Monday, June 15, 2009

Life Lessons - The Importance of the Safety Fund

I have written quite a bit lately about the different influences the economic downturn has had on the world. I have yet to really talk about how it has influenced me. I first started to realize we were in a recession when I was looking to buy an investment property with a friend. When we started talking about putting in the required amount for a down payment I realized that I had little to no cash on hand. I had plenty in investments and retirement but didn't maintain a safety fund with liquid cash. I try to optimize all my money right when it comes in so that my checking is as close to zero as possible at all times. However, without cash equivalents on hand I was assuming (dangerously) that nothing unexpected would arise. That assumption is a good way to start down the path of excessive credit card debt. In this case it also limited my opportunities to purchase an investment property.

When the market took a dive I watched like everyone else as my investments plummeted. Now I have a personal rule that I do not cash out any investments. I have yet to do so since I started investing. That will likely change when my wife and I purchase our next home. But what would have happened during this time frame if I had an unexpected life emergency and needed some cash? I would have cost myself literally thousands of dollars by locking in my losses in the market instead of riding out the paper losses and taking advantage of stocks on sale. That realization plus my desire to have some cash on hand in the event of a real estate investment opportunity caused me to start stashing cash, in a money market of course.

I have built up enough in cash reserves that I am now investing almost all of my money in the market again. But the other day I benefited from the life lesson that the recession taught me. I came back from being out of town for two weeks and my car had a flat. The tires were pretty old so I was already in the mindset that I was out about $500 for new tires. However, I got the classic call from the mechanic later that day that there were some other things wrong with my car. After going in and seeing for myself I negotiated a 10% discount and figured out what was necessary and what was 'preventive maintenance.' I got the bill knocked down from a whopping $2200 plus down to a slightly less painful $1600. Was I upset? Yeah I was pissed. But as the shock of the bill wore off I realized that I had put myself in a spot that I could recover from this setback. $1600 is a lot of money for me and for most people I know, especially when you don't get much tangible value out of it. But it had to be done and I was prepared. I put it on the US Air credit card to rack up some miles, I negotiated a discount on a big ticket item, and I had given myself the ability to pay it all off and replenish the portion of my safety fund in upcoming months. Adversity is learning and there isn't a purchase in your life that will put you through more adversity than a car.

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