I know you’re thinking, “duh… of course I know the difference between debt and expenses, debt is stuff like student loans, mortgage, revolving credit card debt. It’s a total number, like $500,000.”  And, “expenses are what we spend each month to keep our household going, like groceries, electricity, mortgage, CREDIT CARD MINIMUMS, babysitter, clothes, etc.”

Ok, I know you know the difference between expenses and debt on a strict definition basis, but do you know how the difference affects your household and maybe even more importantly, your level of stress and civility with your spouse?

Many households make plenty of money after taxes each month. Both partners work super hard, barely have enough time to help the kids with homework and hardly ever take care of themselves. Sound familiar? Right, if you have “plenty of money” why do you feel like you’re suffocating sometimes. Why do you feel so out of control financially?  Well, it’s a little annoyance called LIQUIDITY.

Liquidity means that you have some money left over at the end of the month each month. It means you have a little cash stashed (not your emergency savings; that’s for job loss, disability or financial catastrophe ) for when the toilet breaks, or you need four new tires. It’s a rainy day fund.

Most importantly, it’s knowing that you don’t have to CHARGE those rainy day items as they come up. When you have to put little annoyances and emergencies on a credit card, you get an overwhelming feeling that you have too much debt and that your household is financially “out of control.”

Debt and expenses are different.  Debt and liquidity are different BUT related.  If you charge your rainy day items, your monthly credit card minimums or consumer loan payments get bigger and that means you spend more each month servicing that debt and have even less (if anything) left over at the end of the month. You have more debt AND a liquidity squeeze.  You create a spiral of feeling out of control.

Having a little cash stashed for rainy day items stops you from having to charge them as they come up. It is a great anxiety reliever and will decrease arguments and stress between you and your partner (I guarantee it!).

You may or may not have too much debt and my article on calculating if you have too much debt can help you figure that out, but the suffocating anxiety, is generally due to a lack of liquidity. You can’t muster a few hundred or even thousand dollars at a moments notice if something breaks down without having to charge it.

What do you do? Put together a small rainy day fund, kept in a savings or money market account. For a family of four in an urban location, $2-3,000 is my usual recommendation.  For a single person $1,500 is plenty.  Put your rainy day fund aside first before even beginning to tackle paying off debts. Why? Because when life throws you a tax bill, a broken fridge or a broken ankle with a $1000 deductible, you won’t have to charge it and feel out of control. You have some cash around for these items and that will go a long way toward calming you down.

Keep me posted on how the number of fights over money go down once you’re feeling less backed into a corner over your LIQUIDITY!