In many ways, money is like fine wine. If you “age it,” you enjoy it more than if it is fresh out of the barrel – the barrel being payday. Building a cash buffer for the sake of being able to sleep better at night is reason enough, and frankly this is why most people do in fact build a buffer. This type of cash buffer is called an “emergency fund.” The problem is that when the United States is running at 7 to 9% inflation, like it is now, every dollar you save today is worth 91 or 93 cents a year from now. Hardly the way to securing your financial future! This is particularly true when you are saving as much as three to six months of income, as most emergency funds suggest. That becomes real money ‘withering on the vine,’ so to speak…
There is a better way and that is to actively work your cash buffer account, using it to accomplish big financial things. There are basically three outcomes you want from your cash buffer: to sleep better knowing that you are covered if something goes horribly wrong, to avoid interest and penalties, and to secure the biggest discounts possible by being able to pay for something when it is cheap, instead of over time (think about a magazine subscription vs buying it at the newstand) or when that “thing” is most expensive (think of buying snow skis when the ski seasons ends in March vs. buying them when it begins in late November).
If you looked around your home, at your checkbook, or in your daily planner, there are literally hundreds of ways to save thousands, perhaps tens of thousands of dollars over the next few years, if you just had the cash in your account and the right plan.
Fortunately getting the cash is simple (notice I didn’t say ‘easy,’ I said simple). If you really want to do this, to build a cash reserve and then squeeze every dime out of it, then it comes down to a few simple steps.
Step 1: Know What Your Target Is
Let’s say you wanted to be able to avoid paying late fees because you are perpetually late on your bills, but eventually pay them. Aside from wreaking havoc on your credit score if you are late on credit cards and other loans (which bounces back quickly if you pay your loans on time for 12 months or so), being late makes you feel poor all the time even if you make a decent check. Worse yet, you are just late enough so that you are getting nickel and dimed on late fees. If this is your top goal, you probably want an extra paycheck’s worth of savings.
Here is the thing about late fees, there are what is called “exculpatory.” Exculpatory means that they are just not fair, but are there so that you pay the bill. They usually exist because the company or organization to whom owe the money can’t affect your credit report (usually only borrowed money, not paid has an impact. That is until legal action is taken and things like liens on homes happen – then all bets are off).
Have you ever not paid a $20 dollar parking ticket, and you received a bill in the mail for $20 + $100 in late fees. You missed paying it, probably because it rose to the level of not important at the time, and whamo! You are hit with a $100 fee on a $20 parking ticket, all because you didn’t put 25 cents in the meter! That is exculpatory. Now when you don’t pay that ticket still, and they put a $300 boot on your car, then it goes from exculpatory to nearly criminal. You then owe, $20+$100+$300 or $420 dollars. All because you forgot to put 25 cents in the meter. By the way this happened to me a few years ago. It was unintentional, I was a little irritated that I missed the meter expiration by 6 minutes and put the ticket in my glove compartment. When the bill came, it was almost like it was invisible because I thought what almost everyone thinks in that situation: this is unfair. It didn’t register that I actually needed to pay it. Then, parked on the same street two months later, I came out to find a orange boot.
It may not be fair, but it was effective… but I digress.
Now let’s say that your goal is take advantage of all discounts that are available to you in your life. It is reasonable to assume you can save 20% or more if you get the timing right. Here are 10 off the top of my head that I took advantage of in the last 12 months:
- Buying Japanese Cherry Blossom trees for my front yard in September: Savings circa 50% versus buying them in April when they were blooming. I was too cheap to purchase them, but wanted them for years and the discount made it more palatable.
- Early bird discount for a course that I want to take on videography so that I can film better YouTube videos with a new, more complicated, camera.
- Buying that “more complicated camera” at a going out of business sale at the local camera shop.
- Buying a package of golf lessons for my daughter in December at the local indoor high tec golf lesson shop so that Dad does not have to golf alone!
- Filling up may gas tank in the town eight miles away on the way to the train station because the gas there is $1.25 cheaper per gallon, rather than filling up my car down the street when I am just about empty.
- Prepaying for a stay at a 5 star hotel in Miami for 53% off the cost it was last year when I booked it at the last minute.
- Replacing an outdoor barbeque that was waaay past its’ useful life, using American Express points on Amazon when it was on sale for 20% off because it was November.
- Firing a longstanding home service provider (think HVAC maintenance and repair, lawn cutting, lawn chemicals, plow guy type of service) because the service was horrible and I was fed up, and THEN finding out that I was being taken advantage of financially in the process. Circa 10% savings for signing an annual contract with a highly recommended competitor.
- Buying plane tickets to three different destinations in 2022, flying during the day, mid-week, and saving on average 30%.
- Making a simple dinner one more night a week, versus eating out or home delivery that night.
I could go on and on, because my list is probably 50 purchases long and I spend very front footedly. I know exactly what I like, need and want. I am (usually) not caught up in the sales hype. I say usually, because I am a human being and occasionally need to check myself with a 24 hour cool down period. If I still want it and can afford it at 24 hours, then I will by it.
Okay, now you know “the why,” but “how” do you do this?
The good news is that if you don’t increase your consumption (this is really important) then you can actually get this done inside a year with very little pain and a big pile of money inside your bank account at the end.
Step 1: walk before you run. Don’t use the strategies to build the savings account while simultaneously paying late fees.. discounts are another story, but late fees are, as we said, exculpatory and no one want to pay 2100% on a parking ticket. So job one is to pay all your bills on time. This will free up cash by osmosis. How do you do this.
To create the snowball effect, you need about two weeks income in most cases is a segregated account. If you have not done so already, open a second account with your bank so that you can freely transfer funds between accounts. The second account is vital – this will not work without one because even financial geniuses will get this wrong. Now focus on the following:
Food. A shocking fact is that 50% of all food goes to waste in a household. Why, because as my mom used to say to me when we’d go to the smorgasbord, “your eyes are bigger than your stomach.” You buy what you think you’ll need because you don’t have it in the house and you know that people consume it. The item makes the list and you’ve heard that shopping with a list at the grocery store is the way to go, so you think you have done all you can do.
The biggest problem with a grocery store list is that it only identifies missing items, not consumption patterns. So, here is a neat trick which will cut your spoilable food cost in half in many cases. Take your list (if you don’t have a grocery store list, you need, need, neeeeeed one). and keep it next to the trash can that you use when throwing out spoiled food. Every time you throw something out, put an “x” next to it on your list. The next time you shop, buy less than you normally do of that item, even if it means you need to go to the store more often. By the way, you won’t need to make the extra trip very often, but give yourself permission to go again so that it takes the burden of “getting it right,” off the table is powerful. I find that I buy half or less in many cases and never know the difference. When you buy “half” a the store, put a check mark on the list of the same item, and permanently move that to the other account everytime you go to the grocery store. This is a forever thing and happens every time you shop.
Gas. Find the cheapest gas station on your normal daily or weekly drive and only fill up your car there. Do this when your tank is no less than 1/4 full. This will save you a lot of money. Every time you do this, move the $$$ saved between your local station and the distant station into your side account.
Meals and Entertainment. Cut going out by one night per week, until you hit the two week mark in you side account. It’s not hard, you did it during the pandemic, just use the strategies that you used then again now. You know what to do on that night, move the savings into the side account.
Pay all of your bills on time. As soon as possible, pay all your bills on time, even if that side account goes down. It will continue to grow, and you will experience a dip for a while if you were normally paying your bills late. Once you have this under control, then work to save two weeks, then three, then four weeks income. Once you hit four weeks, you are in control of your late fees and small discounts and can now focus on big discounts. This requires more in the side account, often two to three months or more depending on how you spend, because your are “buying in bulk-” paying for things annually instead of monthly and buying off season.
The first thing to note is that this will happen over time if you just continue to do what you are doing, but you can also speed up the process.
Speeding the process up
If you do nothing more than the actions above, you will very likely hit your two week’s cushion in a few months, but to get to the point where you are working your side account properly you will need 60, 90, even 120 days income in that side account. This can happen over time, but if you want to speed up the process, it will require work. The most common “work” is a side gig, selling something of value that you are not using (like an old car) or combing through how you spend your money and making better consumption choices.
Along the way, enjoy the process and know that you are getting financially stronger every single day. Stick to the plan, it will work.
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