Last week I argued that the cost of happiness is actually significantly less than the commonly-cited $75,000. This, I argued, is because we are bad at knowing which spending will make us happier and which will not.
This may lead you (quite justifiably) to ask me to back this up. If I claim that people should spend their money differently, then how do I think they should spend it? And can I prove that they will be happier?
If you stop and think about this for a moment, you will realize that there is no connection between the numbers above and any sort of age. We’re not saying that you will be able to retire when you hit 62 or 65 or 59.5.
We live in a world where decisions abound. We have a plethora of options when it comes to just about everything. The alarm goes off and we decide whether to get up or hit the snooze button. We decide what to eat for breakfast. We decide which shampoo and soap and toothpaste to use. We decide which clothes to wear. We decide what method of transportation to use to get to work. We decide which route to take.
Everybody knows that they need an emergency fund (despite the fact that not enough people have them). Nobody wants the stress of being unable to handle a medical emergency, the loss of a job, or a car that needs repairs. But what priority level should your emergency fund be compared to paying off debt or saving for retirement? How much do you actually need to save? And should it be in all cash or invested? These are the issues we’ll be looking at today.
When to Start Saving
The loudest voice in personal finance is Dave Ramsey. Ramsey tells his readers and listeners to first save $1,000 in an emergency fund, then pay off all non-mortgage debt, then build the emergency fund to 3-6 months of expenses. And all of this before contributing anything to retirement savings.
When given an option between a reversible decision and an irreversible decision, we tend to prefer the former. We like money back guarantees. We like no strings return policies. There is something comforting about knowing that we can change our minds in the future.
There is less pressure on us to make the perfect choice. We are not stuck if we make a bad decision.
This is assumed to be due to being in their formative years when the 2008 recession happened. One expert noted that prior generations saw “plenty of boom times where the stock market was going up, home prices were going up, so they didn’t feel they had to save.”
Millennials saw that markets can go down and home prices can go down and placed more emphasis on emergency savings and a bit less on consumption.
Sometimes I will read the same piece of advice across a dozen personal finance books and a host of personal finance blogs. My brain will automatically start pushing that to the back of my mind as common knowledge.
And then, sometime later, I will be interacting with someone in the real world and remember that it is not common knowledge. I will remember that I am a weirdo and normal people don’t spend their time reading personal finance books for fun.