Investing is exciting. You’re putting money into your future. Your dreams. Your retirement. Your financial security. Values can change rapidly, so you could see your account balance double within a year.
Saving is, well, saving. It is about as exciting as watching paint dry. This was true even when savings accounts were paying 5%, and it is even truer today with the same accounts paying 0.005%. In the 1900’s, many people used to open their papers in the morning to see how their stocks did the day before. Today people are constantly checking quotes on their phones for the same information. No one checks their bank account balances twice a day, or even twice a week. If you do, you have some serious problems.
Unfortunately, before you can start investing, there is some critical savings that must be done first. Otherwise, you’re setting yourself up for some big steps backwards. You might have just put your first $5,000 into a mutual fund, or bought your first 100 shares of company XYZ, when suddenly your car breaks down. The mechanic needs $800, so there you go, taking the money out of your investment portfolio because you didn’t save up cash for car repairs.
If you bought individual stocks, you might need to pay a $50 commission to get your $800 out. Even with a mutual fund, you might be restricted from buying into the fund for six months or a year if you take money out. No matter what, you’ve wasted your time because now you’re taking money out that you worked so hard to put into investments. So how do you prevent this? Two words: Murphy Insurance.
If you don’t have savings built up to take care of the car breakdown, or the air conditioner replacement, or the roof replacement, Mr. Murphy will swoop in at the worst possible time and ruin your year. You’ll have an appendicitis and need to sell stocks to take care of the copay. A pipe will burst in your home, and you’ll need to pull money out of your mutual funds to pay your deductible. Maybe it will just be something as simple as your wife wanting to go on a vacation or an unexpected wedding. If you have money saved up, chances are that Mr. Murphy will stay away, leaving you to grow your investments in piece.
Forms of Murphy Insurance you’ll need are:
An emergency fund: This is the money you use when the you trip on the stairs and need to pay your medical bills. It is also the fund you use when you lose your job and need to pay bills while looking for the next one. For this reason, you’ll want to stash enough money to cover 3-6 months’ worth of expenses. This all needs to be readily accessible, so most of the money should be in a money market fund with perhaps some in a short-term CD.
A home repair fund: Things in your home will break, which is why you need to be putting money away each month for home repairs. Some things like a new roof or new air conditioner will not be needed for 10-20 years or more, but they cost a lot so you need to be saving up. Some of that money might go into investments since the expenses will be somewhat predictable. You will still need some cash, however, for the unexpected repairs that may come up. Here we’re talking $1000-$2000 or so, which will cover most things that just can’t wait.
A car repair fund: Just as with the home, there are some predictable things, like the need for a new, lightly used car every five to ten years. Saving for car replacements can be part of your investment plan. Repairs, however are fairly unpredictable and require cash immediately. You should have at least $800 in a car repair fund, per car, again in cash. Plan on having at least on car “emergency repair” per year.
A vacation/luxury fund: You’re kidding yourself if you don’t think you’ll need to have money to take some sort of vacation each year. Put in a vacation as part of your budget each year and be sure to be putting money aside regularly. Because this will be spent within a year, cash (a money market fund) is the only way, unless you know you’ll go late in the year, in which case a short-term CD might be a better option.
Real insurance: As good as cash is for many emergencies, there are things like a major medical event or a home fire that you just cannot sustain without insurance. Be sure to keep home, medical, and auto insurance up to date. Also, don’t forget about life insurance. 15-year level term is the best choice for most people because it allows you to buy the most coverage for the smallest rate.
When ever any of your funds get depleted due to an event, replace the funds as fast as possible. Remember that you and your family are vulnerable whenever the balances dip. Once you’ve gotten your emergency savings into place, and bought necessary insurance, you’re ready top start putting money towards investments.
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Disclaimer: This blog is not meant to give financial planning or tax advice. It gives general information on investment strategy, picking stocks, and generally managing money to build wealth. It is not a solicitation to buy or sell stocks or any security. Financial planning advice should be sought from a certified financial planner, which the author is not. Tax advice should be sought from a CPA. All investments involve risk and the reader as urged to consider risks carefully and seek the advice of experts if needed before investing.
