This is a great list! However, I was almost immediately turned off because of
2. Some banks charge you $20 a month for an account, others charge you 0. If you’re with one of the former, have a good explanation for what those $20 are buying.
Because this point is nowhere near top of mind for “tips for better personal finance”. $240 per year should never make or break your life (among people who are reading these comments, anyways), so I’d suggest something more along the lines of:
Make sure you have 3 months of expenses in liquid cash
Store 90% of the rest of your money in an index fund
Experiment with the last 10% (stock picks, prediction markets, crypto, who knows)
The cash-on-time return for getting these basics right is much much higher than switching banks to save a measly $20/month (or e.g. worrying about interest rates on your savings accounts)
$240 per year should never make or break your life (among people who are reading these comments, anyways)
Well, that’s a somewhat off-putting aside. I’ve been broke and reading LessWrong, had friends unable to pay bills or living on disability, etc, and there are definitely times your advice is impractial for people who may in fact be reading this site. Not getting into countries with different power-per-dollar or banking situations than the US who may nonetheless access it.
When you are scraping the bottom of your bank account, fees can compound by hitting you with an overdraft fee when you don’t have enough money to pay the fee. Bank fees tend to increase with low bank accounts. A $35+$20 fee when you have <$20 is very bad.
Sometimes $20 is your monthly expense budget. Maybe you have a source of food and shelter but need exactly one prepaid phone card for job searching. Maybe you have to spend it on food and are partly starving, but surviving.
Your circumstances may not allow you to save over a certain amount in assets at a time without losing benefits, at which point, because those circumstances might be not being able to work due to disability, you can’t earn much at all.
You aren’t guaranteed to be able to restore your income and liquid cash after having to spend it. You might need to sell your stocks in a downturn, and you know, stocks might be going down for the same reason you lost your job in the first place.
There’s good reasons to favor savings interest rates that reward you for existing rather than penalize you and to avoid fees that are there more to close their jaws on you in case of ill fortune than to buy you something useful. These reasons relate more to being safer in a bad financial situation than they do to earning money. While we all like earning a lot of money, prioritizing not losing money over gaining money at lower income levels is pragmatic.
If you think you’ll never be poor, financially strained, or have to worry about a stray $20 with 3 months expenses in the bank, you aren’t most people and may be optimistic about how much emergencies can actually cost relative to monthly expenses for most people. My monthly expenses are, let’s say, $1500, my insurance deductible is more like $8000 and if something happened to the person I split expenses with that could mean I suddenly suffered $11000 of expense in one month and lost my ability to work as a contractor.
If the stock market also dropped steeply and cut my savings because, say, this was March and we’d gotten sick then (which we did, incidentally, just not badly), $4500 of emergency savings wouldn’t have saved me from either a really bad loss on stock savings or notable medical debt.
I can see where the calculations might change a bit if I had a lower deductible and more expensive insurance—higher monthly expenses would result in ‘3 months’ being more savings and lower one-time emergency costs—but I’m also not worried about a car, dependents aside from a cat, a house …
(And if you have really low monthly expenses (own your house and do your own repairs, grow your own food) you may want a different number than monthly expenses to consider for your emergency fund.)
First off, I’d like to apologize; I wasn’t trying to gatekeep LessWrong or anything like that. This is part of what’s hard about giving advice online; my mental model of the audience is shaped by the few I know personally + myself, but it’s by no means comprehensive. Some people need to hear “this is specifically how you can save $20/month” and not “this is the general way to approach personal finance”!
That said—I still want to push back. When it comes to personal finance, it’s easy to focus on cutting costs and personal spending; it feels virtuous, and the benefits are visible. But the huge gains in personal finance come from a getting a handful of things very right, almost all of which are related to making more money rather than cutting your costs.
In my head, these things are:
Earning a consistent high return on your cash (stock market’s ~10% rather than saving account’s ~0.5%)
Negotiating your salary
Working on your career capital and connections
One intuition for this is the amount of money you can earn is unbounded; no matter who you are, I’d guess you personally know someone making 2x as much, and know of someone who makes 10-100x as much. But the amount of expenses you can cut is hard capped at 100%, and most people would have a pretty difficult time dropping it by even 30%.
And again, it’s hard for me to speak to your financial situation, not knowing you personally; it’s possible your financial strategy matches well to your risk appetite and lifestyle, in which case, please ignore my musings!
Hmm, I disagree with the “one intuition” way of looking at finances. Yes, you can’t drop your expenses by more than 100%, and you can increase your income by more than 100%, but what you really care about is increasing the ratio of income to expenses. In this context, halving your expenses is equivalent to doubling your salary, and if you drop your expenses to zero, that’s equivalent to increasing your income to infinity.
That’s a good point, actually; one takeaway from the FIRE (Financially Independent, Retire Early) community is that your retirement date is basically a function of your current expenses; assuming a safe withdrawal rate of 4% you “just” need 25x expenses to retire forever.
But dropping your expenses to zero is fairly hard; in fact, dropping your expenses by any meaningful amount is hard since people have fairly sharp intuitions about where their money is going, and probably not wantonly spending it in the first place.
And moreover, the goal isn’t to extend your personal runway to infinity, but rather to improve the fuzzy metric of “living a happy, fiscally secure life”. Presumably, most of your expenses are reasonably rational purchases on that axis, and getting rid of them would make you less happy overall.
My thesis is that, for the same amount of annoying dealing-with-financial-institutions-effort, setting up an online brokerage account to put the majority of your money in index funds is like 10x to 100x return on effort for many, compared to saving $20 a month switching banks.
That’s only one angle, though. You could think of it like you’re giving $240 a year to a business that isn’t honestly earning it and helping perpetuate that. That’s how I took the second part of the advice—make sure you can justify the value. Otherwise that value could be going elsewhere, perhaps in a more deserving or useful place.
Yeah, I often refuse giving people money for something I don’t care about even if the impact of that on my wealth would be negligible just in order to not reward them.
It seems obviously correct, just too specific; a more general policy like “be extra careful before signing up for anything with a recurring fee” would prevent this mistake, and also many others.
It’s not near the top of my mind either, but it is something I feel confident recommending to almost everybody, whereas I don’t feel confident advising people on their financial investments. This is a small fruit, but it’s low-hanging.
Plus there are ethical banks which do not invest in weapons, addictive substances/activities and the like—which are typically very profitable—and, therefore, are very justified in charging some money for an account.
This is a great list! However, I was almost immediately turned off because of
Because this point is nowhere near top of mind for “tips for better personal finance”. $240 per year should never make or break your life (among people who are reading these comments, anyways), so I’d suggest something more along the lines of:
Make sure you have 3 months of expenses in liquid cash
Store 90% of the rest of your money in an index fund
Experiment with the last 10% (stock picks, prediction markets, crypto, who knows)
The cash-on-time return for getting these basics right is much much higher than switching banks to save a measly $20/month (or e.g. worrying about interest rates on your savings accounts)
Well, that’s a somewhat off-putting aside. I’ve been broke and reading LessWrong, had friends unable to pay bills or living on disability, etc, and there are definitely times your advice is impractial for people who may in fact be reading this site. Not getting into countries with different power-per-dollar or banking situations than the US who may nonetheless access it.
When you are scraping the bottom of your bank account, fees can compound by hitting you with an overdraft fee when you don’t have enough money to pay the fee. Bank fees tend to increase with low bank accounts. A $35+$20 fee when you have <$20 is very bad.
Sometimes $20 is your monthly expense budget. Maybe you have a source of food and shelter but need exactly one prepaid phone card for job searching. Maybe you have to spend it on food and are partly starving, but surviving.
Your circumstances may not allow you to save over a certain amount in assets at a time without losing benefits, at which point, because those circumstances might be not being able to work due to disability, you can’t earn much at all.
You aren’t guaranteed to be able to restore your income and liquid cash after having to spend it. You might need to sell your stocks in a downturn, and you know, stocks might be going down for the same reason you lost your job in the first place.
There’s good reasons to favor savings interest rates that reward you for existing rather than penalize you and to avoid fees that are there more to close their jaws on you in case of ill fortune than to buy you something useful. These reasons relate more to being safer in a bad financial situation than they do to earning money. While we all like earning a lot of money, prioritizing not losing money over gaining money at lower income levels is pragmatic.
If you think you’ll never be poor, financially strained, or have to worry about a stray $20 with 3 months expenses in the bank, you aren’t most people and may be optimistic about how much emergencies can actually cost relative to monthly expenses for most people. My monthly expenses are, let’s say, $1500, my insurance deductible is more like $8000 and if something happened to the person I split expenses with that could mean I suddenly suffered $11000 of expense in one month and lost my ability to work as a contractor.
If the stock market also dropped steeply and cut my savings because, say, this was March and we’d gotten sick then (which we did, incidentally, just not badly), $4500 of emergency savings wouldn’t have saved me from either a really bad loss on stock savings or notable medical debt.
I can see where the calculations might change a bit if I had a lower deductible and more expensive insurance—higher monthly expenses would result in ‘3 months’ being more savings and lower one-time emergency costs—but I’m also not worried about a car, dependents aside from a cat, a house …
(And if you have really low monthly expenses (own your house and do your own repairs, grow your own food) you may want a different number than monthly expenses to consider for your emergency fund.)
First off, I’d like to apologize; I wasn’t trying to gatekeep LessWrong or anything like that. This is part of what’s hard about giving advice online; my mental model of the audience is shaped by the few I know personally + myself, but it’s by no means comprehensive. Some people need to hear “this is specifically how you can save $20/month” and not “this is the general way to approach personal finance”!
That said—I still want to push back. When it comes to personal finance, it’s easy to focus on cutting costs and personal spending; it feels virtuous, and the benefits are visible. But the huge gains in personal finance come from a getting a handful of things very right, almost all of which are related to making more money rather than cutting your costs.
In my head, these things are:
Earning a consistent high return on your cash (stock market’s ~10% rather than saving account’s ~0.5%)
Negotiating your salary
Working on your career capital and connections
One intuition for this is the amount of money you can earn is unbounded; no matter who you are, I’d guess you personally know someone making 2x as much, and know of someone who makes 10-100x as much. But the amount of expenses you can cut is hard capped at 100%, and most people would have a pretty difficult time dropping it by even 30%.
And again, it’s hard for me to speak to your financial situation, not knowing you personally; it’s possible your financial strategy matches well to your risk appetite and lifestyle, in which case, please ignore my musings!
Hmm, I disagree with the “one intuition” way of looking at finances. Yes, you can’t drop your expenses by more than 100%, and you can increase your income by more than 100%, but what you really care about is increasing the ratio of income to expenses. In this context, halving your expenses is equivalent to doubling your salary, and if you drop your expenses to zero, that’s equivalent to increasing your income to infinity.
That’s a good point, actually; one takeaway from the FIRE (Financially Independent, Retire Early) community is that your retirement date is basically a function of your current expenses; assuming a safe withdrawal rate of 4% you “just” need 25x expenses to retire forever.
But dropping your expenses to zero is fairly hard; in fact, dropping your expenses by any meaningful amount is hard since people have fairly sharp intuitions about where their money is going, and probably not wantonly spending it in the first place.
And moreover, the goal isn’t to extend your personal runway to infinity, but rather to improve the fuzzy metric of “living a happy, fiscally secure life”. Presumably, most of your expenses are reasonably rational purchases on that axis, and getting rid of them would make you less happy overall.
My thesis is that, for the same amount of annoying dealing-with-financial-institutions-effort, setting up an online brokerage account to put the majority of your money in index funds is like 10x to 100x return on effort for many, compared to saving $20 a month switching banks.
That’s only one angle, though. You could think of it like you’re giving $240 a year to a business that isn’t honestly earning it and helping perpetuate that. That’s how I took the second part of the advice—make sure you can justify the value. Otherwise that value could be going elsewhere, perhaps in a more deserving or useful place.
Yeah, I often refuse giving people money for something I don’t care about even if the impact of that on my wealth would be negligible just in order to not reward them.
It seems obviously correct, just too specific; a more general policy like “be extra careful before signing up for anything with a recurring fee” would prevent this mistake, and also many others.
Gym membership anyone?
Thanks!
It’s not near the top of my mind either, but it is something I feel confident recommending to almost everybody, whereas I don’t feel confident advising people on their financial investments. This is a small fruit, but it’s low-hanging.
The $20 may be a stand in for consumer—hostile behaviors like bad customer service or high ATM fees.
Plus there are ethical banks which do not invest in weapons, addictive substances/activities and the like—which are typically very profitable—and, therefore, are very justified in charging some money for an account.