Safety Net - Millionaire on the Prairie

Your Emergency Is On Its Way – Prepare Now!

“I have too much money during this time of emergency!”
No One Ever

If you’ve been paying any kind of attention, you’re no doubt aware that natural disasters have touched many people’s lives in fundamental ways. Threats of fire forced the evacuation of the city of Yellowknife in the summer of 2023. A wildfire in Maui destroyed the city of Lahaina, on the island of Maui. People in both cities are displaced and trying to figure out their next steps. I can’t even begin to imagine the stress and anxiety that they are feeling. However, this blog is about money and protecting yourself for the negative consequences that come with not having any.

Being evacuated from your city is an emergency. It is precisely the kind of situation for which one builds and maintains an emergency fund. The people fleeing from Yellowknife had to convoy along a 12-14 hour trip to next major center. That wasn’t free. They had to pay for gas. Those without family or friends had to pay for accommodation if they weren’t willing to stay in the shelters. With only hours to flee, there wasn’t sufficient time to think of everything. Once in a safe location, they had to pay for food, clothes, toiletries, and pet food. It’s doubtful anyone had budgeted for an evacuation that month. For those working hourly jobs, there’s no more income until they go back to work. The emergency fund exists to cover these costs.

Right now, you should be assessing your emergency fund. Ask yourself some hard questions. Is my emergency fund enough to sustain me if I couldn’t work for a month? If I had to flee from a natural disaster, do I have enough to cover my expenses until I can get back on my feet? And if I don’t, then what am I doing to build my emergency reserves?

Unless you’re one of those very fortunate people who have a year’s worth of expenses tucked away somewhere, you should be adding to your emergency fund every time you’re paid. Even if it’s only $10, $25, $50, add it to your fund and leave it alone. When the day comes that you need to rely on those reserves, you’ll be very happy with yourself that the money is there waiting for you.

In my opinion, emergency funds are not “dead money” sitting in a bank. These aren’t the dollars that are meant to fund your retirement, or your short-term goals. You’re not looking to invest your emergency fund to earn a big return.

Your emergency fund is your safety net.

It is there when your income disappears. It exists so that you don’t go into debt when the universe lobs a grenade that blows up your life. Even if you have insurance and you’re going to be reimbursed, insurance companies sometimes take longer to pay than you may like. They might even try to fight you and you may have to appeal their decision on what is covered and what isn’t. Your emergency fund pays for the necessities while you get yourself re-established.

Even after becoming debt free and building my investment portfolio, I still contribute to my emergency fund. My goal is to have a year’s worth of necessities socked away. If anything goes too terribly off-course, I want the comfort of knowing that I can survive for a year. I’ll be able to make decisions without the pressure of needing to earn money immediately. My emergency fund offers me peace of mind. It gives me time to breathe and to think carefully before making my next move.

There’s no reason to wait. If you have an emergency fund, contribute to it from every paycheque. Every dollar counts. The more you can stuff away during non-emergency times, the better. If you can afford it, save an amount equivalent to your age. Increase the amount when you can. Start your emergency fund today if you don’t already have one. Opening an account is as simple as clicking a few links on any bank’s website. Automatically transfer money from your chequing account to your emergency fund.

There’s an emergency headed your way, but you can’t know when it will arrive. Today is the best time to prepare for it financially. When that emergency eventually hits, finding the money to deal with it should be the last of your concerns. Adding money to your emergency fund is entirely up to you. Choose wisely.

When You Have a Safety Net, You Have More Options

Think of yourself as the star trapeze artist in your own life. You swing from one day to the next, endlessly until your part of the show is over. And each day brings its own options, challenges, and choices. Some of these involve risk. Think of these risks as letting go of one bar so that you can catch the next one. It’s easier to take risks when you know that there’s a safety net down below to catch you if you fall.

In real life, a cushion of cash acts as a safety net. If you start a new business and it fails, money in the bank means you’ll be disappointed but not financially crushed. Perhaps there’s an unpaid internship that you want to take. Having a multi-unit revenue property that covers your expenses, or parents who are willing and able to foot your bills, means that you can work without renumeration in order to pad your resume. Perhaps you’re simply mentally exhausted from work so you decide to take a sabbatical while living off your dividends.

Dividends. Cash-flowing rental property. Parents. These are all forms of a safety net. If you have access to them, then you have a surer foundation from which to pursue various options. To go back to the trapeze analogy, you can let go of the trapeze bar knowing that missing the next one and falling down won’t break you.

Try to imagine taking time off work to protect your precious mental health without anyone or anything around to pay the bills. How long could you go before being evicted? What kind of impact would the financial stress have on your mental well-being?

Having a safety net gives you room to breathe, to make choices that bring you closer to your goals. You’re not stuck. Getting un-stuck from whatever bad situation is making you unhappy is rarely ever easy, but it’s always easier with money. Hate your job? Quit! No longer love where you live? Move! Need 9 months off to pursue your Bucket List travel itinerary? Go!

When you have the safety net that money can provide, you’re free to pursue those options.

I’ve talked about having a safety net for Future You and that you need to save for your retirement. While that’s very important, you still have to live in the present moment. There are probably some things you want to try before you get to your golden years. It’s very likely that whatever those things are, they’ve got a financial component to them. I want you to pursue your dreams, but I don’t want you to be impoverished if those pursuits aren’t successful.

For my own self, I knew that I wanted Future Blue Lobster to have access to a stream of dividends in retirement. I’m happy to report that my army of money soldiers is growing nicely. I’m not doing as well as Tawcan and his annual dividend projections, but I’m getting closer and closer to my own goals each month. In other words, I’ve created a safety net for myself. I don’t have wealthy parents who can pay my bills for me. Instead, I now have an annual stream of income that will allow me to live without employment should it become truly necessary. It would be Lean FIRE in the extreme, but I would survive without going into debt.

Money buys options. Having a solid safety net in place means that you can pursue those options without worrying that doing so will lead to complete financial ruin. You can hope that your plans work out while knowing that you have the resources to recover if they don’t. The safety net of money allows you to consider risks that you otherwise would have disregarded. Imagine if you had rental property that paid all your bills, what would you do with your time? If you love your job/career, maybe you’d keep working. But if you wanted to spend a few months in an artist colony, you could do so without worrying about going bankrupt.

If you don’t already have one, I suggest that you work on weaving your own safety net. The bigger and stronger it is, the less risk you will face in pursuing whatever option you think suits you best. You won’t ever regret having a safety net if the time comes that you need one.

Weave Your Own Safety Net

The deadline to contribute to your Registered Retirement Savings Plan for the 2020 tax year is March 1, 2021. I would strongly suggest that you contribute a little something to your RRSP because the money will grow on a tax-deferred basis. Tax-deferred just means that the money will not be taxed by the Canada Revenue Agency until such time as it’s withdrawn from your RRSP.

As you weave your own safety net, it would behoove you to take advantages of all legal option for avoiding the taxation of your money. In Canada, two of the best ways to legally avoid taxes are to put your money inside of your RRSP and your Tax Free Savings Account.

The care & feeding of Future You is your responsibility. Since this is a blog about personal finance, I’m going to focus on the two main reasons why you simply must weave your own safety net.

Escaping Bad Working Conditions

I’ve talked about the unfortunate reality of horrible bosses and I’ve also talked about some great advice that I received way back when. When you weave your own safety net, you are buying yourself options in the event that your working conditions become unbearable or that you’re suddenly turfed from your job.

I promise you that having a safety net brings you peace of mind. I hope that you haven’t had to experience the panic and anxiety that comes when you don’t know how you’ll pay for the expenses of your life. I’m not talking about having to missing a vacation. They’re wonderful and I do love to travel, but vacations are a luxury. I’m talking about worries stemming from how you’ll get your next meal, whether you’ll be evicted or foreclosed on due to non-payment, whether you have to suffer harassment or bullying at work because you need the paycheque. These are the kinds of financial problems that can magically disappear when you weave your own safety net.

I won’t promise that it will happen quickly, but rest assured that accumulating a several hundred thousand dollars in your piggy bank will give you the option to walk away from a toxic work environment. It will provide you with the breathing room you need to find a better job, to start your own business, or to find another way to fund your life.

However, your safety net won’t weave itself. You have to take the steps to create it. And it starts with $1. You will weave your own safety net by being diligent, by relying on tools to transfer a portion of every paycheque into your investment portfolio. The sooner you invest your money, the faster it will grow.

Should you be one of the Fortunate Few who loves their job and has never had serious problems at work, then I still want you to weave your own safety net. Why?

DB-Pensions are few & far between.

The answer is that you’re more than likely going to be responsible for footing the cost of your own retirement. Defined-benefit pensions are a rarity. These are the pensions where you know exactly how much you will be paid every month when you retire.

Defined-contribution pensions are completely different. With DC-pension, you know how much you contribute every month. However, the amount that you are paid from this pension is dependent on the strength of your investment choices. If you’ve chosen well and earned good returns over the years, then your pension will pay you a very nice sum. Conversely, if you’ve not chosen well and your returns aren’t good, then your DC-pension will not give you a comfortable retirement…and you may simply have to continue working when you’d rather not.

Investing throughout your working life gives you the option to quit earlier, if you so choose. In a perfect world, you’ll contribute to your pension regardless of whether it’s a DB or a DC variety and you will contribute atleast 20% of your paycheque to your own investment portfolio!!! After a couple of decades of uninterrupted contributions & growth, your investment portfolio will be sufficient to give you the option of retiring early if you so choose. It should be kicking off dividends and capital gains that are sufficient to fund your life.

Weaving your own safety net means buying yourself options about how you want to live your life. You’re not yoked to employment forever. Those of us who aren’t born into money know that we have to earn it by working. At some point, most of us will want to stop working for money without seeing a precipitous drop in our standard of living. The only way to quit while keeping the same way of life is to have a financial safety net that exists to replace our paycheque.

Your primary goal for your safety net is to be there when your paycheque disappears. Your safety net will then take over the job of putting money in your pocket for things like food, shelter, clothing, transportation, and entertainment.

So start today, right where you are:

As you pay off debts, re-direct 75% of each former debt payment to your investment portfolio.
Never stop learning about investments – read books, blogs, magazines, online articles.
Don’t invest in what you don’t understand.
Keep your management expense ratios low, which means under 0.5%.
Invest atleast 65% of your portfolio in equities, including half of that in international equities.
Ignore the media! The day to day gyrations of the stock market aren’t important unless you’re on the eve of retirement.
Invest for the long term, which means 10 years or more.
Build up an emergency fund so you need not dip into your investment portfolio when the inevitable emergency comes your way.

Some Final Words of Advice

Don’t become a mere conduit for your paycheque.

What are you talking about, Blue Lobster?

I’m suggesting that you are not simply a convenient link between your paycheque and someone else’s bank account. If you work hard, get paid and spend every penny that crosses your palm, then what have you done other than make someone else rich?

Instead of your employer paying sending your paycheque directly to your credit card/streaming service/subscriptions/memberships/etc, you’re the one dispersing all of your money to others… And at the end of that dissemination process, you have nothing leftover in your bank account. You were simply a conduit.

Tell me again. Why do you work so hard to give away all of your money? Don’t you want to keep some for yourself?

An indebted employee is a person with few options other than to keep going to work. Granted, one of those options includes losing everything but no one really wants to go through that experience. And you need not do so. Staying out of debt, or paying it off as fast as humanly possible, gives you the option of keeping more of your money for future you.

It’s in your best interest to do what you can to resist the pervasive societal training to become a dutiful, prolific spender. And I’m not preaching that you go to the other extreme. I don’t want you to become a miser. I truly do want you to enjoy your money and to use it in a way that maximizes your happiness. Contrary to every marketing message that bombards you daily, there is no good reason for you to obey the AdMan’s relentless message to spend-spend-spend-then-borrow-to-spend-some-more!

Determine what your life’s goals are, what dreams are most important to you, what makes your heart sing with unadulterated joy! Then only spend your money in ways that move you towards fulfilling those dreams, accomplishing those goals, and experiencing that glorious joy.