Tag: Productivity

Rainy Day Fund

Creating the Rainy Day Fund

Creating the Rainy Day fund is both harder and easier than it sounds. Yes, quite the dichotomy. Saving money is hard because we have a consumer led economy. Consumption makes up about seventy percent of the United States Gross National product (GNP). Thus spending money is pushed in our society. Unfortunately, this is antithetical to creating a rainy day fund since savings is seen as a leakage to consumption. And thus detrimental to growth. But my premise is savings is a necessary part of an efficient economic system.

The current pandemic is an excellent example. Temporary lay-offs have stretched to six months. Companies big and small are in financial distress and so are the families of their employees. Keynesian economics fought back in the U.S.A. with the PPP program and monetary payments to a good portion of the working population.

But think how a rainy day fund could have eased the burden on families, companies and government at all levels; local, state, and federal.

Steps to Creating a Rainy Day Fund

The key step to creating a rainy day fund is to live within your means. Money spent must be less than money earned. This sounds simple, but many, many people do not follow this principle. Why? Perhaps there is confusion on needs versus wants. Or maybe individuals who have satisfied the lower steps of Maslow’s Hierarchy through spending, believe the upper levels can be reached through more spending-they can’t, but that should be discussed another day.

Needs versus Wants

However, drilling down into needs versus wants is a critical first step in creating the rainy day fund. A simple exercise helps illustrate this concept. Get out a piece of paper and divide it into three columns. In the first column write down everything you need to buy in the next 48 hours. Maybe you are out of milk or your gas tank is empty, these types of entries are what you are striving for. In the second column, write down everything that must to be purchased in the next month. Again, only write down what is absolutely needed to meet the basic needs of water, food, clothing and shelter. Finally, use the third column to list everything your heart desires. These are your wants.

Now compare the columns. Do you have the funds to cover the first two lists? If not, what is your plan? These of course are necessities. They relate to the base of Maslow’s Hierarchy. Those individuals not able to meet the needs of these first two columns should evaluate why they can’t and make changes in lifestyle. Seeking help from professional financial planners may be warranted.

If you do have the needed funds, how much money is left over? And what do you do with it? My observation leads me to believe most people start buying things off that third column until there is no money left. Unfortunately, a few keep buying on credit even after all income is spent.

Delaying Gratification

The first step to creating a rainy day fund is to hold off on purchases from that third column. However, delaying gratification in our society of instant everything is now an alien concept. And there is a place for convenience. Restaurants with drive through windows have weathered the pandemic storm better than others. Plus the adage of time is money comes into play with respect to buying clothes versus making them. However, self-sufficiency comes into play with saving for a rainy day.

Expenditures from that third column in the above activity need to occur after a financial cushion has been established. First you must pay yourself by saving the extra money, not rewarding yourself with new shoes or a pumpkin latte. So how much is left over after paying for your monthly needs? According to the U.S. Bureau of Labor Statistics (BLS) in the recently released consumer expenditures for 2019, about 15% of income is available for discretionary spending.

To Econogal, this is disheartening. As you can see by clicking here for the report, the necessary expenses include Housing at 32.8%, Transportation at 17%, Food is 12.9%, Personal insurance and Pensions take out 11.4 percent. 8.2 % is spent on Healthcare and 3 % for Apparel and Services. Add everything up and the average household has spent 85.3% on needs.

The numbers get gloomier from here. (Hence the nickname The Dismal Science for economics.) Let’s say you recently graduated from high school and the only job opportunity due to the pandemic is paying minimum wage, $7.25 an hour. Looking at the numbers, income is $1160 a month or $15,080 a year. If you are frugal and don’t buy anything from column 3, savings after one year will amount to $2262 which is less than a two month cushion. Furthermore, even I am not that frugal.

Frugality

So how can one get ahead? After all, the above numbers reflect living within ones means. Two components are needed to increase the rainy day fund. Frugality and productivity. The BLS statistics are an average. Individual expenses vary. As do needs and opportunities to save. Each person can choose where to beat the average. From a personal standpoint, housing and transportation are where I beat the average. With the exception of one period of less than three years, I have never spent more than 25% of income on housing. Thus, I enjoy an 8% advantage over the average. In the above minimum wage example that would yield an additional $1200 for discretionary income.

In my opinion, the categories which yield the biggest potential for beating the average are Housing, Transportation, and Food. Aim for a cap of 25% on housing. This should include utilities. But savings can be had by eliminating items such as cable or satellite.

Transportation is another item to look at. What are the options? Can you carpool or take public transportation? In America we seldom walk to work. Even if we live close to work. The campus I taught on was less than half a mile away. Many days I chose to walk and more often than not I was asked if I needed a ride.

Carpooling, walking and combining errands into one trip have the benefit of cutting gas expense. But the fuel tank is only part of transportation cost. Wear and tear on the vehicle shows up in the price of new tires and oil changes. Another benefit to reducing transportation cost is environmental. Just something to think about if you want to reduce your global footprint. Europe and much of the world is way ahead of America in regards to transportation as a percentage of household expense.

Productivity

The second component to increasing savings and thus creating a rainy day fund is productivity. Technically, productivity is measured by dividing outputs by inputs. With respect to labor, if your cost for labor exceeds the money gained from selling the output of labor then you are in trouble. But that is at a corporate level. What about the individual?

How does one measure their own productivity? Earned wages reflect a person’s productivity. Minimal skill levels usually correlate to low pay scales. In the above example of the minimum wage annual income, a pay increase is unlikely without the development of skills via experience or education. Or both.

But an increase in wages does not automatically create a rainy day fund. In fact, economic theory argues that increased wages leads to increased consumption. An individual making $20,000 will spend 85% of their income as will a person making $100,000.

So can an Individual put money aside? We circle back to delaying gratification. Thus, creating a rainy day fund is independent of income amount. Instead, self-discipline is the key to accruing savings. Delay buying from that third column in your early years of earning a living.

Self-sufficiency

Additional ways to save money tie to self-sufficiency. This gets a bit tricky especially in a service based economy. Self-sufficiency also is counter to specialization. But I think it is time to discuss how self-sufficiency can add to the rainy day fund.

One of the economic textbooks I used began with an illustration of how the author is more productive spending his time as an economist versus mowing his yard. He posited that someone making $50 an hour should never mow their lawn because of opportunity cost. Hiring someone to mow costs less than $50. So the economist is ahead of the game by hiring the service to mow while he works.

There are problems with this theory if you are not self-employed. (And even if you are!) The college I worked for only paid me for 40 hours of work. No overtime. None. So in my case there were many hours left in the week. (Even when I did work extra hours.) I had more money for my rainy day fund when I used those hours productively around the home.

At one point in time I investigated hiring someone to come into my home and clean for three hours a week. The lowest price quoted was $50. So to this day I do my own housecleaning. That is at least $2600 a year not spent on a service. Extra savings for the rainy day fund.

There are 168 hours in a week. Even if you sleep for a third of those hours, that leaves 112 hours. Subtract 40 and you have 72 remaining. Put those hours to productive use and you will have a rainy day fund in no time at all.

Rainy Day Fund-Important Regardless of Age or Income

Life is not predictable. Hurricanes, floods, fires and tornadoes and even once in a lifetime pandemics are unexpected but naturally occurring. Natural disasters are not the only challenge in life. Accidents, illnesses and layoffs are part of life. The longer we live the greater chance of facing multiple challenges.

A rainy day fund is necessary. If you do not have a fund do not delay. Set aside money on the next payday. The more you earn, the greater amount you should have set aside. Returning to a lower standard of living is not fun-but sometimes necessary. Remember delayed gratification and productive use of time are the key components of creating a rainy day fund.

Procrastination

Procrastination is defined as delaying a task or action to a later time. I have witnessed procrastination all my life. Occasionally I am guilty of procrastinating. But most of the time I am not. The times I procrastinate revolve around either a dislike for a task, or a fear of rejection.

Tasks I dislike and often put off include scrubbing toilets, taking out the trash and matching clean socks. If I have both inside and outside chores, I will opt for the outside ones unless the weather is bad. Or I know company is coming.
Fear of rejection also delays me. I have two completed children’s books that I have not submitted for publication. My current excuse is I have no illustrations to go along with them. The real problem is I fear rejection. I love the stories but worry no one else will.

As I have aged, procrastination has become less and less a problem. Juggling a career, four kids, volunteer work, hobbies and last but certainly not least, a husband meant staying on task. Thus I have a few tips to share.

Paying Bills

I pay bills as soon as they arrive. This way they are paid on time. Some of my bills are set up for online payment. In this case, the payment is scheduled for a few days before the due date. Some may prefer to have the bills submitted straight to the checking account. Again, this method ensures prompt payment.

Procrastination at Work

The workplace is primed for procrastination. There are co-workers to provide distraction. Other delays are caused by customers, clients, suppliers or students as the case may be. I remember one boss complaining of all the “fires” that needed to be put out and hence things didn’t get done in a timely manner. But there are ways to stay on track.

First, set aside time to get the needed tasks completed. This may mean going in an hour before others if you are in a management position with lots of interruptions. Or put out some type of do not disturb notice. I remember one December donning a Grinch hat and posting a warning note indicating the posting of grades came first. No one knocked on my door.

Second, prioritize the work. Organize the tasks by both importance and deadline. Sometimes a first in first out approach will not work. Make sure you schedule enough time to check the work for accuracy whether it is proofreading, measuring or even taste testing.

Third, break large projects into small chunks. Procrastination has a psychological component. Often the task is overwhelming. By dividing the work up into pieces or parts the job no longer seems as daunting. Give yourself a break between sections of the work. But set a time limit on the down time. If you don’t have a plan and a time-table, procrastination can sneak back in.

Fourth, learn to delegate. If you can’t share the load, then know when to say NO. Procrastination becomes a nightmare when multiple tasks pile up.

Exercise

Another area ripe for procrastination is exercise. We all know how important it is to exercise. Studies show benefits from physical activity include brain health, physical fitness, longevity and psychological well-being. But many put off the work-outs. Maybe you woke up late. Or it is too cold. Or too hot. After work you are too tired. Part of the year it is too dark. All these are just excuses. Some people just don’t like to exercise so they put it off.

Don’t procrastinate! Exercise is one of the keys to life. In the old days we labored (and some still do). The labor served as our exercise. If you are lifting bales of hay you benefit as much as by lifting weights. But most no longer labor. The future will probably involve even less manual work. Just think of the inventions such as the robots that clean kitchen floors. In order to keep our bodies fit, we need to substitute work outs for labor.

Keys to avoid putting off exercise are as follows. First, have an exercise partner. You can encourage each other. Second, find a workout you enjoy. There are so many types of exercise that you can mix up the workouts. Bicycle two days, run two days and dance or kick-box on other days. Third, stick to a routine. Try not to go two days in a row without some form of exercise. Remember your physics, an object in motion stays in motion.

Benefits from overcoming Procrastination

Defeating procrastination leads to many benefits. Tasks are done on time. This translates into less stress which tops the list for me. There is also an increase in productivity. Procrastination slows down the time-table. So once you put the drag of undone work behind, you will be surprised at just how much work can be completed. Furthermore, you will establish a reputation for getting things done. This can-do work ethic is what employers look for. So start today by stopping procrastination.