Black Friday is an annual source of entertainment and amusement to me. Every year, it seems like a number of alleged adults at different locations around the U.S. end up acting like 3 year olds when fighting over discounted merchandise upon the day after Thanksgiving.  Yelling, pushing each other out of the way, and pulling things out of each other’s hands are all things that happen somewhere on Black Friday. Everybody is so anxious to spend their money that they just can’t contain themselves!

Why are people so anxious to spend so much money? Well, I think that there are quite a few people that use Black Friday as an excuse to go out and overspend. You know, kind of like a built-in excuse to go overboard, as in “hey, it’s the biggest sale of the year, what was I supposed to do?”

Personally, I do get the idea that life is to enjoy, and there’s nothing wrong in buying some things that make us happy. But doing it as some sort of “retail therapy”, so to speak, may not be the smartest thing. We all have a certain level of income, certain fixed expenses, and eventual needs such as retirement, health care, maybe even kids’ college costs. Those things come first, right?

Well anyway, there are still a number of people out there who are actually smart with money who still like to shop on Black Friday. The thinking is that you can truly get deals on that day, so one might as well buy things that you’ll need to get. Things like actual needs for yourself and family, which might include gifts for the upcoming holidays. With that line of thinking, if you’re truly not spending more than you might not otherwise spend, I can certainly see how it could be worth it.

Now for me, being someone who doesn’t view shopping as a contact sport, I have a different approach. In my view, it’s the easiest and most effective way to save money on Black Friday.

What is that?

Don’t go out for any shopping, don’t surf the web to buy online. Simply put: don’t buy anything at all.

Boring? Perhaps. While many others enjoying their shiny new purchases, marveling over the goodies in their overflowing shopping bags, I’ll be settling for using the same old stuff that I had the day before. Nothing new to enjoy. Same old, same old. But remember, the difference is that I’ll have spent nothing, and can take pride in being resourceful and not wasting. If you don’t spend, and if you cut expenses – that’s one day closer to financial freedom. We all have our own version of excitement

Truth be told, I’m absolutely not all about the money and do spend quite a bit on the things that I value and like. Family and those closest to me mean the world to me, so all told I’m a spender with those people. I also like spending on life experiences, traveling to see things, etc.

However, in terms of running out and buying some big TV, household goods, clothes, etc – it’s just not a priority. Maybe it is for a lot of folks, and that’s fine. But I’m totally fine with doing absolutely no shopping that day, and having a family day doing other things. I did that last year, it worked out well.

I have a friend who told me a few years ago how his wife had “made” him go out to the stores in the middle of the night (like 3:00 AM) to stand in line for sales. As in, stand in line outside, in the cold.  Hey, suit yourself, buddy. I’ll be sound asleep, bank balance maintained!

My Questions for You:

Do you see things differently, with regard to Black Friday? What’s your take on this particular day, and how it fits in the American experience these days?

What are your plans for Black Friday? Alternatively, if you’re reading this after the day has passed, what did you buy?

Back in the old days, before most of us (including me) remember, people had to go out to see a movie.  It was an experience, and a common form of entertainment.  Do that today, and it could end up being a costly experience.

At the local theatres, it’s about $10 a ticket for going out to the movies at night. Let’s say there are two of you going out – that makes it $20 just on tickets. While you’re there, you might get tempted to get a bag of popcorn, candy, or a soft drink. Each of those will likely set you back another $2 to $5, based on what you’re buying.  All told, it’s easy to spend $25 for two people to go out to the movies, at many theatres.

Admittedly, I do like to go out to the movies. It’s fun to go out and get a real theatre experience, with the requisite big screen and high quality sound. I don’t go very often these days, maybe a few times a year.  It’s enjoyable to go, but there are other options for watching movies, and I’ve taken to a few of them.

Here are some lower cost alternatives to paying full price at the movies:

Matinee Performances

That same $10 full-price movie might be, oh, say $7.50 for a matinee showing. Sure, you’ll have to go earlier in the day, thus taking away from the traditional “night out at the movies” experience. But hey, for two of you that’s $5 saved.  The way my mind works, is taking that $5, multiplying it by an annual rate of return of 8%, and you will have an extra $34 after 25 years. So see, it can be worth it to see a matinee!

Discount Theatres

Sometimes, you can go see movies for less money by going to a low budget place. Some of these are actually pretty decent. I recently went to a place that offered new releases, for much lower price. I believe we paid $6 per ticket for a prime time show. Now, the theatre is much older, without many of the niceties of more modern venues.  However, it’s a good option for going out to see a newer movie while paying less. 

I know there’s a place within a 30 minute drive from where I live that offers $2 movies. Haven’t been there, but someone who has told me that it was totally worth it. For many of us, these options do exist. We just have to seek them out – and many times, be pleasantly surprised!

Drive-in Movies

If you really want to go old school, you could do this.  Aside from theatres, this was another venue of several generations ago. Not far from where I live, there’s a drive-in that offers showings for less than what you’d pay at a traditional indoor venue. I believe they’re in the $5 to $8 range. Anyway, it’s a way to save a few bucks and more importantly get a different experience.

Netflix

Speaking to the streaming plan, for $8 you can watch unlimited movies. Clearly, despite recent controversy, this option is very popular. Netflix accounts for a staggering percentage of internet bandwith, recently noted at 32% of U.S. downstream traffic at peak times.  I’ve enjoyed the unlimited option with Netflix to some extent, as it’s convenient and super low cost. However, you likely won’t be getting the newest, most popular current movies with this plan from what I’ve experienced. Something to consider.

Cable

With my provider, newer movies cost about $5 to watch. It’s convenient, as you just push a few buttons and you get to watch a movie. That seems too high to me, and I’d say that there are better alternatives. However, it’s clearly cheaper than going out to the movies.

Redbox

Around here, these kiosks are seemingly everywhere. At $1 per day for a regular DVD rental – or $1.50 per day for BluRay – this is a good, low cost option for people who are on the go. I’ve enjoyed Redbox, and it’s a good way to get a movie for a very low cost. As long as you know you can return it the next day, and don’t have to go out of the way to visit the kiosk, it seems like a good alternative.

Library

This is my current favorite alternative. For the cost of – well, nothing – you can check out a movie for up to a week at the local library here. The selection is actually pretty good.  Of course the free concept is hard to beat, but I also like that you generally have some time to watch the movie. One downside is that the movies get viewed quite a bit, so the DVDs might not always operate perfectly. Or, at least one recent one I rented skipped a couple times. But most of the time, they’re totally fine – and all of the time, they’re free! As long as they’re not overdue, anyway!

There are plenty of other options: Amazon, Apple iTunes, Vudu, and Blockbuster. With the latter, they’re still around with some varied options, though I think it’s interesting how Blockbuster might have been the first option if an article like this would have been written a decade ago. Now, it’s almost a footnote here.

My Questions for You

What’s your current favorite way to watch movies?

How often do you go out to a theatre to see movies? 

Loopholes can be great, particularly if you’re the one taking advantage of them. What’s even better is when the loopholes are pointed out to you!

Recently, I visited a local Starbucks in order to catch up on some things. There are random times when it’s just easier to get work done in that type of environment, without the distractions of home. This was one of those times, and I was looking to have something to drink while staying there for a few hours working.  As I shared in a story about a previous effort to do this, you do get what you pay for, so I made sure to go to a place that I knew would be conducive to getting things done.  Thankfully, no freaky customers at this place, versus that other place:)

My Order

This probably won’t surprise anyone who regularly reads Squirrelers, but I was looking for something that was:

1. Reasonably healthy
2. Inexpensive

So, I surveyed the choices and decided on hot, herbal tea as my selection.  In my renewed enthusiasm for making healthy choices, I decided against anything loaded with extra calories, or even super high in caffeine. With respect to the former – as a sidebar – it’s astounding how fattening some of those drinks can be, compared to what many people might think! So tea it was for me, healthy and cheap.

As I was ordering, the lady behind the counter asked me which size I wanted: Tall (small), Grande (medium), or Venti (large). I recall that Tall was $1.95 and Venti was $2.45, and don’t remember the price of Grande. Anyway, I thought “what the heck” and ordered a Venti. Thus, I spent $2.45 for the tea.

As they were preparing the tea, I chatted a bit with the lady behind the counter, and asked if I later I could get a refill of hot water. My idea was that I could get as much out of that bag as possible, of course! She said yes, that wouldn’t be a problem it get more water later. Cool! Extra glasses of tea for no additional cost, I like that!

The Loophole

Then she voluntarily told me about how there are customers that come in and try to game the system in other ways. What she shared is that there are some people who take advantage of the following loophole:

1. Order a Tall (small) tea, and pay $1.95 – instead of the $2.45 I paid for the Venti (large).
2. Ask for the Tall sized tea to be served in a Venti cup – which meant it was maybe 2/3 or thereabouts full.
3. Immediately as for extra hot water
4. Walk away with a large drink for the price of a small, saving $0.50!

Clever!

Now, I recall hearing about other tricks people try when it comes to getting extra value at such establishments. But I’ve never really thought about it, perhaps surprisingly. This time, it actually took the lady behind the counter to tell me about it on her own

After hearing her tell me all about this loophole, I laughed and told her that if I come back there, I’m going to do the exact same thing. What was interesting is how she and another employee there who overheard the conversation were both telling me that I might was well. If others try this, why don’t you? They didn’t have a problem with it. Plus, it’s yet another example of how it doesn’t hurt to ask for a discount, or at least think out of the box to try to get a better deal.

My Squirreling

The thought definitely crossed my mind later that I should have asked them if they could change my order to a Tall, which was a mistake I made. I was busy talking with them about the whole idea, and trying that next time, that I didn’t think of asking for the discount right away. The order was complete anyway and they rang me up, and next time would be fine anyway!  However, I did manage to get something small out of the deal.

I realized that they use 2 tea bags to make your tea. Right away, I saw a small opportunity. I asked her if I could only use one tea bag for this order. However, I wanted to keep the other tea bag and possibly have it later.

She smirked, and said that it would be fine. No problem. I asked if other people do this, and she mentioned that very few people ask, but some have.  So, I took that extra bag of “Passion” tea and brought it home.  Hey, every little bit counts, right? I’ve picked up coins at a drive through before, so I’m not above saving a few nickels this way either

My Questions for You:

Has it ever crossed your mind to think of a loophole when buying something at a retail establishment? If so, please feel free to share.

Have you heard of other people pulling off other “arbitrage” opportunities like this, whether at a coffee shop or anywhere else?

Would you like to have more money and work less? I”m sure most people would, even despite a few displaying bravado of how much they are driven to work for work’s sake.  The reality, I think, is that much of this work is based on the need to work.

Here’s a simple way to work less: spend less

I think it’s one of those common sense principles that gets lost in the noise of personal finance blogs, books, shows, etc.  If you don’t want to work forever, spend less money. Additionally, keeping your baseline, “steady state” expense level low can really make a big difference over time.

A while ago, I wrote a post on how time is money, where we discussed the topic of how long we actually work in order to buy things. In looking at it, I think that this concept can be revisited and used to consider how much less we would have to work if we don’t buy something.

Let’s take an example of somebody earning a salary of, say, $60,000 a year. If you divide this salary by a standard full-time calendar of 2000 working hours, you’re at $30 per hour. Taking this effective hourly salary calculation, what if this person had the opportunity to take a deluxe vacation that would cost $3,000. Or, he had an alternative of taking a more modest, no frills vacation for $600.  Both would be relaxing, but the expensive one would entail high end hotels, fancy meals, etc. The difference in costs would be $2,400 dollars – or 80 hours of work. 

Thus, the high end vacation would cost an extra 2 weeks of work.  Makes me consider the notion of a vacation – which is supposed to recharge us – actually creating more work!

The concept is not just about vacations, obviously. The idea is that incremental expenses cost incremental work. Want to go out to eat for dinner and drinks? If the person in the example above dropped $35 on that, as opposed to a simple $5 meal at home, it would cost an extra hour of work.  Want to buy a $100 pair of jeans, as opposed to a $40 pair of jeans? That’s an extra 2 hours of work. Clearly, these choices can add up.

With bigger expenses, the impact is greater. Want to buy a house that’s $90,000 more than an alternative, good enough home? Well, you’re going to work away an extra 1.5 years of life at the income levels noted above.

When taken together, our spending decisions contribute to our need to work longer. If we ask ourselves the question of “How much work would I save by choosing the less expensive alternative”, it might help us with our quest to make smart purchasing decisions. It’s a question that’s an easy way to help us save money and work less.

My Questions for You

What do you think of the concept of figuring out how much work could be saved by making cost-conscious purchasing decisions?

Do you ever think about not wanting to need to work forever (as opposed to working because you choose to)?

Saving money can be fun for some of us. The idea of spending less money that we would have otherwise spent on something brings a small dose of satisfaction. Usually, that means buying less, substituting a less expensive choice for a more expensive one, or getting something on sale.  Here’s a different way: bargaining and asking for a discount!

Admittedly, I’m not someone for whom this comes naturally.  However, I came to realize something recently. What might seem uncomfortable at first can actually be fun when you generate successful results!

Previous Unsuccessful Bargaining

My previous approach to asking for a discount can be illustrated by an experience on a trip overseas many years ago. I had to pass through Hong Kong – and stayed a few days. Perhaps it was being far away from home here in the Midwest in the U.S., and being in a place where nobody knew me – but I tried to bargain a couple of times. I did have a little success on a few things, getting a couple of deals. But then, I had a failure.

There was a street vendor selling t-shirts for $2 – might have been in Hong Kong Dollars. Anyway, I thought I could bring some back as gifts, so I made a bulk offer: how about 7 t-shirts for $6? I was trying to walk away feeling happy to get them for less than $1 each.

The guy said something I didn’t understand, as I did not understand Chinese. But clearly, it was not nice what he said! He then waved me off, gave me a nasty look, and said in English: “I’m not starving!”.

Maybe it was because I was younger, but I was actually a bit embarrassed. I walked away, and didn’t try to bargain with anyone there again. Not sure why I reacted so timidly, but I did.

Recent Successful Bargaining

I’ve been more interested in pushing for bargains in the last few years. Not often at all, but opportunistically. One example was just in the last few weeks.

First off, the purchase was a pure impulse buy. It wasn’t a need, but a want. So I’ll admit that up front.

We were at the local mall, and one of my kids noticed a kiosk with a bunch of stuffed animal pillows, and a few smaller animals.  She found one that she got really excited about, and asked if she could get one.  I guess we could say that she was successful in bargaining, because my heartstrings were tugged at and I didn’t immediately say no like I normally would.

Anyway, I wanted to ask the guy running the small kiosk how much this small stuffed animal was.  However, he was helping another customer who was excited over some other toy being sold. She wanted to purchase it, and asked him if he took credit cards. Clearly, he did, based on the reader right there.  However, the kiosk owner pushed back, and asked the lady if she wouldn’t mind paying in cash if she had it.  She said ok, and they made the transaction.

I took note of his interest in cash, and his own willingness to haggle a bit. Then, when it was my turn, I made my move.

My question: “How much is this?”

His response: “Uhh….$6.95″.

I paused for a second, then thought I’d lowball.

My response: Pulling a $5 bill out of my wallet, and saying “I can pay $5 cash”.

He paused, looked at me, and said “Ok fine”.

Success! It felt great to walk away paying less than the initial asking price!

At first I thought maybe he gave me an inflated price, but I then noticed that $6.95 was indeed the noted price.  So hey, just by asking, I got a $1.95 discount! On a percentage basis, that’s 28% off.

The Lessons.

In this case, it doesn’t matter that it was a want vs. a need, or that I willingly gave in to the ‘negotiation’ of whether or not to buy this toy. Also, I know it’s funny that as a grown man I’m getting excited about getting a deal on a stuffed animal.

Yeah, I know

So looking past that, what we can take away from this is that it doesn’t hurt to ask for a discount! In many cases, there’s very little downside.  Additionally, even when you just save a couple of dollars, it’s fun to successfully bargain for a deal!

Imagine how fun it would be to actually get a deal on something where you actually paid hundred of dollars less than asking price?

My Questions for You:

Do you like to haggle for a deal, or do you prefer to avoid such negotiating?

Do you have any tips for successfully getting a discount?

What’s the best deal you have gotten when asking for a discount?

Loss Leader?

With Halloween upon us, we recently went to a pumpkin patch as a part of having some seasonal fun. The weather was pretty decent, so it was a good day to go out there and enjoy the experience. It’s fun for kids, fun for doting parents,  and it’s generally inexpensive. What a deal, right?

Now, up front I’ll say that it was a lot of fun going – and I don’t have regrets. I got some great pictures in, and made some memories along the way. It’s priceless seeing a kid enjoy taking part in fun fall traditions, and carrying out a pumpkin!

Good times, indeed. Worth every penny for the reasons I mentioned above. This in spite of being expensive, due to being taken in by the creative use of a loss leader by the pumpkin patch!

A loss leader is of course a product that’s sold at a low price, in order to entice the purchaser to buy additional, more profitable products. I always think of the razor blade model as an example – razors are sold for a low price, but the replacement blades are pricey. Perhaps a better example might be the super cheap, $0.01 two-pocket folders I bought during back to school sales.  These incredibly low prices probably didn’t offer a profit margin for the store, but it got people in there to buy other, more expensive items while already there. Supermarkets doing this quite frequently as well.  We’ve all seen this in play.

At this pumpkin patch, the pumpkins are all up front near the entrance gate. It’s actually at a farm, which has a ton of space. Anyway, the place is known to have low prices on pumpkins, relative to the local area. It probably draws others in that way too – we picked up 2 decent sized pumpkins for about $3.50.  Not a bad price.

Of course, there was a catch!

As you looked past the pumpkin area, ahead of you was what amounted to a big autumn carnival. They had all kinds of rides for little kids, animals to pet, and other seasonal activities. They had fresh corn on the cob, as well as a makeshift dining area where you could buy lunch. Additionally, they had a kind of country store in a big barn, with apple cider for sale and a ton of gifts, candies, and things of the like.  This was much more than a simple pumpkin patch, in reality.

The prices for these other activities were not low. A kid’s ride? $2.00 to $3.00.  A bottle of water? $1.75. How about this: want to feed some parakeets (yes, they actually had this): $1.00 – I think. Might have been $2.00.  You get the idea.

Bottom line is, we spent over $25 extra, beyond the cost of the pumpkins. We were lured in.  It’s way easier said than done to say no to excited kids during that time, and I wanted to give them a good time anyway. It was worth it.

It was also a good reminder of how a loss leader can be used to draw you in to spend more than you originally expected to.

My Questions for You

Have you ever fallen for any loss leader pricing strategies?

What strategies do you have for either avoiding or taking advantage of such enticements?

Do you have any examples to share of loss leaders that you’ve encountered?

Recently, I had to purchase a box of envelopes after discovering that I didn’t have any at home. With online bill pay, the need for envelopes just isn’t top of mind in my home. However, once in a while you need to actually send a check via mail.

Anyway, I added buying envelopes to the list of things I needed to get done on that day. So, on my way to a local Wal-Mart, I spotted an office supply store very close to my destination and immediately thought “Envelopes!”.  So, I stopped on in and searched for envelopes.

Once I found the aisle with envelopes in the office supply store, I narrowed my search to the standard security-lined variety.  In doing so, I was searching for the best value. After all, an envelope is an envelope, right? Now, I didn’t want to buy in bulk and buy too many, so I settled upon a box of 45 for the price of $4.49.

After I paid, I got back in the car and drove over to Wal-Mart. As I walked into Wal-Mart, I quickly went through the store picking up the few items that I needed.  Before I got to the checkout area I thought about my envelope purchase just 20 minutes ago from the other store. That got me curious about what the cost would be for envelopes from Wal-Mart, so I walked over to the supplies area to look for envelopes and satisfy my curiosity.

As I found the envelopes section, I quickly found a box of security-lined envelopes. A glance at the price yielded a surprising figure: $0.97. That’s right, 97 cents!

I did a double take, and it was definitely $0.97 for a box of envelopes. I then looked at the box, and yes – it was for security lined envelopes. I very quickly thought “what about the number of envelopes in the box, maybe there are less”. Well, I looked at the box and it indicated that there were 40 envelopes in the box.

So let’s revisit the prices again (excluding taxes):

Office Supply Store: 45 envelopes for $4.49 – about 10 cents per envelope

Wal-Mart: 40 envelopes for $0.97 – about 2.5 cents per envelope

Basically, it cost me 400% more to buy envelopes from the office supply store vs. Wal-Mart. But wait – isn’t the former an office supply store after all?

Well, it might be, but that doesn’t mean that prices will be lower there. Now, for all I know the envelopes from Wal-Mart might have been a bit lower quality. Who knows? But as I mentioned before, an envelope is an envelope for these purposes, right?  To pay 4 times as much at an office store seems a bit crazy.

Doing so would almost be like ignoring coupons or coupon codes that could instantly help save money. For example, for a different type of purchase in an entirely different store - let’s say soaps, lotions, etc – you could take advantage of a coupon code to save money. So clearly, across product categories and stores, there are ways that we can save money.

Anyway, back to my specific experience – I went ahead and bought another box of envelopes, this second one from Wal-Mart. I had to go back the other direction anyway, and then stopped at the office supply store and returned the envelopes I had bought there.

Lessons Learned:

• Just because a certain store specializes in a certain type of product, it doesn’t mean that it offers a better price than a general retailer
• Prices for given products can vary significantly from store to store – even as much as 400%!

My Questions for You:

• Have you ever bought something at one store, then discovered that you could have purchased it cheaper somewhere else?
• Have you ever noticed any products for which there’s a wide range in prices, depending on where you buy them?

We all would like to have more money, right?

Well, maybe all is a strong word. Some people are totally content with what they have, and don’t think they need more. However, most of us fall into that first group. We would like to have more money!

Here are 5 steps for increasing your savings:

1. Discern wants from needs.  Figure out what you truly need, and distinguish these needs from what you want. Do you need a car? That’s probably the case, for most us.  Do you need a new car that costs $35,000? No. You could always buy a lesser brand that’s still reliable, and pay $20,000, for example.  Or, better yet, spend even less on a quality used car. The brand name is a want. The ability to safely get from Point A to Point B is a need.
2. Track your expenses.  Instead of spending indiscriminately, track your expenses. If you track cash outflow down to the penny, you can get a really good idea of where your money is really going. This can help you figure out where you can cut the fat, so to speak.
3. Live within your means.  OK, if you follow Step #2 above, you know how much you’re spending and on what you’re spending, right? Now you need to make sure that this fits within your income. Most people have a much better idea of what they earn than what they spend, it seems.  If you have both pieces of information, you can make sure that you’re spending responsibly.
4. Maintain a gap between income and expenses.   Once we’re able to live within our means, we can take steps to make sure that there’s a gap between our income and expenses that results in savings.  Of course this means income exceeds expenses, not the other way around:) Many people say 10% is a good figure, but I think that is way short for most people. Working up to 25% or more is more realistic, in my opinion, for today’s reality of a self-funded retirement.
5. Preserve and grow income.  Thus far we’ve focused on keeping control of expenses. That’s certainly important. That being said, we need to actually have money to save, before we can work on saving it! Let’s not take for granted the cash inflow part of the equation.  Working to maintain income first, and then working to increase income, are vital to our overall financial situation. Doing this, while keeping expenses under control as detailed in Steps #1 to #4, can supercharge our savings efforts.

The net result of increased savings is more money in our bank accounts.  From there, we can choose the best accounts for our needs. Ultimately, taking the money in these accounts and investing intelligently with a good rate of return (and time on ours side), we can work toward a bright financial future.

My Questions for You:

What steps have you taken to increase your savings?

Where do these steps above fit into your savings efforts?

When making everyday purchasing decisions, we have variety of ways that we determine whether or not something is a deal.  Maybe it’s at a low price compared to the price we’ve seen it elsewhere. Perhaps, it’s priced well compared to substitutes. For some of us, we consider how a purchase fits into our budget.

What about thinking about how a purchase impacts our long-term financial situation?

On the surface, this makes sense. The more we spend now, the less we might have in savings later.

For example, let’s say you’re deciding between 2 vacations for the summer:

1. An inexpensive, 4-day vacation that’s within a few hours from home, with fun activities and solid if unspectacular lodging. Cost: $1,000
2. A pricier, 7-day vacation that requires booking a flight across the country, also with fun activities, but more upscale lodging. Cost: $3,000.

If these are your two alternatives, you have a decision that involves an incremental $2,000 at play. So, by choosing option #2, it can be said that you’re taking $2,000 away from your future retirement. That is, assuming of course that you would saved it instead of splurging on something else. That’s an assumption to be sure, but let’s go with for now.

Down the line, you’ll have to earn an extra $2,000 to make up for that amount, right?

I think that might be true, but in reality it could potentially be a lot more than that. As I postulated in a post last year (when Squirrelers was fairly new), what you spend today could mean something very different in the future. Your opportunity cost is not just what you spend today, but what that money might become in the future.

Let’s take that $2,000 from the example above.  What would that be worth in the future?

Well, let’s assume it’s invested and grows at 5% per year. Let’s say this is after taking inflation into account.  That $2,000 will be worth the following amounts, at different points in time:

Clearly, that $2,000 which was spent turned out to be just like spending a lot more future dollars. Factoring in growth, that vacation actually cost $8,644!

Crank up that growth rate to 8%, and this $2,000 becomes something much more:

$20,125 after 30 years. That sure was an expensive choice, to upgrade to a deluxe vacation!

Now, the purpose of this exercise is obviously not to focus about different expected rates of return, or the merits of spending on vacations. Rather, the takeaway is that when we spend money today, we’re really spending a sum of money that might be worth a lot more in the future.

From big purchases all the way down to the smallest purchases, I think this concept holds.

My Question for You: 

Do you think about how a sum of money today can be worth a lot more in the future, and connect it to spending decisions made today?

Do you have an emergency fund?

Well, if you read many personal finance books or blogs, you’ll consistently get recommendations to have one. Typically, I’ve seen people recommend 3 to 6 months of expenses as a part of an emergency fund. Sometimes you’ll see higher, such as 6 to 9 months, but over the years I’ve seen lesser amounts recommended.

I don’t think that’s quite enough.

After giving this some thought of late, I think it’s a very sound approach to keep at least 9 to 12 months on hand for emergencies.

This exceeds what I tend to read elsewhere, but the more I think about it the more it just makes sense. 

The big reason I see is that traditional advice for this area of personal finance seems to be stuck in a different time period, under different economic conditions.

In the recent past – prior to the last few years, anyway – the employment situation here in the U.S. just seemed a good deal better. Now, while the stated unemployment may say one thing, I think there are plenty of people out there who have given up looking for work or are underemployed in some capacity.  It may not be apparent at all in certain metro areas, but is more than clear in others. In other words, if someone suffers a job loss, it just might take a while to find another comparable position.  3 to 6 months may not get it done. This happens to people all the time.

In addition to job market considerations, what about medical emergencies, accidents, and other health-related crises? Best to plan for just in case something happens. Sure, we have insurance, but that might not cover every expense in the case of emergency.  Things do happen to people. While the odds of any one thing happening might be small, when you consider all the risks out there, it puts into perspective the chances of something happening.

What about home and car situations? Maybe your hot water heater will go out, or a sump pump will fail. Maybe your car will break down and require significant repairs. Again, things happen.  Sometimes, multiple things can happen at once.

One great thing about having a substantial emergency fund is that is gives you more peace of mind and confidence  in your ability to deal with situations such as the ones I mentioned above. There’s something to be said about the “sleep well at night” factor when considering one’s ability to handle sudden financial needs.

Last month, I posted about an interesting survey of which I saw results that indicated nearly 50% of Americans would have serious trouble coming up with an unexpected $2,000 expense.  Now, how many months of expenses do you really think that is for most people? No way that it’s anywhere close to the 3 to 6 months mark. Realistically, tons of people are having trouble coming up with money that equates to even 1 month’s worth of expenses. 

Saving money can be a challenge for many people, darned near impossible for others it would seem. We all have different lives, and some have some very real, genuine difficulties. So, I acknowledge that finding the money to save 9 to 12 month’s worth of expenses for an emergency fund may not seem easy.

That being said, I think that if somebody (or a family) can build an emergency fund that can push 1 year, it can really alleviate some concerns, stress, and some very real financial risks. Avoiding those things is good, right?

What do you think?

Do you think 3 to 6 months is sufficient for most people, or do you think something closer to the 9 to 12 month range I advocate makes sense?

Do you have an emergency fund for yourself (or family)? If so, how many months of expenses can you cover?