My husband is not really a "financial planner". He's not much of the "be prepared" type. He likes to keep things stocked up for work projects or to use to build something from for the kids, but he's not one to think of worst-case scenarios and prepare for it. I didn't realize I was that way, until we had children. I guess that's mother-hen or mama bear coming out, because it came out with a vengeance!
We've been fortunate that we've never been in a position where we couldn't pay something since we've been married. But, much of that was because I was paranoid about not being able to pay something. I had a credit card bill being sent to the wrong address one time, on a card I had forgotten about, from a well-known department store, to get the discount. Well, that late fee made me realize I never wanted to feel that on a larger scale, ever. Again. It was a minor fee and was really not a big deal. I canceled the card after paying the fee and learned an important lesson. Don't open cards for the discount at a department store like that. The hassle was not worth it. And don't forget about 'em when you move!
Back to the point: We have always made sure to have enough set aside for any unexpected or forgotten bill. Before we had children, the amount of cash we had saved in bank accounts was smaller. Maybe something like $30,000 in bank accounts, ready to deploy for all expenses (unexpected as well as to pay the bills). As my husband's side consulting work picked up, we had more cash in bank accounts. We learned about quarterly taxes and not spending every bit that came into the accounts. We had to be able to pay his business credit cards and quarterlies. We basically keep a rainy day minimum amount in our accounts to cover these expenses.
We don't budget, per se. I say "we" . . . As I said before, my husband has little interest in this and his business books are, um . . . non-existent unless I manage it. It's just not something he's interested in taking care of and figures he can get by without putting too much time and effort into it. However, I try to keep an eye forward, planning for the upcoming expenses. I do this for his business as well as our family financials. We know of the predictable timing of the expenses. Some are scheduled and predictable like property taxes. Others, come up as needed, like a new roof every 10-15 years, we will have to re-stain our home every 5-6 years, furnace, water heater age needs to be remembered, new tires on cars, boat storage, etc. I look forward and plan accordingly, as much as possible; my husband and then I discuss when we should plan on doing these things. I also keep in mind healthcare max out-of-pocket expenses and make sure to carry enough liquid to cover these costs. Being an RN, I know well how the expenses can rack up after an accident or illness (or birth with a complication)! We make sure to save enough in cash to cover these expenses when the time comes and then some for other surprise expenses.
As our needs have changed, so has the amount we keep liquid. These days, we have enough to cover a large tax bill from the sale of our home that appreciated 2x in 10 years that will be due in April. We also have enough to cover over a year's worth of living expenses, just in case anything happens like job loss or illness. Ultimately, as we near "retirement" or at least reducing w-2 work, I would like us to have about 3-5 years of living expenses in cash, to cover recessions and subsequent recovery periods, as well. My husband would like to retire soon, so we need to establish these buffers first. We project in about 3 to 5 years he can let the W-2 work go to build these buffers and pay for healthcare for the family. We have a few more goals we would like to meet in terms of net worth before we cut that cord. The current economy is even more difficult to predict, thanks to the pandemic and lock-downs. We are enjoying the current run on the stock market, but are uncertain of how long it will last. We are not trying to "time the market" in terms of buying stocks. We simply will not know if we can weather retirement until we have these cash buffers built up.
Ideally, we would like to build a small real estate portfolio to produce some passive income along with our stock/bond portfolio to help cover annual expenses. This is on our to do list after we file our taxes for the 2020 year. As I have mentioned previously, we have to save some cash from the sale of our home and to pay my husband's business taxes as well. We are waiting for all of his tax documents to arrive from the year from his consulting gigs and will have more solid numbers regarding our taxes owed. We estimate our quarterlies and pay per quarter as required by law, but we often have a refund or still owe a bit once tax season rolls around. After we take care of that business, we will start to roll our surplus into savings for a new rental property to begin the next phase of building our retirement passive income portfolio. We are debt averse, even though I understand the returns can be much higher. We appreciate the security of not owing money to others, even in the case of rental real estate.
As we look toward the future, we continue to invest and not hoard all of our surplus as cash, but we are still maxing out my husband's 401k and will continue to do so until he retires. We do maintain a cash buffer, currently a year's worth of expenses and will 3x that in the next few years as we also invest in a rental property per year out of state, in the same small city where my parents have rentals for ease of keeping an eye on them while we are away and to check on them while visiting our families. I have been thinking about the need to possibly pick up some gold and silver as insurance, but I am skeptical our dollar will completely be debased any time soon. We bought the lot next to our new home so no one would build on it, so I think we have value there, our home is paid off, and we will have fully paid off rentals as our next investments. These physical assets, while will not be liquid, should also buffer our wealth if currency and stocks crash. If real estate crashes, we will still have the physical properties and they cannot just be completely wiped out of existence like a failing currency can. I, however, am optimistic that these things will not come to pass. And should a crash or war occur during these wild, uncivilized times, I am confident our economy will recover and prosper. It always has thus far and I believe in people. We are made to innovate, build, strive and accomplish. There will be those who will fight to thrive and will pull (possibly slowly) the economy with it. Either way, I believe things work out and we can figure out how to live in abundance, one way or another.
How are thinking about the future? How will you prepare for the worst-case scenario while continuing to hope for the best and build abundance and achieve independence?
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