The Doomsday Fund: How Planning for the Worst Prepares You for the Best

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?

Published or Updated: April 21, 2014
About Rob Berger

Rob founded the Dough Roller in 2007. A litigation attorney in the securities industry, he lives in Northern Virginia with his wife, their two teenagers, and the family mascot, a shih tzu named Sophie.

Comments

  1. plonkee says:

    I gave up taking the bus to work, and walk instead. It takes me about 10 minutes longer and saves me 35 a month. I thought it would be pretty difficult, but its actually turned out to be one of the best decisions I’ve made.

  2. jm says:

    “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.”

    Is this true? I live in PA and we have no such tax. Is this a DC thing? who exactly do you pay this to?

    • DR says:

      jm, it is true, I’m sorry to say. Virginia has personal property tax for cars, boats, motorcycles, campers, etc. The tax is a lot lower today than it use to be, but we still pay about $1,000 a year on personal property tax!

      • Steve Libonati says:

        Same deal in NC. You pay personal property taxes on your vehicle(s). In the case of NC, you pay the county you live in. For me, Mecklenburg County.

  3. zh says:

    We cut off our cable in May (it was about $65 a month plus whatever ppv movies we felt like watching). At first I missed it a lot, and so did my son; now we have found other ways to fill our time. I still rent movies sometimes and even download shows or buy them from iTunes, but it’s amazing how much I don’t really miss TV, and especially how I don’t miss having ads shoved in my face every five seconds (and in my son’s face — seeya, children’s advertising). I had planned on just stopping TV for a year and seeing if I could do it; now I’m pretty sure I just won’t ever bother starting up again.

  4. Steven says:

    I haven’t owned a TV in years so I don’t have cable.

    When I retired two years ago, I left California and moved to Illinois. Reason: Seniors pay no Illinois state income tax on pensions, IRA, 401K, and social security distributions.

    I live in Chicago and it is a great walking city. I walk everywhere.

    I use a phone card so I have only local calling service and no cell phone.

  5. Those are great tips. We’ve been trying hard to get funds saved, but “unexpected” things keep coming up.

    Thankfully we do have some flexibility in that both my wife and I are able to generate income outside of my main employment.

    ChrisCD
    Jumbo CD Investments, Inc.

  6. Minimum Wage says:

    Car registration fees based on value are technically personal property taxes (and therefore deductible on your federal tax return). I used to live in a state where the fees are based on value for the first six years and then based on weight for older cars.

    • DR says:

      That is true; the personal property taxes are deductible on our federal tax returns. I’ve never heard of taxes based on the weight of the car. Aren’t politicians creative!

  7. Debbie says:

    My daily transportation is my bike. I take my daughter to school, I do my marketing, everything via bike. We own a tv but no tv connection… we only watch dvds and hence don’t have to deal with the buying signals from incessant marketing. We have a generous 6 month emergency fund and have a house rule that whenever a chunk of money comes our way we automatically save at least half. It means waiting a long time to finish some of our projects, or putting off buying a few things, but I love sleeping well at night. My goal is to have a generous 12 month emergency fund, and then pay down our mortgage faster. I would LOVE to make our 30 year a 15 year mortgage. We have no debt at all except for our that and I would love to own my sweet home free and clear by the time I’m fifty.

  8. Craig says:

    I started biking to work and school instead of taking the train. It saves me darn close to 15 dollars a week, and I gain the time that I would have spent exercising after I got home.

    • DR says:

      Debbie & Craig, biking is a great idea, and I wish I could do the same thing. Unfortunately, being a contestant on The Running Man would be safer than biking to work where I live.

  9. Toby says:

    As the saying goes, “The cheapest car is the one you already own.” Perhaps selling only one of the cars would be a better idea. Trading in a reliable late-model car for an older car with unknown past and future reliability seems like a big gamble to take during such a desperate financial time. Better to take the sure bet at a time like that.

    Case-in-point, my BIL who’s not bothered looking for a new job for the past six weeks because “my car’s not running right now so if I found a job I’d have no way to get there…” What he’s been doing for the last six weeks besides “not repairing the car” I have no idea.

  10. Tim says:

    This doesn’t sound like a “doomsday fund” more than a disaster plan. The concept is good though. Just like having a power of attorney and a will, disaster planning is necessary. This should also include a triage list of investments that you might have to liquidate in order to finance a disaster, which you have omitted in your list (except selling the house or cars). Realistically, the monthly savings gained from cutting down the monthly expenses on your list, would probably not cover a true doomsday scenario; moreover, your emergency fund should already be covering those monthly expenses.

    i see an emergency fund or doomsday fund as covering income disruption plus being able to cover major emergencies (1xmedical, 1xhousing) simultaneously. If the scenario required more than what i had funded, then I have a rank ordered list of investments I could liquidate–that is, rank ordered in terms of least to highest penalties.

    • DR says:

      Tim, ranking the investments from least to highest penalties is an interesting concept. I gather the list would look something like this: (1) Non-retirement investments that would trigger a capital loss; (2) non-retirement investments that would trigger a capital gain (from least to highest); (3) retirement investments. In my planning, I subtract the taxes and penalties I’d pay and use what’s left in calculating my safety net.

  11. Tim says:

    DR, basically yes; however, there are some retirement vehicles you can withdraw without penalty, contributions to your roth, although the penalty is that you can not replenish and you then forgo any more future earnings on the lost contributions. other things like taking a loan against 401k’s etc. Some thought has to go into what your triage list looks, and it should be done before an emergency because during an emergency you probably aren’t going to be thinking too straight.

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