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Financial Firewalls: Establishing Personal Finance Safety Nets

Anyone that knows me irl knows I am the furthest thing from a personal finance guru. I know the basics of course, but once someone starts talking about anything beyond that my eyes start to glaze over.

That doesn’t mean I don’t take it seriously though. I know firsthand how a couple of poor financial decisions can lead toward years of uphill struggle trying to climb out of a debt pit.

A Quick Background Summary

If the very first sentence of this post didn’t clear this up, I just want to again clarify I am in no way a personal financial advisor. This information is just about something I do so that I don’t feel constantly stressed about money.

I came from a lower middle class family. I never went hungry when I was growing up, so I can’t really complain. But, I definitely saw the paycheck to paycheck struggles my mother went through.

I started working when I was sixteen. I worked through the state college I attended, and I needed student loans to cover my tuition.

Upon graduation I was definitely in the red, but I always knew that if I ran completely out of cash and had no way to keep a paycheck coming in, I always had a room at my mom’s townhome. Then, she passed away and I realized I was pretty much on my own.

Entering the Real World

I was actually living and working in Taiwan when my mother passed away. I wasn’t making great money, but I was making enough to live well in Taiwan.

One of the problems I had seen many ESL teachers fall into though was something I then referred to as an exchange rate black hole.

When I made my move to Taiwan, I did so because at the time it was one of the three countries you could teach English as a foreign language in while living comfortably and still have a little of your salary left over to save, or in my case, to pay off student loans.

But, I definitely did not make enough to amass a good chuck of change quickly and most other teachers were in a similar boat.

Since the pay covered your cost of living and allowed you to save a little but not a lot, many teachers would look to move to other countries every year. The idea was, if I can live well in Taiwan on $2,000 USD a month and save a couple hundred, or I can live just as well or better in China on $1,200 USD a month and still save a hundred or so, what’s the difference?

The quick answer is the problem with that strategy is your savings get eaten up quickly due to your constant relocation expenses. And, most people tend to drift toward lower cost economies thus limiting their earning potential. If you can save 25% of your monthly income, but that income is only $500 month, you might have a problem if you unexpectedly need to scrounge up $1,200 for a plane ticket.

And, that was why I set up my first firewall.

What is a Financial Firewall?

A financial firewall is simply some form of financial protection you build into your personal finance. The very first and most common one you will read about or hear of on podcasts from the Dave Ramsey types is setting up an emergency fund.

At the time all of my money was either in my American checking account so I could pay my student loans, or my Taiwanese account that I used locally. I didn’t really know what an emergency fund was, but in a sense that’s what I set up.

I opened a new savings account at my American bank and made to sure to keep enough in there so I could buy a single one-way economy class flight from Taipei back to the USA if needed. In every true sense of the word, it was an emergency fund. If everything else fell apart, I at least had a ticket back to the USA.

Having some type of emergency fund is like having a safety net. But, I like to call it a firewall, and I like to have several of them in place. If one fails, like if you need to tap your emergency and it runs out, you won’t be in dire straights if you have another firewall set up.

What Type of Layers Can You Build?

My first emergency fund was severely lacking when compared to what you would consider a traditional emergency fund, however it was a start.

But, I feel you can try to do a little better than just having a pool of cash you can access should SHTF.

Additional Revenue Streams

If the Covid-19 era has taught us anything it’s these two very real facts:

  • You cannot rely on your government to help you
  • Your job is not and never truly was secure

Understanding the above shows us that having more than one source of income is incredibly beneficial.

Having more than one source of income doesn’t mean you can’t have a career. You do not have to make them even and you don’t need to give all of your income streams the same attention.

The goal is that if you lose one, you don’t lose everything. For example, tens of millions of Americans lost their service industry jobs due to Covid-19 overnight. One day they were employed, and the next they had zero incoming money.

If they had a 3-6 month emergency fund to dip into, the had a bit of safety. If not, it’s no exaggeration to say that panic may have set in quickly.

Yet, instead of relying on your emergency fund firewall right away, what if you had additional income?

I am not going to go into all the various ways of earning more money, but for the sake of this post a waiter could for example have had a second part-time job or a side-hustle like delivering for InstaKart or Shipt. The could have been leveraging personal talents like teaching guitar or selling art, or they could have been doing something more in my wheelhouse like owning several affiliate websites. The second revenue stream doesn’t matter as long as there is one.

Take a look at how much this can help. All of these numbers are fictional, but I find giving some real dollar values helpful.

If you’re making a modest living, say $3,500 gross per month and your monthly commitments chew up about $2,500 of that, you don’t have a lot leftover after taxes. To have that $3,500 vanish overnight is going to hurt badly.

Even if you cut your monthly costs down significantly (rice and beans instead of avocados and steak, cancel Spotify premium, drop your Internet to the lowest tier, etc.) and mange to get them to $1,800 a month, you are still going to feel a lot of financial pain.

Now, consider you had a side hustle that was bringing in about $1,000 a month. That is a very doable number. It takes effort, but it’s not something completely unreasonable.

Instead of being $1,800 in the red each month you would be closer to $1,000 in the hole after you account for taxes, though in an emergency situation your might kick the tax can down the road and deal with that later. Plus, if you were laid off or furloughed, you should in theory be able to devote some more time to your other revenue stream and bump up your income to at least get you to even.

Yes, I left out unemployment insurance because it is systematically designed by each state to be difficult to claim, and it took a global pandemic to get congress to temporarily do something about that.

Working your tail off to break even isn’t fun, but it’s better than seeing a mountain of debt grow each and every month.

So, the first firewall is to try and have more than one source of income. The elephant in the room is that depending on what that source is, there is no guarantee it also doesn’t get wiped out in the case of a curveball like Covid-19. But, you have a much better chance of retaining some kind of income if all your eggs are not in one basket.

A Traditional Emergency Fund

We already talked a little about emergency funds, but they aren’t something to take lightly. You absolutely should have one. In fact, not having one is like going deep sea fishing without a lifejacket.

Having a liquid emergency fund gives you almost instant access to hard capital should you need it. Relying on cash flow just is not enough these days, and the current pandemic is showing why.

Even if you had a traditionally stable full-time white collar job, a part-time gig waiting tables, and a couple of e-books you wrote and were selling on Amazon for some pocket money each month, it’s very likely all three of those income streams could have vanished in a matter of days.

Most experts recommend having somewhere between three to six months of expenses set aside. I personally try to base mine on six months of assumed reduced expenses.

If you are lucky enough to keep a side hustle going after you lose your main source of income, that six months can end up lasting up to a year or more if you’re careful.

Just remember, your emergency fund is for emergencies. It’s not for splurging when you want something fancy.

Alternative Assets

You can also get a little creative with how you set up a firewall. For instance, I enjoy traveling. Over the years I have carefully taken advantage of some of the generous sign up bonuses certain credit cards offer.

For example, if you don’t yet have one of Chase’s Sapphire credit cards you can get 60,000 Chase UR points after spending $4,000 in three months: https://www.referyourchasecard.com/6a/N2ZJIDRSGI

The goal here is to spend how you normally spend to cover that $4,000 and not to buy extra things you don’t need. That defeats the purpose of the bonus.

I usually use the points for flight tickets, but if you have an unused batch and you are in dire need of some financial relief you’re in luck.

Many of the non-airline points can be used for purchasing items and gift cards. You do not get great value for your points, which is why all the travel hackers out there cringe when you mention doing so. But, if you’re in a jam, you do what you need to.

A way to use points to cover some of your monthly expenses would be to swap them for major retailer gift cards like Walmart or Target, and then use those to purchase your groceries. Again, this is not ideal, but this is also only something you would do if you break through your other firewalls.

Spending future travel funds on food so you can eat now in lieu of not eating so you can maybe visit Costa Rica a few years down the line is a no brainer.

Other examples of leveraging alternative assets would be selling some nice clothes you don’t wear often or that your children grew out of on platforms like Poshmark or joining virtual yard sales for your community on Facebook.

Credit

First and foremost, using credit as a firewall is basically DEFCON 1. You have little to no incoming money. You burned though your emergency fund. You leveraged all your alternative assets.

Now what?

If you managed to not lose any credit you previously acquired whether it’s on a credit card or you have a line of credit with your bank, it might be time to use it as a stopgap loan.

Is this ideal? Absolutely not. Having credit card debt is awful. I never carry debt on credit cards. But, if there’s a solid chance you’ll be able to get back on track to earning some money in a few months and it’s either run up some credit card debt to eat or don’t and starve, I’m going to choose putting some food in my belly.

Just remember, credit is not an emergency fund. It’s a last resort.

In Summary

Jobs come and go just as money and financial obligations do. Setting up some kind of system to ensure you don’t end up on the street is both wise and extremely helpful in reducing financially induced anxiety.

I personally set up a series of firewalls just in case my first safety net breaks. Hopefully I will never have to test them all.

And to just make it clear once more, I am not a financial advisor. I know some people may read this and make claims about how having six months of expenses just sitting around in a low interest bearing savings account is stupid as that it instead could be earning money in the market or how credit cards are the devil no matter how you use them.

Maybe they are right and maybe not. What I do know is that sometimes you need to do what works for you and what works for you might not be what works for others.