Basic Personal Finance Concepts | Rational Reminder 241

Today we are spending most of the episode going further into the basic concepts that ground good financial practices and the personal finance topics that are often taken for granted. The three main areas we unpack in this episode are the cost of living, savings capacity, and emergency funds, and though these can be viewed as basic ideas, there are always areas of the simplest variety that deserve more attention. Listeners can also expect to hear a little more about what our role as financial advisors constitutes on a daily basis, as we respond to an audience member's question about how to conceptualize the profession. We welcome Dr. Wendall Mascarenhas back to the show for a brief cameo in which he shares his reading habits and approach with us, which contrasts with some of the opinions often expressed by other guests, so make sure to stay tuned in for that. We also find time for a quick recap of an old episode we had with Rick Ferri and a book review of Rethink Lead Generation by Tom Shapiro.
Timestamps:
0:00 Intro
4:41 Main Topic 1: Basic Personal Finance Concepts
5:00 Cost of Living
25:51 Savings Capacity
38:52 Emergency Fund
47:14 Episode 33: 60 Seconds
49:53 Book Review: Rethink Lead Generation: Advanced Strategies to Generate More Leads for your Business
58:20 23 in 23 Reading Challenge: Special Guest Dr. Wendall Mascarenhas
1:11:00 Aftershow
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Extra references on cost of living, savings capacity & emergency fund can be found at: rationalreminder.ca/podcast/241

[@donpeters9534]

I think that many things that might be considered emergencies should actually be budgeted for as depreciation... e.g. All appliances / car / etc. will need to be replaced eventually, probably once in 10 years, and so a cash amount equal to the purchase price(s) of the existing appliance(s) divided by 120 should be set aside every month, other than the emergency fund, to meet repairs or replacement when necessary. They are Long Cycle items, and not emergencies...

[@anon_9221]

I agree that the monthly depreciation of appliances etc. should be included in the expenses calculation for a monthly budget. When I started doing that in my personal accounting, all the statistics became a lot smoother and more meaningful. This represents the long-term expense nature of these things well. At the same time they IMHO still have be part of the emergency fund calculation. This is to represent the randomness over time aspect of these expenses. Because even though, I may intend to use an appliance for ten years, it may still break after 3, one day out of warranty and then it would have to be replaced and I would want to have the necessary liquidity for that.

[@curtisl7300]

I think the simplest way to track cost of living is: 1. Track your savings not spending, there are many fewer transactions on this side of the equation. 2. Track whether your debt balances are increasing MoM. 3. Cost of living = take home pay - savings + change in debt levels I would generally exclude housing debt because you have an offsetting appreciating (slowly) asset. So essentially it's leverage.

[@curtisl7300]

Also don't count Savings for large purchases or an emergency fund in the savings column. Those are still going to be spent eventually.

[@King_Kong_510]

I surprisingly enjoyed Wendall’s insights. Glad I didn’t skip. Thank you! Great episode as always

[@ss_websurfer]

Love the podcast, I am happy to listen and realize that I am in a better place than most people, it makes you realize how far you've come with your personal finances. Still things to be improved, but important to always acknowledge the room for improvement.

[@fiddling-snowboarder]

Once a year I export all of my checking and savings account transactions into a spreadsheet. I filter out transfers among accounts and income taxes, and then I add up all withdrawals.... to find out *exactly* how much I spent in the previous year.

[@rudged123]

My "emergency savings account" is a Roth IRA. Contributions I have made can be taken out without any penalty, and with no age restriction. I have separate employer retirement accounts, and as such I am disinclined to viewing a slight reduction in the Roth IRA account as somehow imperiling my retirement. The only time I have ever dipped into it was for $3 K last year, because we decided to take our first cruise and discovered how deceptive the travel industry can be (the listed costs for the cabin and flight were per person, a detail only revealed after we started the purchase). Did I like selling equities in a down market, no, but that is precisely why it was only after I had exhausted every other way of avoiding a cash flow issue that I resorted to using it.

[@jamesmckinney1868]

A limitation of the papers related to emergency funds is that they consider only a young investor that builds up an 3-6mo emergency fund over a 1.5 to 3-year period, compared to another young investor that instead invests. Predictably, time in the market wins, over a 40-year horizon, by at least 10% (20-35% in one paper). But, if you aren't a young investor - say a middle-aged investor with many times your 3mo expenses in retirement savings - then taking 3mo expenses out of the market and into cash, over say a 20-year period, isn't going to be a huge drag (small percentages). It's not optimal, but also not enough to worry about (if it gives you peace of mind, etc.).

[@famsaun3357]

I have to thank Cameron for recommending “How to live on twenty four hours a day” by Arnold Bennet. To anyone who reads this post - read the book!

[@muffemod]

YEA OKAY I WILL

[@wingman2k]

If you are a natural "saver" than "spender", the way I do it is I have automatic withdrawals for maxing out HSA/401k/Roth IRA/Mortgage, plus a few hundred to automatically go into savings. Aside from that I dont budget for anything.

[@muffemod]

I know right?! Literally the monthly credit card statement IS the budget.

[@fluffyscruffy]

Would having a $0 credit card balance be considered an Emergency Fund? Any unexpected expense of + $500 can be paid right away.

[@rossmacintosh5652]

While having credit readily available can provide some piece of mind, the problem is that in a true emergency you might not be in a good position to repay any amounts you find yourself needing to borrow. In a similar way, many people get themselves in a mess with HELOCs when they don't realise that the bank is only extending that credit when you have a job with income to pay it back. Lose one's job and the HELOC loan can be called by the bank.

[@freedomlife3623]

How could anyone do financial planning if they have no idea how much they need to maintain their lifestyle? We have those great expense tracking apps, have been doing that for 12 years now, I know exactly where our money go. I do similar as Ben, put income to saving first, then we can spend whatever left.

[@freedomlife3623]

Is what TSFA for emergency? Saving account pays so little for interest and taxed on interest. At least you can keep stacked GIC in TFSA and not paying tax on the interest.

[@sheldonpetrie3706]

You can put your emergency savings into a TFSA HISA. However the real potential of the TFSA is to hold low cost, broadly diversified ETF's as the tax free gains over a lifetime will be immense. I keep my savings in a normal HISA, and have XEQT in my TFSA.

[@muffemod]

Me was here!

[@thesorrow312]

Where my gas station sushi gang at? 🍣🙌

[@strangedotmachine9281]

Ben needs YNAB.