Hi,
Melissa Jane,
Thank you for your question!
Melissa Jane wrote: ↑May 8th, 2023, 4:08 pm
Hi Scott,
Thank you for creating this forum. I was, at first, hesitant to ask my questions because I didn't really know which questions to ask, as I have several. However, I'll start with this:
Do you have any advice on how to plan one's finances? I've been watching some motivational videos and reading some books on finance planning and I've seen some formulae . For instance, one person suggested this structure:
40% of the income on expected,
40% on savings
20% on emergency funds.
Do you agree with the above plan?
Off-hand, I think it's fine, but no more or no less than most others. For simplicity, we could refer to the above proposal as 40/40/20. I don't see that as being better or worse than 45/45/10, or 30/30/40, or 33.3/33.3/33.3, or countless other breakdowns.
In analogy, I've heard that when it comes to weight loss diets, they all work. If you follow them, that is. Thus, the main factor that will affect statistical success rates for different diet plans is simply how likely they are to be followed by those who happen to start them.
(And, presumably the same is true of weight gain diets, which is worth mentioning since I do work with some people who are actively working hard to gain weight.)
If you are putting
anything to savings on a weekly basis, you are probably doing better than most people at managing your finances. To me, the key question is
not the very specific details and exact tuning of your plan (e.g. is it 38% to or 42% to savings). That's
not the key factor in your success, and in fact what would exactly work best varies from person to person. 38% might be the best number for one person; 40% for another person; and 42% for a third person. The key question is will you stick to the plan, whatever it is, and by extension will you even start it. I've met people who spend hours working hard writing down a very strict and detailed diet plan or financial budget that they never even start, let alone stick to.
If someone's rent costs them 65% of their income, I wouldn't recommend they put 40% of their income to savings and thereby become homeless and hungry. Before you worry about savings at all, I say pay your rent/mortgage, buy your groceries, and so on.
I typically would conceptually combine emergency funds and savings together, thinking of them as one category. You do want to avoid putting too much if any funds into long-term and/or non-liquid investments until you have a safety net of some liquid savings for emergencies.
I don't usually think in terms of percentages, but rather in terms of priorities.
I = Monthly Income
N = Your monthly basic living expenses, such as groceries, rent/mortgage, healthcare, transportation to work/school, etc.
D = I - N.
What to do with D (Discretionary Spending) depends on your unique goals, dreams, and preferences.
Many times when a person is putting a certain amount of funds into "savings" it's with a specific expense in mind that they cannot currently afford to buy, such as wanting to buy a house or a car or start a business or go on a vacation.
Emergency savings is a little different, but not as much as some people think. Imagine if a safety net wasn't a metaphor. Imagine you had to go to the store and buy a literal safety net, if you wanted one. Imagine they came in different sizes and qualities. If you have $10,000 to spend, who would I be to say that the wrong thing for you to do is buy a $5,000 safety net that you want and buy a $5,000 car that you want, instead of buying a much better designer brand safety net that costs $10,000 but no car and have to walk or taxi everywhere. To repeat myself, it depends on your unique goals, dreams, situation, and preferences. The desirability of a certain financial safety net over another varies by person. Some would be better off buying the bigger more expensive and reliable one, and others would be better off buying the cheap one, and some would be better off foregoing it altogether.
Melissa Jane wrote: ↑May 8th, 2023, 4:08 pm
It would be great if you gave some insights too on how you used to plan your finances, particularly before your savings reached $10k.
It use to be that that I would go grocery shopping for my kids and I about twice a week, and I would have less than $100 in my account. I'd have to put things back at the register sometimes because I literally didn't have the money in my account to buy them. One time to make my rent on the last day when it was due, I took spare change I could from my house to the bank to turn it into to just squeeze together the last few dollars. There was little choice to make financially because there was so little room. The financial decisions made themselves. When one of the two or more choices is feeding my kids versus letting them starve, it's hardly a choice at all.
My I - N was basically $0 on a good day, for many years.
If after a while of improving my situation I had $1 per day to spare, it would have still taken me 10,000 days to get to $10,000 in savings even I put 100% of that spare $1 into savings each day. Over 10,000 days, unexpected expenses would have surely come up to eat away at those savings. I'd probably still be poor and struggling to get to the $10,000 in savings if that was the strategy I took. If I made savings a big goal for me back then, I'd probably still be poor and with little savings. But that is very unique to that situation.
I had to take big risks to get out of that situation.
I feel it wouldn't have been rational or sensible to have thousands of dollars sitting in an account unused at that time, in case of some possible unknown future emergency that
might come up. In a way, my day-to-day life was an ongoing emergency for many years.
In other words, I didn't achieve the success I've achieved by playing it safe and by spending my limited money on unprofitable safety nets to have around
just in case.
I was very cheap when it came to safety nets. I took a lot of risks. I invested my spare money in investments that were very high-yield but thus risky.
I didn't have enough to lose financially to make it worth the major cost of desperately protecting my assets with safety nets. If I had declared bankruptcy, I would have lost almost nothing because I had almost nothing (financially).
Safety nets are a better investment for when you (1) can afford them, and (2) strongly want to keep exactly what you already have currently, not for when you want something very new. If you want a big return, the cost is more risks.
Neither strategy is right or wrong. It depends on your unique situation and your unique goals.
Most importantly, none of the things written above in this post really get a key aspect of why I was successful financially, especially over the long term. Rather, this last paragraph is far more important than anything I have written in the above post:
If you have spare money leftover after paying your basic living expenses (e.g. rent/mortgage, groceries, etc.), consider these three options of where you could put it: (1) into a low-interest liquid savings account, (2) as cash buried in your backyard at no interest, or (3) into risky high-yield investments or business ventures. In any of those three cases, you are presumably way better off financially and making much better financial decisions than someone who instead spends it on (4) luxuries or recreational expenses such as alcohol, drugs, movies, cable TV, Netflix, luxury cars, fast food, eating out at restaurants, jewelry, name brand clothes, etc.
I love a glass of wine or whiskey, but there was a couple years in there where I didn't drink at all, not even one glass, because I was putting every spare dollar and minute into OnlineBookClub and my kids. That's part of how I made my income go from what it was to being more than 10x that much.
Even in the case of someone who spends a lot on #4, I'm not saying they are making a mistake or such. If they prefer fun now over long-term financial stability or long-term financial goal-achievement, then that's their choice. There is nothing wrong with it. In fact, I'd typically choose to be more like them over someone who dies at old age with a lot of unused money in a savings account. What I am saying is that minimizing #4 is the main factor in achieving your mid-term and long-term financial goals, if you have any.
If someone wants to be financially rich and isn't, they aren't going to get there by spending their limited funds on alcohol or Netflix or jewelry.
Based on your question, I have a feeling that's not you. It sounds like you are already on a path to success, and I would recommend you don't worry to much about the details and instead focus on staying on that great path you have chosen.
In the private one-on-one phase of the mentoring program, I will get more details about exactly what each mentee is spending their money on currently, and what their unique situation is, so I can provide more specific advice, but I have a feeling based on your question that you have already found the right path and are walking it.
Thank you,
Scott
I've really enjoyed reading the other Q&A's.
