Joining us on this episode is Ed Chairvolotti, president and CEO of 401karat.
Today, the burden of preparing for retirement has been placed on the individual, making saving for it more important than ever. But between balancing all other aspects of their lives, the average American doesn’t have time to add managing their retirement account to their to-do list. At 401karat, our expert 401(k) advisors do the heavy lifting for you, providing quarterly allocation recommendations based on your employer’s 401(k) options.
Bob Martin: Our guest on today’s episode of Imagine America Radio is Ed Chairvolotti with 401karat. Ed is the president of 401karat and has a long list of degrees and certifications in the financial service areas—and more than 35 years of experience in financial planning. Recently, Ed created a new internet-based company solely designed to assist the new investor to better understand how to better (and more effectively) manage his or her retirement funds. The new organization, 401karat. And he’s also a supporter of the Imagine America Foundation and he’s helping the foundation help our scholarship recipients understand the ins and outs of saving and investment.
Today’s episode is the second in a series of podcasts designed to assist Imagine America awardees and Imagine America students. The first podcast focused on the overall need to start saving now and to start putting money away now and discuss the three-bucket formulae with our audience today. Today’s episode is designed to go into more detail to fill in some of the blanks on the three-bucket formula. But today, specifically, we’re going to talk about bucket number one.
Ed, welcome to today’s show. For the benefit of the listeners, could you very quickly summarize the previous episode where you talked about the three-buckets theory and outlined your thoughts on that?
Ed Chairvolotti: Yeah, great. Thanks for having me today, Bob. Yeah, so last time on the call, what we talked about on the podcast were—we subscribe to three buckets of money method. What it is is most people in the United States do not have complicated financial lives. Everything they own can fit into one bucket.
But from your financial bucket to be successful, you just need three. You need a short-term fund for emergencies. Your long-term fund is your retirement plan. And after you’ve started to fund both of those, you can focus on your mid-term, which is my favorite, which is your lifestyle bucket, and we’ll get to that later. So that’s it, Bob. Three simple buckets of money to fill and you can be successfully financially.
Lee Doubleday: Okay, Ed, now let’s get into the nitty-gritty of bucket number one. Can we talk more about what is bucket number one? It’s emergency funding. Kind of talk a little bit about what is that. What should you have set aside in bucket number one? Do you do bucket number one first and then you move to bucket number two? Let’s explain the process of what bucket number one is and how to get started.
Ed: Okay, great. Yeah, in the United States today, it’s estimated that 60% of Americans can’t afford a $1,000 emergency. And that’s scary. So, bucket number one is your emergency fund. And it’s estimated—and the financial planning world will tell you this—everybody needs three to six months of your household expenses set aside for emergencies. So again, three to six months, right? So, if it costs you $2,000 a month to live, you’re looking at $6,000 to $12,000, which is scary. We don’t want to scare anyone yet. We want to get people started as little as 5 bucks a week. But those short-term emergencies are short-term unemployment, short-term medical, and short-term natural disasters. And you say, “Wow. Natural disasters?” Well, we’re living through one right now called a pandemic, right? So, who would have ever thought once every 100 years? But to focus on those three of employment—again—medical, and disasters, throughout the country the United States—I actually live in Florida, Bob and Lee. And, so, everyone here in Florida worry about hurricanes. So, we’ll get a hurricane. And I lived through three hurricanes in six weeks in 2004, and we were shut down for weeks. The idea behind this short-term plan is to keep your plan in place. You want to be able to be paying your insurances—your health insurance, your life insurance. Those are the most important because they ensure your biggest asset, which is your income, right, because, hopefully, you’re carrying medical insurance. We know that’s a whole another topic, but that middle bucket of that medical insurance, right, if you had surgery and you were out three months, again, the same thing. You want to keep your plan in place. And, God forbid, if you were unemployed, it’s no different than the same thing, you want to get back up on your feet. And that money is there strictly for emergencies. So, this is not—
Ed: Yeah, go ahead.
Bob: So, this is Bob again. Absolutely stunning. 60% of Americans do not have $1,000 to handle an emergency situation. So, I’m assuming that that 60% of the people are relying upon government resources, after the fact, to come in and help them, I’m guessing. Would that be fair—
Lee: Or a credit card.
Ed: Yeah, that’s if they can get those resources. I mean, we’ve seen that, in this pandemic, how many people there was a snafu in their unemployment, right? They weren’t able to get that. God forbid, they got sick. We know a lot of doctors don’t take you unless you have insurance. So, the whole thing is very scary. So that’s why we focus on that short-term bucket first.
Lee: Right. Okay. That was going to be my next question, which is we looked at the overall bucket, the three-bucket strategy. We’re talking about, right now, bucket number one, which is making sure you have two to three months of your living expenses put aside. And that’s what you should focus on doing first for financial stability. And making sure that you have that is really going to help you later down the road. Make sure that the rest of what you’re doing stays on track.
Ed: Yes. So, we like to focus on getting people, whether it’s $5 a week—you’d be amazed, if you’re not in the middle of an emergency today, how fast that money will accumulate, right? $20 a paycheck, whatever the number is. And it gets to a minimum of a $1,000. That’s the goal. Get there and get that done as fast as you can. And at that point, again, you worry about the retirement bucket start putting it there. But first is the $1,000 emergency to cover that, whatever that might be. If your car breaks down, right, you can’t get to work. So, you can see how all these things compound, right? You can’t get to work, you lose your job. So that is the thing. We should be teaching kids in high school and grade school about saving for emergencies. They don’t even need to talk about anything else about investing. But that’s number one.
Lee: Yeah. I mean, the 60% honestly doesn’t really surprise me that much, just based off of how much you really learn about personal finance growing up. I mean, you don’t [laughter]. You have to do your own research. You have to find this podcast to learn about something like that. And to some people, you might think, “Oh, this makes common sense. Why would you live your life without at least some money in your savings?” Well, it’s hard to do when you’re living, quote-unquote, paycheck to paycheck. And so, I mean, it’s difficult. And if you don’t have the discipline to make sure that you’re in—like you said, maybe it starts $5 a month or $20 a paycheck. Or you start small. I think you’d be surprised what really is left over at the end of the month if you stop buying things you don’t need, and maybe being a little bit more responsible. I know even for myself, it just—it is surprising once you get started and once you realize, “Oh, actually, I could probably do a little bit more than what I originally planned—if I just stop doing this.” Whatever “this” is. Maybe it’s going to Starbucks getting coffee. That’s an analogy that’s popular.
Bob: Maybe it’s your Netflix.
Lee: Maybe it’s your Netflix, maybe it’s—yeah—or there’s all kinds of stuff. Everybody has their thing that they could cut down on. I can’t remember who coined this phrase. It’s like the cup of coffee a day is costing you, in the long run, more than just the two to three dollars. It’s costing you compound interest on that two to three dollars, years down the road that you could have been doing with it. The opportunity cost of that cup of coffee is more than what people think about.
But anyway, getting back on track, this first bucket is really talking about doing whatever you can to set aside some money a little bit at a time to make sure you can cover a $1,000 expense. And then once you’ve got that, moving it to two to three months of your household expenses. And then, once you’ve got that, moving to bucket number two, which is retirement.
Ed: Yeah, actually, we call bucket number three retirement because it’s the long-term bucket. So, it’s short-term, mid-term, long term. So we want to fund one first, right? We want to fund one first. Start funding number three, because three, if you’re younger—to be successful, you just have to do a little all the time. And you mentioned compounding, which is amazing. So, you can start checking off that third bucket right after the first one with just a little bit of money. And then one thing you talked about—and I don’t want to scare people. I want to give them hope. This is a strategy that works, right? It’s a disciplined strategy. But what I want to do is, is that, again, I mentioned early on when we were speaking—when we opened up about the middle bucket—that’s the fun bucket. So, we need to live life in moderation, including moderation. So, when I have a big weekend and spend a little more than I should on Amazon—because there’s only two kinds of people in this world, there’s spenders and there’s savers. I happen to be that spender, right? So, when I look back and I said, “Wow, I probably shouldn’t have bought that exercise bike”—whatever it was. I looked back and I said, “Is my emergency fund either in place or am I working on it?” Check. My retirement plan, is it—well, I’m too young to retire, so I’m not there yet, but I don’t have enough there yet, either. But I’m working on it. Check. And then I can fund anything else in that middle bucket, and we’ll talk about that, I guess, in the future. But that you have some balance in life that you enjoy yourself.
We need to give people hope that this isn’t a bad thing to save, right? We’re not trying to cheat them out of, like you mentioned, the cup of coffee. I get where you’re going with that, and that’s true. But we want people to enjoy life. Life’s too short. I should like to say.
Bob: We’re talking to Ed Chairvolotti with 401karat. Hey Ed, this is Bob again. Very quickly, I know that you do this so many times you, listen—but just for the benefit of our listeners, when we’re talking about the three to six-month household expenses, just off the top of your head, we’re talking about rent and/or mortgage. We’re talking about utilities. We’re talking about food. We’re talking about gas. We’re talking about transportation. We are not talking about, possibly, cable TV, streaming services, and maybe additional cell phones if—beyond what they normally would need, right? Am I right or am I missing something?
Ed: Yeah. Well, how to start, you want to build a budget, right? So, you want to take your—and here’s the thing is you want to take your checkbook and you want to look at—some people might never have balanced a checkbook in their lifetime. Bob, I know you and I grew up balancing it once a month, right? [laughter] Lee probably has—
Lee: Yeah. I don’t do that at all. I’ve never even used it. I mean, maybe twice in my life I’ve used a checkbook but—
Ed: Yeah. It’s fascinating. So, the thing is, everyone should go through the checkbook and look at your top four expenses every month. You will know where you spend all your money. And then you want to build, like Bob said, is build up that budget for three to six months based on those major expenses: your rent, your mortgage, your car, your insurance, your food bill, right? You might have to learn to cook at home instead of going out. But knowing that—and so think about it. If you were stuck at home and you weren’t going out, right, you didn’t go to work every day because you had a medical emergency, where would you save money? You’d probably save money on gas, right? You’re not driving. Probably cook food at home so you’d save money on going out. So those are things. So, you don’t necessarily need your full paycheck that you make. But you want to make sure you’re covering your insurances, the roof over your head, food, water, and shelter. What could you cut out of your budget? I always poll the audience. What can you just sit back and—Lee nailed it with the cup of coffee. What can you cut out of your budget to get through those three months or six months? How many streaming services do you have today? How many? Because that’s what the thing is. There’s a new service out there—and I don’t know the name of it—that actually will find how many streaming services and subscription services you have that you pay every month that you don’t even realize you pay. Because we don’t balance our checkbook.
Lee: Yeah. And you start there. That’s how you save money to put towards this first bucket. What are you spending the money on, like you just said?
Ed: How many people have gym memberships and don’t use them? That’s the number one subscription service, number one.
Lee: Yeah. Yeah. Yeah. And it’s not like—we’re not saying, “You have to cut your gym membership forever. You can’t go to a gym ever again.” It’s just saying, “Until you have money in this first bucket, maybe you cut some things out of your budget until you can afford to live in that second bucket,” that we’re going to talk about later on. And it’s just about getting you stable first. I don’t know. Is that fair to say?
Bob: Is that fair to say, Ed?
Ed: Yeah. No. That’s perfect. I mean, you guys—you guys get this better than most.
Bob: All right. Well, thank you, but [laughter] I—
Lee: I don’t know what a checkbook is.
Bob: I’ve been beaten up on the side of the head many times on personal finance. So, I’ve learned the hard way. [laughter]
Ed: Well, I always ask the question, Bob, is where did you learn about money, right? And that’s why we compartmentalize into three buckets because it’s simple for me. I have to be able to—you can’t make it complicated. And I learned from my mom. But it’s fascinating: I have family, siblings, that all learned the exact same thing I did. And they’re just like my mom. They’re savers and I’m a spender. I don’t know where I got it. But if I didn’t put—take the money off the top first—today you can go to your payroll company and they will take $5 a week out of that check and put it right in a savings account. It’s convenient. It wasn’t convenient years ago. It’s convenient now.
Lee: Yeah. Yeah. That’s a good point. If you can make it automatic, make it automatic because if I don’t see it then I don’t miss it but if it—if I see it, I’m going to spend it. [laughter] I gotta spend it.
Ed: Oh, absolutely.
Lee: It’s automatic. Just make it easy on yourself. Make it five bucks a paycheck. That’s how you start. Just automatically put it over into this first bucket into a savings account.
Bob: We’ve been talking to Ed Chairvolotti, the president of 401karat. We’ve been talking about personal finance. This is the second episode that we’ve had on this topic. I would really urge any of the listeners that want to get more information on 401karat to go to their website and/or ours and possibly even listen to the first episode. Today’s episode was establishing an emergency fund.
We want to thank—really thank Ed for his time and the valuable work 401karat is doing for coming out. Thank you for coming on today’s shows. If you have any questions of Ed or 401karat, we urge you to contact him directly or go check out his website, which has all the contact information on it. For more information about these podcasts, you can go to the Imagine America Foundation website, which is at imagine-america.org/podcast.
We want to thank you for taking time out of your busy schedules to join us today, thank Ed for his time, and just say we hope you have a great, great day. Thank you very much.