You probably know I’m a fan of Dave Ramsey. Last month I wrote this tweet:
I like Ramsey’s start and build. Start with $1k, then go to 3 months, then up to 6 months. The other part of that is how employable are you, or how can you create income (freelance, consult, etc.). Build THAT for emergencies, too.
— Jason Alba (@jasonalba) November 19, 2020
Dave is very principle-based, and his advice is meant for each of us, no matter where we are at. I love how instead of saying to start with six months of emergency fund he says to build up to just a month. One month is much more doable than six months, right? If you made $60k a year, you’d have to have $30k for a six month emergency fund (kind of… you could reduce that amount by what you pay in taxes, probably). Who can fathom building $30k into an emergency fund? I can stomach the idea of building $5k, but $30k just seems impossible.
And so he says to start with the one month, then build to three months, then build another three months. And then you are in a good place!
In my tweet I talk about the other part of emergencies… the part that hopefully gets you back into an income stream before your emergency fund runs out. When I ask how employable you are, I’m talking about things like:
- What skills do you have, or can you learn? Pretty important to convince someone you can actually do the job, right?
- Who do you know? Or, as they say, it’s not who you know, but WHO KNOW’S YOU! If this sounds like networking, it is.
- What do people know about you? Or, in jargon: What is your personal brand?
My final thought on the tweet is to BUILD your employability… or any of those three things. Please, please become more employable. I don’t want you to spend months, even years, figuring out how to replace lost income. I want you to enjoy your career, which isn’t done when you are fretting to figure out how to provide for the basics (like a roof over your head).
One of the analogies Dave uses that I love is that of the hole and the shovel. For example, he’ll have someone call in who is $100,000 in debt but only makes $20,000 a year. They have a very big hole (their debt) and a very small shovel (their income). Contrast that to someone who calls in and has $500,000 in debt (“WOW!!”)… but has $400,000 of income. They have a very big hole, but a massive shovel.
For most people, your shovel is your job. But when you create multiple income streams, or your partner has a job, you grow your shovel from just your job income to all the income. Creating a bigger shovel with more than one income stream is an immensely powerful concept. Businesses do it all the time. Remember the old, original Amazon, which sold books? They have since diversified into streaming video and hosting websites and a slew of other things. When we diversify our income we create opportunities to grow our shovel. The diversification can also create a buffer to protect us from unforeseen threats, such as a job loss or a pandemic.
Of course, filling in the hole, reducing expansion of the hole, or stopping more holes, is also critical. Can you imagine only needing a little bit of money to pay immediate bills, without worrying about loans and mortgages and other typical debt? I hear being completely debt free is so liberating. Even if you lose your job you won’t have your debtors breathing down your neck for past due payments.
- Build your emergency funds.
- Build up your shovel.
- Reduce the hole you have to fill.
These are three core elements to having financial peace, which can lead to financial freedom, setting you up for financial wealth.
P.S. Here’s an example of Dave talking about the shovel/hole (at minute 3:20):