The Difference Between "Need Money" and "Seed Money"
- Friday, September 08, 2006
In my mind, the second stone of your Wolf Barrier needs to be a Murphy Fund. I would encourage you to put at least $1,500-$3,000 into this account as quickly as possible. (My personal rule of thumb: Try to build up about an amount equal to about 5% of your "true income.") This will give you the luxury of being able to tackle unexpected problems—without those problems tackling you.
Let me leave you with two suggestions regarding your Murphy Fund. First, never, never, never use your Murphy Fund for anything that isn’t a real emergency. This money isn’t there to pay for a vacation or a new computer. Second, put your Murphy Fund money into a separate account. This will help you avoid accidentally mixing it with your "need money." Also, it’ll make it a little harder to get your hands on it. Some people put their Murphy Fund in a money market account with a mutual fund company, or a savings account at a bank or credit union that pays interest and allows check-writing privileges on the account.
Stone #3) Consider Funding Your Life Insurance. More than most things, insurance is a matter of philosophy. In my judgment it makes sense to fund a term life insurance policy before we go further in the process. Like the commercials say, life insurance isn’t for the living, it’s for those left behind. It is one of the most loving things you can do for your family. Of course, in saying this I am assuming that you have already addressed your health insurance (possibly through group coverage where you work) and auto insurance. Depending on your particular circumstances, you may need other coverages like disability, homeowners, umbrella, renters, etc.
Stone #4) Accelerate Payments On Short-term Debt. I hate debt. So I like to encourage other people to consider speeding up their short-term debt repayment schedules. This includes school loans, credit cards, department stores, home equity and debt consolidation loans—most everything except mortgages. (I’ll address mortgages in Stone #9.) When you think about it, many of these are relatively high interest loans. I would rather pay off a loan that is costing me 12%, than to put the same money into a mutual fund. Why? Because lots of mutual funds don’t average a 12% return, and I know of none that guarantee it.
Stone #5) "I Don’t Need This Job" Fund. Wouldn’t you like to come to work because you find it challenging, enjoyable, fun? Wouldn’t you like to know that if circumstances changed where you work—you could simply resign and take your time looking for another position? Also, wouldn’t it be great not to be concerned about layoffs, mergers, or downsizing? Well, the good news is it’s possible, and lots of people have done it!
Stone #5 is where I encourage people to build up what I call the "I Don’t Need This Job" Fund. Ideally, this should be an account with 6 (even 12) months of living expenses.
Yeah, I can hear the collective groan now, "That’s pie-in-the-sky! I’ll never save that much." But, au contraire, my dear friends. There are 3 things that will be helpful as you consider this goal: First, with Stone #4 (paying off short-term debt) behind you, there’s now more money available for purposes like this one. Second, remember not to confuse 6 months of living expenses with 6 months of income. Usually your living expenses are significantly less than what your gross income is since they won’t include the money that goes to taxes, Social Security, retirement plans, etc. Third, remember that determination is a great thing. Once you make up your mind that funding an "I Don’t Need This Job" fund is a top priority, you’ll be less tempted to spend the money for other things.
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