Money Lesson #4 Part 2: Security
How I am creating my "Soft Life".
This post is 1,484 words, a 6-minute read. Enjoy!
This is a continuation of our Money Lesson Series. Last week, we began discussing Lesson #4: The Journey. How we enjoy today and tomorrow. We continue on that lesson today. Hope you enjoy.
Les Brown, “If You Do What is Easy Your Life Will Be Hard. But if You Do What is Hard Your Life Will Be Easy.”
This is the part of money that feels hard. Because this does not provide immediate gratification. It is something you do for a while before you see tangible results.
It is also hard because in this phase it can feel like you are making no progress. Every time you take a step forward something inevitably comes up that forces you to step back for a bit.
However, if you keep at it, I can promise you LIFE BECOMES SO MUCH EASIER!
I am living proof of this. Here's how I did and am doing that:
Debt Free Living
We talked about the importance of getting out of debt and how to pay off any debt in Money Lesson #3. However; if we are not careful, we can easily walk right back into debt as life gets complicated. It is important that we remain vigilant over the decisions we make. There are two ways we walk back into debt:
Vehicles, Homes, and Vacations/Experiences are commonly the fastest ways we choose to take on debt without much thought.
Restuarant and Shopping are more of a slow burning way we choose to get into debt.
I use the word "choose" very purposely. I want you to believe you have agency over your life. Do not believe that things are just happening to you. Of course, randomness happens AND you have a choice in many decisions you make.
It is not wrong to want to spend money on any of these things. Remember part of this phase of life is doing things that bring us fulfillment. However, if we have to take on debt to be able to do any of these things, we are not chasing fulfillment. We are EFFING it up.
I know completely avoiding debt in the United States is like telling a fish to avoid water or a bird to avoid pooping on my car 🤬. So here are some guidelines on how to use debt to our benefit and not detriment.
Credit Cards/BNPL
No amount of credit card debt is good.
If you wanna play the credit card points game, then YOU MUST PAY OFF YOUR CREDIT CARD IN FULL EVERY MONTH!
Buy Now Pay Later is a trap. Just pay for the item and move on with your life.
Never use your credit card as an emergency fund.
Cars - 20/3/8 Rule
I would prefer everyone buy a car with cash, but we may not always have the ability to do it for a plethora of reasons. Use the 20/3/8 to keep you ahead.
Breakdown: 20% down payment on the car
Financed for no more than 3 years.
Total cost of vehicle is no more than 8% of income. This includes insurance, gas, parking, maintenance, and any other car related costs.
If you are buying a luxury vehicle, the rules changes. You have to be able to pay the car off in 1 year or less.
Yes, Teslas and most EVs falls in this category.
So do 80% of SUVs and Trucks.
Buying a House
Easily one of the biggest decisions we will ever make and can easily turn to your worst decision ever. Let's not allow that.
Total housing cost no more than 25% of your gross income
This includes mortgage, utilities, insurance, and maintenance.
Plan to live in that house for at least 5-10 years.
For the first house you buy, you can put down 3%.
For the second home put down or have the ability to put down at least 20%.
For Vacations, Shopping, and Experiences; if you do not have the money, DO NOT USE DEBT TO DO IT!
Emergency Fund
Remember an emergency fund is our Kevlar* against the inevitable bullets of life. As we progress on the journey of life, we tend to acquire more things and increase our life surface area meaning our responsibilities. There are more failure points in our finances.
When we started the journey, it may have just us. However, as you progress it may become us and our spouse then children then grandchildren etc. As those responsibilities grow, we need something stronger than Kevlar* to protect us outside of being properly insured.
The question is how much emergency fund do I really need?
The answer depends on your risk tolerance and job security. The amount you need will be based on your monthly expenses. The general advice is having 3-6 months of expenses saved in a not too easily accessible savings account.
Personally, I have a 3-month emergency fund. Because I believe that as engineer, I should be able to get a job rather quickly if I was fired or laid off. However, when I get married that will go up to 6 months. When I have kids, that will increase to 12 months.
You can ask yourself the same question: "If the worst were to happen, how long would it take me to replace my income?"
If you work in a specialized field, it may take longer which means you need a larger emergency fund.
If you are an entrepreneur, you might need higher than the 6 months. You might need to go all the way to 12-18 months.
If you have a family depending on your income, you might need a larger emergency fund.
Here is an example of how you would calculate the total amount:
If you spend $3000/month but your core expenses: rent/mortgage, food, utilities, gas, phone, internet is only $1800
Your emergency Fund will be based on the $1800 not the $3000.
Remember, your emergency fund is not designed to cover all your discretionary expenses. It is for the core things and for survival.
It might also take much longer to hit your Max Emergency Fund. You can work towards that total number over time. It was only last year that I was finally able to have my "Big Boy" emergency fund. About 7 years since I got serious with my finances. Do not be discouraged, enjoy the process as you walk towards the goals.
Invest More
In Money Lesson #3, we talked about beginning to invest. Doing the basic Roth IRA and getting your company match 401(k). In the security stage, this is where we push to do more. For example:
If you have only gotten your company 401(k) match, push to begin investing in the Roth IRA.
Then push to max out that Roth IRA
Max contribution limit is $7,000
If you have access to an Health Savings Account, push to begin investing in that. Then eventually maxing that out.
Max Contribution limit for a single person is $4,150 and $8,300 for families
Then push to increase the amount you do towards your company 401(k) and eventually max out your 401(k)
Contribution limit is $23,000
Then max out your Total 401(k) which includes a not often discussed After-tax account
Total 401(k) contribution limit is $66,000
Then invest in an after-tax brokerage account or real estate or a business or whatever else
I will be transparent and share what I currently do:
I max out my Roth IRA, been able to do this since 2021.
I invest about 8% into my company 401(k).
I invest only $1200 into my HSA, been able to do this since 2022.
Currently, there are some short-term savings goals that are much more important for my life fulfillment than maxing out these accounts. We will talk more about it in Money Lesson #4 Part 3: Fulfillment. However, I am pushing to be able to do more. My goal is to one day be able to invest at least 30% of my income consistently. Which means that I may never get to the point of doing the After-Tax 401(k) account. I have NO PLANS to own a ton of real estate properties (that ish is too much work).
The key thing I want you to take from this section is for you to strive to do more, EVENTUALLY!
These three parts: living a Debt-Free Life, having an emergency fund, and investing more than the minimum; are how you create security today and tomorrow. It's how life becomes EASY! How you are able to live the "Soft Life", not a facade of the Soft Life.
I implore you to make the hard choices once, so your life becomes exponentially easier!
Thanks for reading. See you soon
God Bless You
Remember Generosity>greed
✌🏾
*Kevlar - Bulletproof vest