If I Were My Financial Advisor, What Would I Tell Me?
I’ve had a few people ask me for financial advice recently. I really enjoy these conversations (though I start with “I’m not qualified in any way to give advice”) – so much so that I decided to have one with myself.
There are plenty of shortfalls in our financial situation, but I’ve become inured to them. We’ve lived with them for so long that we’re blind. So I decided to put on my Objective Hat and take a hard look at our situation.
Objection 1: Why do you only have $1,289.12 in your emergency fund?! Even three months’ expenses would be $6k or so… What would happen if one of you got kicked out of your program, or Kyle graduates without a job?
Objection 2: What exactly is your nest egg savings account for? Is it a secondary emergency fund, a checking buffer, a short-term savings account, or for something long-term?
Objection 3: Why the heck do you have all these savings accounts? Doesn’t this get confusing? How can you properly pull money for expenses as they come up?
Objection 4: Um, you might be saving too much for retirement. Seriously, over 15%? And you don’t have cable, hang-dry your clothes, and “can’t afford” to replace your six-year-old bathing suit? Something is unbalanced here.
Objection 5: Your savings seems to be all for the very short-term and very long-term. Don’t you want to buy a house at some point – or even a car?
Objection 6: I think putting money you needed in 3 years into the stock market was too risky. You should move more of it to CDs and money market funds.
Objection 7: … Do you even have clearly articulated financial goals??
The big question now is: Will we make any changes based on this assessment? There are reasons these situations arose, of course, but they shouldn’t matter now. For instance, why can’t we consolidate our nest egg into our emergency fund? (Answer: Because then I wouldn’t feel free to pull money out of it and I like having it as a buffer.)
What’s your biggest financial blemish currently? If you could choose one of these objections to correct first, which would it be?
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These mostly don’t seem bad – you’re saving a lot, and you criticize some of the ways you divide up that savings, but that’s easy to fix. Just move things around! You could save a little bit less for retirement and throw more into your emergency fund temporarily, for instance.
My issues are actually somewhat the opposite of yours. We don’t save enough for retirement (6.5% out of paychecks, and up to 15% with “found money” but that’s been scarcer this year), but have a big emergency fund (we could probably last a year off savings, I’m paranoid). We also leave enough wiggle room in our monthly budget to deal with periodic bills like yearly medical, car insurance, and bursar bills, but never actually plan them out in advance, so they always seem like a surprise and make me feel short on cash – the opposite of your many accounts. Should probably sit down and work that all out.
I’m with you on “no medium term savings” though – we have a travel fund that we’re hoping to use for a big trip pre-kids, but nothing for, uh, post-kids! Or for replacing a car. Good thing we can’t really imagine buying a house anyway. I think medium term is pretty hard to do when you feel like you don’t have that much money, but I guess everyone must have that problem.
The real problem is that I’m so obsessed with maxing out our Roths even though it’s probably not the best thing for us. We could definitely have a decent EF if I wasn’t fixing my eyes on the $10k mark.
That is a very nice EF! Will you be less paranoid when you’re out of grad school/the economy improves or do you think you’ll always want a high one?
In general our many targeted savings do work well and I’m happy with them for the reasons you mentioned. I’ve just been rethinking how to deal with the unanticipated/non-regular expenses like car repairs vs. the very regular ones like car insurance. Right now they’re lumped together but it’s giving me a bit of a headache.
It’s hard to tell which ‘problems’ are specific to grad school – like not having medium-term goals – or if it’s something we’ll always struggle with. Time will tell, I suppose.
I love those conversations too! A coworker once talked about not contributing to his 401(k), so I sent him a nice long email explaining why he should, even if it was just to get the match.
I actually had never heard of the term ’emergency fund’ until I started reading PF blogs. I had always kept a strong cash reserve. I also have a history of borrowing from it and paying the money back. So I guess I don’t have the caution in my head against that that you do…
I think the most important thing, more important than saving for retirement, is that you have enough money set aside to cover expenses in case Kyle doesn’t get a job and you have to live off of just your stipend for say, 6 months.
I personally couldn’t have imagined buying a house anytime soon or a condo, but since my cash savings kept building up, I eventually did start thinking about it.
What’s my biggest financial blemish right now? Hmmmm. I used to say that I was saving too much, but I wouldn’t say that anymore. Maybe it’s that I spend too much time thinking about money when I don’t really need to?
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I think PF blogs have influenced my sense of an OMG-do-not-touch EF. We never had one until 2010 when we got married and my leftover cash reserves (mostly spent on wedding stuff) became our official EF. I think the purposelessness of our nest egg makes us sustain this situation – is it cash reserves (more or less same as EF) or are we going to throw it all at a down payment eventually (in which case we will need a nice EF or other reserves)?
Living off my stipend alone… that is seriously a nightmare scenario. I did kind of prepare for it in a previous exercise. Honestly though, I don’t know anyone here who graduated and was forced out without a job (though some leave of their own volition). Usually graduation is delayed or a postdoc is arranged for within the institution until the permanent job is found. But still, it is a possibility and we should prepare for it.
But are you worrying about money or just thinking about it? I think the latter is more of a hobby but the former could cause a lot of stress. That’s coming from someone who also thinks about money far, far more than average (in an effort to reduce stress, mostly).
If I had been your advisor (back in “the day”)I would have recommended you clean up the number of savings accounts and emergency fund deficit first.
I wouldn’t have touched your long term savings plan until we saw whether you were actually ahead or behind on the goal. If you’re gut is correct, and the amount you’re saving there was too much, then I’d use this money for your mid-term goals and to fill in the emergency fund deficit.
All of that would have been AFTER clearly defining your goals.
There’s also no discussion of risk management. I would have had you walk through potential risks to you and then decided what the right levels of insurance were there. Often that’s a money saving exercise, but sometime it’s just shifting what you pay for insurance into the right types.
Great post. Fun exercise. I wish more people did this!
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Thanks for commenting – I had hoped you would!
Are you in general not a supported of multiple targeted savings accounts, or do you think it’s just gotten a bit out of control for us? I do like them, but I think we would feel like we had more money if we had all of them pooled. Not sure if that’s good or bad.
I guess I didn’t mention insurance because I’m happy with our current coverage. I’ve looked into the types of insurance that we don’t yet have and I don’t think they’re appropriate for us at this time.
One of the reason we lack mid-term goals is our uncertainty about where we’ll be living in a year or two, and how much we would value replacing a car now vs. doing it when we have real jobs. I can’t help but look forward to better times in the future and not want to sacrifice so much more now to pay for something in a few years (like a car or a down payment on a house) when it will be comparatively easy to save once our incomes are higher. For instance, if we want to save $30k for a house down payment, that’s 60% of our salaries now, but only 20% of a totally reasonable estimate of our yearly salaries two to four years from now.
Maybe we will pay someone with credentials to have this conversation with us… 🙂 These are all sounding like pretty poor excuses!
In terms of the emergency fund, the first question to ask is if you can live off of just one of the incomes. If you can then the need for drawing on your emergency fund is greatly diminished to the scenario of both of you loosing your incomes.
Even then, while I don’t know how things work for you now, once you are both working regular jobs (whether university or private sector), unemployment insurance will become a fall-back. If you could live off one income, then you should be able to live off two unemployment checks.
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We would be in a slight deficit if we had to live on one of our stipends, and actually our EF would last quite a while (see my response to Leigh). In the unlikely scenario that we both were unemployed, we have plenty of cash as well as some non-retirement investments we could liquidate… They’re just all outside of the traditional EF. 🙂
I hadn’t even thought about unemployment insurance and I have no idea if we’re eligible now!
We run at a slight deficit on just my wife’s income as well, but it can work in a pinch.
I took a look at NC’s unemployment benefits information and didn’t see anything that would limit eligibility of someone to receive unemployment benefits, other than the standard “out of work through no fault of your own” (i.e. not fired or quit). Is your stipend counted as earned income on your taxes? If so, you should be eligible if that dried up.
Edward Antrobus recently posted..The Warren Buffet Congressional Reform Act
Yes, we are both paid with W-2s. Good to know! I might look into this further to see what benefits graduate students who leave or are forced out of their programs might receive in various states. Thanks for the idea.
Cool post! I think my biggest financial blemishes are 1) My e-fund is too small 2) I have no retirement savings, all the savings are short term. Other than that I think I’m doing ok.
Jordann @ My Alternate Life recently posted..I’m An Idiot
You’re aggressively paying down debt though, right? So you have a priorities that you’re sticking with. I think that’s fine.
If I were your financial counselor, I would tell you that you were way ahead of the game for your age. I think you guys are doing awesome!
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Thanks, Holly. 🙂 I hope that will mean later in life we’ll be able to let off the gas a bit. In some ways I don’t like to compare to others our age – I would prefer to just ask if we’re meeting our goals and living a good life on our terms. I need to put some more thought into what that really means, though.
I like your hat! I’m putting too much toward loans and not leaving enough buffer in savings. That much I know.
Kathleen @ Frugal Portland recently posted..Save Up: It’s like gambling without the cost
Are you following the DR $1k EF? I guess you have to judge how much you’re overpaying your loans (that money could be used toward an emergency) and how much time you have left.
Your decisions honestly don’t seem that out in left field – I could live with any of them. Sometimes its not so much what decision you make, but that you actually made one (rather than doing nothing)!
And on No. 4, I don’t think you can save TOO much for retirement! It just means you’ll be able to retire (or be richer) than the rest of us.
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What I’m concerned about is saving so much for retirement that our current standard of living really suffers. I’ve made the (super arbitrary) reach goal of maxing out our IRAs without consideration for our current needs and mid-term goals.
Don’t worry, we do a lot of nothing, too! It took us a year to decide how to invest our money on that 3-year time horizon (could have been 4 years). :/
My biggest financial blemish is I can’t wait to see my retirement fund grow to my dream goal. It’s buried in stocks and I have to wait 10 years to have it built to my desired proportions. It’s all I think about most days when I have time to ponder. It doesn’t help when the market is down but I’m comforted with the thought that I don’t have to sell at this point.
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What are you going to use the money for in 10 years? A particular dream, retiring early…?
Early retirement:-)
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