Lazy Man and Money

Do It Now: Check Your Emergency Fund

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Recently, I’ve been thinking about how I written a lot about personal finance over the years. I just came back from a financial conference with thousands of people who produce tons of personal finance content (including video and podcasts) every day.

That’s a lot of talk… and as Aerosmith’s Steven Tyler says:

Talk is cheap, shut up and dance

So today, I’m going to channel my inner Suze Orman. I’m going to assign you homework. And you better do it!

Check your emergency fund. That’s it. If you don’t have one, today’s assignment is easy: START ONE

Don’t be worried if you don’t have one. Don’t even be worried if it isn’t much. I’ll let you on a tiny secret:

I am embarrassed by how small our emergency fund

I’ll get to those details on that in a bit… we have an unusual, complex situation.

First, I want to help you figure out your situation. Then, if you are still interested, you can get your voyeurism on and read about mine. But only if you finish your homework. If you don’t eat your meat, you can’t have any pudding. Sound good? Let’s go!

How to Calculate Your Emergency Fund

To put it simply, an emergency fund is how much money you have in cash divided by your monthly expenses. If you have $9,000 in cash and spend $3,000 a month, you have an emergency fund of 3 months (9000/3000 = 3).

It’s usually easy to figure out how much cash you have. You look at your bank account(s). It’s tougher to figure out how much you spend. Did you eat at too many restaurants too much this month? Did you have a minor car repair? Did you find a big sale on chicken?

Those links above were a test to see if you are getting distracted from the task. I hope you didn’t click on any of them. You can always read them when you’ve finished.

To make calculating expenses easy, I’m inventing my own rule of thumb. What did you expect from Lazy Man, right? On average housing and transportation are half of people’s expenses. You may not be average, but you’d probably know if you aren’t. Thus you can roughly add up your monthly house payment and car payment and double it. So if your rent/mortgage is $1500 a month and your car is $300 a month it would $1800 a month or doubled to $3600. (Doubling accounts for things like food, gas, utilities, coffee, food for your monkey butler… whatever it is.

While rules of thumb may not be accurate, this whole exercise is about creating an estimation. I’ve found that this is the best way to get it done quickly and easily. For me, it works better than getting bogged down in the details until…

Hopefully this rule of thumb can get you to an estimation in 5 minutes or less.

How Much Emergency Fund is Enough?

This is a question that is debated constantly. Most people say 3-6 months of your typical expenses. Some like more security and that’s okay too. Let’s aim for the 3-6 months, because many people don’t have that.

Also, you can always worry about “more security” after you have “security.”

Did your calculation give you more than 3 months? I hope so. If not, you may want to consider it as your next money goal.

Our Emergency Fund Situation

I can’t assign you homework that I wouldn’t do myself. So here’s a little analysis of our emergency fund. I’m not giving you all the numbers, but you might be able to estimate them from the context.

Our emergency is about 6-7 months, so it isn’t as small as I thought above. It is above average, but it feels small. That’s probably because it comes with a lot of “but”s. (I warned you it was complicated.)

Our expenses are very large between three rental properties (all at 15-year fixed mortgages), our own primary residence (same 15-year fixed mortgage), kids’ private school, and other stuff like food, transportation, utilities, etc. We are fortunate that those last three are limited. Our cars are paid off. I’m good at putting together cheap dinners (now is a good time to click on that chicken link above). Our paid-off solar panels eliminate our electric bills.

However, if we lost a tenant (or two), our emergency fund would drop quickly. In the above, I assume our renters all pay their rent. That’s a bad assumption for an emergency.

Also, our cash is split in a lot of different accounts. It feels less because I have to keep some money in certain accounts to keep them from getting overdrawn. There’s not just our personal accounts, but our joint account, the business account for this website, the business account from the rental properties. More than a month needs to sit there to avoid fees. I put that money in and try not to even think about it. In a true emergency, we can get at it, but it doesn’t feel the same as if we a big account with $40,000 in it.

Additionally, and fortunately, we have quite a few different income streams. The diversity of income is, in a way, its own emergency fund. If I’m fired from one job, I have 3 others. That’s why our emergency is complicated.

Extra Credit

If you’ve finished all that, I have some extra credit for you. Simply leave a comment below with at least 50 words about your emergency fund and/or thoughts on emergency funds in general.

I’ll put what I consider to be the best 5 comments in a virtual hat and pick a winner at random. What do the winner get? A $20 Amazon gift card.

What’s Your Net Worth Growth to Income Ratio?

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If you’ve followed FIRE bloggers long enough (about 10 minutes will do), you’ll probably hear them talk about their savings rate. Many are saving 50% or more of their income.

In 13 years of being a FIRE blogger, I’ve never calculated my savings rate. For many people calculating a savings rate is may be easy. With our finances, calculating a savings rate presented a number of problems.

Before I get to those problems, let’s approach how an average person could calculate their savings rate. Let’s say you earn $50,000 a year. You try your best to max out your Roth IRA and 401K, but you also have a powerful need to eat food and have shelter. You’re able to save $10,000. That gives you a 20% savings rate ($50,000 / 10,000). You might want to calculate your income after taxes by looking at a recent pay stub and doing some multiplying. There are no savings rate calculation police checking your work.

It’s a little more complicated for us. Here are the main two complications:

  • I have a lot of irregular income

    I don’t know if who much my dog sitting or blogging is going to make on any given month, much less for a full year. I don’t know what freelance income I might make.

  • Our real estate properties are problematic

    We have three rental properties and a primary residence with 15 year mortgages. Some people may choose 30-year mortgages with lower payments and invest those savings. I could probably figure out what the savings would be with the rental properties by calculating the amount of the principle debt being paid off. I don’t know how to apply to our primary residence. I know I said there are no savings rate calculation police above, but I don’t know what would be close to accurate.

If forced to guess, I’d say that we have about a 50% savings rate. That would be based on the mortgage debt being paid off on the real estate properties and the retirement account savings. That’s the most we can afford with another $30,000 a year in education costs for my wife and kids.

Since I am envious of everyone else’s ability to calculate their savings rate, I decided to come up with my own metric.

Introducing Net Worth Growth to Income Ratio

I track our net worth with personalCapital and an office spreadsheet. I’ve been doing it for years. For this reason, it’s very easy for me to look up how much our net worth grew in any given year. As I explained above, I don’t know how much money we’re going to make this year, but thanks to our tax filings, it’s easy enough for me to look up last year’s numbers. If necessity is the mother of invention, laziness is the father of invention.

Plugging those two numbers into my calculator shows me that in 2018 we had a net worth growth to income ratio of 65.86%.* For example, if we made $100,000 last year, we’d have $65,860 of net worth growth with that ratio.

Where did I come up with this? Well one easily argue that growing your net worth is the most important thing in personal finance. Translating as much of your income into that net worth growth is important.

I was a little hesitant to move forward with this idea, but I reached out to Twitter and got some good encouragement. Here’s a sampling of the responses:

“Winning ratio?” I like that.

“Pretty elegant” I love that.

“More meaningful” than a metric in The Millionaire Nextdoor? That’s amazing praise.

Is the Net Worth Growth to Income Ratio Valid?

In some ways, it’s easy to criticize net worth growth. If the stock market does well (as it has) or the real estate market does well (as it has) our net worth is going to grow despite what we choose to save. It can be a reflection of past savings and investments in combination with our current savings and spending. I don’t know if this is good or bad. It can be seen as bad if great markets are masking a poor savings rate.

On the other hand, if you are able to get this ratio at 100% (the net worth growth and income the same number), you are essentially living as if you spent nothing, right? That’s a very good thing, right? This gives you more of a “bottom-line” view, which some could argue is all that really matters.

I know of a family where both spouses earn a very high income, but they spend a lot of it and are often wondering why they aren’t in a better money situation. This could be a quick tool to show them that making $300,000 may not be helping their financial situation because their their net worth isn’t going up and they have a very, very low ratio.

That last Twitter quote made a good point asking what happens if you are retired. In that scenario, you might not be earning much income, but you’d presumably have a nest egg that might be growing. I’d argue that savings rate doesn’t mean much if you are retired since you likely aren’t saving much of what I presume is an insignificant or tiny retirement income.

Someday soon, I hope to pull some of our old tax forms and calculate some past numbers to see what I can learn from them. Can you calculate your net worth growth to income ratio for last year?

* I’m mixing up ratio and percent a lot in this article. For our purposes, the nomenclature is no big deal.

Attempting to Fulfill Tyler Lockett’s Wishlist

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I few weeks ago, a Tweet from a football player caught my attention. Actually, it caught the attention of nearly 100,000 people who liked it:


I couldn’t agree with Tyler Lockett more. Lockett lists 10 items on his wish list. Of those, 6 are personal finance topics. I’ll cover them in a minute, but first I’ll tackle the 4 that aren’t about money.

  • Cooking – My high school had “home ec” classes that included cooking, sewing, woodworking, and power mechanics (how combustion engines work for example). It wasn’t extensively covered, but it is covered in school. Today, my 6 year old has an optional cooking enrichment class at his school.
  • Life Decisions – This is a really broad topic, and I’m not sure how you teach it school. Maybe it’s teaching critical thinking? Maybe it’s making a pros and cons list?
  • Single to Married – I’m trying to think of what that curriculum would look like. It feels weird to teach how to make a marriage work in school.
  • How to be a Parent – This may be taught in school. There are any number of sitcoms where kids bring home an egg and take care of it like a child. This isn’t parenting of course, but it is something.

With those out of the way, let’s dig into the 6 personal finance topics:

  • Budgeting – My sister site, Be Better Now, has covered The Three Budget Systems. This would certainly be part of a personal finance curriculum.
  • Filing Taxes – I’m not sure if this should be taught in school. After all, the current administration said they’d make it as easy as sending in a postcard. More importantly, the government can do taxes for us.

    Put all that aside, most people can use very simple, free (or very cheap) software to do their taxes. Those people could also use tax preparation services that relatively cheap. If you have complex taxes, such as a football player who makes millions (in multiple states due to the football schedule), it’s unlikely that school is going to teach that special case.

  • Buying Homes – This should be part of a personal finance curriculum in school. It’s much more complicated than I thought it would be. Fortunately, there are real estate agents who guide you through the process. That’s a bandage and I’d like to see our schools do better.
  • Investing – Yet another topic that should be covered in a school’s personal finance class. The curriculum doesn’t need to be too extensive either. It could cover compound interest, low-expense index funds, and asset allocation/risk tolerance in probably a few hours. This is classic 80/20 rule… most people would get the basics with very little time.
  • Generation Wealth – I don’t think this should be taught in school. I feel that if you get to the point where you care about generational wealth, you can afford to have financial advisors who can guide you through your specific circumstance. Nonetheless, this could be touched upon when explaining how compound interest works.
  • Credit – Building good credit is important. This would be a core section in my hypothetical personal finance curriculum.

I find it interesting that most of the “why didn’t they teach us this in school” is related to money. And it seems like many people agree it is really important.

So why isn’t personal finance taught in school? I don’t know. If you have the answer, let me know in the comments.

Teen Titans Taught My Kids Personal Finance Before Me

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Sometimes I find personal finance lessons in unexpected places. Sometimes it’s in a a Jack Johnson song. Other times it’s a kids’ cartoon. They can even pop-up in old re-runs of Fantasy Island that I started watching.

Note: This article may sound like an advertisement, but it isn’t (though Warner Brothers should reach out me). I’m simply a fan of the Cartoon Network show Teen Titans Go!

It started as simple self-preservation. On one hand, I could watch the “Fat Controller” berate Thomas the Tank Engine and his Friends for not doing their job, while ignoring the employees who are on the train. On the other, I could look for another show.

While we’ve tried a variety of other shows, the one we keep coming back to is Teen Titans Go!

For those who don’t know the Teen Titans Go! characters, it’s a basically a five teenage superheroes being teenagers. Instead of saving the day, they are usually doing something silly like finding out what the Tooth Fairy is really doing with all the teeth he (yes, “he” in the show) is doing with all our teeth.

Before we get to the personal finance lessons from the show, I have to mention the Teen Titans Go! to the Movies that’s in theaters. It’s very watchable for people who know nothing of the show and gets a 90% on Rotten Tomatoes, which is very, very good. It’s been compared to Deadpool for kids. Since I haven’t seen Deadpool, I can’t give an opinion on that.

Rather than write about the individual characters (as I could do for days), I’ll jump into:

Top Personal Finance Lessons from the Teen Titans

Money is Whatever Currency We On

In the episode Two Bumble Bees and a Wasp, Robin (of Batman fame) tries to teach the rest of the gang about money:

“Money is not to be wasted on things that bring you happiness and joy! Money is to be hoarded, until your have enough money that your money makes more money.”

I’m not sure too many children are going to pick up on that last point, but it certainly caught my attention.

Turning to a cartoon representation of money we get this lesson:

“I am paper, but I am also money. All I am is an agreed upon representative of credit. Something you trade for goods and services! So I can be anything.

They go on to ask whether money can be a pineapple. (Actually pineapples have been used as money in history.)

After Beast Boy insists that money is evil and rips up a dollar bill, Robin decides not to pay anyone until they respect money.

Flash forward to later and Beast Boy has a pizza. Robin would like a slice and offers to buy one with a dollar. He soon learns that the rest of the team has agreed that the new currency is bumble bees.

Yes, bumble bees. I told you it was a silly show.

It ends with this hilarious song and dance:

If you are interested, there’s a complete script of Two Bumble Bees and a Wasp here

Focus on Health and Wealth

In the episode, Think About Your Future, Robin announces that he’s buying the Teen Titans all jackets. Raven has an epatheny:

Raven: Aren’t you guys worried about wasting money?… So we have some later?
Starfire: But the later is not until the later. Currently it is the now.
Raven: I know, but aren’t we going to get old one day?
Beast Boy: Yeah, but later .
Cyborg: And it’s the “now” right now.
Raven: Oh, okay, that makes sense.

So they buy the jackets. And then they celebrate with pizza, but not just any pizza it’s “extra-large, extra-extra cheese extra-extra-extra pepperoni, plus “large jugs of the soda” and “a gallon of ranch dip.”

Raven once again warns that perhaps they should eat healthier to avoid health problems later. Again, the rest of the gang doesn’t care about “later.”

The scene ends and we jump ahead to 70 years later.

The gang is old with many health problems. They can’t afford their medications because they don’t have any money.

They suddenly realize that Raven was right. So they do what anyone would do. They build a time machine and send their old selves back to talk to their teen selves into making more sensible choices.

That brings us to this clip about learning how to eat healthy, starting a 401k plan, and an explanation of compound interest.

Everything goes perfectly. In fact it goes a little too perfectly. The rest of the episode isn’t educational, but it is entertaining.
Again, if you are interested in the script, you can find it here

Building Wealth with Rental Properties

No cartoon is dumb enough to create an episode around a boring topic as building equity from rental properties. No cartoon except for Teen Titans Go!

With episode after episode about silliness, the writers created, “Finally a Lesson.”

The best part of the episode is Robin explaining rental property and how to build equity:

If you can’t watch it, here’s Robin’s explanation:

“Equity is the amount of a property you truly own. It’s the difference between your loan balance and your property’s market value. If you sold your property and paid off the bank, the value of your equity is what you’d walk away with. When you build equity, you increase the net value of your asset. One way to do this is by paying off your mortgage.”

The episode takes them through all the steps. First they find the right property – a run down apartment building. Then they get to the financing, which involves getting 20% down, the way that “everyone else does” ask someone else for that 20%.

Then we get to the other fun parts of securing a rental property… the loan process. There’s an explanation of credit scores, securing the right lender, filling out the paperwork, and getting a good faith estimate.

The gang is starting to get very bored, but Robin assures them they’ll be very satisfied in the end. For now they have to turn their attention fixing all the problems with the building.

There’s a fun twist, but finally, Robin gets us to the satisfying end, “It takes decades to actually build equity, but in 30 years, it will provide a modest cash flow to pay for our numerous old people medications.”

For a cartoon geared at kids, it’s as good of an overview that you’ll get. When my kids are older and ask why we have rental properties, I’ll just cue up the episode on the DVR and ask if they have any specific questions.

You guessed it, the script is available here.

Pyramid Schemes Will Make You Broke

I almost didn’t include this episode, but my wife mentioned that I should. I’ve written extensively about MLM Pyramid schemes, so I didn’t feel this addressed the topic very well. On the other hand, many adults can’t understand pyramid schemes, so I can’t expect the Teen Titans to teach kids this complex topic. As usual, my wife is correct and it’s just my own extensive writing that artificially raised expectations.

There’s actually a very good description of a pyramid scheme in this 2 minute clip:

The key money quotes almost always come from Robin and this is no different:

Robin: This is a pyramid scheme!… Not that kind of pyramid! A pyramid scheme is an unsustainable business model, that promises payments to participants, based on the amount of additional people they enroll in the business, instead of focusing on the sale of goods or services to the public… As you can see here, the exponential growth of the “business”, will eventually cause the entire operation to collapse, leaving the participants at the bottom of the pyramid bankrupt, while those at the top walk away rich…

Starfire: I do have the question. Did the mummies build the pyramids?

Robin: There are no mummies! It’s not a literal pyramid!

Almost everyone in MLM doesn’t understand this concept and still go meetings to learn how to show the plan or enroll people in the business. In fact, the people who make the most money in every MLM are the people who have the largest downlines of enrolled people, not sales of goods or services to the public.

Beast Boy joins and makes Pyramid Scheme money which leads to this awesome song:

Of course the rest of the gang (sans Robin) want all the money, so Beast Boy enrolls them as “money deputies” with himself as a “money sheriff.” Robin warns them, “You are participating in a fraudulent business” and “This pyramid scheme is going to leave you broke, Titans.”

Everything spins out of control and gets mixed in with mummies wanting their money back and the Teen Titans not being able to deliver. They get out of it with some silly stuff that doesn’t make sense, but by this point, they’ve addressed the topic fairly well.

Once again, you can find a transcript of the episode here

Final Thoughts

I really don’t know how much financial information my kids are absorbing from this, but I know that they remember nearly everything they see.

I’ve watched my share of cartoons and I can’t think of any other general cartoon that covers half of the financial topics in Teen Titans Go! There are still a lot of episodes that I haven’t seen, so I might have missed a few money lessons.

Where are the surprising places you’ve found money lessons? Let me know in the comments.

Wealth at Any Income: Assets vs. Liabilities

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Last week, I introduced you to a new (very short) series on how to be very wealthy at any income. That article focused on making compound interest work for you rather than against you.

It makes a huge difference. Over 50 years, earning a conservative 5% interest means you’d turn one dollar to $11.50. So you could turn 90,000 into over a million dollars. Conversely, you could be paying 10% interest (or more) on a credit card. If you can make one dollar grow to more than $11 in 50 years, how much do you think the credit card companies can make at twice (or more) the same interest rate? I started to do this calculation and the numbers got so ugly that I didn’t trust my math. (It was essentially that you have to make $117 to pay off each dollar of debt you created… and it was 10 times worse when paying 15% interest.)

Of course few people plan ahead 50 years. That’s not really the point.

The idea was that you can turn a dollar into more than $11 or turn more than a hundred dollars into a single dollar. If I gave you a million dollars today, would you rather have more than $11 million or less than $10,000?

Ahh, but compound interest was (literally) so last week.

Let’s turn our attention to something new: assets and liabilities.

Before I go any further, I have to give some credit to where it is due. This concept was brought to my attention by reading Rich Dad, Poor Dad by Robert Kiyosaki. While the book inspired me, the only useful I learned was this explained in pages 69-70 (of my copy, your edition may differ.) Other than this, I think Kiyosaki is selling a bunch of misinformation. Does it count as “giving credit” if I (and many others) believe the person is a fraud?

The concept was that people who are rich buy assets that appreciate in value. People who are poor spend their money on liabilities.

Let’s take an example of two people: Asset Man and Liability Man. (If you thought I was going to in a “fatherly” direction there, you were very close to being right).

Liability Man spends $60,000 to buy a luxury SUV. He enjoys it for four years and decides he wants another new car because he just loves that smell. We don’t need to get into that new purchase. Let’s just focus that his luxury SUV is now worth only $30,000.

Asset Man decides to buy a Subaru Forester for around $25,000. It has the same new car smell. He uses another $35,000 to put a down payment on a $150,000 investment property. The tenant pays the mortgage and the property goes up in value over time (real estate is an appreciating asset). The property appreciates an average of 4% a year for 15 years and becomes worth $270,000. The mortgage is down to around $70,000.

Liability Man turned his $60,000 into $30,000. Asset Man turned turned his $60,000 into $200,000. That $200,000 comes from the $270,000 value of the property minus the $70,000 mortgage. Yes, that’s 15 years away, but wouldn’t you want $200,000 in 15 years? (Who would say no to that?) Also, the Forester he bought is worth around $12,500 after the same 4 years as Liability Man.

These numbers are estimated, but hopefully you can see what’s happening. Asset Man is building wealth. Liability Man may be enjoying life, but he’s not building wealth. In 15 years Asset Man might decide to sell that investment property and use that $200,000 to buy a luxury SUV AND 3 more investment properties. Those properties might provide enough cash flow to fund his entire retirement.

That’s not bad for a single buying decision over four years. Imagine if the decision was to buy a used Forester at $10,000 and the remaining $50,000 was invested? Imagine what you could do if you lived a lifestyle that was focused on spending money on appreciating assets.

This scenario is very similar to the compound interest point that I made above. Your money can grow or it can shrink. It’s up to you to make the choices that are right for you. My general focus is on acquiring assets that appreciate because financial freedom is important to me.*

Unfortunately, appreciating assets can be very boring. I don’t know too many people that think, “I’d love to be a landlord and get calls about pipes bursting at 3AM!” (You can get a property manager – don’t let this scare you away.) Only a nut like me thinks, “Oh, a few more shares of IBM will make so happy!” (Okay, I’m not even nutty enough for that.) It’s difficult, but the idea is to focus on the big picture.

Spending money on liabilities that depreciate is a necessary fact of life. You notice that I didn’t suggest that people should just not buy cars. That’s possible for some, but not for others.

It’s a balance. If you can tip the scales towards buying assets, I think you’ll find yourself fairly wealthy in a decade or two.

* That doesn’t mean we can’t splurge every now again. In fact, we bought a luxury SUV.

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