In the one month I’ve had this blog, I’ve managed to get 556 unique visitors. I’m not sure if that’s good or not, but I’m kinda proud of it.
This is the second post of a Friday series called “You’re a sucker to….” which explores whether conventional financial wisdom is necessarily the best advice out there. Everyone’s situation is different; if you’re doing something that I tell you you’re a sucker to do, it doesn’t mean it’s bad or wrong. There’s just other options out there that you should be aware about. You can read the first of the series here.
An emergency fund, when used properly, can be one of the best financial moves you can make. Having supplemental cash on hand can be used for anything from car repairs to a broken furnace to vet bills for a beloved pet. If someone doesn’t have a sum of cash, they run the risk of getting into a problem if the you know what hits the fans. If there’s a money emergency, someone who has just gotten out of debt could fall right back into the abyss. Nobody wants that.
It’s not the idea of an emergency fund I have a problem with. My problem is with the size that people recommend. The Simple Dollar recommends a person have 6-12 months of cash sitting in an emergency fund. Frugal Dad recommends the same. For the average family, this represents having anywhere from $25k to $75k sitting in a bank account earning 1% interest. Financially, that’s a very bad move.
There’s no reason why you can’t take the money you’d normally have in an emergency fund and have it as the more conservative part of your portfolio. Buy an exchange traded fund of real return government bonds. Or maybe some high grade corporates. Mix in some preferred shares as well. If you bought a combination of the three, you’d be getting close to a 4% return. That sure beats 1% from your savings account. 3% more on $50k is $1500 per year. The prices of these three funds don’t move very much either. They basically have a 10% range. If you’re forced to sell something at a loss, it won’t be that big of a loss. Take the amount of risk you’re comfortable with.
Don’t put all of your money in something like this. I’d like you to have a month’s worth of expenses sitting in your bank account. Emergencies happen. But what kind of emergency really needs more than one month’s expenses to fix? How likely is the probability that sort of catastrophic event to happen? It’s like winning the crap lottery. Sure, it happens. It just isn’t very likely.
Having money sitting around doing nothing is a financial sin, plain and simple. I never have more than $5k in liquid savings. My money is constantly being put to work. It begs for a return greater than 1%. And yeah, emergencies happen. I have a credit card available for just that purpose. I simply charge up my credit card, then take my time figuring out how I’m going to pay for it. Why have piles of money kicking around when there’s credit cards waiting to lend you the money? I can sell all or some of a position in an ETF in 5 minutes and still have enough time to twitter everyone about what I did. It takes 3 business days for the money to be accessible in my account. That’s it.
It’s about time for people to put that emergency fund to work. Your increased net worth will thank you.
Feb 252010
I really don’t want to keep picking on The Simple Dollar. But I can’t let this one just pass by without saying something about it.
A couple of days ago, Trent published a post titled A Guaranteed Way To Increase Your Investment Returns. The point of the post is that the more money one invests for retirement, the more you’ll end up with. While I’d personally file that under my “well, duh!” part of my brain, maybe someone will get some nugget of information that will help them better their financial lives, even just slightly.
I hope so, because there’s so much wrong with the post I barely know where to begin.
I’m going to quote part of the post in question:
Even better, I’m not going to sell you this sure-fire tactic in some sort of two-day seminar or an investment kit. I’m going to give this advice away!
Are you ready for it?
Here is the one guaranteed way I’ve found to increase your investment returns.
Live cheaper and direct that saved money into your investments.
First of all, he talks it up like it’s some sort of great advice. He even uses exclamation points! Here’s one guaranteed way he’s found to increase your returns. Are you ready for it? The solution is to invest more money.
Except that has absolutely nothing to do with returns!
It doesn’t matter if you invest a dollar at 5% or a million dollars at 5%, your return is still 5%. The rate of return has absolutely nothing to do with the amount invested. Of course somebody is going to end up with more money if they invest more money. My cousin who is in second grade could practically tell you that. This is advice that is just blatantly wrong. There’s no ifs, ands or buts about it.
This is the reason why I don’t want personal finance blogs giving advice. I know this is fairly minor, and yes, the overall message of the post still makes sense. Just, if you could, actually hold yourself accountable when you get your facts wrong. I’d really appreciate it, but I’m not counting on it.
I bought the house I currently live in during the summer of 2008. It’s a great house, just perfect for me. It’s in a great neighborhood, the yard/patio is fantastic, it has central air and the interior is very comfortable. Even though it looks like I may have bought it during the peak of the market, I don’t regret the purchase for a minute.
My house is unique in that it has a fully contained basement suite. My renters get to come and go from my back door, and they have their own space complete with a kitchen, living room, bedroom and bathroom. We share laundry as the machines sit in an area downstairs outside of their suite. It is absolutely perfectly set up.
I rent it out for about the same as my original mortgage payment was. That means that all I’m out every month is about $500 for utilities. I include satellite tv and wi-fi, mostly because I’m using those anyway. It makes it easier to market it with everything included.
I’ve gone through 3 renters in the less than 2 years I’ve owned it. Each time I’ve had to rent it, I’ve only had to advertise it for a few days before someone snatched it up. The rent is cheap, everything is included and it’s in a great neighborhood. It’s a win-win for both me and my tenant.
The thing I especially like about living above my tenants is the fact that they basically can’t do anything down there without you knowing. Are they smoking pot? Having a party? It’s pretty hard to do that stuff without me figuring it out.
Just by living there, I’ve filtered out the crap tenants. I’ve shown it to young single guys who immediately lose interest once they learn I live upstairs. I’m also very clear on the lease about what’s acceptable behavior and what isn’t. I haven’t had a major problem yet.
I’ve found that it’s important to enter into it as a business relationship. Sometimes the tenant will end up being your friend; that’s the nature of sharing a house with someone. That’s fine, but insist on getting all important things in writing, giving them receipts for the rent, etc.
I make almost enough to cover my mortgage for about 5 minutes of work a month. How long do you have to work to pay for your mortgage?
Oh, the memories…
When I had just turned 14, my parents decided it was time for me to get a job. I was 14. The last thing I wanted to do was to go hand out resumes, especially at the beginning of the summer. I was looking forward to a long summer of hanging out with my friends and slacking off. Instead, I was dropping off applications at the local Dairy Queen.
I still remember the day I started. It was July 18th, 1997. The first hour I spent just talking to the boss, going over the aspects of the job while she smoked (!) in the back room. Then it was time to hit the floor. For the first little while, I was on cleaning duty. I wiped tables, trays, etc.
Eventually I became the cook (I got to work by myself back in the kitchen, the sole reason why I wanted it so much) and settled into working there for over 3 years. Basically the only reason why I left was because it was time to get a real job. For the most part I enjoyed the job and now that I look back on it, I learned some valuable lessons:
1) If you work hard, you’ll be rewarded. I still remember the first time I ever got yelled at by a boss. It was because I wasn’t moving fast enough. I got the message loud and clear and ever since I’ve prided myself on the ability to work harder than other people. Working smart is important too, and combining both will ensure success at whatever job you take.
2) Working with people irritated me. I almost begged my boss to let me become a cook. I longed for the chance to lessen my exposure to the usual crap that working with fast food employees brought. It was a lesson that, over 10 years later, I still consider myself lucky for finding it out so quickly.
3) Supervising people sucks too. I quickly discovered that I had little desire to supervise people. People are different, responding differently to certain stimuli. Trying to motivate people to work is hard, so I quickly got myself into a position so I wouldn’t have to. Of course, at my second job, I supervised people for upwards to 4 years, so I obviously needed some more time before I figured that one out.
4) Spending money on crap is really easy. I should consider myself lucky. I learned at 14 just how fast money can disappear on crap. I remember looking at my bank statement after 6 months of working hard and finding the balance way too close to zero for my liking. So I just down my crap spending. I haven’t looked back since.
5) Relationships are important, but overrated. I don’t talk to anyone I used to work with. I would still talk to my boss, except she passed away suddenly about 8 years ago. Some jobs are good at building relationships. Some aren’t.
6) 50% of food for staff is a good way to get fat. Dammit!
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