Clear Thinking about Your Financial Priorities: Podcast Episode 93


Hello YNABers. My name is Jesse Mecham and this is podcast number 93 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

A little bit ago Mark posted on the blog about his savings priorities. I wanted to pull him up really quick. The post was from July 30th, so almost a month ago, and this is where he was at. He wants a one month buffer, $5,100; number two, a three month emergency fund, which would be $15,000; three, pay off all debt other than the primary mortgage on the house – and he’s talked about this, it’s roughly $72,000; then four, finish his basement and make other home improvements; number five is save for kids’ college; and then number six is save for his retirement.

So, here’s how I would shake things up a little bit. I liked Mr. Money Mustache’s approach that he talked about debt. He used some colorful language so I won’t quote him, but he said you treat your debt like a massive emergency. I think he might have tied it into bees crawling all over your face or something like that – I can’t remember it. I just remember laughing and it resonated. But he saw debt as a HUGE emergency. There’s a little bit of momentum that needs to be built, and not having any buffer at all could kill that. So what you don’t want to be doing is going back into debt as you’re trying to get out of debt. And you’ll be going back into debt because you are operating on a very, very tight rope. So, we agree on the one month buffer – Mark and I do. It just optimizes everything. It’s just oil in the machine to let things run really smooth.

The three month emergency fund he calls $15,000 – I’m okay with your one month buffer being part of your emergency fund. I think it makes perfect sense. When there’s an emergency you step out of the buffer a little bit if you have to. You make things happen, you sell stuff or whatever it takes, and you get back on track. But a one month buffer – that’s one month’s expenses and he wants three. I say if you’ve got your one month buffer you’re already there. You only need two more months of your emergency fund. Personally, I like a six month emergency fund – but not until a lot of other pistons are firing.

So, that three month emergency fund he has, I’d put it down to two months and I would move it after paying off all debt. So we would be at one month buffer, then once that buffer is complete next extra dollar goes to paying off all the debt other than the primary mortgage on the house. And Mark’s talked about this on the blog. He’s going to be looking at his freelance income as the money that basically makes a big dent in that. Once he has that debt paid off, he’ll have some improved cash flow that he can use to fund him toward these other goals.

Number four he had as finish his basement and make other home improvements. That to me is freaky. Not so much finishing the basement – you can put a dollar amount to that – but making other home improvements. Maybe I wish he would have delineated exactly what that was. I don’t see those as critical unless there’s something bigger going on that he hasn’t mentioned that made him bump that to number four. I would probably put it somewhere with the kids’ college.

So, number four for me is saving for retirement. Once you’ve paid off all the debt, then you go to the extra two month emergency fund, then you save for retirement. And at retirement he has $1.5 million – that sounds good to me too. It’s fuzzy there. The biggest number that controls your retirement is what you spend. So, you spend less, you’ll need to save less, your burn rate won’t be as high on your nest egg. That number gets so glossed over in all these fancy money magazine articles, but what you spend makes a world of difference.

So, saving for retirement is… Oh gosh, people, I’ve lost it! One month buffer, pay off all debt, finish up the emergency fund – another two more months plus the buffer gives you three months, save for retirement – at least 15%. Then I would split 50/50 between saving for the kids’ college and finishing the basement. I put retirement above kids’ college because I would rather have my kids worry about themselves when they’ve got… I mean, Harrison just asked me the other day, “Dad, do you think I’ll live to be 133?” and I thought, “Yes, you probably will!” By the time you get old enough, and who knows what kind of medicine we’ll be doing and bionic limbs and what not. So I said, “Yes, you’ll probably go to 133,” and he seemed pretty pleased with my answer. Anyway, they have a long life to worry about their own finances and you need to take care of yourself. Unless you want to depend on your kids, which is perfectly fine – it would just be a frank discussion as they get older. A lot of cultures do that. In America we tend to not. But anyway, that’s a discussion to have with your kids. I’d split 50/50 between the basement and the kids’ college. My guess is that Mark has more behind finishing the basement than he wrote in the blog post as to why that would be high priority.

So, that basically is it, and that’s basically what Julie and I have followed. I’ll recap one more time. One month buffer, first and foremost. Then pay off all your debt except your primary mortgage. Then finish up the emergency fund – two more months, basically so you have a three month buffer plus two months. Then save for retirement – at least 15%. Do more if you can. Then split between saving for kids’ college and finishing the basement. I’d try and pay off your primary mortgage. It feels really good. But if I wanted to support my kids through college I’d obviously put that after that.

Other big things like your daughters’ weddings, let’s just hope my daughter wants to have a cheap wedding. Or let me put it this way: let’s just hope that I can stand my ground when we have that discussion.

So, those are kind of my priorities, and once you’re doing that then you just start funneling extra money toward investing and just doing what you want. It’s surprisingly anticlimactic. At the end of the day you realize, “I’ve got a good life, I’ve got my health, I’ve got my kids, I find joy in certain things.” And beyond basic needs and then some extras where you’re finding that joy and where your values are attached, more money for its own sake is a big snoozer.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.