Like many people interested in frugality and personal finance, I have been a long-time reader of advice for the middle-class. Of late, advice is in short supply. Where are Jonathan Clements and Andrew Tobias?
Then, I saw "new financial advice" proffered on the CNN website. As far as I can tell, the advice was the opposite of the advice offered by experts in the recent gilded age (for some, not me). So it seems that we middle-class types should do the opposite of whatever is suggested.
All the advice is of the "locking the barn after the horse runs off" genre. How can you amass an emergency fund when you are laid off? Thanks for the great tip! Either you have one (thank heavens!) or you don't (what was I thinking?). I suppose if you're still working, you can get one going. That task would be made easier by the fact that frugality is now "in" and you don't need to apologize for carrying last year's "aspirational handbag."
One of my fave bloggers, Funny About Money, raised the topic: "What is the financial mistake you didn't make."
Here is my answer, related to my musings above:
All my mistakes came from following the advice of the financial press/experts. All the mistakes I didn’t make came from procrastinating or being stubborn.
Emergency Fund:I amassed a large cash emergency fund out of inertia, since I am a frugal girl married to a frugal fellow. At the time, I was told to “get the $$ working for me by investing it.”
House: I was also told to do a cash-out refi; I chose instead to pay off my house.
Here is what I'm doing now (subject to change): I am continuing to put my retirement into equity funds in same percentage as in days of yore. I have TIAA and Vanguard.
I'll probably sell my non-retirement funds that are in other families.
I will amass an even larger emergency fund. I want to have AT LEAST 5 years of base expenses in cash at retirement (10 years hence).
The above plans are possible thanks to two things. One is that I paid off my house, so my base expenses aren't that high. The other is that my children are good test-takers (of the standardized variety) and have chosen good programs at state universities that are willing to fund their tuition AND room and board. As I discussed in an earlier post, Mr. DFS and I will give them the money we saved in a 529 plan post-graduation. Luckily again (another mistake I did not make), the 529 plan is entirely in cash. So when they graduate, they can opt for a year of travel and return to a nice stash of cash for grad school or job search.
And don't forget: it's Thrifty Thursday!
What's a mistake? What's not? It depends on where you are when you need the money.
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7 comments:
The mistake I didn't make was investing heavily in tech stocks during that bubble. Also, did not 'trade up' but improved current home and paid it off.
Perhaps leaving a huge corporation before my inflation-adjusted pension vested was a mistake... but working for myself the past 20+ years has been priceless.
Funny, word verificatin is "mille".
Brilliant!!!
I was also told to invest early, but right now as I am not on contract I need to sit on my cash ($36k) until I get another one before I can pump a reasonable $20k into the stock market/retirement fund.
*crosses fingers*.
Another mistake I didn't make was just the minimums of my student loans because "I was young and I only live once".
Instead, I really lived on the bare minimum and cleared my debt ASAP.
Am already a lover of your blog!
Yeah, this is good.
Too much of the conventional wisdom seems not to be working out as predicted: stocks are the best investment for retirement; real estate is nonliquid but will continue to appreciate; keep a mortgage for its alleged tax advantages.
Equities may very well be the best investment vehicle over the long run. But maybe not: as we're seeing now, markets have their peaks and their valleys. If we happen to slide into an abyss just as one is coming onto retirement, the soon-to-be retiree will lose a large chunk of savings that will not come back in time to keep her out of penury.
And I have to agree with you, Frugal: the best financial move I ever made was to pay off my house.
While obviously it's a good idea to accrue an emergency fund if you're earning enough to do so, an EF has an inherent drawback: you need to keep it somewhere reasonably "safe," such as a bank account, CDs, or the money market. None of these investments keeps up with inflation. Assuming you need $20,000 or $25,000 a year to survive, a five-year emergency fund would tie up $100,000 to $125,000 in low-return investments.
Wow, I've never seen a recommendation for five years' income as an emergency fund; the advice I've heard is two months to a year, tops. Is five years a common recommendation?
Does that assume someone has no health or disability insurance, or is uninsurable?
@All--You are inspirations!
@Duchesse--I meant that I wanted 5 years of needs in cash (including CDs etc) so I won't have to liquidate equities in a down market. This was inspired by a book I read, which advocates 7 years.
The 5 years is an interesting thought - well worth aiming for now we are hearing about sensible pensioners who saved for their retirements having such a drop in living standards.
The mistake I didn't make was that even when we were hard up I kept up both our life insurance policies even though my husband would have got my death in service benefit to pay off the mortgage if I had died and I could have afforded to keep paying it if it had been him. The policies only had a year to run but I too don't have a mortgage now either. I have taken a new one out for me to provide for the girls, just in case.
I am also now debating the wisdom of starting pension policies for my daughters. Not sure if effectively investing in the stock market is a good idea - or should I take a longer term view bearing in mind they are only teenagers.
@Alienne--My 20 y.o. son is hot to get a Roth IRA (don't know what British equivalent is). He has faith in the future world economy. Of course, he doesn't have much to lose at this point.
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