We’ve all heard the advice before–save three to six months worth of expenses in an emergency fund. The money should be held in a safe, risk-free account such as a money market, certificate of deposit or a good old fashion savings account. In the event you lose your job or incur some unexpected expense, you’ll have the funds to cover the emergency.
But there’s something missing in this picture. If you really did lose your job, and if you were unable to find work, what changes would you make in how you spend money? It was that simple question I asked myself several years ago that led me to retool the traditional emergency fund into The Doomsday Fund (cue scary background music). Allow me to explain.
Preparing for the Worst
If you read about my financially painful childhood, then you may understand why I call it a Doomsday Fund. I’ve lived through Doomsday before as a child. And while it’s no fun, you can prepare for it. So if I lost my job and couldn’t find another one, here are some of the changes I would make to reduce expenses and increase cash:
Sell both of our cars: We have two cars and they are both paid for. I would sell them and then spend as little as possible to buy one reliable, used car. Selling the cars would generate enough cash to see us through about three or four months worth of living expenses.
Car insurance: Having replaced both cars with a less expensive one would save us about $100 per month in car insurance.
Personal property tax: We have to pay tax on our cars each year! Replacing them with an older car would save us $75 per month in taxes.
Cable/Internet: I would cancel our cable and internet services to save about $90 per month. But don’t worry faithful readers, I could use the library’s internet service for free!
Eating Out: We don’t eat out a lot as it is, but we could save about $150 per month by cutting back.
529 Savings: As much as it would pain me, we would stop contributing to the 529 Savings Plan for our children’s education. This would save us $400 per month.
Retirement Savings: As much as it would really, really pain me, we would stop saving for retirement. Because we max out the 401(k) at my work, this would save us $15,000 per year (excluding the tax benefit).
Telephone service: We would get rid of our home telephone, but keep our cell phone, saving about $30 per month (we have Vonage). Of course, we could get rid of our cell phone, too, once our contract was up. That would save us about $40 per month, but we would probably keep the cell phone if at all possible.
Utilities: We would take steps to use less gas and electric in our home. It’s difficult to estimate the savings, but I think we could lower our bill by about $50 per month.
Sell our home!: This would be the last major step we’d take if necessary. Even in the current housing market, we could sell our home, pay off all of our debts, and have some money left over. This would not be a happy day, but we would be debt free! Maybe I’d even call in to the Dave Ramsey Show and shout, “We’re debt freeeeeeee!” No, I don’t think so.
In the end, we could substantially reduce our monthly expenses and generate several months of expenses by selling our cars.
Preparing for the Best
When I first prepared my Doomsday Fund, I put all this information into a spreadsheet. Using my reduced monthly budget, I then calculated how many months we could survive without selling our home. As our investments went up or down, the number of months would change, as they would when we added a new expense to our monthly budget or got rid of an old one. I don’t keep this spreadsheet updated any more, but it was a good exercise for two reasons.
First, it let me know exactly where we stood in the case of a real financial meltdown. If the result is that you have very few months of reduced expenses saved, hopefully the exercise will motivate you. In our case, we had enough to last for several years, which was comforting, particularly since I worry about money and going broke incessantly (remember the article about my childhood).
Second, and most important, the exercise forces you to distinguish between wants and needs. There is so much in our lives that we treat as needs, when in fact they are wants. Owning two cars (or any car!) is a perfect example for us. Two cars is a convenience, not a need. We could easily survive with one car. It would mean we’d have to make some changes to our daily routines, but we would get by. And I suspect in the end we wouldn’t miss that second car so much. So why haven’t we made the change? I think the answer is our desire for convenience. But is it worth the money we pay for it? Adding up insurance, personal property tax, gas, repairs, and the lost opportunity cost from not investing the money we’d generate from the sale, I’d put the savings at nearly $400 per month.
And this brings me to Preparing for the Best. I think distinguishing between wants and needs can be liberating. It forces us to reexamine our assumptions about what we really need to be content in life. I suspect most of us (myself included to be sure) spend a lot of our lives working to earn money to buy things that don’t really add to the quality of our lives. Two cars is a perfect example for us. Maybe I’ll talk to Mrs. Dough about selling HER car.
So here is my question for you: What financial changes have you made that at first seemed like a major sacrifice, but in the end you didn’t miss whatever you gave up and were glad you made the sacrifice?