[billybob]

If you don't have enough money to handle an emergency, you have an emergency. Go ahead and panic. Trade your car for a cheaper one, move into a cheaper apartment, stop eating out, sell your TV, and get an emergency fund.

If you're already living on toasted rats in a cardboard box, that's different, but if you've got unnecessary expenditures, you should really cut those out and get an emergency fund. To do otherwise is reckless. And you're cheating yourself of sleep and peace of mind.

[ChuckMcM]

I wish I could double raise this.

When raising our kids we often talked about money and "kinds" of money. When you're young you can go for long stretches with "no" money, as you get older you get introduced to the notion of a "cash flow" and a steady stream of expenses that need to be paid.

The single biggest point we try to impress on them was that if you were not able to 'save' (put aside) some money every month (could be $10 but it had to be net positive) such that under 'normal' circumstances you've put money aside in more months than not in a year, then you are, by definition "living beyond your means."

If you found yourself in that space you needed to scale back your life if you could, or upgrade your means.

Being able to come up with $2,000, "if you had to", is pretty important. And while its perfectly ok to say you have to liquidate your savings or sell an asset.

Acquiring it through a credit instrument didn't pass the test, since you just moved the obligation forward in time, and if you couldn't come up with it now then why do you think you can come up with even more later?

It used to bother me a bit when peers whom I knew were making about the same amount of money as I was were living much more "exciting" lifestyles, and it really wasn't until the 90-91 recession hit that it was clear that they were living on credit. One person called me in desperation for a ride to work because their car had been 'stolen.' It turned out it had actually been re-possesed. Thats a hard place to be.

[meric]

>>Acquiring it through a credit instrument didn't pass the test, since you just moved the obligation forward in time, and if you couldn't come up with it now then why do you think you can come up with even more later?

What about stocks? I need three days for a sale of stocks to settle and take the money out. If I have an emergency I can use my credit card. (and pay it back at the end of the month).

[2arrs2ells]

Stock (plus a credit card while you wait for settlement) is certainly fine, but be careful...

The times that you are more likely to need liquidity (loss of job, economic crisis) are also the times that the stock market is likely to be incredibly low.

You might end up like many hedge funds who (as a result of some toxic assets) ended up having to sell good assets at firesale prices during the recent recession.

[hugh3]

True, but on the other hand, with US-dollar interest rates being what they are at the moment, the alternative to keeping your money in shares (or a similar volatile liquid investment) is keeping it your savings account at 1% or less. I keep a few grand in cash, but everything else goes in the sharemarket.

[ChuckMcM]

Stock absolutely counts, but it has an interesting caveat. If you read the article they included the caveat "...within 30 days." Which covers the 'you pay it now with a credit card and you pay it off when the CC bill arrives' scenario.

Back in the 80's when I was trying to buy a house, part of the down payment was going to be funded by the sale of stock (I had worked for Intel and had vested a few shares). How much of the down payment was flipping all over the map as Intel's price went up and down and up and down. On the one hand I wanted to hold it as long as possible (the trend was upward) but I didn't want to get caught in a dip either. My wife and I picked a number we felt was "reasonable" and put that in as a 'limit' order. When that fired, we picked the best choice of the three houses we had as candidates and made an offer on the house.

The stock was up an additional 5% by the time we closed but had been down at least 5% between the sale and the close. Very stressful if we had been under contract and the price was falling.

Flash forward to the dot-com days, a good friend bought a house beyond their means and was making payments by selling stock. When the bubble popped they had to sell the house. Not ideal but it didn't leave them permanently stuck.

[ebiester]

You're looking at it from a middle class perspective. Unfortunately, most of these people are also deep in debt and have already made such cuts.

This is the byproduct of double digit unemployment as much as anything. As much as we talk about consumption, most of it is at the middle class level. Now, I've seen poor people make very bad decisions, but many are on purchases you and I would make without a second thought.

It is far too easy to forget how good we have it.

[hugh3]

Unfortunately, most of these people are also deep in debt and have already made such cuts.

Sometimes I wonder about this. How many poor folks are wasting their limited budget on frivolous crap?

One reality show I really would like to see would be about a sensible financial advice type who parachutes into the lives of low-income, deeply-in-debt people and shows them how to budget properly.

[djcapelis]

One reality show I would really like to see would be about sending entitled people into low income neighborhoods so we can all watch them realize just how hard working some people are and just how well most people manage their money. Maybe then they'd stop saying misinformed stuff like "all that person really needs is someone to help them with a budget." A budget helps you cut excess spending. There's not a lot of spending in low income places almost by definition. There is not a lot of excess.

Deeply in debt people typically don't come from low income neighborhoods, they come from the middle class. Low income folks can't get credit that easily, even when credit was easy.

Most poor people I know work amazingly hard and manage their money well.

[jdietrich]

I grew up in one of the poorest parts of the UK. After leaving school, I volunteered for an advice charity for eighteen months, spending two and a half days a week going over (predominantly poor) people's finances with a fine-toothed comb.

Out of the hundreds of people I worked with and kept extensive records on, I found four who were in serious financial difficulty through no fault of their own. Four. I saw people manage perfectly well on £9000 a year and people on £40,000 a year hiding their car from the bailiff.

Correlation between quality of life and income was remarkably weak - the ability of clients to stretch their income and conversely their ability to fritter it was often astonishing. Middle class clients took on unmanageable mortgages and racked up huge credit card bills. Working class clients took out payday loans every week, bought consumer electronics on expensive hire-purchase and spent their housing allowance at the pub. I did observe one strong correlation - the more serious someone's financial problems, the more likely they were to walk out through boredom or frustration, or become abusive when it became clear that I could not fix all their problems.

Of course, we have a welfare state. From my perspective, the political environment in the US seems to be dominated by people who actively hate the poor. It may well be the case that Britain is exceptionally supportive of the poor, or that American society is exceptionally hostile towards them.

[btilly]

I know a lot of poor people who work hard and manage their money well. I also know a lot who could save themselves a ton of money with obvious (if not easy) steps like quitting smoking.

[timsally]

Quitting smoking may seem obvious, but it's important to consider the context. Middle class people grow up in homes that are very anti-smoking. In the rare case that a middle class family isn't anti-smoking, middle class schools certainly are. Hell, I was indoctrinated with anti-smoking feelings starting from age 10 in school. Whereas a lot of poor people are probably being given cigarettes at age 10. Combine this with the highly addictive properties of cigarettes and I'm not convinced quitting smoking is a reasonable money management strategy to suggest unless we provide some sort of support program or infrastructure. If there are free programs available to teach how to fight addiction, then sure I'm on board.

[btilly]

I wasn't claiming that quitting smoking is a reasonable money management strategy. But a pack a day is something like $1500/year straight to your bottom line. No matter what your feelings about tobacco, it is an obvious luxury that you can live without and save a lot of money.

This relates to a very important distinction between being working poor and impoverished. And it isn't money. It is whether you've given up.

Someone who is working poor may objectively have it hard, but they feel in control of their lives. They can and do plan for the future. They save up for things. They anticipate what can be anticipated and make plans. I've seen people like this calculate the cost of smoking, and choose not to because they can't afford it.

Someone who is impoverished believes that their life is hopeless. Bad things are going to happen to them. They might have some influence over which bad things, but it is going to be bad. So why bother? Live for the moment and tomorrow can go hang. Smoke another cigarette, hope for some cheap booze (or other substance) tonight, it is all hopeless anyway.

Someone in the latter frame of mind knows that payday loans are stupid, but doesn't care. Because it is bad in that nebulous future that they already know is going to suck, and how much worse is it really going to get?

Anyone who talks about the poor being good with money who does not understand this critical difference between being working poor and impoverished is missing a very important point.

[hugh3]

One reality show I would really like to see would be about sending entitled people into low income neighborhoods so we can all watch them realize just how hard working some people are and just how well most people manage their money.

That would indeed be interesting if it were true, regardless of your snarkiness. I'd be interested in seeing a show just like that regardless of how it works out.

[tesseract]

Secret Millionaire?

[kamaal]

Yes, that is always the case. Poor people often work hard and save money for many reasons. One obvious reason is they really have no way out. If you are given one and only one chance to do something, you are left with no choice but to do it well.

The other aspect I see is upbringing, when all you see around is poverty and and way out being working hard, you grow a natural tendency to think of hard work that way. You also learn to live frugal, and manage even with little resources. Later on life when you earn well, these habit help in saving and making proper investment decisions.

On the other hand people raised in spend thrift environments, try to match their living accordingly. For example even if they do no have money they try to buy things through debt and credit.

Saving and making investment decisions overtime make you rich, this is obvious and nothing surprising. But people rarely realize this.

[stretchwithme]

Why is someone able to provide sensible financial advice considered entitled?

There are plenty of people who started with nothing and who, by being sensible, worked and saved and became financially successful.

hugh3 probably had such a person in mind, not someone with a trust fund who has learned to stay within their allowance.

[tricky]

I have a friend at work who I try to help. I can't count the number of times or ways I've tried to tell him pay day loans are bad news. The one time he came into some money (by cashing in a part of his 401K) I suggested he open an account at a credit union or even walmart (he lives 3 blocks away) but he ended up opening a "savings" account at a pay day loan shop because it was just around the corner.

It is horrible and sad but the reality is there really is no helping some people...

[reemrevnivek]

Dave Ramsey's Financial Peace program (not reality TV, a and "Total Money Makeover" (a book, even though it sounds like a reality TV show) does delve into how to take a deeply-in-debt situation and start budgeting properly.

Step 1: Create an emergency fund with $1000 (as a rough starting point, your financial situation may be different) to handle the unexpected and avoid making more debt. Adjust the $1000 number based on your income level and possible expenses. A homeowning breadwinner with a wife and kids would need a good deal more. See: http://www.daveramsey.com/new/baby-step-1/

[skidooer]

There's a show in Canada named Til Debt Do Us Part that has a similar premise, except they usually visit higher class households (usually $100K/year+ earners) who still have managed to rack up tens to hundreds of thousands of dollars worth of consumer debt.

[singular]

That sounds like Alvin Hall[1]. He's not done a show (in the UK at least) for a while, but he's definitely done that type of show.

[1]:http://en.wikipedia.org/wiki/Alvin_hall

[rb2k_]

We actually have a show like that in Germany... It's mostly the same basics over and over again (cut the cigaretes, no Pay TV, Why do you have 4 Cell phone contracts, ...). It could very well be scripted though. Maybe I'll remember the name over the next hour or so :)

[bconway]

There is such a show, it follows Suze Orman on CNBC on Saturday nights (I forget the name off the top of my head, something about being married to debt). It's not all low-income people, but it meets the rest of the criteria.

[llimllib]

> Unfortunately, most of these people are also deep in debt and have already made such cuts.

You might be underestimating the middle-class-ness of the problem. My first job out of college was pre-screening people's credit reports (in 2004, so in quite good economic times), and it was shocking how many middle-class and lower-rich-class people were living way beyond their means, while applying for expensive short-term debt to cover it up.

The worst I saw was the owner of a local chain of stores whose wife or girlfriend was clearly cleaning him out, and he was applying for short-term unsecured debt.

[ChuckMcM]

"... most of these people are also deep in debt ..."

At least on the news we see this a lot. The folks who are "screwed" by the banks because they raised their credit card rate and are going broke. When they cover those stories you often get to see how much credit card debt these folks have and it is always > $10,000 and often > $20,000.

To the comment above, at that point you had an emergency a long time ago. If you can't pay off your credit cards at the end of the month you have an emergency.

[kamaal]

Well the first question that needs to asked here is why do those people borrow money after knowing very well they can't pay it back?

Its purely their mistake, and nobody else (society, government etc) can be blamed here.

[Confusion]

You're suggesting that 50% of the US population is deep in debt and lives as frugally as possible to resolve that issue? I don't think so.

[Duff]

Responsibility is not a class issue.

The lady who cleans our office is poor by any definition. She works 14 hours a day, every day. She has two kids, no TV, and has cash saved up to buy Christmas presents and school uniforms.

The guy in the next office makes $110k/year leases a BMW 5 series, owns a new condo, and goes out of the country on vacation 3 times a year.

Who's irresponsible?

[jrockway]

Neither?

When you get paid a lot of money, it's easier to be less careful with your money and not have anything bad happen. It's easy to contribute the maximum to your 401k, have the best health insurance and flexible spending account, save $1000 a month, and still buy a lot of things. If you lose your job, you'll probably get another one. And banks are more than happy to loan you money to bridge the transition.

All I'm saying is that consumption is not bad for any intrinsic reason other than the taboo of consumption.

(Let's look at your examples: owning a new condo, and going out of the country on vacation 3 times a year. New condos cost the same as old condos. You're paying for the ground under them. You're going to pay for that, in some form regardless of whether you rent or buy, so this isn't much of a "consumption" issue. Going on vacation isn't amazingly expensive. A cheap round-trip flight out of the US is $500. If you have friends, that's the total expense right there. So again, not an amazing display of financial ineptitude.)

[kamaal]

I think the guy earning high is to blame here. Nobody else is responsible for one's financial mess(Recession, Inflation, government etc) if one doesn't know how to manage their money well.

All measurements in the world are relative. One person lives frugual, saves and invests money. Another person doesn't.The spend thrift guy will have himself to blame. You can't have good earning conditions all your life, good and bad times come alternatively in every person's life.There will always be recessions, wars and inflation. There will always be health problems, there will always more competition.

The responsibility to secure your future when you have the chance is yours.Savings and good investment decisions make people incrementally richer. A person may not become a millionaire next year with this strategy, but over time savings and good investment decisions can make you really rich over time(When you need it the most).

[anonymous246]

Umm, I think you misunderstood his point. I guess he was trying to make the point that a 110k salary will barely (if at all) cover the sorts of expenses he described.

Which is actually true, unless you go through contortions like interpreting "foreign vacation" to mean shacking with friends in a different country. Btw, AFAIK, new condos do cost more than older ones.

[hugh3]

Which is actually true, unless you go through contortions like interpreting "foreign vacation" to mean shacking with friends in a different country.

Meh, international vacations aren't necessarily all that expensive. $1000 for an airfare, another $1000 for a week's accommodation... that's six grand a year. Heck, let's make it ten grand, just so you don't have to skimp. And a lease on a new 5-series is, what, $600 a month? This is all perfectly affordable on a $110K salary.

I'd never advise anyone to lease a car rather than buying one with cash, but actually I reckon three international holidays a year is a great way to spend money. You only live once, and while you're probably doomed to spend your entire life within a six-mile deep approximately-spherical shell, it's full of interesting stuff so you might as well go and see as much as you can.

[nhangen]

It's easy to say that, but the reality is that many of these people probably blew through their savings while enduring job loss, medical bills, increased energy and food costs, etc.

Most people aren't programmers, and are at the mercy of the job market, which sucks right now.

There are many cases of irresponsible behavior, but I know of far too many responsible people that tried everything they could to right the ship and kept hanging on, hoping that things would change...with no luck.

It would be one thing if gas prices were going down, utilities were getting cheaper, and food prices were getting back to normal, but they aren't.

Most of us are fortunate enough to turn to freelancing when money runs out, but much of America is screwed.

[coffeeaddicted]

Funny you mention freelancing - this was what got me into the deepest trouble so far. One bad contract where I couldn't get out easily and had miscalculated milestones badly. And it is hard to concentrate on coding when you start wondering about stuff like "will I manage to pay rent once more next week or will the bank not accept that I go over the credit limit".

[pavel_lishin]

Does having a credit card count?

What if someone has a $5k debt on a credit card, and only $1k in savings? Should they prioritize getting more cash into a low-interest savings account, while racking up interest on the CC?

[noodle]

this is how i typically recommend people to prioritize their money:

(1) pay your bills (2) get a small emergency fund together (enough to pay for a small emergency, car breakdown, 1 month's living expenses, etc) (3) pay down high interest debt (credit cards, etc) (4) get a large emergency fund together (enough to support you for a few months if you lose your job, major emergency, etc) (5) invest and pay down low interest debt (mortgages, student loans, etc).

creating a smaller emergency fund to start sets the best precedent because it creates a safety buffer. what happens if you throw tons of cash at paying down your CC bill every month and save nothing, but then you lose your job and have 0 income? you're going to end up missing payments, get penalized, and your debt will snowball again quickly. you need to have something to fall back on when bad things happen, just in case.

[phillmv]

That is bad advice. Always always get out of debt first.

CC debt is highly liquid. If you're fucked, you can max it out within 24hrs. Ergo, it doesn't make sense to have a pool of savings around and service the debt interest payments when you could clear out the debt and put that interest payment to good use elsewhere.

[eli]

I'd extend that emergency fund to more than a "few" months worth as soon as possible.

If you lose your job, it may take quite a few months to find a new one.

[noodle]

agreed, this is just a back-of-the-napkin beginner's advice.

[dailyrorschach]

This is exactly how I've been doing it. Auto-transfer set up on the bank account, and taking cash out for spending money instead of just letting myself use a credit or debit card.

[noodle]

credit cards are useful tools. i use mine and just pay it down monthly. if you have any plans on obtaining a loan/mortgage at any point in time, the easiest way to establish yourself with good credit is through actually using a credit card.

[mattw]

Everybody says this, but I've obtained three different mortgages in my lifetime and never had a credit card. In lieu of credit history, the bank has just asked for other evidence that I pay my bills, like statements from the utility company.

Maybe I'm just lucky, but in my opinion, wanting a good credit score is a pretty bad reason to get a credit card.

[noodle]

how long ago were the mortgages and how old were you when you tried to obtain them?

i think the climate is different now. i have a friend who is reasonably fresh out of school and tried to buy a place, but got turned down for mortgages due to lack of credit history (and presumably a lack of "other evidence" as well).

[dailyrorschach]

I don't mean that I don't use it all. I just don't use it for every single thing, every day. I was doing that, and was paying it off timely. But I found my spending was higher then I'd care for.

[fr0sty]

Unless you are carrying low/no interest debt you should really pay it off rather than put money into savings.

As long as your bank is not evil and keeps dropping your credit limit as your balance decreases you can always borrow again against that line of credit if needed.

[elbelcho]

I disagree.

Saving money for an emergency should be a priority over paying off a credit card debt. In an emergency, you cannot count on the credit card bank keeping your account open. You cannot count on them maintaining your current credit line. ALL banks are "evil" in the sense that they operate with their best interests at heart, and no matter how horrible of a position it may put you in, the CC bank has no obligation to maintain your current credit line.

Having a $2000 emergency fund, even if it's in a shoe box under the bed, is more important and more VALUABLE than $2000 worth of open credit on a credit card. The $2000 under the mattress is almost entirely under your control. The $2000 in open credit is almost entirely OUT of your control.

If you're in a real emergency, what would your rather rely on?

[ChuckMcM]

"If you're in a real emergency, what would your rather rely on?"

I think the point was that if you have credit card debt then you are in a emergency situation already. So using money to pay off that debt means you can get 'out' of the emergency. Paying off the debt and then putting $2,000 into a liquid account allows you to declare the emergency over.

The trick that folks often don't quite realize is that when you carry debt, some of your 'income' (whether its a paycheck or money back from recycling aluminum cans) goes to servicing that debt and not to your benefit. If you are living at the edge of your means, any money not going to supporting you directly is wasted.

That's the reasoning that says "priority #1" should be "get out of debt." #2 is build a "cushion" so that when unanticipated expenses hit you don't take a long term hit to the income stream, #3 is invest in longer term income growth (could be night classes, could be a washing machine to save on laundromat bills, could be stocks and bonds).

[elbelcho]

I understand that minimum monthly payments and interest only payments are absolutely wasted and provide you with no benefit.

However, the emergency I'm referencing is not a general "my finances are a disaster" emergency. I'm talking about an emergency that has an impact far beyond your immediate financial situation.

I'm talking about "I cannot afford food" or "I cannot afford transportation to a job interview" type of emergency. That's a real emergency, in my opinion.

[ChuckMcM]

"I'm talking about 'I cannot afford food' or 'I cannot afford transportation to a job interview' type of emergency. That's a real emergency, in my opinion."

I think we're in strong agreement. I was thinking of your two examples as being subcomponents of the base emergency "We're living beyond our means." Once you are in an emergency situation, your safety systems are compromised and additional emergencies become much more likely.

[arn]

The only thing people should be aware of in this situation is that $2000 under your bed actually cost you $4000 or whatever since you are holding a balance on your credit card with high interest.

[reemrevnivek]

But the alternative, having a $2000 expense and no cash, would be a emergency. You can pay off $4000 in debt (and that doubling is probably hyperbole, but whatever), If you can handle small emergencies that will come up. Read Chapter 6 of Dave Ramsey's "Total Money Makeover" for a more thorough analysis.

[GFischer]

I currently don't have U$ 2.000 (not an American, but having money for a rainy day should be worldwide), but I could raise them with a (high interest) loan in about 30 minutes.

The article says they don't count, though:

"29.5% said they would have to resort to credit cards, a home equity line of credit, reverse mortgage or unsecured loan. "

[illumin8]

I hate to break it to you but you're living beyond your means. A high interest loan is not an emergency fund. Ideally you should have enough money to live for 6-12 months if your income stopped tomorrow.

I know when I was younger I didn't have such things, but then the recession of 2002 hit and I found out really quickly how much it sucks trying to make a house payment with an unemployment check.

[GFischer]

I know I am, but one of the niceties of a socialist system is that if I get fired, I get paid my salary for a year and a half in unemployment :) , plus three months' salary straight away.

I actually wish I was fired :) (though the black mark in the CV here is really bad). The really bad thing about this system is that it's based on seniority, if I switch jobs, I lose all those perks (start back at zero, only get some minor unemployment after 3 months on the job)

I'm also neither a homeowner nor a parent, and could scale back my spending to zero pretty quickly (moving in with my grandfather and selling my car). Not a long term strategy, obviously, and I am thinking of becoming a parent (in 2-3 years) which will force me to be way more conservative with money.

[ebiester]

No. If they have $1k in savings, they should continue working on the credit card. However, if they have under 300 dollars of savings (scraping the bottom of the checking account), making it to $1000 should be the first priority.

[pasbesoin]

And you're cheating yourself of sleep and peace of mind.

This. The "sacrifices" you make are not a loss, but a gain.

Edit: Assuming you are not yet "down to basics" -- which more and more people are, these days.

[PagingCraig]

On top of an Emergency fund, I find taking money out for KNOWN expenses makes sense. Like putting aside money for car repair, basic home repairs, etc separate from emergency stuff.

[veyron]

Should be the other way around. Money taken out for known expenses should be on par with money for bills.

[hugh3]

I assume he meant known, yet undetermined, expenses, which is sensible. For instance, you know that your house and car are going to need repairs eventually, so it makes sense to have some money set aside for those rather than dipping into your "emergency fund" -- otherwise what happens if a real emergency occurs before you finish paying it off?

Once you have enough money in your savings, though, I think you can stop thinking in these terms.

[PagingCraig]

Yeah, it's stuff you know you'll need money for that won't be an emergency. Just like saving for anything else (like a new laptop).

[pyre]

I took 'on top of an emergency fund' to mean that the money being set aside for those things was not part of the emergency fund.