#6 A Call For Help (Budget Priorities)

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Less than four days after I started this “blogging” adventure, an unusual text blinged into my phone at 7:03 pm last night. As I was leisurely walking my (4) dogs on their nightly romp through the words, a fellow co-worker was facing a tough decision. Totally unaware that I had just started a personal finance blog (or, for that matter, that I was in the woods with my dogs!), he reached out to me with a finance question.

A Call For Help

How Would You Respond?

It’s fortunate that I’m quite close to the question’s author, and knew his family situation (3 young kids, stay-at-home wife). So…I responded as follows:

First Text: “Depends on how many months “half” of the emergency fund would cover, and how quickly it could be built back up”
His Response: “One month, took us appx 1 year to build up the 2 month cushion.”

Second Text: “Liquidity is something to consider at your stage….i wouldn’t jump for tax savings and lose access to that liquidity. Your emergency fund is too small given your stage in life. Focus on getting that to 4 months min, skip the tax deal. My thoughts.”

I followed up with him this morning in the office. They’re holding off on the tax deal. My text response was only one factor in the decision, but he and his wife had clearly talked about the points I had raised. We discussed that he wasn’t really “saving” the taxes anyway, but merely deferring them to post-retirement. Who knows what tax brackets will look like then? He was pleased with his decision, and realizes the need to protect and build their emergency fund.

Lessons:

1) An Emergency Fund should be one of your highest priorities. Lack of this liquidity can create major issues on very short notice. Prioritize it, fund it, build it. Target to build 4-6 months minimum of living expenses. After paying off your credit cards, this should be your highest priority.

2) Never make a financial planning move strictly on the basis of tax reduction. Keep a holistic view on your priorities.

3) Never make a quick decision if you don’t have to. My co-worker was pinched by the April 15 tax deadline, and late tax prep work. He was getting pressure from his accountant to make the move, but hadn’t really been able to take the time to think through all of the issues.

4) Phone A Friend: We should all have a trusted friend or advisor who we can use as a sounding board. If you don’t, find one.

It’s interesting how things work. Through my 2+ years of podcast listening and blog reading, I’ve often thought I would find it rewarding to offer Financial “Coaching”. I never really knew how it would evolve, but it’s been a frequent thought. After helping my co-worker last night, I realize how much I enjoy the world of personal finance, and am seriously considering how this could potentially grow into a Christian Financial Coaching service after my retirement. Time will tell, but it’s certainly a coincidence (or is it?) that I received that text last night, and was able to experience first hand the rewards of knowing I had helped someone answer a pressing personal finance question.

Written: April 14, 2014

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3 comments

  1. Our student loans won’t be paid off for several years still… but I’ve always wondered, when it does come time: Would you ever use some of your emergency fund to wipe out your remaining debt? It would be saving you money as far as interest goes, but you would just have to hope you could avoid any emergencies for a while. Not sure if it’s worth it.

    1. Camille, thanks for joining my blog! As you’re starting down your path, I’d encourage you to focus on one main goal: Keep Expenses Below Income, and start saving the balance into a 1 month Emergency Fund. After you’ve built up a 1 month buffer, start taking the difference between income-expense and applying it to your loans with the highest interest rate first. Good luck!!

  2. Hey Fritz,

    Found this blog a few days ago, and am really enjoying it.

    I was actually in this situation a few times early on, and chose the other option. When you only have $11k lying around, giving away $2k to the tax man unnecessarily is a big pill to swallow. But I certainly see both sides, depending on the likely risks in the upcoming year.

    For example, I think projected job stability should play a role in the decision. If you’re not likely to lose your job soon, the $5500 left would cover most car repairs, medical bills, and appliance failures. And putting it in the IRA is not closing off all access to the money in a worst-case scenario…you’ll still be able to tap 90%. (Which is a big difference from Camille’s student loan example above, which I would not drain my emergency fund to cover.)

    I’m a very bird-in-the-hand person, though. I took the guaranteed $2000 up front, knowing that there was a chance I might have to pay the 10% if things went badly badly sideways.

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