Carl Richards says, “Risk is what’s leftover after you think you’ve thought of everything.” I love this sentiment because it gets at the heart of almost everything in finance.
With investments, people fear the latest news story – a war, congress passing a new bill, or the market irrationally hitting a new high. They don’t think about an interconnected system of rating agencies, inappropriate amounts of debt, and securitization of securities that could bring down the financial system. They don’t think about a global pandemic that halts the world economy. It’s the thing people don’t see after thinking about everything that dramatically changes markets.
With budgeting, people tend to spend time thinking about how much they dine out at restaurants, how to save money on furniture, or the money saved by making a coffee at home. They don’t spend as much time thinking about how they will cover their next medical emergency, how they would repair a home’s shifting foundation, or what they would do if a family member became sick and they needed to care for them. These are the types of things people don’t normally think about, but can break their budget and throw people into a worse financial situation.
Most people agree you should pick a goal and save towards it. I am on board with that strategy because it is easier to be motivated when you can envision the result.
On the other hand, it is also okay to save for nothing. What do I mean by “save for nothing”? It is okay to save and invest extra money each month not intended for retirement, a new home, or your next vacation. You can save and invest because you acknowledge you already have not thought of everything.
There are two ways to save for nothing. You can purposefully make a separate account and call it your “save for nothing” account. Otherwise, you can live without it if you are willing to repurpose other funds in the future, should something happen.
Let me tell you a simple story to highlight how repurposing can work. It’s not related to finances, but will help make the point.
Saving for Nothing by Repurposing
Over the past few years, wildfires around the Pacific Northwest have become worse. Living in Seattle, we can get smoke for Eastern Washington, Canada, or Oregon. Depending on the weather, it can last a day or weeks at a time.
The outside air quality can turn hazardous quickly and without much warning. It’s hard to breathe. It agitates my eyes. It makes it tough to go for a short walk around the block.
After one summer of particularly bad wildfire smoke, I decided I would purchase N95 masks at the end of wildfire season for the next season. During the season, it was not possible to buy N95 masks because they had sold out in this area. When everybody needed one, there was not enough supply.
Again, risk is what is left over after you have thought of everything. Growing up, wildfires were not an issue, and therefore, I did not think to have protective gear stashed away.
Now that I knew, I bought the N95 masks in the fall and they sat in my closet. The next year’s wildfire smoke was not bad. It lasted a short time, and I didn’t even break out the box. The following year, it was awful. The smoke lingered for weeks. We used a few masks that year, and it was a huge improvement for our lungs to feel healthy.
Then, COVID hits. People were panic buying masks, the government was encouraging people to leave N95 masks for healthcare works, and it became nearly impossible to get an N95 mask, even if you were a healthcare worker.
During this time, I remembered I had the N95 masks in my closet. One box was entirely unopened and the other had quite a few masks. Never in a million years did I think I would use those masks to protect me from a virus. I bought them with the sole intent to keep my lungs healthy in wildfire smoke.
I had not stocked the N95 masks for no reason, but I was perfectly fine repurposing them for the current world. I donated the unopened box to a local hospital, kept a few masks in the opened box, and gave a few masks to family.
A year later, it’s still hard to buy these masks.
Life happens. It will throw unexpected events your way. It’s natural to adapt and repurpose funds. It’s good to think about which funds can be repurposed in advance.
When emergencies happen, how can you repurpose if you do not have a “save for nothing” account? There are a few ways.
Although not repurposing, you can use your emergency fund. Emergency funds normally should have 3-12 months of living expenses in them, which makes them a perfect starting point for smaller, unexpected life events. Depending on the event, you may need to use more than your emergency fund. For example, if you have a major sewer repair that costs $20,000 and your emergency fund only has $10,000, you may need to have another repurposing strategy.
Another option is a home equity line of credit, also known as a HELOC. HELOC’s are a way to borrow against your house if you have enough equity in it, normally above 20%. For example, if your home is worth $400,000 and your mortgage balance is $200,000, you could open a HELOC of $50,000. In this scenario, there is still equity of 37.5%. Now, using your home as collateral, you can borrow up to $50,000 against it and pay it back over time.
If you just bought your $400,000 home and put $80,000 as a down payment, it’s unlikely you can open a HELOC because you have not built any equity in your home besides the 20% you put into it. Typically, banks like to see you maintain equity of 20% or more.
Another option is a 401(k) loan. If you have a 401(k), you can borrow from the account and pay it back over time. Each employer plan is different, which means you’ll need to check with your employer about whether this option is available to you and how it works.
The general rules are that you can borrow up to 50% of your balance up to $50,000. You also need to pay it back within five years with interest. Something I see quoted often is that because you are paying yourself interest, it is a better deal than other types of loans. That’s not necessarily the case. If you pay yourself back with 4% interest, but the money could have been invested and earned 10% that year, you lost out on an extra six percentage points of return.
One extreme downside is if you leave your job, whether out of choice or because you were laid off, you typically need to repay the entire loan by the tax filing deadline of the following year. For example, if you quit in December of 2021, you need to pay it back by April 15, 2022. If you don’t, you’ll owe income taxes and a 10% penalty on it.
Another option is a personal loan. A personal loan is an unsecured loan, which differs from a HELOC, a secured loan. A personal loan is not backed by anything besides your promise to pay it back. Because it is unsecured, interest rates tend to be higher than secured loans and some installment plans. It is usually best to work with the organization to which you owe money to see if installment plans or lower interest rate financing is available. For example, if you have medical debt, you can try negotiating a discount or a payment plan with little interest. This may be preferable to a personal loan.
A credit card is also an option. There are credit cards that offer 0% introductory APR on purchase and balance transfers for a limited amount of time, often 12-18 months. What this means is you can make purchases on it for the time period it offers 0% and pay no interest. Some cards even allow you to transfer the balance from another credit card and have 0% interest. You need to carefully read the terms and the length of time 0% applies because interest rates often jump to 14%+ after the introductory 0% rate.
You may not have access to all these options. That’s okay. The key is to know what is available to you and have plans in place that if something does happen, you know the best starting point for accessing funds.
Each of these options repurposes something you saved in the past – whether it is borrowing against your home equity, borrowing your 401(k) funds, or leveraging your credit score for a 0% interest credit card.
Saving for Nothing – Separate Account
Now that you know more about the repurposing options, let’s discuss how you can save for nothing.
Maximizing your 401(k) is spewed in nearly every personal finance article or book. The issue is that the money is not easily accessible until age 59 ½, except in limited circumstances. As we talked about above, you can borrow against it, but it comes with risks. I’m not saying saving in your 401(k) is a mistake. In fact, I highly encourage it, but it should be balanced against saving in other types of accounts that can be used for more purposes.
If you can maximize your 401(k) and then continue saving additional amounts, kudos to you. One option is saving and investing in a brokerage account. Unlike a 401(k) that has tax advantages, a brokerage account has dividends and interest you pay tax on along the way and capital gains any time you sell an investment for more than your purchase price.
The reason this account is useful is that there are no time constraints on using the funds. If you want to buy a home, you can sell investments to generate cash. If you need to pay off medical expenses, you can liquidate your brokerage account. If you want to take a sabbatical from work, you guessed it – you can do this by selling part of your brokerage account. The same can’t be said without hoops, taxes, or penalties for your 401(k).
If you cannot maximize your 401(k), you may still want to consider investing in a brokerage account for part of your savings. Please keep in mind it is a very personal decision and depends on your life. In most situations, you should invest in your 401(k) at least until the company match and usually more. Past that point, the brokerage account gives you more flexibility.
It can be your “save for nothing” account.
Then, you have an account that is not an emergency fund. It’s not a retirement plan. It’s not intended for a down payment on a house. It’s a “save for nothing” fund. It’s a flexible account. It’s there when life inevitably changes, and money is earmarked for that purpose. You don’t need to feel guilty about repurposing other money or feel like you are taking a step back if you deplete another bucket intended for something else.
If life goes exactly according to plan and you never need to use it, you can use it for retirement, travel, or other enjoyable experiences.
The idea of a “save for nothing” account sounds simple. The concept may be too elementary for people, but it is extremely powerful. And, the best part is that it is most powerful when you feel at a low – usually when something goes wrong or you need to make a change.
In personal finance, we, myself included, often get caught up creating goals and then going after them. We feel that every dollar needs to connect back to how it will be spent, but that is not necessary. The “save for nothing” account exists because we inevitably know life happens and plans change. The “save for nothing” account is the bridge that gets you to your next destination.
Final Thoughts – Summary
Although I believe everybody should create goals, there is also a necessary space where you acknowledge that life happens and your financial footing can be shaken. There are many ways to repurpose your past retirement savings, home equity, and credit strength, but those often require paperwork and other timelines you need to track closely.
A “save for nothing” account is a different way of thinking about the future. By starting a “save for nothing” account, you are saying, “I have goals, and I am saving towards my goals, but I also recognize the need for flexibility in my financial life for when life changes.”
I believe more people would be better off if they had a “save for nothing” account. What do you think? Will you start one?