back on with this roof project. We’d get a lower rate at least at first. Our HELOC is an adjustable 3%, and it looks like the Fed is looking to raise rates. At least it would be tax deductible, right?

Mathematically, this is the best option. But, sometimes there are other things to consider.

When I look at the option of using their credit line, I find that it has a couple of non-mathematical advantages:

  1. It would leave us with $15,000 in our HELOC. More safety net is better than less safety net.
  2. If we sell the condo, the new buyer pays off the loan. This might be wash in the sales process, but it will still feel better to make someone else pay for the bad roof.

Some may ask, why not just tap our emergency fund? Our emergency fund has been hit to the tune of $35,000 this year. I know! That’s crazy stuff, right? I’d say that 75% didn’t come from “emergencies”, but from maintenance of our investment properties (expensive stuff like windows, HVAC systems, and kitchens). The other 25% were legitimate unexpected emergencies.

The lesson here is that it isn’t cheap or easy to be a landlord. Our gains on the properties are paper equity. Since they were bought between 2003 and 2004 are valued at significantly less than what we paid for them. (They were never intended to be investment properties, it was just making the best of a bad situation.)

I’m heavily leaning towards using the associations line of credit and preserving ours in case we have another year like this one.

How Much Emergency Fund Should You Have?

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Everyone in personal finance agrees that you should have an emergency fund. If you have one, you are already ahead of most people as 64% of Americans don’t have $1000 in savings.

So the question becomes, “How much of an emergency fund is appropriate?” It’s a question that has been debated for ages… and even after this post it will still be debated.

The problem is that because there’s no clear-cut perfect solution for everyone. People have different risk tolerances. People have different job securities. People have different expenses. People have different assets.

News Flash: People are different.

Many magazines only have a couple of sentences of space to devote to emergency funds. The result is the quick quote of having 3-6 months of expenses. It is actually surprising useful for just a few words. Let’s assume you want to go deeper.

Determine a Unit of Measurement

It might seem natural to just assume that we go with dollars. People save dollars… not goats (usually). However, let’s not jump there yet. (Give goats a chance.)

The rule of thumb does a very smart thing. It forces people to calculate their expenses, which eliminates one variable. Buffy might have expenses of $2000, while Faith might have $5000 a month in expenses. Buffy’s rule of thumb range could be $6,000-$12,000, while Faith’s would be $15,000-$30,000. It is quite a difference, right?

So we aren’t going to with goats as our unit of measurement. We’re going to stick to months of expenses… and we’re going to assume that you can roughly do those calculations.

Try your best to prepare for a doomsday scenario. If you have a rental property with a good tenant now, imagine that the tenant leaves and you have that expense without a corresponding income. Such a scenario could significantly raise your expenses, so I might only consider 50% of the rent, hedging for the likelihood of not having to get a new tenant at the time of the emergency.

Whatever number you come up with, I’d pad it by 20% to cover forgetting something and/or other surprises.

What Is Your Job Security

For a lot of people this is very difficult to answer. There’s isn’t going to be an answer like 3.141593. It isn’t easy as pi. I’d recommend breaking it down into 5 areas such as: poor, fair, average, good, excellent. If you were a temp worker, you’d say poor. If you worked in a small start-up, you might go with fair. If you were a teacher with tenure, you might go with excellent.

You might have a spouse, which complicates things (usually in a good way). If both of you work, you have some extra security (but you probably have higher expenses.)

What Are Your Assets?

This is rarely discussed when it comes to emergency funds, but I think it is very important. If you have a Roth IRA or equity in your home, you might have a hidden emergency fund. Most people may not know they can pull their original contributions out of a Roth IRA with no penalty. These aren’t necessarily the best places to get money from, but it is an emergency fund, not a “buy the best television ever” fund.

Imagine you have $5 million worth of mutual funds. While this far from a typical imagine how that might impact your emergency fund planning. You could have $1 million dollars in a relatively stable investment that could provide you with years of emergency protection. Some people have this… on a small scale obviously.

I recently wrote about having money in Lending Club (Review), which could pay decent income in times of emergency. In the meantime, it is making me 7% interest.

What Is Your Risk Tolerance?

I’m aggressive and I know it. I invest aggressively, because I’m young. Being aggressive has usually paid off for me. I should say that I perceive that it has, which may or may not be due to selective memory.

Maybe you are safe and conservative. It’s cool, we welcome all kinds here.

Maybe you are somewhere in the middle. We can work with that too.

I wouldn’t go too much further than to put yourself in one of those three categories.

Answers, Damn it!

Up to now I’ve given you more questions than answers. Time to fix that problem.

What I’ve really been trying to do is feed you with the information that you can use to find what is the right emergency fund for you. In a strange way, I tricked you into doing one of those quizzes in magazines. Did you catch me?

We start out with baseline of 2 months of expenses in your emergency fund. Now look at your job security rating. Rate it from 1-5 with excellent being a 1 and poor being 5. Add that many months to the baseline. So if you have poor job security you are looking at 7 months. If you have excellent you are looking at 3 months.

Next look at your risk tolerance. If you are aggressive add a month. If you are conservative add 3 months. If you are in the middle… well if you can’t figure this out, you are doomed anyway. Now the possible range could be from 4 months to 10 months depending on those two factors.

Now we want to convert these months to dollars. The good news is that we already discussed this (and goats) above. The calculation is really easy, it is the calculation of expenses that is difficult.

Finally, take a look at your assets.

Your assets may already be worth tens of thousands of dollars in an emergency fund. It is my opinion (and I want to stress that), that if you can have half of your emergency fund in these assets. The other half you probably want to have in a cash or near cash equivalent.

The key to counting your assets as part of emergency fund depends on them being relatively stable. That means you don’t count that Groupon stock you own. You have to be careful what you consider stable. Sometimes you may think they are stable, like home equity only to see a housing crash makes it all disappear.

Example: My Emergency Fund

My wife is a military officer and has excellent job security. I’m a blogger with what I’d say “poor” income reliability. The combination of the two incomes with the level of security puts us in the excellent overall job security section. Think of my “poor” income reliability as an extra bonus to my wife’s excellent job security. That’s worth 1 month.

As I mentioned above, I’m very aggressive in my risk tolerance. That’s worth 1 month.

Add those two months to the baseline of 2 months and we need to have 4 months of an emergency fund. We have around $4500 in expenses for our rental properties so 50% of that is $2200 (remember we are presuming that tenants may not pay rent or move out). Add that to our own $2800/mo. mortgage, we’ll need ~$5000/mo for housing. Add $2000 for car payments and child care and we are up to $7000 with just the big stuff. Add another $1000 for food, utilities, insurance, and other expenses and we are up to $8000/mo. Add another 20% for padding and we are up to $9600/mo.

That’s a lot of money. A majority of that comes from housing in which all the mortgages were 15-year fixed. If we went with 30-year fixed like most people, the emergency fund would be cheaper.

Multiple that by 4 months and we should have an emergency fund of around $38,400. That sounds like a lot of money to keep around in cash. This is where having 50% of that in stable assets can really help. With more than a dozen years of maxing out Roth IRAs and equity in the homes, we have access to a lot more than $38,000 if we need it. Ideally we’ll only count that as half of our emergency plan and count on keeping at least $20,000 around in cash.

Conclusion

At the end of the day, an emergency fund is a very personalized thing. It would be nice if I could have just said, “You need $10,000”, but I can’t. Hopefully this gives you a blueprint for how to know what is the right emergency fund for you.

Do You Have a Hidden Emergency Fund?

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I do, and I didn’t even know it.

A couple of weeks ago, I mentioned that we activated ultra-frugality mode due to the expensive mold removal in one of our investment properties. What was once a very cushy bank account is now looking lean… leaner than it has been in years.

It got my wife worried.

To be honest, it got me worried too, I didn’t want to have an overdraft situation on my hands. There’s always a small gap from when mortgage is due on the first and when the tenants’ checks get through the mail. I mentioned to the wife that we should tap the emergency just to make sure we don’t overdraft at the end of the month during this time.

This worried my wife even more. There’s clearly something “not good” about tapping an emergency fund. However, this is exactly why it exists. In a few days, we can probably move the money back.

This exercise got me thinking, how can I assure my wife that it is “okay” to use this emergency fund. The answer, of course is our hidden emergency fund. You don’t have one? Maybe you do and it is so hidden that you don’t know about it.

I’m going to share with you my secret, hidden emergency fund. It consists of:

  • Our Home Equity – We have about $100,000 in home equity in our primary residence. I am fairly confident that our bank would extend us a Home Equity Line of Credit (HELOC), but this is something that I should have set up before now. Perhaps better late than never. Yes, using a HELOC is not an ideal situation, but we are talking legit emergencies here.
  • My Roth IRA Contributions – As Jonathan from My Money Blog points out, you can withdraw your Roth IRA contributions penalty free. He makes the point that it should be funded before an emergency fund, because it essentially doubles as an emergency fund that is typically growing in the stock market. Again, this isn’t an ideal situation because you’d want that money in the account growing, but for true emergencies it isn’t a big deal. Maxing out your Roth IRA for 10-15 certainly has its benefits, doesn’t it?
  • Our Excess Possessions – Remember when I bought a $60 ball? I don’t use it that much. I could sell it on Ebay and probably not miss it. That’s just one item that is lying around my house. Now if only my gargantuan collection of personal finance books had any value.
  • Ultra-Frugality Mode Itself – Some may not consider this an emergency fund, but we have a ton of food around the house that we need to eat down. We could probably not buying any new food for couple of months (other than milk, eggs, and produce) and instead use up what we have. In fact, we are doing just that with fairly good success. Money that we aren’t spending is money that is going to go straight into our bank accounts.

I hope when my wife reads this, she’ll realize that we have emergency funds on top of emergency funds. It’s fun to realize that you had more emergency fund than you thought.