Things are looking good, even if you’ve set yourself some challenges. You’ve created a budget, determined to live frugally so you can stay within the budget, and started paying off debt. Now it’s time to build some wealth.

The first phase in wealth-building, above and beyond your 401k or 403b plan, should  be—no, make that must be—to establish a survival fund. This can be used to cover small emergencies such as those fun dental bills, the exciting trips to the car repair shop, and educational experiences with the plumber and the heater repairman. Sometimes cash flow just won’t  cover those unplanned expenses. To keep from racking them up on the cards and sinking back into the Slough of Debt Despond, you need some cash on hand. This is a short-term emergency stash.

Long-term, your target in building an emergency fund should be to accrue enough to cover six months of living expenses. Should you lose your job, never an unlikely scenario in the new, enlightened global economy, this may (we hope) tide you over until you can find new employment. If you have in mind quitting your job and starting your own business, then you will need at least a year’s worth of living expenses in savings.

Heaven help us, where does it come from?

If you are paying down debt, you need to budget so that you can put at least one or two hundred dollars a month into emergency fund savings. It means you’ll pay off the cards a little slower, but trust me: you’ll be glad you did it.

If you’ve already paid down the debt, well then. All you need to do is take the amount you’ve been using to pay off the cards and the student loans and shovel it into a savings instrument. I would suggest that if your goal is to pay down mortgage debt as well as cards, student loans, and auto loans, you should establish the emergency fund before you start paying down the mortgage.

Based on my net income, I would need $18,000 to replace my salary for six months. As a matter of fact, I happen to have $18,000 sitting in a Vanguard short-term corporate bond fund, where it earns about 8 percent a year.

How did I get it? Shortly after I divorced, I bought the first car I had ever purchased on my own. The payments were $300 a month. I worked hard to pay off the debt early. By applying every extra penny that came my way to the loan, I managed to get rid of the five-year obligation in 18 months. I then started salting away $300 a month into what I called the “car fund.” The plan was to save enough to pay for a new vehicle. Since the new car was a Toyota, I figured it would run for 10 years, bare minimum.

The money came from

1. •     my salary and spousal support, and
   

2. •     freelance editing projects.
   

Three hundred a month is $3,600 a year. Thirty-six grand times ten years is $36,000. Jeeminay! You could actually buy a car outright with that.

Well, as some of you know, after seven years I sold the Camry to my son and bought the Dog Chariot. By then I had over 25 grand in the car fund. After this pair of transactions, a fair amount remained in the car fund, so that today I have more than enough to get by for six months, should I lose my job.

To make these “payments” into my own savings accounts, I pay myself first. As soon as a paycheck hits my checking account, I go online and transfer the set amount directly to a savings account. Out of sight, out of mind! When you move the money into savings the minute you get it, you’re lots less likely to diddle it away.

Once enough was sitting in a mutual fund to assure that I could survive a truly disastrous scene, I opened a money market account with my credit union, to which I began contributing $200 a month. This serves to cover “extraordinary” expenses: repair and veterinary bills, various little surprises, and occasional indulgences such as a shopping spree at a clothing store.

I’ve continued putting money in this savings account over the years. The balance waxes and wanes; sometimes I have to pony up a thousand bucks or more for some unexpected expense, and then of course it takes five or six months to recoup.

The increases in my salary have not kept up with the costs of utilities, insurance, property taxes, gasoline, and food. In addition, I took on a $25,000 loan to renovate an investment house. So, I no longer have $200 a month to put into savings, above and beyond the $250 a month I’m setting aside to pay toward that loan’s principal. The best I can manage for emergency savings right now is about $175 a month. So, until I have enough to pay off the Renovation Loan, I’ll have to be careful and pray for luck.

In theory.

In practice, though, the Renovation Loan is a second mortgage on a house that has no first mortgage. Its regular monthly payment is only $170, easily affordable on my present salary. Because I’m wary of putting more money into real estate equity at a time when values are dropping, instead of paying the $250 directly toward principal I’m investing it in a Vanguard money market fund, which pays a small amount of interest. With no other contributions to that fund, it will take about seven and a half years to accrue enough to pay off the $23,600 remaining. But with snowflaking and applying net income from a side job, I expect to have enough to cover the balance in about three years. The truth is I could afford to pay the $170 loan payment forever, and so keeping the “principal payments” liquid in effect creates another emergency fund.

In three years, I will be eligible to retire. At that time I will have to decide whether to keep the house or to sell it and move someplace cheaper. If I decide to stay here, I’ll take the money I’ve saved for the Renovation Loan and pay it off, “disappearing” a $170/month bill and making it easier to live on a reduced income. If I sell, the loan will be paid from the proceeds, but I’ll still have an equivalent amount in hand, stashed in a mutual fund. In that case, I will walk from the sale of the house with at least $41,600 ($23,600 + $18,000) in interest-bearing, dividend-producing financial instruments.

So, today as we speak what am I actually putting into savings?

[How do I hate iWeb’s impossible page formatting? Let me count the ways. What is it about “table” that Steve Jobs can’t spell?????]

Does it make me feel a little pinched now and again? Sure. But once you get into the habit of saving—and build a set of frugal living habits—it’s easy.

To summarize:

1. • Start putting something, no matter how little, into savings while paying off loans.
   

2. • When the loans are paid, start putting the amount you were paying on the loans into savings.
   

3. • Put any side income into savings, to the extent possible.
   

This is one of Funny’s Ten Money Principles.

frugality, budgeting, goals