Wednesday, January 30, 2013
There is some debate in the personal finance community about the use and utility of emergency funds.
Some people advocate not even having a dedicated emergency fund, and argue instead for relying on various lines of credit for actual emergencies (credit cards, HELOCs, etc). Their arguments are usually that the the need to use emergency funds are mercifully rare, so it's better to have that money working for you in the meantime. And in the event that you do have to use a line of credit, it is available right away, and you can then sell off some stocks or other assets to pay it off but in the meantime that money was at least earning you interest.
If we are talking about somebody with $50k or $100k worth of savings sitting in a band account earning a quarter of a percent, then they are definitely right. While I understand the feeling of security that comes from having that much money on hand, there is no reason to have that kind of earning potential just sitting on the sidelines. Especially since, in the event of a real emergency, you could liquidate most assets in a matter of days or a week or two if you really needed a lot of cash, and having a charge on a credit card or HELOC for a short amount of time like that isn't a big deal.
Where I disagree is with small, actual cash emergency funds. One of my interests / hobbies is preparedness, and I think there are a lot of good reasons why everybody should have anywhere from $500 to $2000 on hand in actual, physical cash. The supposed interest you would be missing out on is minimal on an amount that small, and the risk of losing it to fire or burglary is also overblown by most people. If you put it in a safe secure spot, it is very unlikely that you would lose that money, even in the event of a burglary. And there are plenty of reasons to have actual cash on hand.
In many times of emergency or disaster, a lot of businesses will only accept cash. In today's technological climate, if there is any economic turbulence, electronic banking /atms are usually the first thing to get disrupted. These problems are usually short-lived, but not being able to buy anything for a week or more could be problematic, so it is useful to have cash on hand.
Having cash is also great for good opportunities, not just disasters. If you are a reseller, picker, or just have an entrepreneurial spirit in general, having cash on hand can allow you to take advantage of a lot of opportunities quickly.
Remember this applies to relatively small amounts of money. I am not suggesting you keep $20K in cash in your house, but having $1000 or so in cash in your possession maximizes the benefits while reducing the downsides to the point of being almost negligible.
For a larger emergency fund I would follow the advice I outlined above: have a line of credit that can be accessed quickly and is equal to 6 months or so of expenses, and don't use it unless you have assets to back it. Then you can use the credit to deal with the expense right away, and pay it off in a few days/weeks when you have liquidated assets (where the rest of your money should be, to make you money).
-The Money Monk
Tuesday, January 15, 2013
I have never been a big fan of trying to keep a strict budget; my strategy when I really needed to save was always just to NEVER spend money unless I absolutely had to. Then I would track my spending and look back at the past month to see if there were any areas I feel had some fat to trim.
I still feel like this is the best strategy for me personally. Some people may be more comfortable with a strict budget, but not me. I am also self employed so I don't get the exact same amount of money at regular intervals like some people which makes it hard to set aside certain amounts or even percentages at a regular basis.
I just recently had a much better spreadsheet constructed for tracking my finances, and it helps alot. Just knowing that after you spend any money you have to go home and enter it in the spreadsheet is a great psychological help with avoiding spending it in the first place, because you can't hide it from yourself.
If you are just spending money haphazardly without tracking it, a Mcdonald's meal here and there doesn't seem like much. But when you are tracking it and see that you have spent $1000 in the past year on fast food meals, it is easier to skip next time you get the urge to be lazy and not cook for yourself.
Not only that, but tracking income and spending will show your progress, which is very motivating. Day to day changes are usually small and can go unnoticed, but when you can look back over the past few months or years, you can see just far you have come.
So track it!
- The Money Monk
Thursday, January 10, 2013
I just read two articles on the Mr. Money Mustache forums that really got me thinking.
The first was from a guy who decided to still bike into work even though the temperature was 20 degrees below zero!!
Another was from a guy from in Slovenia who got a parking ticket. Apparently the parking tickets there are shockingly high, about a weeks pay at minimum wage. He decided he still would not go over budget for that month, even though he was already sticking to a very strict budget with little fat to cut. At the time of the writing he only had 3 days to go, and was running low on food in the house but was determined to make it even if he had to fast
Most people today aren't even willing to skip a meal when their lives are endangered with obesity, or skip a night out when they are about to lose everything to debts. Let alone do it simply to accomplish their goals even though they could afford it.
The discipline and motivation exhibited by these individuals is something you don't see too often these days. If you have this kind of intensity and uncompromising attitude toward ANY goal, it WILL happen. And financial independence is no exception. The biker would have been totally justified in driving to work that day, and nobody would have begrudged him that, even on the MM forums. But instead he stuck to the plan and went "extreme".
The parking ticket recipient could have easily chalked it up as an unfortunate unplanned expense and moved on, but instead he got EXTREME and decided this was not going to negatively affect his goals.
At the end of the year all the people who said these are extreme actions would be right; but they will have less money and will be farther from FI than these two.
Extreme actions get extreme results.
Keep your eyes on the prize!
-The Money Monk
Thursday, January 3, 2013
Numerous times I have come across frugal bloggers' and commenters' calculations they have done to determine whether something is a worthwhile activity for them to engage in, based solely on the amount of money it would bring them on an hourly basis. Usually 'minimum wage' is chosen as an arbitrary benchmark.
They may say something like "That isn't worth my time because it would take me 5 hours and I would only get 30 bucks, that's not even minimum wage!"
In my opinion, until McDonald's lets you come in and work an hour or two here or there for minimum wage whenever you feel like it, this is not a valid argument. There is no way to automatically convert your free hour(s) into minimum wage pay, so limiting yourself by avoiding anything that 'pays' less than minimum wage is leaving money on the table.
I wrote before about how you should try to fill your time with activities that make you money or are at least cost neutral. So many of the things people spend their time on actually COST money, that switching to activities that bring in money, regardless of how little, is a huge benefit.
The way you should think about it is not in terms of minimum wage, but in terms of opportunity cost. If there is another activity you could do instead that would get you MORE money, then by all means do that instead.
But if there isn't, it doesn't really matter if you could technically get more for an hours work at McDonald's, because you can't just go work an hour there whenever you have free time. But you can spend an hour clipping coupons instead of watching TV, for example, even if that hour of activity only nets you 6 dollars. Remember, that is an after-tax 'earnings' as well.
And if you did that 2 hours a week, at the end of the month you would have $48 more than if you decided not to do that simply because it was 'paying' less than minimum wage.
Of course I would suggest trying to find ways to spend your time that get you much more than that, but don't avoid something solely because it gets you less than minimum wage.
-The Money Monk