Build Your Financial House of Brick

Remember the three little pigs? Sure you do. The moral of the nursery rhyme was simple:  build your house right the first time and it won’t be blown over.

In the arts, we’ve all heard this advice before. It’s the quality of our work that brings people back. We’ve watched suspiciously as performers with gimmicks shoot to the heights of fame for a few brief moments; but it’s only quality work that helps ensure a long, prosperous career.

Or in other words, using three little pigs speak:  If you’re building your house, make it brick.

I’ve often heard financial planning referred to by professionals as a house. A foundation laid on the sandy ground of debt and scattered income is bound to fall later. For the average person, building consistent, dependable income and paying down debt are jobs number one and two.

But we aren’t average, are we?

Many of us can’t improve our scattered income yet. We’re working on that. That means it’s even more important to alleviate debt and build an emergency reserve.

Maybe this isn’t brick and mortar, but it’s close. It’s more like brick and duct tape.

Without solid, dependable income, a rock-solid emergency reserve is the key to your foundation. When your car breaks down. When the washing machine dies. When the rent check is going to be late because your client didn’t pay you. All of these situations are covered if you’ve built your cash reserve foundation.

Some people put off building a reserve until they pay down debt. Don’t fall into this trap! You’re bound to stay in debt forever if you don’t build a reserve right now. When disaster strikes (and it will, friends, it will…), where will you run to for cash if you haven’t built an emergency reserve? That’s right. You’ll need to spend money on your newly-paid down credit card.

I’ve seen this scenario replay over and over.

Instead of leading with a debt repayment strategy, first lay your brick foundation of cash reserves. How much should you have? While experts agree that between three and six month’s stored cash is the perfect amount, for now you’ll need just enough to get by. Debt will destroy your financial home if you wait until you’ve accumulated a six month cash cushion. Instead, imagine the largest emergency check you’d have to write and double it. In most cases, this may end up being a reserve between $1,500 and $2,000.

So far, so good, right? But wait, how do we get the money into a reserve?

First, you’ll need to find places to cut. A friend of mine is cleaning out her basement and selling old stuff on eBay. Another friend cut his land-line phone and cable, saving over $70 per month.

Some people find creative ways to increase their income stream. One client began delivering papers early in the morning. A second started babysitting for friends on the weekends she didn’t have performances.

Second, the money has to get saved. Place the money in a hard to reach place (we discussed how to accomplish this in a past post: How Do You Survive the Paycheck Rollercoaster?). Find a good interest rate, if possible, but interest isn’t what we really need in a reserve. It’s paramount that these funds are available for emergencies. Don’t buy a CD or purchase a low-risk mutual fund with this money to tweak the interest rate. Make sure that when the emergency call comes, you have resources quickly available.

…but not too quickly. An ATM card can ruin your cash reserve in a hurry. Avoid ATM cards and other quick-cash options to make sure your foundation is there when you need it.

In theory, it’s simple. But let’s revisit the three little pigs story for a moment. Building a cash reserve takes work. Others, who are building their houses of straw and twigs, may laugh and play while you’re grinding out a second job to build a solid foundation. Smile at them and remember: the wolf will come. But any challenging days ahead won’t find you unprepared.