Tag Archives: Saving

The Murphy’s Law Fund

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Scott who – in my post proposing a Zero Dollar Emergency Fund – says:

I’ve given this topic a lot of thought and how do you feel about seeing a typical ‘emergency fund’ as more of a temporary ‘war chest’? In that, you are building up this cash savings reserve as fast as you can, while you scout for that next great investment opportunity (ie; stock in that excellent undervalued company that you researched, or that terrific foreclosure that you’ve scouted out in a great area that you want to purchase and turn into a rental property, or an excellent business idea or perhaps funding the expansion of your current business).

I figure that way, this money has a specific target(high returns that are more likely to get you to your number by your date) BUT, in the meantime, if Murphy pays you a visit while you’re building up this ‘war chest’, you have some liquidity(ie; emergency funding) to tackle that emergency. But, as soon as you have enough built up to take that next investment opportunity, take it with this money!

The short answer is that Scott has some cash lying around, and hasn’t yet figured out what to do with it. An ’emergency’ pops up, so the logical thing to do is to dip into that cash and use it to solve the problem.

I don’t have any issue with that: but it isn’t an Emergency Fund. It also isn’t a ‘war chest’. It’s just some spare cash lying around …

Of course, I’m overstating things for dramatic effect, here 😉

So, let’s take a look at the following graph to see what may be happening [AJC: I’ve adapted this graph from something to do with the ‘mating cycle of dogs’ that I found on Google image search, but I think it suits our non-canine purposes just fine!]:

Let’s pretend for a minute that this graph represents the amount of ‘spare cash’ that Scott has lying around (Y-Axis) at any point in time (X-Axis):

Scott starts building up his savings, has a little glitch as he realizes that he forgot to pay his car insurance premium by installments so he has to pay it all at once, then steadily builds up again until it reaches Scott’s ‘peak’  – his ideal Emergency Fund of $10,000.

Then Scott hits paydirt: an idea for a new online business, and he starts to spend that $10k on programming, domain name registration, hosting, Google Adwords and all the other stuff needed to get the ‘side business’ off and running. A couple of months and $9k later, Scott’s business is paying it’s own way [AJC: well done, Scott!].

Great, now Scott can start building that Emergency Fund again …

Do you see the problem?

The only time the Emergency Fund is adequate is between the time that Scott has managed to save up the full $10,000 and the time he starts spending the money on something else (in this case, his new business idea; it could easily have been a vacation, new car, girlfriend, or …?).

[Sigh] If only Life’s little ’emergencies’ knew how to fit into Scott’s calendar [double sigh]

I guess it’s up to me to propose a better solution …

Next time 😉

An inch is not a mile …

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You decide that you need a new TV because your old one blew a tube (do they still have those?) and watching the blank screen is a real bummer.

You check your budget then the catalogs and decide that $900 is a reasonable target price for the type of TV that you want, so you trundle down to Best Buy [AJC: Ka-ching! That’s another $1,250 for product placement. Whoohoo!].

Luckily they have the TV you want at only $850 … better yet, with your $50 Best Buy Rewards vouchers [AJC: + $350 Voucher Mention Bonus] you get the whole kit for $800.

So, what should you do with the $100 that you just saved?

That’s the question asked (and, comprehensively analyzed) in a guest post on I Will Teach You How To Be Rich on The Psychology of Money Savings, where the author talks about this as “the last mile of saving”:

So you’ve cut back your car insurance, negotiated a lower interest rate on your credit card—or nabbed a great deal on a new TV. You’re congratulating yourself for being a smart saver, and keeping more of your hard-earned money in your pocket.

Peter Tufano, professor of consumer finance at Harvard Business School, says that many people confuse a lowered rate (on car insurance), or getting a discount (25% off a TV) with saving money.

You can thank a psychological phenomenon that economists have dubbed malleable mental accounting.

C’mon, this isn’t a ‘mile’ … it’s barely a savings ‘inch’: you haven’t ‘saved’ anything … you’ve just spent 800 bucks.

Simple!

If you really want to think about saving, treat the $100 that you ‘saved’ from your original (actually, notional) $900 budget as ‘found money’ and save 50% of that.

Better yet, vacuum the dust off the back of your TV from time to time and maybe it won’t overheat and you’ll be able to ‘save’ the entire $900.

Got it?

5 Steps Toward Financial Independence – Reworked

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Happy Holiday Weekend – which is now already fading as a distant memory of fun and relaxation, as your work cubicle begins to close in on you ….

… although I’m still (technically) on vacation, I’m cutting my blogging-vacation short out of sympathy and because I’m just bursting to share this post with you 😛

Sarah Winfrey – on Wisebread – provides her 5 Steps Toward Financial Independence … I want to share them, then rework them slightly for you.

First, Sarah says:

Whether you’re a brand new grad or regrouping after a layoff or other financial difficulties, you may find that it’s more difficult than you’d imagined to wean yourself from any monetary help you’ve been getting.

1. Get a Job

2. Know Your Expenses

3. Commit to Saving

4. Prioritize Essentials

5. Give Yourself a Deadline

It’s generally good advice, and you should read the whole article here, but this wouldn’t be $7million7years if we didn’t have our own take on things:

1. Get A Job

Losing your job (or graduating college and finding it hard to find that ideal, first grad. job) shows you how fickle the world of employment can be. There’s no safety in employment any more, so you may tempted to become your own boss. But, there’s no safety in business either!

Look, I love the idea of people going it alone and starting a business, but a job provides three things that you might need:

– Cash to live off

– Starting capital for business and/or investing (your ‘war chest’)

– A safety net, in case your first business or two fails.

So, I recommend that you go ahead and get a job … and, start that business on the side!

2. Know Your Expenses

This one is easy … if you try the ‘no budget budget’ ( http://7million7years.com/2009/05/04/i-hate-budgeting-so-ive-only-ever-tracked-my-expenses-once/) 🙂

Hopefully, you already tried this – when (if) you were working – but, now’s a great time to try this again … just for one month.

3. Commit To Saving

Now, this should be easy: if this is your first job, then you’re used to living off nothing, so 50% of something must seem like a HUGE payrise to you. Regardless of whether this is your first job, or you are reentering the Rate Race (I mean, work force), you should treat this as Found Money and aim to save 50% of your income.

If that’s not possible, work your way back from 50%, all the way down to 1% if you need to …

… just remember that your eventual target should be AT LEAST 10% of your net income over and above whatever goes into your 401k.

Why?

Remember that business/investing war chest?

You need access to your money, so start building your savings outside of your 401k, as well as continuing to fund your 401k. But, you should simply treat anything that goes into your 401k as a safety net, much as a high-wire artist treats their safety net as something that’s there but NEVER to be used … except if you fall!

4. Prioritize Essentials

Remember that ‘no budget’ budget?

Now’s a great time to go through it with a fine tooth comb and identify any excesses … and, eliminate them.

And, to help you stop spending money unnecessarily, it’s time to stamp out that Impulse Buying Bug once and for all!

The best tool that I have found to help you do that is the Power of 10-1-1-1-1 card, which should be laminated and sitting in your pocket – well worn from overuse: http://7million7years.com/2009/04/23/the-even-greater-power-of-10-1-1-1-1/

5. Give Yourself A Deadline

Sarah means this as a deadline for getting your financial house in order, but $7million7year readers have a much more important deadline: Your Number / Date.

In case you missed the last three years of posts, here’s where to find:

– Your Life’s Purpose,

– Your Number, and

– Your Date.

By the time you work all of this out, you’ll be in a hurry to get a job and start your active business/investing program 🙂

The Zero Dollar Emergency Fund!

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Last week I asked How many months do you have in your emergency fund?

Earlier, my blogging friend JD Roth at get Rich Slowly (GRS) asked the same question of his readers, and this is what he found:

How many months do you have in your emergency fund?
GRS 7m7y
less than 3 months 38% 29%
3-6 months 26% 24%
7-12 months 13% 24%
more than 12 months 14% 16%

This shows that more 7m7y readers have 3+ months living expenses in their ’emergency funds’ than GRS readers, which means …

… I’ve done a terrible job 🙁

On the other hand, if you answered “what’s an emergency fund?” good for you, you’re already a step ahead of the pack … you see, not everybody – including me – thinks that you need to have an emergency fund at all!

[AJC: At least not until after you reach Your Number]

For instance, Liz Pulliam Weston writes at MSN Money that you should have a $0 emergency fund, replacing it with a concept that she calls ‘financial flexibility’:

The whole idea that everyone needs a big pile of cash, and needs it right now, should be rethought. In reality, the failure to have a fat emergency fund isn’t inevitably a crisis. At the same time, those who feel safe because they have three or even six months’ expenses saved up might be kidding themselves.

Let’s say your take-home pay is about $4,000 a month. Although you have been spending every dime, you make a concerted effort to trim your expenses by 10%. This not only frees up money for your emergency savings but lowers the total amount you need to save from $12,000 to $10,800.

Still, it will take you 27 months — more than two years — to scrape together your emergency fund. And that assumes nothing comes up that forces you to raid your cache.

Let’s explore this a litter further: JD Roth has $10,000 in his emergency fund, but that doesn’t just represent $10,000 today …

…. it represents the future value of $10,000:

Let’s say that you intend to retire in 20 years, if you earn 9% on your money (say, invested in Index Funds) then you are giving up, say, 2% bank interest (by having your emergency fund sit in an ordinary savings account for quick ’emergency’ access) to earn 9% – or, a net of 7%.

That extra 7% earned represents about $8k in extra interest/profit that you are giving up for the benefit of ‘peace of mind’ in an emergency. But, we aren’t investing our money in Index Funds, because we are on a mission: we want to reach $7 Million in just 7 Years!

To us – that is, those of us on a steep financial trajectory – this $10k pile of cash represents seed capital for your new business venture or next real-estate acquisition [AJC: and, don’t tell me that an extra $10k wouldn’t be a big help for either of these endeavors] …

… now, $10k ‘invested’ at:

  • 15% (stocks) grows to $35,000 after just 10 years
  • 30% (real-estate) grows to $106,000 after just 10 years
  • 50% (business) grows to $384,000 after just 10 years

… a slightly larger price to pay for peace of mind 🙂

I’ve received an award!

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Top Saving Money Blog
Online MBA

I’m not sure who Awarding the Web are, but they have kindly just listed $7million7years as one of their ‘Top 40″ Business Blogs in the “Saving Money” category.

This is kind of ironic as I am keeping company with the likes of Frugal For Life, Bargain Briana, Bitter Wallet, and FruGal [AJC: I love puns … unfortunately for those around me, the more groan-inducing, the better] …

… but, this blog is about as un-saving money as you can get (!):

http://7million7years.com/2009/05/02/save-your-way-to-wealth/

Yet, we do spend a lot of time in Making Money 101 on saving tips:

The reason: habit.

While I stick to my guns and say that you can’t save your way to any reasonably large Number by any reasonably soon Date [AJC: Pick any Number north of $1 million, and any Date south of 15 years and see what you come up with, inflation adjusted], the reason why you should still save/save/save is twofold:

1. You create the seed capital that you might need for your first real-estate purchase and/or business venture … it’s these that will create your Number/Date, and

2. You create the habits that will stop you from spending your wealth once you get it.

Saving money is kind’a like the bookends to your financial life …

… but, true wealth building is in the bits you do in between that really have nothing at all to do with saving.

Well, not directly 😉

What difference does 1/10th of 1% make?

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Brian Tracey makes an interesting observation of making tiny, incremental changes which accumulate over time to make huge differences.

You could apply this principle to anything: for example, if you want to save 26% of your income (not a bad goal if you want to get rich slowly, with inflation chasing your tail), just start by saving 1/10th of 1% of your income today, and increase that amount by 1/1th of 1% each day until you reach your goal.

Use your ‘golden hour’ to read the personal finance headlines at http://personal-finance.alltop.com/ looking for money saving tips and you’ll find plenty of fuel for your daily 1/10th of 1% increased savings goal.

How much is in your emergency fund?

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How many months do you have in your emergency fund?

View Results

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I think this is a good time to take another look at your emergency fund; I’ll explain next week …

In the meantime, answer the survey to let us know how much you have saved specifically as an emergency fund, and leave a comment (if you like) to tell us why!

The problem with Henry …

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Actually, it’s not the problem with Henry, it’s the problem with HENRY: High Earner Not Rich Yet.

Included in this group, a group that most workers mistakenly aspire to, are those doctors and ceo’s (at least those not in the Fortune 500) that I mentioned in yesterday’s post.

Now, this is only interesting because I can now answer the question posed on Twitter [AJC: you can glance across to the right to conveniently find a link to my Twitter account].

Dianne Kennedy (CPA), I think erroneously, links HENRY’s to taxes then lifestyle, but (as my article some time back about doctors also said), I think it boils down to three non-tax (even though taxes hurt!) issues:

1. As your income grows so does your spending … then some!

2. Keeping up with YOUR Jones (i.e. other high-flying corporate executives and professionals) is VERY expensive

3. You can’t sell a salary package (like I can sell a business, some shares, or a property or two) when you decide to retire

[AJC: You need both a big 401(k) – see reasons 1. and 2. why this doesn’t happen – and a huge golden parachute, which may / may not happen to compensate for reason 3.]

If HENRY’s want to become rich, they have only two choices:

– Get lucky, or

– Invest a very large % of their annual earnings

Let’s assume that a HENRY – conveniently named Henry who happens to be ceo of a medium-sized business – is earning $290,000 and has already managed to save $1 million – our consummate Frugal Investor – and has arranged things so that he can continue to save a very hefty 35% of his salary (this is all pre-tax).

After 22 years, Henry will have saved just enough (in Rule of 20 terms) to replace his $290,000 ceo’s salary … by then, inflation adjusted to $661k per year, assuming that he wants to maintain his lifestyle [AJC: more importantly, assuming that he can – and wants to – ‘ceo’ for 22 more years … if he ‘only’ starts with $500k in savings, he’ll need to work for at least 26 more years].

Seems easy, but human nature [read: urge to spend it up] is what it is …

I should know: I was ceo of my own business, employing over a hundred people across 3 countries (USA, Australia, and New Zealand).

I paid myself $250k per year, and had cars, cell phones, laptops, and health insurance all paid for by my company – I reinvested all the remaining profits in these businesses.

I had a $1.65 million house in the ‘burbs, paid for by cash (s0, no mortage), and two children in school (one private, one public). We traveled domestically and/or internationally once or twice a year as a family, ate at ‘normal’ restaurants (and, the occasional top-tier eatery).

I can’t see how I could have saved 1/3 of my salary … I couldn’t even save 10% 🙁

Of course, I could have saved 10% if I really tried, but my point is that it’s very hard to save 30% of even a high salary, unless you gear yourself up to do it from the very beginning.

[AJC: Look, it’s not my job to tell what should happen as you get richer, but the reality of what will happen and how to do better … when you get to $250k you will bring with you exactly the same spending and saving habits as you have today, if not worse. Moral: start MM101 today!]

In other words, don’t divert all of your creative energy into playing Corporate Lotto (i.e. chasing a higher salary) if you want to get rich – or, even to reach a more humble goal, such as becoming debt free (a dumb goal, IMHO).

First – and, as soon as possible – learn how to get rich (or debt free, or …) by taking action right now, with whatever you can bring to the table.

If your salary happens to improve along the way, all the better … but, don’t rely on it!

Why aren’t CEO’s rich?

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Why aren’t CEO’s rich?

Now, that’s an example of an attention-getting headline 😉

You see, CEO’s are rich!

At least, some of them: for example, Fortune Magazine lists the 10 most highly paid executives in the USA, listing salaries ranging from a low (!) of $48 million to a high of $71.4 million per year!

[AJC: This was published in 2005, so I am sure that it has dropped by $10 or $20 million each, per year; poor babies!]

Even when you ‘sink’ to the top US companies – in 2009, 200 such companies were surveyed for the Wall Street Journal, each with greater than $4 billion in annual revenue – CEO salaries are still a respectible $7.5 million per year (made up of: Base Pay $1,030,000 + Annual Incentives $1,523,701 + Long-Term Incentives $5,007,556).

This is in 2009, during the Global Financial Crisis; hard times, hard times ….

Clearly, you would have to define ‘rich’ very differently to most to say that these guys (and gals) are not rich!

But, we’re talking about the absolute top echelon in the field here; the top few hundred US companies (out of the 24 million+ businesses in the USA) … the same could be said of the top performers in any field: sports, medicine, entertainment, gambling, etc., etc.

We’re not at all concerned about them …

So, let’s look instead at the CEO’s of more ‘typical’ companies, as reported by Salary.com who surveyed 1,800 companies with 500 or fewer employees across 50 industries to find that these CEO’s (including Partners and Owners salaries) only earned [AJC: a debatable term]  $290,000 (including: Base Salary $233,600 + Cash Bonuses $67,300) plus whatever fringe benefits they could eke out of the system.

Interestingly – according to a blog devoted solely to the salaries of doctors [AJC: now, that’s specialization] – in 2009, the average pay for a ‘hospitalist’ (apparently, the hot new term for Internists and hospital physicians) was $226k per year.

Now, is $226k per year rich?

Before I sold my businesses I took a salary of $250k – but, my cars were provided by the company, and my house was already paid off yet there was never very much left over at the end of the month …

… nothing left over to provide an emergency fund or to provide for retirement. So, I guess I was rich, as long as I could keep drawing the salary.

Except, that I already had $7 million in net assets, ‘just in case’ I got sick or my business went under. I wonder how many of these other ceo’s do?

So, I guess a ceo’s salary is ‘rich’ … but risky 😉