In my last post, I talked about saving money, which then begs the second question: How much money do you need to save? There are lots of things to consider: Are you saving to buy a house? Saving for college? Retirement? Vacation? Remodel? New car?
Let's put all of those aside for now. How much cash do you need on hand, for like a small rainy day? The general rule of thumb is three months of living expenses. This cash should be liquid, like in a checking or an accessible savings account. I am not talking about the stock market or bonds or anything
a) you would need to pay capital gains on, orb) that could easily decrease in value (hello Bear Market!)
First, let's discuss what could be a "rainy day." It could be a car repair, and you need your car to go to work. It could be a healthcare expense. It could be you need to fly to visit your ailing parents. You could lose your job. Whatever. Rain is rain.
Here is the wild and trippy things that sounds weird in words but makes sense in numbers. The fewer expenses you have, the less you need to save, but then the more you can save. So having fewer expenses means you can save more money.
Here's the math:
- Figure out your monthly expenses
- Multiply that by 3.
| b. Monthly Expenses | d. Three Months of Expenses (b x 3) | |
| Example 1 | $5,500 | $16,500 |
| Example 2 | $5,000 | $15,000 |
| Example 3 | $4,500 | $13,500 |
| Example 4 | $4,000 | $12,000 |
| Example 5 | $3,500 | $10,500 |
| Example 6 | $3,000 | $9,000 |
| Example 7 | $1,000 | $3,000 |
Great! You can probably do that on a piece of paper! If you want to become a superstar, I recommend learning how to use a spreadsheet like Excel or Google sheets. (Note to self: I can probably figure out a way to post these spreadsheets so I can share them.)
So how can you save that money?
- What is your income minus monthly expenses? I call this my buffer. This is my discretionary money after all of my expected expenses are paid. (I'll talk about a list of expenses in another post.)
| a. Monthly income | b. Monthly Expenses | c. Difference (a-b) | d. Three Months of Expenses (b x 3) | e. How long to save this much? Months (d / c) | |
| Example 1 | $5,000 | $5,500 | $(500) | $16,500 | (33) |
| Example 2 | $5,000 | $5,000 | $- | $15,000 | #DIV/0! |
| Example 3 | $5,000 | $4,500 | $500 | $13,500 | 27 |
| Example 4 | $5,000 | $4,000 | $1,000 | $12,000 | 12 |
| Example 5 | $5,000 | $3,500 | $1,500 | $10,500 | 7 |
| Example 6 | $5,000 | $3,000 | $2,000 | $9,000 | 5 |
| Example 7 | $5,000 | $1,000 | $4,000 | $3,000 | 1 |
See the magic here? The less you spend, the less you need to save, but the faster you can save it, which means you can save more!
Of course, you still need to live. You need a roof over your head, you need groceries, clothes and probably some kind of entertainment. How can you decrease your expenses?
I've read a bunch of books on financial planning and some of them are brilliant and others make me cringe with all of the "rules" or what is a "good" way to spend money and what is not. Some of them are useful, like try to get out of paying PMI (principal mortage insurance) on you home loan as soon as possible.
Yet, most of these rules are bullshit. You will need to figure out what you value and if you want to spend money on it. Some of these financial planners don't want you to have any fun. They would have you dress in a burlap sack you bought at Goodwill that you drove to in your used Prius while drinking your homemade coffee after your trip to the library to get a book on how to cut your own hair. You are reading library books because no Netflix, cable television, etc. Plus the library has free internet! Actually, you should walk because then you could drop your gym membership.
Here are some of the financial rules that you can take or leave. You may 100% agree with them, which is awesome. You have the power and freedom to choose.
Rule 1: Don't buy books. Get them from the library.
- Not gonna happen here. I love books. There is a Japanese word tsundoku which means buying more books than you can read. This happens to me all of the time. I love the library books, but I also like owning my own books. Sometime I check out a book from the library, keep it for a month after it is due, owe $8 in overdue fees and then buy it anyway. This is what I did to Untamed by Glennon Doyle. I bought it, then highlighted half of it and wrote in the margins.
Rule 2: Make coffee at home instead of going to Starbucks or other coffee shops. At $6 a day times 5 days a week for 50 weeks a year, you could save $1,500.
- Do you go for coffee with your friends or co-workers? Is this coffee enhancing your career or sustaining friendships? Is this an affordable luxury? A small break that makes you feel awesome? Do you meet your neighbors at your neighborhood coffee shop? Does the cool coffee shop bring fun to your corner of town? If you answered yes or even maybe to any of these questions, drink the coffee. (Maybe split the difference and get coffee twice a week and buy stock in Starbucks SBUX.)
Rule 3: Eat at home. Don't eat in restaurants.
- Restaurants are more expensive than eating in, but what are you getting? When the kids were living home, going out to eat gave me an hour and a half of their undivided attention, and I didn't have to spend time grocery shopping, cooking and cleaning. This was at at point in my life where I had more money than time so it was a good investment. I know how much I spend in restaurants. I measure it. I make trade-offs. I spend less (than I want to) on shoes and clothes so I can go out to eat.
Rule 4: Credit card debt is the root of all evil.
- I am 98% percent on board with this, but there are (rare) occasions when it makes sense to float some credit card debt. I had a friend who lost his job. He was deciding if he should take $10K out of his retirement to cover expense in case he didn't find a job soon enough. I suggested doing the math. He would have paid a 10% penalty on the $10K, which is $1,000. He was a tech guy in Seattle, so the likelihood of him getting a new job was high. I recommended seeing how long he could get by with a credit card. He got a new job in about a month. He didn't rack up much credit card debt at all, just a few thousand, which he then paid off. He paid way less than $1,000 in interest and still had all of his retirement money. Long story short -- do the math before making a decision. Sometimes credit cards are cheaper.
I have nothing against saving money. My problem is with rigid rules that people can't live by. Then they break a rule (for a good reason, let's say) and then give up on their mindful spending and cry.
I propose something else. Make your own guidelines. Rules are rigid. Guidelines are flexible. But make them your own.
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