If you’ve been here a while, chances are we have drawn a water tower (or something resembling one…) to offer a visual representation of how money flows from earning to spending. The bottom of the tower – your liquid checking and savings accounts – is what we call your “moat.” It’s the portion that protects your longer-term investments from being touched before they should be.
Volatility can often be solved with time. The longer we stay invested – generally speaking – the more we are rewarded. But, if we are constantly bobbing in and out of the market, all we do is create chaos and risk diminishing returns.
Having a solid grasp on what it actually costs for you to live is the cornerstone of sustainable budgeting. (Yes, I said budget. Stay with me.) You can say you don’t plan to touch your investments in the short term, but if your moat doesn’t match your reality, it can be really hard not to.
Budgets tend to be good at tracking the “normal” or expected things. But we all know how often those once-in-a-while expenses come up and how much they can set us back. If it’s not a water heater, it’s a car repair. Or a broken bone. Or Christmas. You get the picture. Rarely do we get to spend our money solely on what we plan for. So take an honest look at your “unusual” expenses and build it into your annual plan. The events may be surprises, but where the funding will come from doesn’t have to be.
“But how can we build a savings to protect us when every dollar we make is accounted for?” First, I would ask – is it really? And if so, the better question is should it be? Oftentimes people have some level of untracked spending that doesn’t make it into the spreadsheet because it’s below a certain amount or level of importance. But when you really take a critical look at where your dollars have gone, it’s likely you’ll find some waste. And if not? If every dollar went exactly where you thought it did? It’s time to revisit your values and make sure your spending aligns with them.
Now the question we are often asked when discussing the concept of a moat is, “but how big is big enough?” Like much of the rest of the important things in life…it depends. Yes, there are general guidelines to get you started, like 3-6 months of living expenses (again, you have to know what that number is first!), but at the end of the day, it’s what feels right, is sustainable and matches the chaos you typically encounter.
If you can’t decide how wide to build your moat – or if you and your partner can’t agree – let us help!