Episode 4: Budgeting Cash Reserves

Lance and Randy discuss the importance of budgeting cash reserves for unexpected emergencies and economic instability.

What you’ll learn in this episode:

• Randy’s four-part strategy for budgeting: Get yourself organized, Get yourself out of debt, put some cash reserves together and work on your saving and investing for your long term goals and plans. He acknowledges that micro-level budgeting doesn’t work for most people, but his system is designed to overcome the typical limitations.
• Lance’s discovery during COVID-19 of how many business and personal expenses could be cut to dramatically drop his expenses. One of the keys was creating a new mindset where budgeting is actually a positive thing.
• Randy introduces the concept of “Creeping Incrementalism,” how quickly the amount of money you’re spending can add up if you’re not paying close attention. Lance discusses a lesson he learned in his corporate days from an oil executive: It’s important not only to cut your expenses during lean times, but even more important to watch and cut during the good times because that’s when the creeping incrementalism happens most.
• Randy walks Lance through his “Budgeting for Dummies” system. Most people put all their paycheck money in their checking account and pay their bills out of that – putting what’s left over into savings for their future. Step 1: He suggests depositing money in your savings account. Step 2: Estimate how much you spend every month on everything. Step 3: Once a month, transfer just enough from savings into checking to pay those bills. If you put the right amount of money into the checking account, on the last day of the month, you should be out of money.
• Randy’s caveat in case you’ve gone through that whole estimated monthly amount (let’s say, $5000) after just three weeks. Transfer that extra money into the checking account to cover that amount (say, $400) – and at the start of next month, transfer the larger sum ($5400) so that discrepancy does not repeat.
• The next topic is the importance of Discipline. Randy says it’s a short-term thing. It works for a while but generally people get tired and give up on it. He explains that it’s better to have a system like the one he suggested. That way, the only discipline you need is to make sure you’re not “filling up” your checking account in the middle of the month.
• Lance’s concern about over the top American consumerism prompts Randy to suggest that people engage the services of a financial advisor if they feel their spending is out of control or causing harm to their overall financial picture. He re-iterates the effectiveness of his system and how many have benefited from it. It’s easy to manage, easy to watch, easy to take care of.
• The next topic is cash reserves – how much should people have? And should their monthly budget include how much they set aside in a cash reserves account? Randy suggests that they should have a minimum six, maybe nine and optimally 12 months of cash reserves on hand. Out of 12 months, one month’s going to be in checking. Two months should go in savings; and nine months should go in an outside investment.
• Randy offers simple advice for those struggling to make ends meet: either figure out a way to make more income or spend less. There’s no magic there. You have to have a positive cash flow and a business to operate it. For business owners, he suggests putting themselves on the payroll, at least mentally or by taking draws. Have your business write you a check every month, just like you would your employees. If you stick to that amount, you’ll have excess cash reserves building up in your business at the same time.
• Lance talks about the problem of budgeting for landlords of apartment buildings who don’t keep track of their money – and get into trouble because they don’t set aside reserves. Randy applies the same principles to solve this: From your gross rent, set aside 25% to cover vacancies, maintenance and property management. Then use the 75% for mortgage payments and property taxes.
• Lance and Randy discuss creating a Budgeting for Landlords kit (including a spreadsheet) and basing a podcast segment on this concept.

Resources:

LanceSchool.com

Grab a FREE Copy of Lance’s Best Selling Book, How to Make Big Money in Small Apartments here.

Get Access to Lance’s Best-selling Small Apartment Wholesaling Course here.

Get Randy’s The Financial Independence Toolkit ℠

Book Book an Appointment with Randy