emergency fund

ask any number of people about an emergency fund and you are likely to get just as many responses. some say that you need 3-6 months of living expenses in your emergency fund, others say a year of take home pay, and others will tell you something entirely different. don't even ask about where you should keep your money, because you'll get an equally confusing array of suggestions.

here's my take on the whole thing. an emergency fund is a fund that you need in the event that you lose your job. period. end of story. it's not something that you would tap into if you incur a sudden unexpected expense. it is used only in the event that you lose your job and you need to pay your bills. that's it. people will tell you that it's okay to use for this or that or the other. a popular one is medical emergencies. sorry, bub, that's what insurance is for.

now, on to the specifics of your fund. your fund should be based on your total monthly household pay (you need to consider your spouse's earnings) and you should fund it so that in the event that you lose your job you have the equivalent amount of money available to you as you would while you were working. so, you would need to have however many months stashed away as you think it would require to find a new job. in some cases that may be 1-2 months. in others, it may be a full year. a rule of thumb is that for every 10k you make, it will take a month to find a job. so, if you make 40k, you should budget for 4 months to find a job, and, as such, 4 months in your emergency fund.

where should you keep this fund? personally, i keep it in a series of staggered CDs that mature every month. that way, it is almost exactly like getting paid -- the money is available to me at a specific time each month, and if i have a job, i just let it roll over. for example, let's say i make $60,000 a year ($5,000 per month). i need an emergency fund to cover 6 months of pay, or $30,000. i divide that 30,000 into 12 CDs, each maturing at the beginning of every month. in this case, i would have 12 $2,500 CDs. now, if i lose my job, i'll be able to tap into my emergency fund at the beginning of the next month . . . but wait! i don't have my full pay available to me! that doesn't bother me, but if it looks problematic to you, you may want to put your money into a more liquid account. to me, the $2,500 is fine because it's an after tax versus a pre-tax (gross) figure, and i won't be overly concerned with contributing to a 401k or putting money away into savings while i am unemployed. i'll probably want to cut back on some expenses, too. so, to me, the $2,500 is roughly equivalent to my $5,000 monthly gross pay.

what you need to retire

i was perusing a money magazine over the weekend and happened to stop on an article about retirement. it suggested that you strive for an income in retirement that was 85% of your pre-retirement income, so you could continue your current style of living.

my first reation was: WHAT!?@!? why would i need such a high income stream? that's ridiculous!

after thinking on it for a bit, i came to the same conclusion.

if i could achieve an income 85% of my current income, i'd be retired now! no, i'd say what you need in retirement is largely dependent on the size of your nest egg. if i had 10 million dollars that i had saved over the course of my working life, i could probably get by without any income -- i could put that 10 million in my mattress and simply make withdrawals from it whenever i needed to buy something.

the only reason i could imagine that i'd need a high income stream would be is if i had little or no savings and did not own my primary residence.

i don't know who writes this stuff out there in the print media, but some of that stuff sounds just plain crazy to me.

retire early

i was talking to my mother-in-law over the weekend about retirement. she had been looking over the obituaries in the paper and was just mortified to see how young people are passing away. all the time i've known her, she's always been working at 100 mph, but this weekend she expressed a desire to retire early. mainly, she came to this conclusion by looking at it from a very pragmatic angle -- if you live until you are 70 and retire at 65 and spend 2 years bedridden at the end of your life, how are you going to enjoy your 3 years in retirement?

i think it's a fine point. if you suppose that you enter the workforce at 25 and use the age of 70 as potentially stopping point, i'd say retiring at 50 would be pretty worthwhile. that would give you 25 years working and 25 years to enjoy the fruits of your labor.

based on this conversation, i'd like to be able to retire within the next 10 years, at which point, maybe i'd change careers or do something part-time. it just doesn't make sense to work so long into your life.

wasting away in . . .

well, i just returned from a week long vacation in manuel antonio, costa rica. it was a really relaxing and beautiful vacation. it's easy to overspend on vacation, but my wife and i were able to only spend about $100 on souvenirs and by taking advantage of the kitchen in the place that we were staying, we were able to save a ton on eating out -- i think we only dined out three or four times that week!

we vacationed with a group and rented out this amazing house for the week. it was pretty expensive, but once it was divided 10 ways, it ended up being really affordable, and it was a lot of fun vacationing with all of our friends.

we hiked, played on the beach, surfed, and enjoyed the natural beauty of costa rica without spending a ton of money.

buying vs renting

i had a conversation with a buddy of mine yesterday about saving . . . he asked me what i thought my savings rate was and i said, it probably varies between 30% and 50%, but what i didn't take into account was home equity. every month a good portion of my take home goes toward paying on my mortgage, and while it is technically not the same as saving, it is going toward an asset that i could convert to cash at some point. not only that, it is probably earning 'interest' in the form of appreciation.

you can make a good argument on the benefits of renting versus buying. there are a lot of nice things about renting -- you get a good deal of flexibility, you don't have to put a lot down, and, if you rent a place cheap enough, you can really put your money where you can do better than in your home. on the other hand, if you are buying, at the end of it all, you can own your home and/or take some equity out along the way. you get some tax benefits from owning and if your mortgage is around what it would cost to rent, you're really using your home as a great vehicle for saving (it's an asset versus liability thing, if i remember from accounting).

look, i'm not saying one is better than the other, but for me, it's the way to go.

living well is the best revenge?

a co-worker of mine pointed me to an interesting article on forbes site on how much it costs to 'live well' in various parts of the country. they define living well as paying on a 30 year mortgage on a 4 bedroom house in an upscale neighborhood and a vacation spot in a likewise upscale place, owns 2 nice cars, travels, sends their kids to private school . . . basically all the trimmings. i was shocked to read the article.

for one, i punched in a pretty nice salary into the calculator -- $200,000 (and, this is a net income figure!) -- and selected what is renown as one of the cheaper big cities in which to live, houston, texas. well, i was floored to find that i was nearly $100,000 shy of being able to live well! absurd!

i think the premise of the site is a bit ridiculous. not only would i be able to live very well on $200,000 after taxes, i could easily have all the things they mention and still be able to put some away for savings. forbes points out, however:

"Our family saves very little (1%) of its income. This may not be the most fiscally prudent way to behave, but it is the norm in this country. In fact, we were even a little generous, as according to the Department of Commerce, American households save less than 1% of their income these days."

well, at that rate, it would take you nearly 30 years to become a millionaire -- and that would only be because you'd be building equity in your million-dollar home.

who can really afford to live like that? anyway, i'd much rather live how i am living now than 'well' by those standards.

live (debt) free or . . .

i was driving in to work the other day and heard an ad on the radio about living debt free and how great it is. i understand the allure of carrying no debt, there are some forms of debt that make a lot of sense.

i mean a mortgage, for example, affords me the opportunity to build equity in my home versus spending money on leasing. what this amounts to is that with a mortgage, i get a vehicle for saving money rather than spending it.

the same cannot be said for most other forms of debt, which is where i agree with debt free community. i currently carry debt in the form of home and car loans, but their rates are very reasonable and in the case of the car loan, i can take the cash that i would have spent and invest it. if i can at least break even on it, i prefer having the flexibility of having the cash.

anyway, living debt free may be nice for some, but if the plan involves me selling everything and living on the street, aren't i better off living with some debt?