Getting to one year’s take home pay in the bank

By Scot Herrick | Personal Finance

Aug 21

Yesterday, I wrote about the need for Cubicle Warriors to have a year’s worth of take home pay in the bank. From a career management perspective, these savings represent your ability to search for the right next position in your career in case of a layoff.

Most people would take one look at this advice and politely move on. Cubicle Warriors would start figuring out how to achieve this goal. Let me suggest a few ways…

Can we have some frank conversation here about money? When you want to “keep the castle,” a lot of the discussion is about money. So let me offer a few insights on what it takes to get to one year’s take home pay in the bank.

Assumptions

This will take longer than a year to implement.

After all, it’s tough to put in a year’s worth of take home pay in the bank and still live during the year!

Health insurance is an imperative need.

When Kate and I were laid off together, the COBRA family policy was $1,200 per month. I don’t think that is too far off for most COBRA payments, so right off the top, you need $14,400 in the bank just to cover health insurance because you were only paying a portion of this when you were working.

If you think this isn’t necessary, consider this: two days after my corporate health insurance went out, I needed to be in the emergency room. They did an MRI. The bill was close to $10,000. COBRA ended up paying it – after a $7,000 “health care discount” getting the total to just over $3,000. (And you wonder why people are ticked off at health care in this country…). With no insurance, I was on the hook for a $10k liability.

If you are contributing to a 401(k) program at work, you will not if you are laid off

Consequently, this isn’t calculated as part of your take home pay. However, needing health insurance is probably more than you are currently contributing to your 401(k), so you will still need lots of dollars.

This fund will also constitute your “emergency” fund.

Suggestions

  1. Payroll deduction to savings. There is nothing better than removing money from your paycheck directly to your savings account. It is easy and far less tempting for you to touch the money. For whatever amount makes sense, do this first.
  2. Taking your bonus to the bank. Companies often offer yearly or semi-annual bonuses. Don’t spend these; put them into your fund.
  3. Restricted Stock. I was fortunate to receive restricted stock grants as part of my work. I took the vesting amount and put it in the bank.
  4. Stock options. While not as popular as in the past, money from stock options should also go into the bank.
  5. Commissions. While some positions are 100% commission based, others offer a decent base with commissions based on meeting goals. Live on you base income. Bank all your commissions. If you are able to live on your base and bank all your commissions, do it for as long as you are in this career – the dollars really add up.
  6. Put your savings into a brokerage account. Placing the savings into a brokerage account allows you to earn a higher rate than savings. Invest in conservative mutual funds or ETF’s. Earning 7% on $20,000 is another $1,400 annually added to your available savings in case you are laid off.
  7. Have as little debt as possible. If you have debt, you need to pay on it if you are laid off. Spending $2,000 a month on car payments, home equity payments, and credit card payments means you need $24,000 to service your debt plus $14,400 to service your health insurance. Minimizing your debt helps your take home savings last longer with less stress. Or, if you don’t have a full year’s pay in the bank, not having to pay $2000 a month to service your debt is a big deal.
  8. Take a seasonal or second job. This will be quite a bit of time and effort for a while, but for those without stock and bonus options, this could be a good way to build up savings quickly.

Are there other ways? Yes, but each situation is different, so use these as a way to brainstorm how you can reach your goal of one year’s worth of take home pay in the bank.

One commentary on 401(k) plans as it relates to this post. Make sure you are at least contributing the minimum amount necessary to get the maximum amount of company match your plan offers. If you need to contribute 6% of your pay to get the maximum 3% company match, do so right off the top. Not only will you start to contribute to your retirement, but you will never get a 50% return on your money – tax free until withdrawal – from any other source.

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About the Author

Scot Herrick is the author of “I’ve Landed My Dream Job–Now What???” and owner of Cube Rules, LLC. Scot has a long history of management and individual contribution in multiple Fortune 100 corporations.