How to have a life if you can't save 6months expenses?

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Gambler
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How to have a life if you can't save 6months expenses?

Post by Gambler »

From this post about the social downsides of saving too much:
http://www.bogleheads.org/forum/viewtopic.php?t=135253

in my mind, the ideal balance between saving for retirement and living life is:
1) max out 401k
2) max out roth
3) have 6-12 months expenses in the bank

after all 3 are accomplished, spend the rest.


But what if you cant do all 3?
Lets say you can only afford to save up to the company match in the 401k. You can't do a Roth.
You only have 1 month expenses in the bank but adding $50 every month.

Everything else goes to rent/bills.

How can this person have more to life than just sleep and goto work?

Cut down the $ going to bank acct?
ie: $25 to savings, $25 for fun?
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
dickenjb
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Re: How to have a life if you can't save 6months expenses?

Post by dickenjb »

Google Liz Weston and the 50/30/20 budget.

50% of your net income goes to rent, bills, etc FIXED

20% to savings which includes mortgage principal and other loan reductions SAVINGS

30% for dinners out, vacations, "fun". DISCRETIONARY

Your hypothetical person (thus perhaps unactionable and this thread may be locked) seems to be spending 80% on fixed monthly bills which doesn't leave enough for the other two categories.
Longdog
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Re: How to have a life if you can't save 6months expenses?

Post by Longdog »

Having "a life" is not a guaranteed right. It's all about making choices and being held accountable for those choices - enjoying the benefits if they are good choices, and suffering the consequences if they are bad choices.

Such a person should realize that not everything fun costs money, and should find enjoyment in things that don't. Or spend money and go deep into debt, with a full understanding and acceptance of the potentially dire consequences.
Steve
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HardKnocker
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Re: How to have a life if you can't save 6months expenses?

Post by HardKnocker »

All you can do is all you can do.

You could of course suspend 401k contributions until you get your 6 months emergency fund.

You are presently only one month away from disaster.

How about a part-time job to earn more money?

Lots of people at some point in their lives just go to work and then to bed.
“Gold gets dug out of the ground, then we melt it down, dig another hole, bury it again and pay people to stand around guarding it. It has no utility.”--Warren Buffett
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jeffyscott
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Re: How to have a life if you can't save 6months expenses?

Post by jeffyscott »

I think it depends on why. If you are earning $20K, then I think it's quite reasonable to not do any of those things, if you can at least save enough to get the company match you are doing well IMO. If you are making $100K and "can't" do more than save up to the company 401K match, which I believe is typically only about 6% of pay, that is an entirely different situation.
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The Wizard
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Re: How to have a life if you can't save 6months expenses?

Post by The Wizard »

Depends a bit on job security, or at least your appraisal of it.
Don't think I ever had six months of expenses laying around 20 or 30 years ago.
Money is for investing or spending, not sitting essentially idle; that was my idea back then.
I survived OK...
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BigTom
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Re: How to have a life if you can't save 6months expenses?

Post by BigTom »

If you have a fairly secure job you could cut 6-12 month EF to 3-6 months .

As for the order in witch you stated these goal they are backwards , not sure if you put them in order but it needs to be like this .

1)Get you EF funded
2) 401k to match
3)max Roth
4)max401k

If you need more money you need to cut savings in the reverse order . The rule is 15% of you salary for investments , you would need to be making quite a bit of money to be max out with retirement contributions . Using percentages keeps thing relative and allows money to be left over to live a little .

But if you are early in you career I wouldn't strap your self at a young age stressing max contributions . Let's say you are making $30k a year ,you only should be investing $4500 for retirement . That doesn't even max you Roth but you can add contributions as you progress your career .
Johm221122
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Re: How to have a life if you can't save 6months expenses?

Post by Johm221122 »

Put emergency fund in Roth
Figure which makes sense traditional or Roth
Definitely get company match
Can you get savers credit
Rember that with traditional (401or IRA) it's possible to pay zero tax going in and out, don't be fooled by you need Roth , low income people don't pay much tax especially in retirement
John
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Gambler
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Re: How to have a life if you can't save 6months expenses?

Post by Gambler »

dickenjb wrote:Google Liz Weston and the 50/30/20 budget.

50% of your net income goes to rent, bills, etc FIXED

20% to savings which includes mortgage principal and other loan reductions SAVINGS

30% for dinners out, vacations, "fun". DISCRETIONARY

Your hypothetical person (thus perhaps unactionable and this thread may be locked) seems to be spending 80% on fixed monthly bills which doesn't leave enough for the other two categories.
hm.. Never heard of the 50/30/20 budget.

who is Liz Weston?
Wiki doesn't have a page on her
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
stoptothink
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Re: How to have a life if you can't save 6months expenses?

Post by stoptothink »

Gambler wrote:
dickenjb wrote:Google Liz Weston and the 50/30/20 budget.

50% of your net income goes to rent, bills, etc FIXED

20% to savings which includes mortgage principal and other loan reductions SAVINGS

30% for dinners out, vacations, "fun". DISCRETIONARY

Your hypothetical person (thus perhaps unactionable and this thread may be locked) seems to be spending 80% on fixed monthly bills which doesn't leave enough for the other two categories.
hm.. Never heard of the 50/30/20 budget.

who is Liz Weston?
Wiki doesn't have a page on her
Never heard of the 50/30/20 budget, but am familiar with the personal finance columnist Liz Weston. IMO she writes some absolutely awful columns.
Harold
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Re: How to have a life if you can't save 6months expenses?

Post by Harold »

Whatever your salary is, someone is living on 20% less. If you think saving is important, you'll live like that person. If you don't think saving is important, you won't. (Can replace 20% with whatever the desired savings goal is.)

This equation of course changes if you're at/near the poverty line. But these questions are generally not asked by impoverished people, who are in more desperate straits than someone who just wants to "have a life" without saving.

Besides, "spending money on stuff" doesn't equal "living".
clubby
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Re: How to have a life if you can't save 6months expenses?

Post by clubby »

Gambler wrote:
dickenjb wrote:Google Liz Weston and the 50/30/20 budget.

50% of your net income goes to rent, bills, etc FIXED

20% to savings which includes mortgage principal and other loan reductions SAVINGS

30% for dinners out, vacations, "fun". DISCRETIONARY

Your hypothetical person (thus perhaps unactionable and this thread may be locked) seems to be spending 80% on fixed monthly bills which doesn't leave enough for the other two categories.
hm.. Never heard of the 50/30/20 budget.

who is Liz Weston?
Wiki doesn't have a page on her
http://lmgtfy.com/?q=liz+weston
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Clever_Username
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Re: How to have a life if you can't save 6months expenses?

Post by Clever_Username »

Gambler wrote:
dickenjb wrote:Google Liz Weston and the 50/30/20 budget.

50% of your net income goes to rent, bills, etc FIXED

20% to savings which includes mortgage principal and other loan reductions SAVINGS

30% for dinners out, vacations, "fun". DISCRETIONARY

Your hypothetical person (thus perhaps unactionable and this thread may be locked) seems to be spending 80% on fixed monthly bills which doesn't leave enough for the other two categories.
hm.. Never heard of the 50/30/20 budget.

who is Liz Weston?
Wiki doesn't have a page on her

Liz Weston writes some fantastic personal financial advise columns: http://asklizweston.com/ -- when a friend asks me what to read to get started understanding personal finance, I suggest her. She doesn't write much about investing or how to do so.

The 50/30/20 budget, though, isn't from her, it's from a long-running Harvard study about families in all sorts of different financial situations, and it found that those who limit their need-based spending to 50% of take-home, and who save 20% (for some large definition of save, which includes debt repayment) tend to come out well ahead of those who don't. I won't go into the details here, but the short story is to look at your budget and see if you can pare down some required spending if you're way out of this proportion.

(Liz Weston does write about the budget sometimes; when I say it "isn't from her," I mean it isn't her creation. She also doesn't claim to have created it)

Edit: Here's an article by her about the budget: http://money.msn.com/how-to-budget/how- ... eston.aspx
"What was true then is true now. Have a plan. Stick to it." -- XXXX, _Layer Cake_ | | I survived my first downturn and all I got was this signature line.
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Watty
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Re: How to have a life if you can't save 6months expenses?

Post by Watty »

How to have a life if you can't save 6 months expenses?
Live like a college student. When I was in college I didn't have a lot to spend but I had a lot more of "life" than I do now since most of my friends were in the same situation.

As other have said being able to max out all the retirement accounts first is not realistic for someone with even an average income.
lululu
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Re: How to have a life if you can't save 6months expenses?

Post by lululu »

Many things that are fun cost no or little money.
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Gambler
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Re: How to have a life if you can't save 6months expenses?

Post by Gambler »

Clever_Username wrote:
Gambler wrote:hm.. Never heard of the 50/30/20 budget.

who is Liz Weston?
Wiki doesn't have a page on her

Liz Weston writes some fantastic personal financial advise columns: http://asklizweston.com/ -- when a friend asks me what to read to get started understanding personal finance, I suggest her. She doesn't write much about investing or how to do so.

The 50/30/20 budget, though, isn't from her, it's from a long-running Harvard study about families in all sorts of different financial situations, and it found that those who limit their need-based spending to 50% of take-home, and who save 20% (for some large definition of save, which includes debt repayment) tend to come out well ahead of those who don't. I won't go into the details here, but the short story is to look at your budget and see if you can pare down some required spending if you're way out of this proportion.

(Liz Weston does write about the budget sometimes; when I say it "isn't from her," I mean it isn't her creation. She also doesn't claim to have created it)

Edit: Here's an article by her about the budget: http://money.msn.com/how-to-budget/how- ... eston.aspx
ahhh.. thx!
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
555
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Re: How to have a life if you can't save 6months expenses?

Post by 555 »

Gambler wrote: 1) max out 401k
2) max out roth
... [then] spend the rest.
Stop right there. This is complete nonsense. Why should the contribution limits for 401k/IRA magically be just the right amount to save for retirement?
Lars_2013
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Re: How to have a life if you can't save 6months expenses?

Post by Lars_2013 »

I've heard about the 50% "needs", 30% "wants", 20% "savings" breakdown from a book by another Liz, now-Sen. Elizabeth Warren: http://www.amazon.com/All-Your-Worth-Ul ... 0743269888

It makes sense to me and seems more scale-able to various incomes than rules like "max your 401k", which might not even be possible for lower-income people and would be insufficient for higher-income people. But I think the 50/30/20 guide doesn't account for life-cycle very well. A working young adult who has paid off their student loans, doesn't yet have children, but intends to have them in the future should probably be saving more than 20% of their income in anticipation of a lower savings rate during the early years of parenthood when "needs" like child-care will be higher. On the other hand, parents with kids younger than school-age might be unable to save 20% of their income, but should strive to boost their savings once their child(ren) reach school-age and child-care costs are reduced.

Assuming the original poster is actually talking about themselves, not some hypothetical person, I would take a hard look at your fixed expenses or if there's a potential to bring in more income. Spending almost all your income on rent/fixed bills is not sustainable emotionally or financially. Is this a temporary situation that you just need to get through until some known time when finances will get easier? Or do you need to make changes to create a more sustainable situation?
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Gambler
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Re: How to have a life if you can't save 6months expenses?

Post by Gambler »

555 wrote:
Gambler wrote: 1) max out 401k
2) max out roth
... [then] spend the rest.
Stop right there. This is complete nonsense. Why should the contribution limits for 401k/IRA magically be just the right amount to save for retirement?
I did a simple excel spreadsheet:
$10k/yr for 401k, $5k/yr for Roth. ($15k/yr total)

Save $15k/yr at age 30 to 59, assume you average 8%/yr return.
At age 60 when you can withdraw your 401k/Roth without penalty, you have $1.85M.

Yes, that's a lot of assumptions.
8% avg returns over 30yrs? and how much will 1.85M be really worth in 30yrs?

But I think it's a logical compromise between saving and living.
Max out all the tax advantaged savings, spend anything left over.

Is there a better rule of thumb?
"Always be thankful for what you have no matter how much or how little" -EternalOptimist
ajcp
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Re: How to have a life if you can't save 6months expenses?

Post by ajcp »

555 wrote:
Gambler wrote: 1) max out 401k
2) max out roth
... [then] spend the rest.
Stop right there. This is complete nonsense. Why should the contribution limits for 401k/IRA magically be just the right amount to save for retirement?
+1. Someone making half a million should be saving much more than that. Someone making 50k probably can't afford to max both, and even if they do they may be crossing the line from responsibly saving to depriving themselves.
freddie
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Re: How to have a life if you can't save 6months expenses?

Post by freddie »

Saving 15-20% for retirement is a good rule of thumb if your looking to retire in the 60-65 range. You do that using whatever options (401(k), ira, taxable account,... ) that make sense for you.
Gambler wrote:
555 wrote:
Gambler wrote: 1) max out 401k
2) max out roth
... [then] spend the rest.
Stop right there. This is complete nonsense. Why should the contribution limits for 401k/IRA magically be just the right amount to save for retirement?
I did a simple excel spreadsheet:
$10k/yr for 401k, $5k/yr for Roth. ($15k/yr total)

Save $15k/yr at age 30 to 59, assume you average 8%/yr return.
At age 60 when you can withdraw your 401k/Roth without penalty, you have $1.85M.

Yes, that's a lot of assumptions.
8% avg returns over 30yrs? and how much will 1.85M be really worth in 30yrs?

But I think it's a logical compromise between saving and living.
Max out all the tax advantaged savings, spend anything left over.

Is there a better rule of thumb?
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