Tuesday, April 30, 2019

Beyond an Emergency Fund: Making More Money with a Financial Cushion

As I was considering leaving my last job, which had a very generous 401k match, I realized that it was unlikely that my next company would have as generous of a match. As soon as I decided I was serious about finding a new employer, I cranked up my contribution to 50% of my salary until I got the full match in a few short months before I quit. We lived off some extra savings we had set aside to be able to pay the bills. That extra savings we lived off of, essentially made us $1,000's of dollars.

Over the past few months, I've noticed even more places that if you have some extra financial cushion, you can use it to make even more money. This is good motivation for having a cushion beyond an emergency fund. I'm talking about money set aside not for emergencies...but opportunities. This principle reminds me of this quote from the Richest Man in Babylon.

“The man who became of his understanding of the laws of wealth, acquireth a growing surplus, should give thought to those future days. He should plan certain investments or provisions that may endure safely for many years, yet will be available when the time arrives which he has so wisely anticipated.”
George S. Clason, The Richest Man in Babylon 

Here are a few ways I've seen this in action. 

1. ESPP (Employee Stock Purchase Plan). If you work at a publicly traded company and they offer this is a perk, if you can do without 20% of your salary for 6 months, you'll get a >15% guaranteed return on that money you set aside. Read this link for the details on how it works.

2. Exercise early options. A very tech example, I know, but if you believe an IPO is eminent at your company you can exercise early and lock in long term capital gains and save a lot of money in taxes. Read more here.

3. Pay in advance discounts. There are many products, like car insurance, where if you pay in advance they give you a discount.

4. Strategic charitable contributions. Consult a tax professional, but especially if you give a regular percentage of your salary, there might be some tax advantages to paying for the next year in December of the previous year depending on how near you are to exceeding the standard deduction. 

5. A great deal. This is a very dangerous one, but if used with constraint and it's legitimately something would have bought eventually, the financial cushion an let you pounce on a great deal.

6. Tax moves. The most common way is making a contribution to a traditional IRA or pre-tax 401k, but you might be surprised at the answer if you have an accountant and ask them the question. "How could I move some money around to lower my tax bill?".

Bottom line, if you can set aside some money apart from your emergency fund for opportunities, I'm confident each year you'll find more ways to have even more cash in your pocket that year. 

Disclaimer...these are just some ideas, consult a professional