In a discussion with my wife about future plans, she asked:
Her: Hey, do we have an adequate 6-month emergency fund?
Me: We might have 3 months.
Her: Nah, I need 6.
Me: Cash is trash. But I'll tell you what, let's me in the middle and establish a barebones 6-month fund. We'll slowly work up from there.
Her: OK, whats that number?
This conversation forced me to eat my own cooking. Im always talking about simplification and being a good steward of your money by knowing where everything is and what is coming and going. And here I am, stuck on a question that I consider to be pretty basic when it comes to budgeting.
What is a barebones budget?
A barebones budget, as described by me, is the amount of money our household would spend in the event that the two of us lost our incomes at the same time. In other words, what expenses would we cut out immediately.
Remove all unnecessary spending
I thought we were running a lean operation already. So when asked this question, my thought was to multiply our current budget by 6 and said we need ~30K, “but I’ll get back to you with a more accurate number”
I booted up the spreadsheet and got to work, one category at a time to see what would stay and what would go.
One line at a time…
Daycare: In the event that we both lose our jobs, Im going to pick up my kids from daycare and tell the teachers that they won’t be returning for a while. This line item is easily our largest expense and will be cut merciless.
Travel: If I had something already booked and prepaid, Im still taking that vacation. Keeping in mind that there are tough times ahead. But, any future travel plans are out the window.
Home Expenses: I like to budget 1% of our home’s purchase price to account for any repairs that might come up. For example, if we paid 300K, I’d budget 3K/year or $250/mo. My mistake with this category is that I don’t bank the money into a separate account. If I don’t spend the $250 that month, it simply stays in the account. I’ll address this at some point in the future. In a barebones budget, Im only worried about the right now, so this category will need to go.
Restaurants / Bars: Dead!
Entertainment: Super dead!
Goals / Savings: Still dead!
Donations / Charitable Giving: You guessed it!
Kid’s Education: Better be getting straight A’s! No contributions to this fund will be made under a barebones budget.
Arriving at a number
The only things left after all non-essential expenses are cut from our budget are mortgage, transportation, groceries, utilities and phone/internet.
It turns out we spend almost $2,500/mo on the essential categories. Which means we need to have a minimum of 15K tucked away in order to give my wife some comfort.
Having the talk
I informed my wife of what are number was and logically the follow up question was, “do we have it?”. Well…
Yes and no. I assured her we could get access to this kind of money if we were in a bind, but it wouldn’t be as easy as going down to the bank and getting it. “Why?”
Well first, I really do think cash is trash. I hate the idea of having that much cash laying around earning nothing. Interest rates are at zero right now.
Second, having that much in cash when we owe more than 3X that amount in student loans doesn’t sit well with me psychologically.
And last, having that kind of money in one place standing still makes me nervous. Thats right, I said it. It makes me nervous. First, I would never keep that amount of cash physically. But even in the bank, I live in fear that the bank is goin to get hacked or something and I’ll have no recourse.
I know that is utterly ridiculous. But like my wife tells me all the time, “you can’t tell me how or what to feel. My feelings are mine”!
Time for some action
Although I think my wife is confident when I tell her we could access this money over time if needed, I decided to go a step further and actually pool this money together, where possible.
During our quarterly meeting where we review our net-worth, I want to be able to point to one line item and say here is our emergency fund.
I’ll start by pooling cash that is parked in several “high-yield” savings accounts and find a municipal investment vehicle to put this money. That is the least amount of risk I am willing to accept for longterm cash. We’ll aggressively fund the rest with some of the savings we are realizing due to being in quarantine for the past 2 months.
What I will not do is sell any investments just for the sake of consolidation. Especially if that investment still makes sense. I don’t want to trigger any taxable events.
Im not sure where establishing a barebones budget falls in the steps to FIRE handbook, but Im sure its on there. Although we have our funds established, this is a good exercise to go through. After all, what gets measured gets managed!