Living paycheck to paycheck is, mentally, easy. As hunter-gatherers, it was in our DNA to consume things as we got them, and as long as there was enough available any time we needed it, we did just fine. Hunter-gatherers are the ultimate income-based folks, living rabbit to rabbit or berry to berry.
The only problem is that we’re no longer a hunter-gatherer society. We don’t wake up each day with a clean slate and see if we can make enough money to get through the day. We require a much longer term view, and the financial forces that can align against us can be massive and random.
So imagine instead that your financial life is you swimming in the ocean. Your income is what keeps you going, and if you stop earning, you stop swimming, and sink. Someday you’ll make it ashore and relax with a purely asset-based life, but for now, you’ve got a long way to go and some deep water beneath you.
In general, the waves are gentle, the water’s fine, and you’re happily cruising along.
But once in a while, some major waves hit. Are you a strong enough swimmer to stay on top of the waves, or do you go under? I guess that depends on the size of the wave.
If you’re living paycheck to paycheck, your open mouth is about an inch above the water line, and almost any ol’ wave is going to cause you major problems. You’ll breathe in a mouthful of saltwater and find yourself, deep under a wave, in real trouble.
Why have you chosen such a precarious place to sit in the water? Why not raise yourself up just a little bit more? You know the big waves are coming, but you sit there with just a tiny margin of safety.
If you’re making a lot more than you’re spending, you’re suddenly a pretty good swimmer, and you’re sitting high in the water. You’ll just power through much of what the ocean throws at you without missing a beat.
But even Michael Phelps could get overwhelmed by the wildest ocean wave. And even Michael Phelps needs to take a break every once in a while.
And by the way, there is an added problem with this little scenario – you may not have noticed it, because there are so many other folks swimming in the ocean with you: YOU’RE IN THE OPEN OCEAN, SWIMMING FOR YOUR LIFE!
You don’t need to just become a stronger swimmer, you need to get the heck out of the water.
But a boogie board, rowboat, jet ski, or yacht will have to wait. Your very first step is simply to get yourself a life jacket.
If your net income is your swimming ability, assets are your floating ability. Assets are what keep you on top of the waves in the wildest of seas, and they’re ultimately what will bring you to shore so you don’t have to swim at all.
If someone offered you a life jacket while you were stranded in the open ocean, it would be worth a fortune. The great news, though, is your financial life jacket won’t cost a fortune. This very first step in this very long swim, your first and most beloved asset, is simply a small pile o’ cash.
Cash. Glorious cash. Every journey begins with a single step, but this first step is the most important.
Many people think that if you start saving, and invest your savings, it’s a simple equation that someday you’ll have a huge pile and be able to retire. While that is true at a high level, life isn’t such a smooth journey that it’s a simple question of savings + compound interest. What if a wave comes and knocks you, and your little 20 or 30 or 40 year formula, upside down?
Small Piles Can Do Big Things
This small pile o’ cash does so many things. It lowers your costs (which makes you a better swimmer), and covers so many of the waves that can come your way. With a small pile of cash, you can and should:
- Avoid going into credit card debt for unplanned expenses*
- Decline insurance-like protection / extended warranties for minor purchases (You’ll get to say, “Your (Jedi) mind powers won’t work on me, boy” – it’s fun, and ends the sales pitch fast!)
- Take high deductibles for insurance policies and thereby sharply lower insurance costs
- Pay for the uncovered portion of significant medical expenses
- Avoid financing like the plague (unless the terms are terribly in your favor – and you’re able to see and avoid the trap – there’s always a trap)
- Avoid getting “squeezed” by anyone, or anything, just because you have no margin for error. There are a ton of sharks in the world, and they can smell if you have no cash reserves.
* If you’re already in credit card debt, you aren’t swimming on the surface at all. You’re underwater with an anchor around your neck, and you’re using a paper towel tube as your snorkel. Not only can you not survive a major wave, you can’t survive (financially speaking) at all much longer without changes.
Is This My Emergency Fund?
No. An “emergency fund” (to be tackled at a later day) is for – you guessed it – emergencies. Like you cramp up and can’t swim at all. Or a shark takes a bite out of your bottom.
This small pile of cash has more modest aims. Its goal is to start using your balance sheet, rather than your income, to tackle modest financial problems that come your way.
How Much Is a Small Pile?
As in almost all things financial, the answer to that question is, “It depends.” When you consider your situation and the nature of the expenses above the pile o’ cash may need to cover, it’s definitely at least $1,000 and can be many times that. If you have sterling medical care and low exposure to insurance or insurance-like instruments, you’ll be at the lower end; the reverse of course is also true.
Once you have this cushion, it will evolve into your emergency fund and your general savings. There isn’t a cookie jar labeled, “Small Pile O’ Cash” that, once you fill it, it’s complete.
Even $1,000 is a ton of money. How am I supposed to suddenly save that?
Hey, I’m not the one with my chin just above water. I started getting terrified about financial waves that could sink me when I was 8 years old. No one’s saying you can’t continue paycheck to paycheck; I’m just saying it’s no more arbitrary, and a heckuva lot more pleasant, to be wearing a life jacket. If you don’t have a small pile o’ cash, start saving like your financial life depends on it, because it does.
From a Small Pile to a Big Pile
Of course, this is only the beginning. I could say, “Once you’ve saved this small pile o’ cash, you’ll only have to do it many more times over, wait patiently on the power of compound interest, and have a very reasonable chance of someday being rich.” That doesn’t sound very exciting, though.
I’d rather say that a small pile o’ cash is the first key step to becoming a millionaire. It shows you can save, which will be the machine that can make you millions. It shows that you reject the arbitrary and dangerous point in the water that many people accept in a paycheck to paycheck existence. And it shows you can use your financial assets as active tools to strengthen and defend your financial position.
A small pile o’ cash may seem like a modest building block to start your quest for millions, but it is a critical first step toward an asset-based life.