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Last week, I introduced the concept of a New Zero in your checking account. This is a buffer of one month’s expenses that you keep in your checking account at all times.
Just like having a buffer in our checking account for small emergencies that may pop up, we now need to create a larger buffer that will provide protection from a potential loss of income or other large financial hits we didn’t see coming.
A couple years ago, Lauren and I were in a great financial rhythm. We hadn’t had any emergencies happen in a while and we felt like we could breathe easy. Beside our house, there were some trees that I had been wanting to cut down. They were leaning towards the house and when it was windy, I would always brace myself as I waited for one of them to fall at any moment.
After trying and failing to successfully fall them myself, we hired a local (professional) lumberjack and he and his team went to work falling 22 tall pine trees beside our house. We had budgeted for the expense, but that was the end of the discretionary income we had. As the lumberjacks were working, one of them came up to me and asked if I was having problems with our drain field. I told him that every now and then, I’d smell something, but it wasn’t that bad. He let me know that our drainfield was failing.
The drainfield guys said they could fix it for half the price of a new drainfield, so they got to work and tore through half of our backyard. Our savings was starting to drain. After a month or so, we realized that their “solution” didn’t solve anything and we were going to need a new drain field.
The expenses were coming quickly. Our entire yard was now dirt between the trees being cleared out, the old drain field being “fixed” and now, a new drain field being put in. In our life, we had never had so many expenses come at us unexpectedly and so quickly. And it wasn’t as if we had a choice. If you know what a drain field does, then you’ll also know that if it doesn’t do that, you’ve got problems.
Thankfully, we had stored away five months of expenses, or 5 times our checking New Zero, and had a solid New Zero in our savings account. And in the course of a couple weeks, it was nearly drained - ironically enough, by our drain field. I’ll forever remember it as the field that drained our New Zero in our savings account.
This account is like your emergency fund, but for BIG emergencies like the one I had. I didn’t know that my drain field was going until it was gone. But I went into debt to pay for that. Not debt to a bank, but debt to myself. And I had to work very hard to repay the money I spent out of my savings to once again fully fund my New Zero in my savings account.
So what should your New Zero target be for your savings account? Multiply your monthly expenses by 5 and that is your savings target. Once you have it, lock it away! It is your new zero. When it is below that number, you are broke as a joke, the bank is closed, and there is no more money to spend!
Zach Santmier is the owner of Trumble Agency, Inc. and the author of the personal financial course, Increase. He focuses on helping families escape paycheck to paycheck living so they can freely pursue their ideal future.
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