URL: http://www.abqjournal.com/biz/yourmoney/matt03-99.htm

SAGE March, 1999
Liberty Cash
A special fund, held inviolate, can mean freedom from debt if you meet an emergency
By Lee Matthew / Illustration by Robin McClannahan
    "We create our own reality." One of the basic axioms of financial planning is to set aside some money in an emergency fund, to cover unexpected expenses without having to use a credit card or some other form of loan.

    But a surprising number of people believe that if they have an emergency fund, they will somehow create the emergency the fund was designed to cover.

    If you are afraid an emergency fund will create an emergency, consider this: Part of creating your own reality is being flexible enough to handle the unknown.

    You wouldn't go backpacking without a first-aid kit, would you?

    Does having the kit create an injury?

    Consider what a so-called emergency fund is really about.

    If you can handle a certain level of unforeseen expense without taking on unwanted debt, you remain free to move forward.

    Call it your Freedom Fund.

    Fine, you say. Freedom is a reality I could get into creating.

    But how do I do it?

    Here are some answers to common questions about building and maintaining a Freedom Fund:

     

     

    1. HOW BIG DOES MY FREEDOM FUND NEED TO BE?

    The general rule of thumb is three to six months of take-home pay, but some planners now believe this is too high.

    A more useful approach might be to make a list of monthly expenses necessary for your survival (housing, food, insurance, etc.).

    Then ask yourself some questions about your cash flow.

    For example: Are there two income producers in your household? Could you live on one salary if necessary?

    Have there been any announcements or rumors of layoffs in the company where you work?

    Could you find another job quickly? Are you paid every week or month, or does the money arrive in irregular chunks?

    Do you have other sources of cash you could tap, such as home equity or a line of credit?

    Are these alternatives worth the loan fees and interest you might have to pay?

    Working your way through questions like these will enable you to understand your personal cash flow and determine an appropriate size for your Freedom Fund.

    2. WHEN DO I TAP MY FREEDOM FUND?

    If you lose your job, your Freedom Fund can tide you over until you find another one.

    The fund could also be used for sudden home or automobile repairs or unforeseen travel.

    The fund might allow you to tap into unexpected opportunities. For example, perhaps you were planning to finance a new car, but a friend of yours is moving and wants to sell her low-mileage vehicle for cash.

     

     

    3. HOW DO I BUILD MY FREEDOM FUND UP TO MY GOAL?

    If you wait until there's "extra" money, the fund will never even get started.

    Building a Freedom Fund must be given priority.

    One way is to list your essential living expenses and subtract them from your take-home pay.

    What's left over is money that could be added to your Freedom Fund.

    A second method is simply to define the amount you want to save and build the rest of your budget around that.

    Once you've decided on an amount you can live with, consider having the money sent automatically from your checking account into savings or a money market fund.

     

    4. WHAT IF I'M ALREADY IN DEBT?

    If you're building your Freedom Fund and paying off debt at the same time, you'll need to budget even more closely.

    Add something, even a small amount, to your fund every month.

    This creates good habits and may help reduce your chances of adding to the debt as you go.

    If your debt is massive, consider talking to a consumer credit counseling service about setting up a debt repayment plan.

     

    5. HOW DO I KEEP MYSELF FROM FRITTERING IT AWAY?

    If your Freedom Fund is burning a hole in your pocket, make it harder to get at the money.

    Then maybe you'll think twice about dipping into your fund for purchases you'll later regret.

    Don't get check-writing privileges on your account, and if your fund is at the same bank as your checking account, don't set up telephone transfer privileges.

    In fact, think about establishing your fund at a different bank, one that does not have a branch near you.

     

    6. HOW DO I MAINTAIN MY FREEDOM FUND?

    Once you've built your Freedom Fund up to your goal, keep it there. That means that when you draw on your fund, make it your first priority to replace the money as fast as you can.

    Here's where an automatic deduction from your checking account can really help out, since the money gets replaced regularly in amounts you can manage. What's important


    In today's world we have permission to create our own reality, and we can use our Freedom Fund to help us achieve our dreams.

    Unfortunately, the culture has also given us permission to "want what we want and to want it all right now."

    Building a Freedom Fund may mean having to re-evaluate your priorities and decide that some things will have to wait a little while.

    But isn't your freedom worth it?  

* Lee Matthew is a financial planner in Albuquerque.