Earlier, I mentioned how important saving a $2,000 emergency fund can be to stave off financial hardships. Once this goal is reached, we move on to Key #3, paying off debt– aggressively. The problem lies when you are in periods of transitions, especially during this economy, $2,000 may not be enough to protect you.
What’s your runway
A runway is a defined rectangular area designed for plane landings and take-off. There are very small runways like the ones on an aircraft carrier, and very large ones found at major airports. Your personal runway is how many months of cash you have in the bank to survive.
In business, one of the biggest problems I see is how often they operate with small runways. In fact, this problem is one of the major contributors for business bankruptcies. It takes time to develop a clientele, but due to unseen start-up costs, most businesses start with less than a month’s worth of cash and hope to make it the rest of the way.
Businesses need a solid “runway” to survive if their income dried up. If they didn’t have a single customer walk in the door, how long would it take for their money to dry up? This is a crucial element to start-up success, and the best businesses in the world understand this. So much so, that one of the major requirements to open a major franchise is cash (often $750K+) in the bank.
How does this affect your personal finances?
Let’s assume you just moved to a new city, you’re about to have a baby, you just started a new job, or you are otherwise in a transitional phase. You may want to hold off on aggressively paying off debt, and instead stockpile cash to maintain your runway. It costs money to move cities, find a new job, start a family- much more money than during “normal” times. So while your bank account may have stayed the same, your “runway” may have actually diminished.
Pay your minimums on your debt, but keep the extra cash and pad that runway. If something does happen you’ll be glad you did.
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