Are You Fed Up Yet?
One of the Best Pieces of Investment Advice I Ever Received
When I sit down with prospective clients, this is one of the first things I ask them. Are they secure in their job, fed up with their boss or the state they are living in, etc.? Many will give me one of those “who isn’t” smirks as if I’m just making idle chatter. Then I ask them, if they really were, what could they do about it? Could they just walk out today without another job in hand?
What if it was worse, what if next Monday or Friday, they were sat down and “right-sized,” or we were hit with a “super-bug” that shut down the economy and shuttered businesses, what then? Most people don’t have an answer for these kinds of questions and yet it is fundamentally one of the most critical aspects of becoming financially independent.
My father was one of those people who were never financially independent. He was a high school dropout and street hustler who ended up working his entire adult life in auto assembly plants after he came back from the war.
Not only was he dependent on his employer during his work life, he was just as dependent on his pension in retirement. Imagine sweating out every downturn in the automotive industry worried that your pension might get cut or even go away, 2008 was a grim reminder that a promise is only as good as the person, or entity behind it.
So, when I graduated college, he gave me one piece of advice.
Literally on the way home from my graduation ceremony, he told me that, after I get over the shock of how much money comes out of my pay check, I needed to figure out the cost of a comfortable but un-extravagant lifestyle, and set that as my living budget. He stressed that I should get as close as I could to living off 50% of my take home pay and bank the rest where I would likely not touch it, perhaps even using an automatic withdrawal if it was available. The purpose was to build up a “Fed Up” fund (except he didn’t say “Fed Up”) that would allow me to live an entire year without a job if I needed to.
He believed that, once I could walk away from a job for any reason and any time I needed to, I would never experience that feeling of being trapped as he had all those years. He further went on to advise that with every raise I received, needed to be split 50/50 between saving and spending so that my lifestyle would never get in the way of my security. Eventually, assuming I never had to use the funds, those savings would contribute to my long term retirement, whether it was used for income or simply as a safety net (remember this was before the 401K and IRA contributions were capped at $2500 per year).
Over the years I have given this same advice to both family and friends. Those who took it have always said that it was some of the best advice they’d ever gotten. One family member was able to use a portion of their “fund” money to pay cash for their current home; how nice not to worry about a mortgage payment in an emergency!
For prospective clients I have modified the advice some in order to keep up with the environment we now live in.
In addition to trying to live on 50% of their take home pay and setting the rest aside until they have a years’ worth of expense saved up. I also now recommend keeping at least 2 months’ worth of living expenses outside of the bank. When we suffered an extended power outage several years back, neither ATM’s nor credit card readers would work. The only way you could use a credit card to make a purchase was from someone with one of the old manually operated credit card imprinters. In an emergency when you need cash, the best thing is to have the cash readily accessible. I also recommend having a weeks’ worth in small currencies such as $1, $5- and $10-dollar bills because many merchants will not be able to break a $100 bill during these times.
Once you exceed your years’ worth of income, it is time to put together a long-term plan to grow your income through investing and protect your asset wealth, utilizing the various insurance and estate planning strategies available today.