6 ms·

The big lesson is to keep an emergency fund of 6-12 months' living expenses. He shouldn't have been buying a leveraged investment property until he had an emer

by fsk 11y ago

The big lesson is to keep an emergency fund of 6-12 months' living expenses. He shouldn't have been buying a leveraged investment property until he had an emergency fund. With $100k+/year in income, he should have been finding a way to save $10k+ per year.

xtrumanx 11y ago
Wait, is that normal in the U.S.? To be able to save only around $10k on a $100k a year income?
- lappa 11y ago
  $10k+ isn't "only" $10k.
  - grub5000 11y ago
    Can you elaborate please? I don't understand.
    - fsk 11y ago
      "$10k+" is an abbreviation for "$10k or more".
  - fsk 11y ago
    $100k in pre-tax income comes to only around $60k after taxes. (varies by state) It also depends on rent and your lifestyle. I'm able to save 25%-50%+, but I live cheaply.
- toomuchtodo 11y ago
  This could be an entire blog post, but yes, its common in the US to become overleveraged without a sufficient emergency fund. Its usually recommended to have 3-6 months of expenses in the event of income loss, but its only a rough guideline. In some industries or economic scenarios, you may go almost 12-24 months with a job or significant income (I leave out part time jobs or gig for keeping this simple). In short, we don't save enough in America (for a variety of reasons), and we don't have a proper social safety net for when that comes back to bite us. <soapbox> Have 6-12 months of expenses saved in your emergency fund. This is critical. When possible max out your retirement accounts (a Roth IRA can be used as an emergency fund in a pinch; contributions can be removed at any time penalty fee, but this should be a last resort). Save more. Live below your means. </soapbox> https://www.reddit.com/r/personalfinance/wiki/commontopics https://www.reddit.com/r/personalfinance/wiki/commontopics Infographic: https://i.imgur.com/fb7Dtmh.png https://i.imgur.com/fb7Dtmh.png
  - fsk 11y ago
    Yeah, I'd recommend 6-12 months in cash, with surplus savings in something liquid (like stocks) and a maxed IRA/401(k). An investment property isn't liquid, and it's also leveraged. If you're overleveraged, you'll make extra profits during the inflationary boom, but you'll get wiped out during the next recession.
  - lappa 11y ago
    I'm not sure I agree with the placement of debt. It is often the case that you can you off the debt, but the money invested properly could increase faster than the debt increases.
    - toomuchtodo 11y ago
      High interest debt in that graph is usually understood to be above market returns (8% and up).
    - alextgordon 11y ago
      On the other hand, if you pay off that debt, you're entirely removing the risk of default, which means you can take on more risk with the remaining capital, and don't have to have 6 months of debt repayments in your emergency fund.
  - asuffield 11y ago
    The dimensions of this can change somewhat when dealing with long-term loans. If you have a mortgage on terms which allow this, then you're probably better off keeping several months of overpayments in your mortgage account, on the understanding that you're allowed to stop payments for that long in an emergency. Most lenders have some sort of terms like these, but check yours carefully before doing this. This implies setting your mortgage repayment rate at a level which leaves you with sufficient income to overpay it. Having set things up this way, you can then size your emergency fund on the assumption that you won't have to pay your mortgage out of it. Why do this? Simply put, the savings on interest are massive and this improves your financial stability a great deal over time. Why not do this? It requires careful and diligent financial planning, and that sort of person probably doesn't need telling how to take advantage of the subtleties of mortgages.
- protomyth 11y ago
  Because of taxes and [edit] insurance, retirement, etc. [/edit], yep, $100K is more like $50K - 60K clear (your the 1% but not really). I did the put $100 away a week into a saving account when I was a consultant. I'm luckier than the author since I have folks to crash with (relatives) and can borrow some of the items needed to get a new job (computers, car, etc). I have also been on the other end by letting a friend have a room while he got back on his feet.
  - lgieron 11y ago
    > (your the 1% but not really) From what I'm reading, you need to be making about 400k (household income) to make it to the 1%.
TTPrograms 11y ago
I don't really see how people get to much more than $40K a year in expenses. That's like a $2K/month apartment and a pretty nice used car with lots of margin for going out. Granted if you're too aggressive with IRA investing or student loan payoff you can get in a situation like this. That's my downfall - I'd rather be in the market, but you really shouldn't expose your emergency fund to that kind of risk, especially given near-perfect correlation between market performance and personal financial security.
- jqm 11y ago
  cocaine is one way.
- vlasev 11y ago
  OP had a house and an expensive car to pay off. That's got to be a lot of money right there. Also, OP probably ate more expensive food and probably ate out a lot more. It's not difficult to imagine how a lot of the money can be spent on these things. Let's not forget that taxes will eat a lot of the gross income too.
  - spdionis 11y ago
    I don't understand why Americans ever talk in gross income. Where I live people speak and negotiate only in net income, they don't even consider taxed money as their money.
- softdev12 11y ago
  Food, housing, and cars aren't the only annual expenses to consider. The biggest one you're missing is health (even with insurance). One major acute health problem that lands you in the ER or the need to see a doctor could easily adds thousands to annual expenses. This happens all the time. You'd be surprised how many people get put into collections for unanticipated health expenditures.
  - alphabetam 11y ago
    In America.
asuffield 11y ago
Also "know your exit strategy". Foreclosure means giving up control and probably losing everything, and you should try very very hard to stay in control of what happens here. Selling the house quickly might have been difficult, but the big immediate mistake here was not selling the car - anything that gets repossessed is gone and you won't get any of the cash, anything you sell yourself you have some control over where the money goes.
- hollerith 11y ago
  I'm confused. I always thought that in the US, if you borrow money to buy a car, the lender gets a lien on it with the result that the DMV will not transfer title to a new owner without the permission of the lender.
  - asuffield 11y ago
    Ah, if it's one of those arrangements then yeah, that was always a lost cause.
  - bdcravens 11y ago
    That is true, though you can sell it and clear some cash if the vehicle is worth more than owed. (About 2 1/2 years ago I sold a 2010 Honda Civic that I put $5k down on originally for about a $7K gain)
- gscott 11y ago
  In 2008 no one could get a loan, selling really wasn't an option.
shakycode 11y ago
These days I save every penny I can, drive a used car, live frugally, and try to keep the "oh shit" fund alive. I live way below my means nowadays.
ChuckMcM 11y ago
This is so true. If you're clearing $100K+/year in income there is a big red flag if when that goes away you have $400.00 in the bank (from the article) If you are reading this and you are making $100K+ a year and not saving any of it, that is a huge problem for you. To quote Mr. Money Mustache, every dollar you spend stops working for you. If you are a basketball star, a software engineer, or a movie star, let your relatively high income offset your future low income life.
- shakycode 11y ago
  I wasn't clearing 100k I was grossing it. After taxes and overhead it was more like 50-60K. But I understand where you're coming from. I had just started making really good money and my expenses were pretty much equal to my intake. I've since learned to not live beyond my means and am much more frugal in my older age. (38)
  - ChuckMcM 11y ago
    And that is a great lesson to learn in your 30s rather than your 40s.Being mindful about what you spend your money on will change your life. Not to be critical, but to use as an illustrative example from your own life, you started your challenging period owning a Nissan 350z which got 12 mpg. If you had made exactly one different decision, buying a Honda Civic instead of that 350z, and everything else was the same, you would have hit that point with a car that got 35mpg and an additional $15,000 in your bank account. So from a learning perspective, at the time you made the purchase of the 350z, thinking about value versus cost versus future expense, knowing what you know now do you make the same choice? I am not a fan of dwelling on past decisions, they were made and they are done. But I am a huge fan of learning as much as I can from the lessons life teaches to insure I am getting full value out of that education.
4ydx 11y ago
Good to see he is back on his feet, but most certainly I am really amazed that he was so irresponsible about his situation. Is this how most Americans operate?
collyw 11y ago
I earn a fraction of that here in Spain and still come close to saving half of my wages.

by fsk 11y ago

xtrumanx 11y ago

Wait, is that normal in the U.S.? To be able to save only around $10k on a $100k a year income?

lappa 11y ago
$10k+ isn't "only" $10k.
- grub5000 11y ago
  Can you elaborate please? I don't understand.
  - fsk 11y ago
    "$10k+" is an abbreviation for "$10k or more".
- fsk 11y ago
  $100k in pre-tax income comes to only around $60k after taxes. (varies by state) It also depends on rent and your lifestyle. I'm able to save 25%-50%+, but I live cheaply.
toomuchtodo 11y ago
This could be an entire blog post, but yes, its common in the US to become overleveraged without a sufficient emergency fund. Its usually recommended to have 3-6 months of expenses in the event of income loss, but its only a rough guideline. In some industries or economic scenarios, you may go almost 12-24 months with a job or significant income (I leave out part time jobs or gig for keeping this simple). In short, we don't save enough in America (for a variety of reasons), and we don't have a proper social safety net for when that comes back to bite us. <soapbox> Have 6-12 months of expenses saved in your emergency fund. This is critical. When possible max out your retirement accounts (a Roth IRA can be used as an emergency fund in a pinch; contributions can be removed at any time penalty fee, but this should be a last resort). Save more. Live below your means. </soapbox> https://www.reddit.com/r/personalfinance/wiki/commontopics https://www.reddit.com/r/personalfinance/wiki/commontopics Infographic: https://i.imgur.com/fb7Dtmh.png https://i.imgur.com/fb7Dtmh.png
- fsk 11y ago
  Yeah, I'd recommend 6-12 months in cash, with surplus savings in something liquid (like stocks) and a maxed IRA/401(k). An investment property isn't liquid, and it's also leveraged. If you're overleveraged, you'll make extra profits during the inflationary boom, but you'll get wiped out during the next recession.
- lappa 11y ago
  I'm not sure I agree with the placement of debt. It is often the case that you can you off the debt, but the money invested properly could increase faster than the debt increases.
  - toomuchtodo 11y ago
    High interest debt in that graph is usually understood to be above market returns (8% and up).
  - alextgordon 11y ago
    On the other hand, if you pay off that debt, you're entirely removing the risk of default, which means you can take on more risk with the remaining capital, and don't have to have 6 months of debt repayments in your emergency fund.
- asuffield 11y ago
  The dimensions of this can change somewhat when dealing with long-term loans. If you have a mortgage on terms which allow this, then you're probably better off keeping several months of overpayments in your mortgage account, on the understanding that you're allowed to stop payments for that long in an emergency. Most lenders have some sort of terms like these, but check yours carefully before doing this. This implies setting your mortgage repayment rate at a level which leaves you with sufficient income to overpay it. Having set things up this way, you can then size your emergency fund on the assumption that you won't have to pay your mortgage out of it. Why do this? Simply put, the savings on interest are massive and this improves your financial stability a great deal over time. Why not do this? It requires careful and diligent financial planning, and that sort of person probably doesn't need telling how to take advantage of the subtleties of mortgages.
protomyth 11y ago
Because of taxes and [edit] insurance, retirement, etc. [/edit], yep, $100K is more like $50K - 60K clear (your the 1% but not really). I did the put $100 away a week into a saving account when I was a consultant. I'm luckier than the author since I have folks to crash with (relatives) and can borrow some of the items needed to get a new job (computers, car, etc). I have also been on the other end by letting a friend have a room while he got back on his feet.
- lgieron 11y ago
  > (your the 1% but not really) From what I'm reading, you need to be making about 400k (household income) to make it to the 1%.

TTPrograms 11y ago

I don't really see how people get to much more than $40K a year in expenses. That's like a $2K/month apartment and a pretty nice used car with lots of margin for going out. Granted if you're too aggressive with IRA investing or student loan payoff you can get in a situation like this. That's my downfall - I'd rather be in the market, but you really shouldn't expose your emergency fund to that kind of risk, especially given near-perfect correlation between market performance and personal financial security.

jqm 11y ago
cocaine is one way.
vlasev 11y ago
OP had a house and an expensive car to pay off. That's got to be a lot of money right there. Also, OP probably ate more expensive food and probably ate out a lot more. It's not difficult to imagine how a lot of the money can be spent on these things. Let's not forget that taxes will eat a lot of the gross income too.
- spdionis 11y ago
  I don't understand why Americans ever talk in gross income. Where I live people speak and negotiate only in net income, they don't even consider taxed money as their money.
softdev12 11y ago
Food, housing, and cars aren't the only annual expenses to consider. The biggest one you're missing is health (even with insurance). One major acute health problem that lands you in the ER or the need to see a doctor could easily adds thousands to annual expenses. This happens all the time. You'd be surprised how many people get put into collections for unanticipated health expenditures.
- alphabetam 11y ago
  In America.

asuffield 11y ago

Also "know your exit strategy". Foreclosure means giving up control and probably losing everything, and you should try very very hard to stay in control of what happens here. Selling the house quickly might have been difficult, but the big immediate mistake here was not selling the car - anything that gets repossessed is gone and you won't get any of the cash, anything you sell yourself you have some control over where the money goes.

hollerith 11y ago
I'm confused. I always thought that in the US, if you borrow money to buy a car, the lender gets a lien on it with the result that the DMV will not transfer title to a new owner without the permission of the lender.
- asuffield 11y ago
  Ah, if it's one of those arrangements then yeah, that was always a lost cause.
- bdcravens 11y ago
  That is true, though you can sell it and clear some cash if the vehicle is worth more than owed. (About 2 1/2 years ago I sold a 2010 Honda Civic that I put $5k down on originally for about a $7K gain)
gscott 11y ago
In 2008 no one could get a loan, selling really wasn't an option.

shakycode 11y ago

These days I save every penny I can, drive a used car, live frugally, and try to keep the "oh shit" fund alive. I live way below my means nowadays.

ChuckMcM 11y ago

This is so true. If you're clearing $100K+/year in income there is a big red flag if when that goes away you have $400.00 in the bank (from the article) If you are reading this and you are making $100K+ a year and not saving any of it, that is a huge problem for you. To quote Mr. Money Mustache, every dollar you spend stops working for you. If you are a basketball star, a software engineer, or a movie star, let your relatively high income offset your future low income life.

shakycode 11y ago
I wasn't clearing 100k I was grossing it. After taxes and overhead it was more like 50-60K. But I understand where you're coming from. I had just started making really good money and my expenses were pretty much equal to my intake. I've since learned to not live beyond my means and am much more frugal in my older age. (38)
- ChuckMcM 11y ago
  And that is a great lesson to learn in your 30s rather than your 40s.Being mindful about what you spend your money on will change your life. Not to be critical, but to use as an illustrative example from your own life, you started your challenging period owning a Nissan 350z which got 12 mpg. If you had made exactly one different decision, buying a Honda Civic instead of that 350z, and everything else was the same, you would have hit that point with a car that got 35mpg and an additional $15,000 in your bank account. So from a learning perspective, at the time you made the purchase of the 350z, thinking about value versus cost versus future expense, knowing what you know now do you make the same choice? I am not a fan of dwelling on past decisions, they were made and they are done. But I am a huge fan of learning as much as I can from the lessons life teaches to insure I am getting full value out of that education.

4ydx 11y ago

Good to see he is back on his feet, but most certainly I am really amazed that he was so irresponsible about his situation. Is this how most Americans operate?

collyw 11y ago

I earn a fraction of that here in Spain and still come close to saving half of my wages.