Sadly because they have the term “retirement” attached to them they A – seem dull and B – don’t seem relevant to anyone young enough to really benefit from using them. The truth of the matter however, is the that they make up a critical and tangible building block of your financial future. Read the rest of this entry »
In Part 1 of “Emergency Accounts” we discussed their value and the role they play in both the climb out of debt and a post-debt lifestyle.
But regardless of where you are on this spectrum, at the end of the day, you need to pick an account and start funding it.
In this post, I’ll go over the same types of accounts you’ll hear thrown about in conversation with friends, family, local bankers, and investment types…but the difference is I’ll show you how they stack up side by side, so you can make your own decision about where to start building your emergency account today.
What exactly is an emergency account? And how can you make it one of the primary building blocks to growing and preserving your wealth?
An emergency account (a.k.a. emergency fund, rainy day fund, cash account) is a financial buffer when unexpected expenses arise. Typical items that fall into this category include car repairs, non-covered medical expenses, and loss of income. With regard to loss of income, the usual response is 6 – 12 months of “real” living expenses, as opposed to 6 – 12 months of living the high life. You calculate what this is by looking at your core expenses and immediately eliminating any frills, like dining out, gym memberships (without a contract), etc. We will refer to these core expenses as your Minimum Viable Lifestyle (MVL). Find out what your MVL is by downloading the MVL Worksheet.
The Minimum Viable Lifestyle (MVL) is a quick-and-dirty way to calculate and break down exactly how much and what you need to live on when you’re pulling yourself out of debt or determining the size of your emergency account after retiring that debt.
Main categories of an MVL:
- Taxes – Money for “The Man”
- Housing – Keeping a roof over your head
- Utilities – Keeping the lights on
- Food – Keeping your stomach full and body healthy (e.g., salmon not sushi)
- Transportation – Getting from A to B and back safely
- Clothing – Dressing for success, not to impress
- Health Care – Basic health care to keep the bigger bills at bay
- Personal – The other (small) odds and ends that make up your life
- Debt – Minimum debt payments for education, consumer, etc. bills
- Additional Obligations – Like child support and maintenance
At first glance, you might be thinking, this looks like a typical monthly budget. But there’s a key difference. With an MVL, you’re figuring out what you would need to survive when faced with the loss of income, not simply looking to allocate one that exists.
If your goal is effective and permanent debt obliteration, calculating the difference between your MVL and total income is the greatest weapon at your disposal.
Download the Minimum Viable Lifestyle Worksheet
If you’re like me, once your iPhone has been eclipsed by a newer generation, the rationalization clock of why you need the latest and greatest version begins to tick.
The first line of defense is usually the two-year contract you dreaded in the first place. After all, most people can keep it together long enough to pay the typical $200 entry fee for the newest ride at “Apple World” (there’s an Apple Land, too, but it’s not as good). Otherwise, you face hundreds of dollars more. Even for one on eBay.
But what really gets you once those two years go by are those “I’m a step ahead” people you know. You’re ready to stick it to all your friends and colleagues who need to show you just how much faster and slimmer their latest generation iPhones are, or perhaps give you the “Wait, why isn’t your video working on our Skype call? Is your forward camera broken?” line.
Keeping Hope Alive
Well, if the stars are aligned just right, you might be far enough into the current product cycle, making it likely that Apple will release something even better in a few months. This means you can leap frog everyone who just invested in what is soon to be an iClassic. Apple Insider is great for providing hints as to when Apple plans to release new products. Right now, all is abuzz about an iPhone 5 release in September.
If hope doesn’t give you the needed willpower, the iPhone lust that got you to drink the Kool-Aid in the first place might turn to disgust. For every feature you coveted on your current phone, now you only see faults. You might even go so far as to sabotage your iPhone relationship by going caseless, bating the gods of cracked screens and tormenting them with extra, casual tosses onto the desk in a pathetic self-delusion of fate.
Believe me, I’ve been through it all, and while I hope the iPhone 5 comes out ASAP, at least, in the meantime, The New York Times’s David Pogue offers tips on how to take some tarnish off our current model.
At the end of the day, it’s good to know the value of stretching your upgrade cycle, even by one year.
If you were to get the latest iPhone for $200 every three years vs. every two years over the course of the next 35 years, you would save an average of $34 per year. That’s lame, unless you invested the savings… For example, if at age 30 you invested the $34 in a well-performing humdrum investment, such as a quality mutual fund with a long track record, you would find an extra $10k and change in your bank account when you retired at 65.
Let’s say you went really crazy and decided to get a new, last generation iPhone (e.g. 3Gs) for $50 every two years. Over the course of the next 35 years, you would save an average of $77 per year. That’s not even a fancy meal out, but it’ll boost your retirement by $22k.
Now the insanity. If you could handle being one generation behind every two years (having a 3GS today), and you kept your previous iPhone in good enough shape to eBay it (the original iPhone) every time you upgraded, you would be pulling in another $100 to your “iPhone Fund.” Over the same 35 years, that’s $48k waiting for you at the end.
A 1965 Ford Mustang Cobra replica I found on cars.com
Now tell me this: What would you buy with $48k? Do you think you’d get more utility/enjoyment out of having the latest iPhone instead?
Wow. We have been talking about something like this for some time now. The name itself “Pinstripes & Sandals” is credited to Christopher Alba, a close friend of mine. He was always dressed to the 9s in a 3 piece suit working for one of the big banks while I was going solo as a technology advisor and I was able to spend many a day in sandals.
The real joke was however, that we both envied the other. I wanted his paycheck and he wanted my freedom. Only until now did I match up our “duo call sign” to a project JP and I were throwing around about documenting our personal quests. Read the rest of this entry »