As others have mentioned, we live a good life but below our means. We have nice things but aren’t extravagant. When we want something for our house, we get something nice but keep it for a LONG time, so it’s actually worth it. Started saving systematically over 25 yrs ago. We had a basic rule: short of an emergency (and I mean a real emergency like medical or something like that) , we would NEVER dip into our retirement or college funds EVER until we were ready to use them for their purpose. We’ve had some really good yrs and some lean yrs. Once the investment savings were made, the rest was used to cover lifestyle for that period of time; better in good yrs, less in others. We always took family trips but in good yrs they would be more expensive, nicer, whatever. Frankly I don’t think the kids ever noticed the difference.
Huge rule in our house. We never buy things we can’t afford to pay for (other than our home). We use credit simply for convenience, not for leverage. So If I want to buy some furniture for the house, we write a check or we don’t buy it. Not having any debt, other than our mortgage, makes things a lot easier. It also makes you think about the purchase. Do I really want to spend $X on a car, or trip, or set of golf clubs, of whatever. If the answer is yes, great. If no, great.
It’s just committing to a way of life. Fortunately my wife and I have always been on the same page when it comes to money.
No, not at their age. If they are good at what they do they should be able to get a job within few months or weeks. 6 months was on a conservative side. As one gets older and become more senior it is harder to get another job. When I was in my 20s and 30s I could walk off a job and get a job pretty much within a week. Even now at my age, the longest time I was out of work was 6 months, but I had also negotiated for a year of severance pay. If you are unemployed for years then it is very unlikely you would be able to get another job within your profession.
@ucbalumnus - do you really know of anyone IRL who were out of job for few years and was able to get another similar job? After a year or so out of industry one becomes irrelevant because one’s knowledge becomes outdated.
With respect to the likelihood that long term unemployment will end your career, that makes it all the more important to save aggressively to get to retirement level savings as soon as possible so that any career-ending job loss during an economic downturn can be weathered indefinitely.
I think this is entirely up to the individuals involved. For example, in the Las Vegas trip did you go for the shows, gambling, etc. or the entire package (i.e. where you slept)? Some people like to focus on what they’re doing rather than where they’re staying.
These days, DW and I are more into making our daily lives better. We can’t stand having something that irritates us every day. We’ll drive a car until it becomes an irritant. We’ve remodeled our kitchen and master bath. We’ve replaced our HVAC units and ducting because they couldn’t manage the temperatures properly. We’d rather go on fewer but better vacations (better accommodations).
One thing we’ve always wanted was financial independence – to a fault. If we can’t pay for it outright, we don’t buy it. Since we didn’t come from money, that was extremely limiting early on. We probably should have had a better balance in that regard…
I think the idea of a contingency fund is to set aside at least 6 months of cash for an emergency or job loss that you could readily access if needed. After you have accomplished that, the goal is to continue to save and invest for long term goals. You don’t stop saving once you’ve reached 6 months of living expenses. Yes,as one ages it can take longer to replace a job especially in a economic trough but if you have been diligently saving like you are supposed to, by the time you reached you late 30s, 40s, 50s, etc. you WILL have substantially more assets saved and those assets you started accumulating and investing in your 20s and 30s will have grown in value. They’ll be there to fall back on if you’ve made consistent savings a priority.
The suggestion is to have at least 6 mos of liquid savings. There can be other savings that can be accessed in an extreme emergency but might suffer a penalty if this is done, so the goal would be to have access to liquid savings/investments in case of a job loss or other need to access funds.
jym626 is absolutely right. When I said 6 months savings it is liquid asset that can be accessed. People have investments in real estates, private equities, annuities…but may not be accessible during emergency. Of course with the young adults, most of their early investment would most likely be their house and it is not likely they would want to liquidate it in an event of job loss.
D1 is contemplating about buying an apartment soon. I advised her not to use all of her savings as the downpayment, she should put some money aside for emergency.
Pay yourself first with automatic payroll deductions every two weeks into a retirement plan. If you don’t have the money, you won’t spend it or even miss it.
Same goes when you start having kids, fund that 529 college savings plan.
This is a lesson that really has been hard to teach my kids. Since they were old enough to have bank accounts, interest rates have been abysmal. It is barely better than keeping it under a mattress. I realize it won’t be that way forever, but my kids have never had an “ah ha!” moment when they saw their money growing like I can remember having with my (hand updated by the teller) bank book as interest accrued. So my millennial kids understand in principal, but they haven’t really seen it in practice.
I do think automated transfer to savings is a very good thing to do. But I’d establish that emergency fund first before putting too much into other savings goals.
When you have kids, consider trying to do what we did: We had a pre-tax account for day care expenses where money was taken out of ex-H’s paycheck every time. We paid for daycare out of pocket, then submitted the receipts to get reimbursement checks. When those checks came, we slugged ‘em right into the 529 or other college investment accounts. A few times we tapped those reimbursements for other things (I remember an emergency car repair once). But mostly that is what we did, and it gave our kids’ college savings a HUGE boost. That money had time to grow, and they had a very nice amount to put toward college when the time came even though we tapered off on the amount of savings we put in for each kid after those early years. It made us live a leaner lifestyle in those early years than we might have (we lived in an older, smaller, less expensive house during those years, for example). But it really paid off when it was time to pay for college.
Also, you can (and likely should) have more than one savings goal at a time. I remember times during our peak earning years when we were saving for retirement, college education, making sure we had money in the bank when private school tuition came due, and also saving so we could pay cash for our next car (drove the old ones until they were about to drop, but you can’t drive 'em forever), and made sure we had that emergency fund as well. It was honestly hard to keep track – I kept an elaborate spreadsheet for years that showed how money in various accounts was allocated for those things, and how to split up new savings into those categories.
“I kept an elaborate spreadsheet for years that showed how money in various accounts was allocated for those things, and how to split up new savings into those categories.”
You’re organized! I just took an opposite approach - lived below my means and kept socking away a good portion of my money without a lot of compartmentalization. That strategy worked, too.
I agree about the fairly nonexistent interest rates and kids seeing the effects of compounding but now that mine have accumulated some assets and can invest more aggressively, they are learning how it grows over time and I hope it stics with them for life.
We did the opposite of most. Didn’t save for college at all, and spent most of our money; first on daycare, and grad school for us, then to buy cars, raise kids, and build a house a few years before oldest graduated from high school. We had modest incomes as librarian and teacher and were very frugal. The year before college we ended up with no debt (except the mortgage), two fully paid for cars, and very modest savings. This actually ended up being in our favor, as the kids’ university met 100% of need, and we had no pot of money and they didn’t count home equity. We paid our contribution out of pocket for the seven years we had the kids in college and continued to live frugally. Luckily, there was one year of overlap, with both kids in college, which only cost us about as much as having one kid in college. When I think back, I am amazed that it all worked out - totally opposite from the common wisdom to save for college right from birth. DD ended up getting her master’s at an Ivy League college with full living stipend and support, so that ended up working out also. We’ve been very lucky…
When I make a large purchase, I emphasize the long term gain/loss including maintenance expenses, rather than short term initial cost and compare that to how much personal benefit I believe I would get. For example, you mentioned home remodeling. I remodeled my kitchen in my previous home. It was expensive, but I believe the remodel increased the value of my home more than the initial cost, so it was a long term gain, rather than cost. As such, I had no issue with making this expensive purchase, even though I am not in to kitchen design and would get little personal benefit form this type of remodel. A typical vacation usually has a poor long term gain/loss, so it’s important that the personal benefit is worth that cost. For me personally, I prefer simple vacations, often to scenic areas where I can hike with my dog, so it’s not really a question of staying in a luxury resort vs Travel Lodge. The personal benefit is almost always worth the cost of such vacations to me. It’s more of an issue of fitting it in to my schedule.
Along the same lines, whether I’ve saved enough is more of a rough calculation than a feeling. For the short term, I want to have enough savings available to cover large unexpected expenses, without needing to dip in to investments. And for the long term, I want to have large enough investments/savings/assets to support myself, if I was not was not working (retirement). If my rate of savings was not meeting those goals, then I’d need to make some changes.
How about having your payroll deposit go directly to a savings/investment account? Then move money to your checking/spending account as needed. Having to move money as needed to the checking/spending account may give you more awareness of how much you are spending and on what.
