If you don't have enough money to handle an emergency, you have an emergency. Go ahead and panic. Trade your car for a cheaper one, move into a cheaper apartment, stop eating out, sell your TV, and get an emergency fund.
If you're already living on toasted rats in a cardboard box, that's different, but if you've got unnecessary expenditures, you should really cut those out and get an emergency fund. To do otherwise is reckless. And you're cheating yourself of sleep and peace of mind.
When raising our kids we often talked about money and "kinds" of money. When you're young you can go for long stretches with "no" money, as you get older you get introduced to the notion of a "cash flow" and a steady stream of expenses that need to be paid.
The single biggest point we try to impress on them was that if you were not able to 'save' (put aside) some money every month (could be $10 but it had to be net positive) such that under 'normal' circumstances you've put money aside in more months than not in a year, then you are, by definition "living beyond your means."
If you found yourself in that space you needed to scale back your life if you could, or upgrade your means.
Being able to come up with $2,000, "if you had to", is pretty important. And while its perfectly ok to say you have to liquidate your savings or sell an asset.
Acquiring it through a credit instrument didn't pass the test, since you just moved the obligation forward in time, and if you couldn't come up with it now then why do you think you can come up with even more later?
It used to bother me a bit when peers whom I knew were making about the same amount of money as I was were living much more "exciting" lifestyles, and it really wasn't until the 90-91 recession hit that it was clear that they were living on credit. One person called me in desperation for a ride to work because their car had been 'stolen.' It turned out it had actually been re-possesed. Thats a hard place to be.
>>Acquiring it through a credit instrument didn't pass the test, since you just moved the obligation forward in time, and if you couldn't come up with it now then why do you think you can come up with even more later?
What about stocks? I need three days for a sale of stocks to settle and take the money out. If I have an emergency I can use my credit card. (and pay it back at the end of the month).
Stock (plus a credit card while you wait for settlement) is certainly fine, but be careful...
The times that you are more likely to need liquidity (loss of job, economic crisis) are also the times that the stock market is likely to be incredibly low.
You might end up like many hedge funds who (as a result of some toxic assets) ended up having to sell good assets at firesale prices during the recent recession.
True, but on the other hand, with US-dollar interest rates being what they are at the moment, the alternative to keeping your money in shares (or a similar volatile liquid investment) is keeping it your savings account at 1% or less. I keep a few grand in cash, but everything else goes in the sharemarket.
Stock absolutely counts, but it has an interesting caveat. If you read the article they included the caveat "...within 30 days." Which covers the 'you pay it now with a credit card and you pay it off when the CC bill arrives' scenario.
Back in the 80's when I was trying to buy a house, part of the down payment was going to be funded by the sale of stock (I had worked for Intel and had vested a few shares). How much of the down payment was flipping all over the map as Intel's price went up and down and up and down. On the one hand I wanted to hold it as long as possible (the trend was upward) but I didn't want to get caught in a dip either. My wife and I picked a number we felt was "reasonable" and put that in as a 'limit' order. When that fired, we picked the best choice of the three houses we had as candidates and made an offer on the house.
The stock was up an additional 5% by the time we closed but had been down at least 5% between the sale and the close. Very stressful if we had been under contract and the price was falling.
Flash forward to the dot-com days, a good friend bought a house beyond their means and was making payments by selling stock. When the bubble popped they had to sell the house. Not ideal but it didn't leave them permanently stuck.
You're looking at it from a middle class perspective. Unfortunately, most of these people are also deep in debt and have already made such cuts.
This is the byproduct of double digit unemployment as much as anything. As much as we talk about consumption, most of it is at the middle class level. Now, I've seen poor people make very bad decisions, but many are on purchases you and I would make without a second thought.
Unfortunately, most of these people are also deep in debt and have already made such cuts.
Sometimes I wonder about this. How many poor folks are wasting their limited budget on frivolous crap?
One reality show I really would like to see would be about a sensible financial advice type who parachutes into the lives of low-income, deeply-in-debt people and shows them how to budget properly.
One reality show I would really like to see would be about sending entitled people into low income neighborhoods so we can all watch them realize just how hard working some people are and just how well most people manage their money. Maybe then they'd stop saying misinformed stuff like "all that person really needs is someone to help them with a budget." A budget helps you cut excess spending. There's not a lot of spending in low income places almost by definition. There is not a lot of excess.
Deeply in debt people typically don't come from low income neighborhoods, they come from the middle class. Low income folks can't get credit that easily, even when credit was easy.
Most poor people I know work amazingly hard and manage their money well.
I grew up in one of the poorest parts of the UK. After leaving school, I volunteered for an advice charity for eighteen months, spending two and a half days a week going over (predominantly poor) people's finances with a fine-toothed comb.
Out of the hundreds of people I worked with and kept extensive records on, I found four who were in serious financial difficulty through no fault of their own. Four. I saw people manage perfectly well on £9000 a year and people on £40,000 a year hiding their car from the bailiff.
Correlation between quality of life and income was remarkably weak - the ability of clients to stretch their income and conversely their ability to fritter it was often astonishing. Middle class clients took on unmanageable mortgages and racked up huge credit card bills. Working class clients took out payday loans every week, bought consumer electronics on expensive hire-purchase and spent their housing allowance at the pub. I did observe one strong correlation - the more serious someone's financial problems, the more likely they were to walk out through boredom or frustration, or become abusive when it became clear that I could not fix all their problems.
Of course, we have a welfare state. From my perspective, the political environment in the US seems to be dominated by people who actively hate the poor. It may well be the case that Britain is exceptionally supportive of the poor, or that American society is exceptionally hostile towards them.
I know a lot of poor people who work hard and manage their money well. I also know a lot who could save themselves a ton of money with obvious (if not easy) steps like quitting smoking.
Quitting smoking may seem obvious, but it's important to consider the context. Middle class people grow up in homes that are very anti-smoking. In the rare case that a middle class family isn't anti-smoking, middle class schools certainly are. Hell, I was indoctrinated with anti-smoking feelings starting from age 10 in school. Whereas a lot of poor people are probably being given cigarettes at age 10. Combine this with the highly addictive properties of cigarettes and I'm not convinced quitting smoking is a reasonable money management strategy to suggest unless we provide some sort of support program or infrastructure. If there are free programs available to teach how to fight addiction, then sure I'm on board.
I wasn't claiming that quitting smoking is a reasonable money management strategy. But a pack a day is something like $1500/year straight to your bottom line. No matter what your feelings about tobacco, it is an obvious luxury that you can live without and save a lot of money.
This relates to a very important distinction between being working poor and impoverished. And it isn't money. It is whether you've given up.
Someone who is working poor may objectively have it hard, but they feel in control of their lives. They can and do plan for the future. They save up for things. They anticipate what can be anticipated and make plans. I've seen people like this calculate the cost of smoking, and choose not to because they can't afford it.
Someone who is impoverished believes that their life is hopeless. Bad things are going to happen to them. They might have some influence over which bad things, but it is going to be bad. So why bother? Live for the moment and tomorrow can go hang. Smoke another cigarette, hope for some cheap booze (or other substance) tonight, it is all hopeless anyway.
Someone in the latter frame of mind knows that payday loans are stupid, but doesn't care. Because it is bad in that nebulous future that they already know is going to suck, and how much worse is it really going to get?
Anyone who talks about the poor being good with money who does not understand this critical difference between being working poor and impoverished is missing a very important point.
I agree with your distinction and it is an important one. It is also important to define the function by which one becomes either a part of the working poor or impoverished. I argue it is a function of personal motivation, race, sexuality, religion, and a myriad of other factors. Indeed, pointing this out was the point of my previous exposition regarding smoking. I'm wary of those people that place too much weight on the personal motivation term in the above equation.
One reality show I would really like to see would be about sending entitled people into low income neighborhoods so we can all watch them realize just how hard working some people are and just how well most people manage their money.
That would indeed be interesting if it were true, regardless of your snarkiness. I'd be interested in seeing a show just like that regardless of how it works out.
Yes, that is always the case. Poor people often work hard and save money for many reasons. One obvious reason is they really have no way out. If you are given one and only one chance to do something, you are left with no choice but to do it well.
The other aspect I see is upbringing, when all you see around is poverty and and way out being working hard, you grow a natural tendency to think of hard work that way. You also learn to live frugal, and manage even with little resources. Later on life when you earn well, these habit help in saving and making proper investment decisions.
On the other hand people raised in spend thrift environments, try to match their living accordingly. For example even if they do no have money they try to buy things through debt and credit.
Saving and making investment decisions overtime make you rich, this is obvious and nothing surprising. But people rarely realize this.
I have a friend at work who I try to help. I can't count the number of times or ways I've tried to tell him pay day loans are bad news. The one time he came into some money (by cashing in a part of his 401K) I suggested he open an account at a credit union or even walmart (he lives 3 blocks away) but he ended up opening a "savings" account at a pay day loan shop because it was just around the corner.
It is horrible and sad but the reality is there really is no helping some people...
Dave Ramsey's Financial Peace program (not reality TV, a and "Total Money Makeover" (a book, even though it sounds like a reality TV show) does delve into how to take a deeply-in-debt situation and start budgeting properly.
Step 1: Create an emergency fund with $1000 (as a rough starting point, your financial situation may be different) to handle the unexpected and avoid making more debt. Adjust the $1000 number based on your income level and possible expenses. A homeowning breadwinner with a wife and kids would need a good deal more.
See: http://www.daveramsey.com/new/baby-step-1/
There's a show in Canada named Til Debt Do Us Part that has a similar premise, except they usually visit higher class households (usually $100K/year+ earners) who still have managed to rack up tens to hundreds of thousands of dollars worth of consumer debt.
We actually have a show like that in Germany... It's mostly the same basics over and over again (cut the cigaretes, no Pay TV, Why do you have 4 Cell phone contracts, ...). It could very well be scripted though. Maybe I'll remember the name over the next hour or so :)
There is such a show, it follows Suze Orman on CNBC on Saturday nights (I forget the name off the top of my head, something about being married to debt). It's not all low-income people, but it meets the rest of the criteria.
> Unfortunately, most of these people are also deep in debt and have already made such cuts.
You might be underestimating the middle-class-ness of the problem. My first job out of college was pre-screening people's credit reports (in 2004, so in quite good economic times), and it was shocking how many middle-class and lower-rich-class people were living way beyond their means, while applying for expensive short-term debt to cover it up.
The worst I saw was the owner of a local chain of stores whose wife or girlfriend was clearly cleaning him out, and he was applying for short-term unsecured debt.
"... most of these people are also deep in debt ..."
At least on the news we see this a lot. The folks who are "screwed" by the banks because they raised their credit card rate and are going broke. When they cover those stories you often get to see how much credit card debt these folks have and it is always > $10,000 and often > $20,000.
To the comment above, at that point you had an emergency a long time ago. If you can't pay off your credit cards at the end of the month you have an emergency.
The lady who cleans our office is poor by any definition. She works 14 hours a day, every day. She has two kids, no TV, and has cash saved up to buy Christmas presents and school uniforms.
The guy in the next office makes $110k/year leases a BMW 5 series, owns a new condo, and goes out of the country on vacation 3 times a year.
When you get paid a lot of money, it's easier to be less careful with your money and not have anything bad happen. It's easy to contribute the maximum to your 401k, have the best health insurance and flexible spending account, save $1000 a month, and still buy a lot of things. If you lose your job, you'll probably get another one. And banks are more than happy to loan you money to bridge the transition.
All I'm saying is that consumption is not bad for any intrinsic reason other than the taboo of consumption.
(Let's look at your examples: owning a new condo, and going out of the country on vacation 3 times a year. New condos cost the same as old condos. You're paying for the ground under them. You're going to pay for that, in some form regardless of whether you rent or buy, so this isn't much of a "consumption" issue. Going on vacation isn't amazingly expensive. A cheap round-trip flight out of the US is $500. If you have friends, that's the total expense right there. So again, not an amazing display of financial ineptitude.)
I think the guy earning high is to blame here. Nobody else is responsible for one's financial mess(Recession, Inflation, government etc) if one doesn't know how to manage their money well.
All measurements in the world are relative. One person lives frugual, saves and invests money. Another person doesn't.The spend thrift guy will have himself to blame. You can't have good earning conditions all your life, good and bad times come alternatively in every person's life.There will always be recessions, wars and inflation. There will always be health problems, there will always more competition.
The responsibility to secure your future when you have the chance is yours.Savings and good investment decisions make people incrementally richer. A person may not become a millionaire next year with this strategy, but over time savings and good investment decisions can make you really rich over time(When you need it the most).
Umm, I think you misunderstood his point. I guess he was trying to make the point that a 110k salary will barely (if at all) cover the sorts of expenses he described.
Which is actually true, unless you go through contortions like interpreting "foreign vacation" to mean shacking with friends in a different country. Btw, AFAIK, new condos do cost more than older ones.
Which is actually true, unless you go through contortions like interpreting "foreign vacation" to mean shacking with friends in a different country.
Meh, international vacations aren't necessarily all that expensive. $1000 for an airfare, another $1000 for a week's accommodation... that's six grand a year. Heck, let's make it ten grand, just so you don't have to skimp. And a lease on a new 5-series is, what, $600 a month? This is all perfectly affordable on a $110K salary.
I'd never advise anyone to lease a car rather than buying one with cash, but actually I reckon three international holidays a year is a great way to spend money. You only live once, and while you're probably doomed to spend your entire life within a six-mile deep approximately-spherical shell, it's full of interesting stuff so you might as well go and see as much as you can.
It's easy to say that, but the reality is that many of these people probably blew through their savings while enduring job loss, medical bills, increased energy and food costs, etc.
Most people aren't programmers, and are at the mercy of the job market, which sucks right now.
There are many cases of irresponsible behavior, but I know of far too many responsible people that tried everything they could to right the ship and kept hanging on, hoping that things would change...with no luck.
It would be one thing if gas prices were going down, utilities were getting cheaper, and food prices were getting back to normal, but they aren't.
Most of us are fortunate enough to turn to freelancing when money runs out, but much of America is screwed.
Funny you mention freelancing - this was what got me into the deepest trouble so far. One bad contract where I couldn't get out easily and had miscalculated milestones badly. And it is hard to concentrate on coding when you start wondering about stuff like "will I manage to pay rent once more next week or will the bank not accept that I go over the credit limit".
What if someone has a $5k debt on a credit card, and only $1k in savings? Should they prioritize getting more cash into a low-interest savings account, while racking up interest on the CC?
this is how i typically recommend people to prioritize their money:
(1) pay your bills (2) get a small emergency fund together (enough to pay for a small emergency, car breakdown, 1 month's living expenses, etc) (3) pay down high interest debt (credit cards, etc) (4) get a large emergency fund together (enough to support you for a few months if you lose your job, major emergency, etc) (5) invest and pay down low interest debt (mortgages, student loans, etc).
creating a smaller emergency fund to start sets the best precedent because it creates a safety buffer. what happens if you throw tons of cash at paying down your CC bill every month and save nothing, but then you lose your job and have 0 income? you're going to end up missing payments, get penalized, and your debt will snowball again quickly. you need to have something to fall back on when bad things happen, just in case.
That is bad advice. Always always get out of debt first.
CC debt is highly liquid. If you're fucked, you can max it out within 24hrs. Ergo, it doesn't make sense to have a pool of savings around and service the debt interest payments when you could clear out the debt and put that interest payment to good use elsewhere.
This is exactly how I've been doing it. Auto-transfer set up on the bank account, and taking cash out for spending money instead of just letting myself use a credit or debit card.
credit cards are useful tools. i use mine and just pay it down monthly. if you have any plans on obtaining a loan/mortgage at any point in time, the easiest way to establish yourself with good credit is through actually using a credit card.
Everybody says this, but I've obtained three different mortgages in my lifetime and never had a credit card. In lieu of credit history, the bank has just asked for other evidence that I pay my bills, like statements from the utility company.
Maybe I'm just lucky, but in my opinion, wanting a good credit score is a pretty bad reason to get a credit card.
how long ago were the mortgages and how old were you when you tried to obtain them?
i think the climate is different now. i have a friend who is reasonably fresh out of school and tried to buy a place, but got turned down for mortgages due to lack of credit history (and presumably a lack of "other evidence" as well).
First one was in 2002 and I was 20. Last one was about 21 months ago.
I've heard that a lot of rules have changed as well, but I don't know how much changed after I got the last one. Some changes definitely affected me at that time, but the hassle in my case was related to the fact that I was buying another house before selling the current one so I need to hold two mortgages simultaneously. Required more documentation of cash in the bank due to debt/income ratio.
Ironically, once around 2007 while trying to take advantage of a 10% off deal from a home improvement store on a big purchase, I got turned down for their line of credit due to lack of history. (Glad it happened that way in retrospect.) But mortgage companies have never given me trouble.
Maybe I'm lucky. (I'm not independently wealthy.) Mortgage companies are inscrutable. :)
I don't mean that I don't use it all. I just don't use it for every single thing, every day. I was doing that, and was paying it off timely. But I found my spending was higher then I'd care for.
Unless you are carrying low/no interest debt you should really pay it off rather than put money into savings.
As long as your bank is not evil and keeps dropping your credit limit as your balance decreases you can always borrow again against that line of credit if needed.
Saving money for an emergency should be a priority over paying off a credit card debt. In an emergency, you cannot count on the credit card bank keeping your account open. You cannot count on them maintaining your current credit line. ALL banks are "evil" in the sense that they operate with their best interests at heart, and no matter how horrible of a position it may put you in, the CC bank has no obligation to maintain your current credit line.
Having a $2000 emergency fund, even if it's in a shoe box under the bed, is more important and more VALUABLE than $2000 worth of open credit on a credit card. The $2000 under the mattress is almost entirely under your control. The $2000 in open credit is almost entirely OUT of your control.
If you're in a real emergency, what would your rather rely on?
"If you're in a real emergency, what would your rather rely on?"
I think the point was that if you have credit card debt then you are in a emergency situation already. So using money to pay off that debt means you can get 'out' of the emergency. Paying off the debt and then putting $2,000 into a liquid account allows you to declare the emergency over.
The trick that folks often don't quite realize is that when you carry debt, some of your 'income' (whether its a paycheck or money back from recycling aluminum cans) goes to servicing that debt and not to your benefit. If you are living at the edge of your means, any money not going to supporting you directly is wasted.
That's the reasoning that says "priority #1" should be "get out of debt." #2 is build a "cushion" so that when unanticipated expenses hit you don't take a long term hit to the income stream, #3 is invest in longer term income growth (could be night classes, could be a washing machine to save on laundromat bills, could be stocks and bonds).
I understand that minimum monthly payments and interest only payments are absolutely wasted and provide you with no benefit.
However, the emergency I'm referencing is not a general "my finances are a disaster" emergency. I'm talking about an emergency that has an impact far beyond your immediate financial situation.
I'm talking about "I cannot afford food" or "I cannot afford transportation to a job interview" type of emergency. That's a real emergency, in my opinion.
"I'm talking about 'I cannot afford food' or 'I cannot afford transportation to a job interview' type of emergency. That's a real emergency, in my opinion."
I think we're in strong agreement. I was thinking of your two examples as being subcomponents of the base emergency "We're living beyond our means." Once you are in an emergency situation, your safety systems are compromised and additional emergencies become much more likely.
The only thing people should be aware of in this situation is that $2000 under your bed actually cost you $4000 or whatever since you are holding a balance on your credit card with high interest.
But the alternative, having a $2000 expense and no cash, would be a emergency. You can pay off $4000 in debt (and that doubling is probably hyperbole, but whatever), If you can handle small emergencies that will come up. Read Chapter 6 of Dave Ramsey's "Total Money Makeover" for a more thorough analysis.
I currently don't have U$ 2.000 (not an American, but having money for a rainy day should be worldwide), but I could raise them with a (high interest) loan in about 30 minutes.
The article says they don't count, though:
"29.5% said they would have to resort to credit cards, a home equity line of credit, reverse mortgage or unsecured loan. "
I hate to break it to you but you're living beyond your means. A high interest loan is not an emergency fund. Ideally you should have enough money to live for 6-12 months if your income stopped tomorrow.
I know when I was younger I didn't have such things, but then the recession of 2002 hit and I found out really quickly how much it sucks trying to make a house payment with an unemployment check.
I know I am, but one of the niceties of a socialist system is that if I get fired, I get paid my salary for a year and a half in unemployment :) , plus three months' salary straight away.
I actually wish I was fired :) (though the black mark in the CV here is really bad). The really bad thing about this system is that it's based on seniority, if I switch jobs, I lose all those perks (start back at zero, only get some minor unemployment after 3 months on the job)
I'm also neither a homeowner nor a parent, and could scale back my spending to zero pretty quickly (moving in with my grandfather and selling my car). Not a long term strategy, obviously, and I am thinking of becoming a parent (in 2-3 years) which will force me to be way more conservative with money.
No. If they have $1k in savings, they should continue working on the credit card. However, if they have under 300 dollars of savings (scraping the bottom of the checking account), making it to $1000 should be the first priority.
On top of an Emergency fund, I find taking money out for KNOWN expenses makes sense. Like putting aside money for car repair, basic home repairs, etc separate from emergency stuff.
I assume he meant known, yet undetermined, expenses, which is sensible. For instance, you know that your house and car are going to need repairs eventually, so it makes sense to have some money set aside for those rather than dipping into your "emergency fund" -- otherwise what happens if a real emergency occurs before you finish paying it off?
Once you have enough money in your savings, though, I think you can stop thinking in these terms.
I certainly don't have any put away for a rainy day. After a bit of time being jobless, I finally found some underpaying work to get back on my feet. Coupled with various bills and medical bills, etc., I'm sitting at a paycheck to paycheck point. I get paid again tomorrow and I have $5.00 in the bank. It's quite depressing. Couple that with my girlfriend also losing her job and we tore through any savings pretty quickly.
I have a side project going that I'd love to launch in the next month or so, but I'm also polishing up the resume to begin sending out June 1.
Time for me to start pulling myself out of this rut now that I've got things in my life stabilized again.
I actually feel a little embarrassed posting this here, but what the hell. This will act as motivation for me. I seem to have forgotten along the way that I'm a good developer and worth more than the small salary I have right now. (I took on some consulting work that sort of turned full time. The salary was not/is not great but I kind of ended up 'trapped' there. Stockholm syndrome for the employed?)
Don't be embarrassed. Many "rich" people have similar problems. It's just that, in their case, the cash flow figures are larger by orders of magnitude.
Desperation can be a tremendous motivator, and a great way to set priorities. Think of yourself as a newly-arrived immigrant. Now make your way in your new world.
Whatever you do, don't let depression set in. Depression = failure. Even if you struggle to pay the bills for the rest of your life, if you stay positive, you'll keep the people you love in your life.
It might help to imagine yourself getting that big break, and making enough money to never worry about money again. If that happens, how will you remember the tough times? Will you be proud of yourself, or ashamed? Will you regret that you treated others (and yourself) poorly? The history of the world is chock-full of successful people who were haunted by their past.
I'm on a roll here, so let me finish with this existential note: life is a bloody, sweaty mess, and there is no natural justice. From the day you're born to the day you die, you're flailing about on a tightrope over infinite emptiness. There's plenty to fear, and the easiest thing in the world is to fall.
But don't you really want to be the guy dancing on that tightrope and laughing at the void?
Correct. I got what he was saying but I can see how it could be read another way.
Depression did set in for a while, which is why I allowed myself to get stuck with the unsatisfying job. "Work is work, right?"
I've since kicked the depression from everything that happened in those few years and am feeling great. I can finally see where I need to be and the path to get there... so that feels good. :)
I think depression, as distinct from unhappiness, is something you dismiss as unhappiness (i.e. circumstance driven) until you experience it and realise it is an illness.
The clearest example I can imagine is, take someone who is down on their luck, unemployed, in debt, medical problems etc. and fly them to the best doctors in the world, then give them a great new job with a million dollar signing bonus - I think they'll typically be pretty happy. Do this to a depressed person and they'll probably try and kill themselves because they consider themselves unworthy.
The greatest thing my Grandma ever taught me was that it's okay to be sad when bad things happen. It used to be that I'd get sad for some reason, then I'd feel bad for feeling sad, and this would just set up a tight vicious cycle until I literally became depressed. Once I gave myself permission to feel sad and not feel bad about it, I was able to stop that from happening in the future.
Seems to be akin to religious debates. The brain (and more importantly, the mind) is one of those areas where modern science has too little traction to speak in absolutes.
Anecdotally, I had a breakthrough with mood control when I eradicated "jumping to conclusions" from my idle thought patterns. That made a HUGE difference in my outlook on life.
> I'm also polishing up the resume to begin sending out June 1.
Why are you reading HN instead of doing this? Close your browser, finish your resume, and apply for ten jobs online before you go to bed tonight. Apply for ten more tomorrow. Repeat until you're employed.
I gotta agree with this. There's no darn way that "polishing up" your resume can possibly take a full week. That sounds way too much like procrastinating.
I can understand why you'd feel embarrassed, but as long as you collect yourself from your rut and keep pushing with what motivates you, you can point back to this point where you turned things around.
I think it's very important to instill saving behaviors early on in your adult life. After graduating college, I had plenty of debt, but still made sure I was putting money into a savings account.
Technically, it would have been much wiser to put any excess money towards 15% APR credit card debt than in 5% saving accounts (5% savings accounts did exist for a few years prior to the 2008 collapse), but actually having money to pay for unexpected expenses rather than building the debt I was trying to pay off, felt better.
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Freakonomics did a podcast a few months ago, using either this study or a similar study as part of the podcast. The podcast was about lottery-linked savings accounts. The other half of the equation was that the same 50% of Americans who could not come up with $2,000, were also the ones most likely to play low-odds lottery games. Lottery-linked Savings accounts take the relatively minuscule interest gains on each account, and throws them into a lottery pool, where one or several winners will win the "prize".
This style of savings account worked very well in one country (I believe it was South Africa). The incentive to save, with minimal interest gains, was low. However, the idea of a big payday, which technically was free (you only surrender your interest), led many more people to put money away.
These bank accounts are largely illegal in the United States. Partially because of their image, and partially because states don't want to sacrifice their own state-owned lottery cash cows. I believe a credit union in Michigan was able to work around some laws and find a legal way to offer a lottery-backed savings account.
I find it helpful to convert debt interest rates to real money. My student loans are down to the point where I could drain my savings and pay for them, and while they are low interest they're still above inflation. (Probably. It's kind of getting close.) But if I actually calculate in real money what's left, it's about $125 in interest left to pay over three years. I'd rather hold on to the cash; at this point in my life, that's a rounding error. A largish one, but still a rounding error. Whereas losing all my savings could really hurt; we dipped into them quite deeply recently when I had both my cars break down in the same week and also a moderate house issue.
Keeping cash on hand instead of paying off cheap debt can prevent you from having to incur expensive debt, which functions as a non-obvious term in deciding how much cash to keep around.
I think it's very important to instill saving behaviors early on in your adult life.
Why early in your adult life? People should begin saving as children.
My parents were sensible. I got my first bank account at the age of five, I think. They paid me some small amount of pocket money (two dollars a week?), and encouraged me to save it up to buy things I wanted, and to worship the magic of compound interest (it helps that interest rates were actually decent in those days). I enjoyed watching the amount in my bank account go up much more than I enjoyed actually buying things with it, so I got into good saving habits.
I can't fathom the idea of an adult (or at least, an adult with a job) not having a mere two grand in their savings account, and certainly not of having negative net wealth (ie credit card debt).
I second this. My parents set up a notebook in their office that was my running checking account. Whenever I got a birthday check or earned some money, they would cash it in their own account and credit the value. Whenever I wanted to buy a toy, they would deduct the value. (You were lucky that you got compounded interest, though! My parental account had a zero interest rate.)
At the age of 10 I was acutely aware of the value of things and more concerned with keeping the balance on my imaginary account high than with having every toy or computer game I could see. To this day I don't like buying "stuff". It was an awesome parenting move.
Agreed -- but that worked much better when I could buy a 13% savings bond (late 80's) than showing my kids the <$1 month interest payment they get now.
I realize that inflation may well have eaten into that 13% hugely but as a pre/early-teen that didn't factor into my view.
Here's a paper that's probably one of the original sources for the Freakonomics piece.
I would love to see Prize-linked savings in the US. It'd be fun to have some money sitting in an account that has powerball-esque payouts, but without the powerball-esque destruction of the original bet.
I find the idea behind the lottery linked savings account very interesting. In order to save others the trouble of looking for it (although it was a quick Google), I believe this is the podcast you were referring to.
A lottery-linked savings account sounds awesome since I already play low-odds lottery and put money into savings every month. Texas won't give up their lotteries or multi-state lotteries for anything though.
Lottery is just a tax for those that are bad at math. Why would you do both? Putting money into a low yield savings account will get you a statistically better return over your entire lifetime than buying a few powerball tickets every week.
Have you actually done the math? It's certainly not hard to find lotteries where the expected payout is above 100%. In the big rolling jackpot games, the average payout is about 50 cents on the dollar, but after weeks and weeks of paying 10 cents on the dollar with no big winner, the jackpot builds until it's higher than the expected number of dollars coming in.
It's certainly not hard to find lotteries where the expected payout is above 100%.
This is true, but there's more to it. It's not so easy to find a lottery where the expected post-tax payout is above 100%, since you'll need the pre-tax expected payout to be about 160%. You also have to figure in time value of money, since all large lottery prizes pay the advertised face value as an annuity up to 20-30 years into the future, so you're paying in 2011 dollars but receiving part of the prize in 2031 or 2041 dollars. Finally, you have to be the lone winner to come out ahead, and not be splitting the jackpot with another winner.
Multiply that all together and the situation does not happen. The largest Powerball jackpot ever was $365M, which barely overcomes just the loss to taxation on the 195M to 1 odds.
In Canada, lottery winnings aren't taxable. Buying lottery tickets can't be claimed as a business expense, so paying tax on the winnings would be hypocritical. Of course, being hypocritical rarely stops governments.
Lottery winnings in Canada are always advertised in the "lump-sum payout" amount.
The threshold varies slightly depending on how many tickets are sold, but for Lotto 6/49 in Canada, any payout above about $32M is "in the money". This isn't common, but it does happen several times every year.
I already work my buns off trying to strike it rich and the odds are terrible but playing the lottery gives me the hope that I could just get lucky one day. I figure I should exhaust all my opportunities if I'm going to make it.
I have a question for HN hackers. I make over 6 figure a year. My wife doesn't work. She keeps telling me that we are not middle class, and that I should earn more if I want to afford us a middle class lifestyle, because everything is very expensive now. She also thinks that I'm a bit of an underachiever, professionally, for earning only 120K a year. Am I an underachiever or is she out of touch with Midwestern America? I keep telling her that the average family can only dream of the money I bring home every month with my two jobs.
The problem that I've found is that most people live way beyond their means when they are selecting housing. This means that if you want to live with people like yourself, you have to too. If you spend what you should on housing, you end up "in a bad neighborhood".
So I feel like your wife has fallen victim to this problem. To live with the people she wants to associate with, she has to spend a lot more of your money.
It depends on where you live. Where I am, a 4 bedroom house in the city (mediocre school district) is $180k. So $120k is a good chunk of change, and you can comfortably live on a single income.
If her vision of a "middle class lifestyle" is buying lots of shiny things, you're screwed.
Wow, 180k for a 4BR house!? Houses in the poorer suburbs of my city (the poorest capital in Australia) are still $400-500k +. Rent for a 4BR is about 450+ a week.
You're not an underachiever. Class is all relative. "Middle class" in America translates to "extremely wealthy" for the average human being. My wife and I were just in Newport Beach, CA over the weekend, and we felt very poor. But back here in Nevada, we feel very blessed.
Here are some links to make your wife feel better:
> Am I an underachiever or is she out of touch with Midwestern America?
What has she achieved, besides you? The answer doesn't matter.
What matters is that marriage is an investment and you've both made a bad one. You both deserve better and will have to separate to get it, the sooner the better.
Most people, even those in the top 1%, think themselves as middle-class. You're probably still middle-class, but definitely quite close to the upper bound.
Depends on where you live, but 100k+ is well-to-do where I come from. Most people I know aren't making half of that, and they are working 60 hour weeks. She's out of touch.
Do not value yourself based on that. This is a race you cannot win. If you win the race against the Jones, are you going to start competing against the Jobs or Gates?
It is very easy to criticize, if she is still believes you are an underachiever(you are not) Do what Fraajad says, let her find out how easy(or difficult) it is to succeed.
"Some academics divide the middle class into an upper bracket that includes professionals and middle managers who hold postgraduate degrees and often earn more than $100,000 and a less affluent lower middle class that typically has some college education with household incomes around the national median.
Median household income in the United States was $52,175 in 2008, according to the U.S. Census Bureau."
$120K/year is damn good money for one person to be making, and in most of the US, a family pulling in that kind of money is still doing very well. If your wife thinks that isn't enough to be considered middle class, she's been living in a bubble.
I suggest you sit her down and talk to her like the person who wears the pants. In other words, grow a pair of hot damn brass balls. Next week she will love you even more for your new unknown-to-her-bad-attitude.
Many ways to approach this. I suggest a few weeks of tracking each and every expense, then look over it with her. She is wrong, of course, but if you can show her some numbers and get her thinking about it on her own, then you have the possibility of winning her over.
My family is solidly middle class, have provided enormously for me so I've had advantages most of my college peers havn't, and make around 100k a year.
It's also been shown that while happiness increases drastically up to 60k a year in annual income (in the U.S.A.), happiness does not increase further after that point. I.E. People making 100k are on average no happier than people making 60k, and people making 200k are no happier than those making 100k.
I've been working my butt off in the corporate world, trying to save a year of living expenses for my family of 5 in the suburbs, in hopes of quitting and doing my own thing once I had that cushion.
I hit the 9 month mark, then had major health issues that are wiping a lot of it out.
At first, I was fairly devastated. Then someone told me, "Isn't this exactly the kind of thing that savings is for?"
And you know what, it is. Sure, I wanted to quit my job in the near future. Sure, I wanted to be the rare married family guy who still had the flexibility to do startup work.
But how blessed and thankful I am that I am "only" going to have 3 months stored away after this is all done.
I'd be curious what the survey would have shown if it were given in 2007.
I bet at least some of the people who can't come up with $2000 today is because they've already eaten into their emergency funds due to lost jobs, economy, etc...
I've seen similar studies about emergency funds for many years. They all say roughly the same thing: most people don't save money. To the point that not only do they not have $2,000, they can't borrow $2,000 to handle an emergency.
As a UK resident, I find that distressing. The idea that needing medical treatment might impoverish me or poverty leaves me unable to obtain the treatment I need seems exceedingly cruel.
We had insurance, although nearly a year later we received a call from the hospital saying that our insurer had refused to pay, and that we'd be responsible for the bill if the insurer didn't come through. The insurance company claimed that the hospital hadn't provided the complete paperwork, and the hospital claimed it had provided the information multiple times.
We received two more calls about it, each about six months apart. It's been a couple of years now, but it still feels like it's hanging out there - that we may get a call at any time claiming that we owe this huge sum of money.
I'll add to that that creditors tend to ignore medical debts (according to a credit analyst I know), and that hospitals tend to cut deals for the under-insured.
Bill collectors can't harass you for medical debts
A Google search lead me to the Illinois State AG's website, which claims bill collectors certainly can attempt to collect medical debts. So your claim might only be true in some states (or none at all...)
I had a problem similar to this about two years ago. 9 hours in the ER on a Friday night to get checked out for a pain cost $13,000. I had to pay around $100 upfront, and then insurance kicked in and took care of the rest.
The way hospital balance sheets work these days, they charge you that much to subsidize the many patients who (a) could not afford health insurance, (b) are unemployed, underemployed, or employed without health insurance benefits, (c) avoided preventative health care and healthy lifestyle choices like most Americans, (d) went to the ER as their primary care provider, long after they should have first visited a doctor about preliminary symptoms but could not afford to go, (e) could not legally be turned away by the ER, and (f) had absolutely no way to pay for their care even if they wanted to. The fact that your insurer had to pay almost $13,000 is the point of the individual mandate in health care reform. Otherwise, the only way to keep ERs from closing (and many ARE closing) is getting people like you and your insurer to subsidize the people that use no insurance, get no preventative care, do not manage symptoms and walk into the ER as disasters.
That is crazy. A couple of months ago I had to go to ER, was there for 2 hours or so, and went home. A week ago I got a bill of £12 for the penicillin they gave me for a week, as that wasn't for inside hospital. I'm not insured (in the UK), and I don't pay taxes (anywhere).
When I started college, I had 1000$ to my name. I didn't take out any loans and worked my way through a full load every semester for four years. Graduated and found a job and lived in places well below what I could afford. Every pay check I put between 55-65% of what I earned into savings. A couple years later I bought a house. Took the rest of that savings and put it into the market. Now, eight years later, I've got six figures in the bank and another five in the market. It isn't impossible to come up with money, you just have to think longer term and be disciplined about it.
I wonder whether or not there is a difference between the 'ability' and the 'perceived ability' to raise cash quickly.
Many people are cash-poor, yes, but I am surprised that over half the population has no cash equivalents, hard assets, or access to credit (even from a relative or friend).
N.B. This is not meant to be financial advice, but just to point out that people usually have many more options than they think they do.
Based on my post below, I do not have, on hand, $2000 that I could use in case of emergency. I am fortunate enough, however, that if I absolutely needed it, I have ways of getting the money. (Via family mostly, but I really dont like tapping into that unless it truly is an emergency.)
I'm also extremely thankful for a couple folks that approached me to write some web apps (php/rails) for them. Without them those last few medical payments would have crushed us.
My crappy situation came from double job troubles (gf and I) + dying car + hospital visits.
We've stabilized finally and now it's time to get out of this hole and get my life back together.
That was my first thought as well. Outside of hard assets which could be liquidated without affecting ones future ability to earn; we also have that credit is still widely available, although the interest rates are higher than before. Short term loans from social channels are usually available, unless one has recently moved thousands of miles from their hometown.
Most Americans have their assets stuck in their house and 401k and other toys.
House: It would take you 6 months to sell a house (good luck with all those foreclosures out there), 3 months to get a loan against your house (hard to get a loan these days).
401k: It would take you 1 month to withdraw from your 401k (if your 401k plan allows it).
Car/TV: There's an abundance of car/TV inventory out there, and it might take 2-3 months to move those.
Relatives: if half of Americans don't have $2000 for rainy day funds, chances are you're not gonna have much luck asking your relatives.
So realistically, if you needed $2000 tomorrow to bail out your family member (or $40k for that surgery tomorrow), it wold be very hard.
The timeframe from the article was 30days. which make 401k or IRA funds available. If you can't sell your car in 30days you are not trying.
Also, most Brokers will allow you to borrow against the value of your IRA, or your 401k with very short notice. If you have a house and a mortgage you probably also qualify for an unsecured line of credit and could get a cash advance immediately.
The surgery example is a non sequitur because hospitals have very liberal payment terms and are willing to negotiate costs down significantly for people with financial hardships.
One of the reasons the UK government bailed out the major banks here in the last financial crisis is that they feared what would happen if the retail banking system stopped working - if our chip-n-pin cards and ATMs suddenly stopped working.
I did wonder if it might be sensible to keep a chunk of cash somewhere safe for unpredictable times - having plenty of cash on tap won't help much if it is tied up in a bank that has just stopped working.
I meant physical cash, not a number in a computer system somewhere. I don't use cash that often - which made me wonder about having a roll of cash stashed somewhere.
At the very least, it's worth having dealings with multiple banks (eg your savings account with one and a credit card with another). It wouldn't take a financial collapse to make your money temporarily vanish -- I mean, how long was Playstation Network down for? It's entirely conceivable that one day a major bank will have a serious computer problem that'll shut them down for days.
Or failing that: heck, what happens if you lose your wallet? Yeah, a few hundred bucks (or quid) in a piggy bank isn't a bad idea.
> Meanwhile, Lusardi, Schneider and Tufano also looked at how different countries compare. They consulted with local partners to set the number used in local currency at a comparable level. “Perceived capacity to cope with an emergency is lowest in the U.S., U.K. and Germany, all countries in which 50% of households or more would probably or certainly be unable to come up with the emergency funds,” the authors wrote. “France and Portugal occupy an intermediate position; 46% of respondents in Portugal would certainly or probably be unable to come up with the funds as would 37% of those in France. The highest levels of coping capacity are found in Canada (28% certainly or probably unable), Netherlands (27.9%), and Italy (20%).”
Disclaimer: Been in the UK rarely, never to the US. I don't claim to know a lot about these places.
My impression is that it's just far less dangerous (and so a lot more compelling?) to go without an emergency budget here in Germany, so I wonder if this comparison misses to include the risks involved?
Sure, if you have family and a good deal of property/a mortgage to pay, you've got a lot of incentives to stay in business. But if you're renting? Already living in the lower middle class? No kids?
Worst case scenario: You lose your job (2-4 weeks notice) and are bankrupt at the end of the month. You can apply for help from the state (unless you find something else). You'll get a (60%? No idea, but something like that) percentage of your last salary for a while, afterwards you end up on a different and quite a lot lower benefit level, but you'll most certainly keep a TV, keep a (reasonable) flat, get good healthcare. If you do have kids you get (a bit) more money, education is mostly free for them.
I don't want to claim that it's all roses, but this is the worst that you actually need to worry about in my very humble opinion. What would happen in the UK or US if you run out of cash completely?
I'm definitely not in the part of my life yet when I have to worry about money...but still I do. I actually just made my first proper budget (proper as in not just write down what I'm expecting to spend, on the back of a napkin, but doing it by month, comparing it to what I get per month, planning stuff.) and you know what? It actually made me feel good.
Knowing exactly what I can spend on what is a really comforting thought. When I'm in a shop and I see something I want, before I would have to quickly count up the big expenses of the coming months, see what I have left, and decide if it's worth it. Now I know exactly in what category the item is, and how much money I have left. If I don't have enough and I feel like I really need it, I can take a look at my budget and adjust it slightly.
On a sidenote, I'd love to start a business one day, but as long as it's not completely necessary (and safe) I would never want investments. I'd much rather bootstrap my product instead: the risk is much lower, and the relaxed feeling much higher.
I use a Roth IRA for most of my long-term savings, can withdraw contributions very quickly with no penalty whatsoever. My investments are riskier but even if they tank I can still afford a $2000 type emergency. To me this makes more sense than wasting savings in a low-yield non tax-advantaged account.
If you're in this situation, get yourself an account at an online bank (ING Direct, Everbank, etc.) with an automatic savings plan, then create a dedicated savings account for emergencies and label it Emergency Fund (important!). If there's no automatic plan, just set a portion of your paycheck to be direct deposited into that account. Just put in $50 or $100 per paycheck.
Once the account balance gets to a level you're comfortable with, you can divert that excess monthly savings into CDs and other safe (less-liquid) investments, that you can periodically cash-out to build up your emergency fund for bigger, longer emergencies. The added security will help you sleep better. At least it did for me.
I cheat a little. I'm still a student, so $2k is still a significant chunk of my net worth.
My strategy to allow myself to own a decent car, a computer, etc revolves around a credit card I secured with a very high credit limit. I have $2k I can "borrow" against my future, and then I have a 30-day grace period in which I can sell possessions to come up with the money. In other words, I use my credit card and its 30-day grace period to increase the liquidity of my possessions.
This has two caveats: 1) Keep that credit card paid off to allow use of the grace period 2) I suffer a net loss when I resell something, but that's a small gamble I decided to take.
2,000 bucks is a lot, I know the rule of thumbs is like 3 months net salary to keep for bad days but that's just hard for people like most on HN that are young, trying to either bootstrap a business or have a ton of student debt.
Not sure what I would do but I think I could sell enough non-essentials to make up the money if it was a really bad situation.
>I know the rule of thumbs is like 3 months net salary to keep for bad days
I was under the impression that the rule was around 6 months.. then again, I'm talking about monthly expenses,as opposed to salary(which hopefully a person isn't spending 3 month's worth of salary in 3 months under normal circumstances). It probably goes up somewhat proportionally with age, if you factor in a home / dependents. I'm in the process of looking for a home now, so my decision on "how much home" I buy will be influenced by the notion of wanting to keep around a year's worth of monthly expenses should I find myself unemployed suddenly.
My rule of thumb is "as much as you reasonably can". Always be throwing money into your savings. First you're saving for emergencies. Then, you're saving a deposit for a house. And finally, you're saving for retirement. There's never a point at which you should say "Phew, I've got six months' living expenses now, I can stop saving!"
The only point at which it's okay to stop saving is when you say "Phew, I've got more than enough money to last me for the rest of my life regardless of random emergencies, I think I'll retire!"
Well, I wouldn't suggest a person ever stop saving, I agree. However it just depends on the savings mode that you're in at any given time. If I anticipate a huge expense coming up (house / car), I'm going to penny pinch as much as possible. If things are seemingly normal and I have a good amount saved up, I might spend a little bit more of it enjoying life.
This might go beyond the depth of the article, admittedly.
Also for a car. You're going to buy a car eventually, right? Do you want to borrow the money and pay interest while it's wearing out, or save the money and BE paid interest while your current car is wearing out? Notice that either strategy will tend to repeat itself, so the net difference over time is huge. One person said saving and getting paid interest amounts to "getting free cars."
I read your other posts and hope you are able to work toward better days sooner than later. I have to wonder though - if you hadn't been prudent before everything happened, how much worse off would you be now? Something of a rhetorical question, of course :)
I probably would have been quite screwed. I didn't think that I would end up needing a bigger safety net than that, but I'm glad I had that around. Saved my butt!
I was paying rent in NY on a below average salary and still managed to save about 10k over a course of a few months to eventually quit and bootstrap. All it took was not going out excessively and not buying superfluous new things.
participating in a zero sum or negative sum game makes you, on average, poorer. we all need to play the status game, we have to keep up appearances in order to function smoothly with others in both the personal and business worlds. but explicitly reason about which activities are actually delivering the utility.
one of the ways that other people's thinking strikes me as insane (and not in a hyperbole sense, but literally insane) is not considering the alternative uses of any given chunk of money when making buying decisions. I watch time and again the people around me purchase something they want less for more money, simply because their thinking is compartmentalized i.e. the two items don't get thought of at the same time.
According to wikipedia[1] the population of the USA is 308,745,538 (2010 census). Is, even the majority of those, 1,900 Americans a really low figure to be a solid source for any argument?
If you'd like to know the answer to this question I suggest reading a statistics textbook. I think you'll be pleasantly surprised to hear that we can not only answer your question but put nice precise error bars on all our answers.
For your information, about all polls are done on about 1000 people (slightly less to slightly more). You need to poll a lot more people to reduce significantly the statistical error level.
If you're already living on toasted rats in a cardboard box, that's different, but if you've got unnecessary expenditures, you should really cut those out and get an emergency fund. To do otherwise is reckless. And you're cheating yourself of sleep and peace of mind.