My dad used to tell me and my brother, "Rich people aren't rich because they spend money. They are rich because they have money."
This is common sense, but as Voltaire said, common sense isn't common. My dad's point was having a bunch of fancy things doesn't make someone rich. Money in the bank (or assets or other investments) does. My dad has worked both as a corporate account and then had his own private practice. Years ago, he had a middle-aged client with a great business and a large income who was living paycheck-to-paycheck. My dad also studied psychology in college. The client came into my dad's office, confessed is situation to my dad, and then cried. My dad sat and listened, as if part of his job was to be a therapist, too.
"You have choices," my dad said. "You don't have to live this way."
I have other friends in the same spot--they make a lot of money, and spend all of it. How? A large and beautifully decorated house in one of Seattle's nicest neighborhoods. Private schools for the kids. Fancy vacations with first class air travel and expensive hotels. New luxury cars. New clothes. Nice shoes. Everything is first rate and top notch.
"We don't have two nickles to rub together," said one of these friends.
So what is wrong with that? What is wrong with living large, spending all of your money, especially if you have a large income? There is always more where it came from, right? Why be conservative?
This is where values come in. Values aren't right or wrong, they just are. I was talking to a friend in college about how I planned to work hard, save hard, and then travel when I retire. She looked at me in a strange way. I didn't think there was anything wrong with what I said, but so I asked her what she was thinking.
"My parents lived like that," she said. "My dad worked really hard, then he died two years ago when he was forty-eight. Don't 'wait until you are retired' to take the big trip."
Happiness probably lies somewhere in the middle. Financial hardship is stressful, even if it is self-imposed.
“Annual income twenty pounds, annual expenditure nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”
-- Charles Dickens, David Copperfield
I am not advocating for never eating dinner in a restaurant when you can eat at home, never buying a book when you can get one at the library, or camping instead of staying in a hotel on vacation. All of those are choices that need to align with our values.
But I will say this: bad stuff happens. We can't plan for a life where nothing miserable happens to us. Statistically, it is unavoidable. In fact, the probability of nothing ever going wrong is much, much lower than the odds of perfection.
What are the odds of losing your job? Let's say 0.5%. "But I work hard and I'm smart!" Great. But then funding dries up, investors bail, there is a global pandemic and even though you are the best waitress/hairdresser/masseuse, you are out of luck.
"Fine," you think. What are the odds of getting so sick you can't work? Maybe you will get disability, and then it will very likely be less than you are earning now. And usually there is a lag between when you can't work and then the money kicks in. Let's say 0.25%. I am making up a number.
Now think of twenty other things that could go wrong, and the likelihood of them happening. Small, right?
The joy of those types of probabilities is that you get to add them up because each of those are different events. So the odds of losing your job or getting sick are 0.75%.
Think of it another way. Let's say there is a bucket with a 10,000 balls. In this bucket, one ball is painted red. Every day, you pick one ball out of the bucket, and the ball stays out. On any given day, the odds of pulling the red ball is 1 out of 10,000 on Day 1, which is fairly low. What are the odds of pulling a red ball within 10,000 days? 100%.
Some of those bad things don't cost money, like when Ada died. (I had a stillbirth before Eleanor was born.) Other bad things do, like losing a job, or having a heart attack where if you survive, you might might be able to return to work. It doesn't need to be a big cost to swamp the boat if you are living financially close to the edge. It could be an unexpected car repair, or needing a new sewage line dug for your home (which is in the top 1% of the least fun ways to spend $10K.)
What can you do to mitigate this, to make picking the red ball less painful? There are things you can't control, and thing you can. You can't control something crummy happening, but you can control your savings.
Let's do some math--because I love math--to see the magic of savings. Let's say you make $5,000 a month, and you save 10%, or $500 each month.
| | Monthly income | Savings Rate | Monthly Savings Amount | Yearly Savings Amount | Cumulative Savings |
| Year 1 | $5,000 | 10% | $500 | $6,000 | $6,000 |
| Year 2 | $5,000 | 10% | $500 | $6,000 | $12,000 |
| Year 3 | $5,000 | 10% | $500 | $6,000 | $18,000 |
| Year 4 | $5,000 | 10% | $500 | $6,000 | $24,000 |
| Year 5 | $5,000 | 10% | $500 | $6,000 | $30,000 |
Now you are probably thinking that this is so obvious and simple, you want your money back from reading my blog. But hey -- my blog is free, so don't complain.
No, seriously. The magic isn't in the $30K you will have at the end. The magic is in the $500 you don't spend each month.
What?
Let's say in Year 3 you need new tires for your car and they cost $800.* You spent all of your budgeted $4,500 that month. Guess what? Instead of having to float $800 on your credit card, you can take $300 out of savings and use the $500 you would have saved that month to pay for the tires. At the end of five years, you will have $29,200, which is still pretty cool. And I haven't even talked about interest and dividends and capital gains! This example is equivalent to money in the mattress.
The point of saving money (for me anyway--you might have a different view which is totally cool) is to sleep better at night knowing that you have the ability to absorb crap that may happens.
Let's say you up your savings rate, or get a raise or a bonus. Your buffer gets bigger. What if your buffer gets too big?
Hello, Hawaii.
"But Lauren," you say, "I don't want to go to Hawaii."
At this point, I could do one of two things:
a. Extol the virtues of Hawaii and post pictures from my vacation to Maui years ago, or
b. Tell you that you have the power and freedom to do whatever you want with that money! You get to decide! You want to buy a camper van and drive to all the National Parks? You want to buy a pet boa constrictor? Go you!
Power and freedom?
Yes.
I like it. See, when you save money you still get to do fun, cool, stuff, but just maybe later and less impulsively, minus the debt hangover. And it if is money you saved for, you will very likely have more careful consideration of how you spend it, and likely it will be closer to your hearts desire than a binge purchase because you want to spend money ease some temporary pain.
* Now you may be thinking, "Oh my god! $800 for car tires? Lauren had no clue! Who spends $800 on car tires? That is nuts. Who needs Michelins when Goodyears are fine?" Congratulations. You are smarter than I am when it comes to tires and you will drive a bargain, which is totally awesome. Seriously. Pat yourself on the back. You can do this!
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