How To Always Feel A Sense Of Cash Security

Never Retire Checklist: #8

So much of what we discuss in this newsletter comes down to having the luxury of choice. By the way, Medium readers can receive 50% off a one-year subscription to my newsletter.

We want to make financial and, subsequently, life decisions not out of necessity, but by choice. We want a say in the matter.

Having a say in the matter might be the best measure of financial health we never talk about.

This is one reason why — going back to Never Retire checklist item #3 — it’s so important to not only accept, but embrace your reality before theorizing, strategizing and implementing concrete methods to address it.

Because most of us choose the Never Retire path not by choice, but out of necessity. It’s crucial to get over the fact that we had this reality imposed on us. It’s crucial to understand how living the semi-retired life now and for the duration can actually be a better life than the one that puts you on the typical trajectory to traditional retirement.

You want everything that comes after having the reality that you’ll Never Retire imposed on you to be a choice (should I buy that coffee?) or decision (should we move to Spain?) where you have a say in the matter.

Where you have the luxury of choice.

Without the luxury of choice, you might not even be able to ask questions like that.

Pretty much everything that follows in this series deals with setting yourself up financially to have the luxury of choice alongside strategies you can use once you get there.

This installment looks at one of the best ways to get to the luxury of choice. It’s about how you allocate and organize your cash flow to cover near- and longer-term needs, wants and desires.

I trace my thinking on and how I have tweaked my pots of money approach to personal finance over the last 2-to-3 years.

It’s one thing to budget. It’s entirely another to allocate cash effectively.

What good is a budget if you keep all of your cash in a checking and maybe one savings account? It’s an easy way to lose sight of how much money you actually have to spend on the things you need and want to do.

This is why I use pots of money.

The first thing I aim to do is draw my checking account down every month to the point where I can pay my fixed expenses on schedule, spend freely (within reason) throughout the month and have a cash cushion to —

• absorb any additional expenses
• handle small to medium unplanned expenses
• carry me financially healthy into the subsequent month

So, if I know I spend $2,000 each month on necessities and $1,000 on wants, I strive to start the month with a checking account balance of roughly $3,500 ($2,000 for fixed expenses, $1,000 for discretionary spending and an extra $500 to absorb the extras).

Once you have a rhythm going that looks something like this, you can set up your pots of money, which are a series of savings accounts, earmarked for specific purposes, but versatile in that you can easily reallocate funds on the fly or when you’re long-term needs and desires change.

You can also change your allocations as your perspective on managing your money changes.

To highlight this, let’s look back at a couple of the early Medium articles I wrote about my pots of money and compare it to how they look today.

In September, 2020, I saw it this way on Medium —

One pot of money to consistently satisfy your monthly living expenses for 1.5 to 2 months (subsistence fund). One pot of money to cover reduced or a total loss of income for 3 to 6 months (emergency fund). Other pots of money to pay for discretionary needs and wants (a new apartment or continuing education fund). And another pot of money to fund the aforementioned starts, stops, and restarts (transition fund).

This feels like such a long time ago. And, for me, it sort of is.

At that point, I was more than three months away from going on my first date with my girlfriend of two-plus years.

A different time with different plans and, while it still falls under the same core umbrella, a different way of thinking.

Fast forward to today and I don’t keep a subsistence or emergency fund. I used to because it made me feel cash secure, knowing I had living expenses at the ready for half a year. While there’s nothing wrong with this approach (I still get the reasoning), I abandoned it for two reasons —

• There is no reason why I can’t take cash from another pot of money to cover living expenses if something goes horribly wrong with my cash flow. For example, if things get so bad that I suddenly have zero cash flow to cover my expenses, it probably would not be prudent to go on a big trip. Therefore, money from my travel fund can help me subsist. It can help handle my emergency. I can always replenish my travel fund when things get better and travel reemerges as a priority.

So, for all intents and purposes, I still have an emergency fund. I just don’t call it that anymore.

Generally speaking, pots of money, no matter how you label them, are like insurance. They’re there to use for emergencies. However, you pay too high of a premium by having so much cash in a savings account — knock on wood — you might never use.

Call this the less anxious, more cautiously optimistic way to use pots of money.

Here’s what I had to say about this in June 2021 on Medium —

When things (potentially) take a turn for the worse, the labels you put on these pots of money become relatively worthless.

Think about it this way —

You can tap your checking account to live for as long as your cushion allows.

You can leave your emergency fund alone and use the money for the non-essential funds (e.g., temporary retirement, travel) to live as you aim to get your income back on track. So the original plan was to use these pots of money for these comparatively luxurious purposes, but with the ability to function in utilitarian fashion when conditions require.

So I ultimately ended up thinking why have an emergency fund when you have a cash cushion and other non-essential pots of money you can draw from? Again, changing the language I use from anxiety-provoking to prepared but positive.

• I assessed my work. I have been doing some form of what I do now for the better part of 15 years. I have lost income more times than I can count. Each and every time I have regrouped (most recently when the pandemic hit) and replaced what I lost. Is it guaranteed that I will continue doing this? No, but I feel like it makes sense, in this case, to let confidence in yourself beat anxiety over what might happen.

Plus, I have more control over my work today than I ever have. While I run the risk of Medium or Substack going away tomorrow, I’m confident something else will replace them that already exists or hasn’t yet come online.

It’s about having a plan that gives you confidence to not hoard cash, but allocate it wisely. To, as they say, make your money work for you. To me that means knowing I have money set aside for everything I need and want to spend it on. No guessing. No surprises.

When I started talking about my pots of money nearly three years ago, I was considering a move to Portland. So I was saving to comfortably get an apartment there.

Met my girlfriend and there’s no way I’m leaving Los Angeles without her. So that changed.

I also put the transition fund — which I later labeled a temporary retirement fund — on the backburner.

Here’s what I meant by temporary retirement fund —

There’s a distinction between this pot of money and an emergency fund. An emergency fund exists to cover your expenses — in part or whole — when, through no fault or choice of your own, you lose some or all of your income.

It’s not a rainy day fund (you might include this in phase two or three), which is meant to cover unexpected expenses such as a flat tire. I essentially use my checking account cash cushion as my rainy day fund.

Anyhow, the temporary retirement fund takes care of your expenses when you choose to not work or experience an income loss by choice.

Just as you do the math on an emergency fund (i.e., an emergency fund of $17,500 divided by monthly expenses of $3,500 equals five months), you can do likewise with your temporary retirement fund.

Treat the temporary retirement fund like a loose emergency fund.

While you should be strict with the emergency fund — in a perfect world, you never touch that money — you can run fast and loose with the temporary retirement find. Though, not too fast and loose.

My primary personal financial focus has become filling this temporary retirement fund and doing similar math to what I do with my emergency fund.

In this respect, the two funds only differ in when you use them.

If I choose to forgo income for a period of time, I am temporarily retired. I need to always know how many months — based on my typical monthly expenses — of not earning my temporary retirement fund can cover.

As I settled more comfortably into the semi-retired life and gained the aforementioned confidence in my work, I realized there would never be a need to take off extended periods of time. If I wanted to — like I did for all of February — I can get most of my work done ahead of time and work less than an hour a day while traveling. Very little, if any income lost.

So, within the span of 2-to-3 years, I changed my thinking and stopped contributing to a subsistence fund, emergency fund and temporary retirement (or transition) fund. Circumstances and experience dictated this change. However, your work situation, cash flow and overall outlook might differ from mine. So these are still solid ideas to incorporate into your plan.

Today, I keep the following pots of money —

• Checking account: Structured to cover expenses, my typical discretionary spending and absorb unexpected small- and medium-size expenses.
• Rainy day fund: This is the savings account my bank transfers $1 into each time I use my debit card. If I feel like my checking account is getting too low, I pull some money from here during the month. Otherwise, it’s meant for a splurge.
• Travel fund: To pay for travel expenses I cannot cover from my checking account. I automatically transfer cash into this pot of money weekly, so it’s always replenishing and I’m always saving for the next trip, even after raiding the fund to pay for a trip. During a trip, there’s always more money going into my travel fund for the next trip. The cycle never stops.
• Long-term move fund: As you know, my girlfriend and I have plans to move to Europe, hopefully in the next 3-to-5 years. This money is building so we can execute that move. It’s meant — primarily — to eventually pay cash for a small apartment and bring our monthly housing payment to or close to zero. More details on that in part 12 later this month.

My goal here was threefold:

• To show how my thinking and concrete approach to pots of money has changed over the last few years.
• To show that it’s okay to change your thinking as you take in new information, your personal life changes and you have new experiences.
• To show that, even if I discarded a pot of money, it — or some variation of it — might be useful to you now or going forward.

I hope I succeeded.

Additionally, I wanted to caution against one of my downfalls.

While I’m all for cash security, there’s a fine line between it and hoarding cash. You don’t need to stay hard and fast on labels. If you have six months of expenses in a fund not labeled “emergency fund,” you can still use it for an emergency!

Positivity over anxiety goes a long way. Tough one to sometimes put into practice, but it’s a big one if you want to fully enjoy being semi-retired now and for the duration.

In closing…

Readers often say it better than I do.

Here’s a great comment from a subscriber about why she uses pots of money —

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Today’s article, a version of which appeared in my newsletter, built off of Wednesday’s Medium post. To get up to speed on what we’re doing this month on Medium, here’s a link.

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