KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

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deikel
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by deikel »

9-5 Suited wrote: Wed Jun 29, 2022 9:34 am This is a pretty widely circulated blog post on the topic. At some point it just boils down to how long you desire to work and the assumptions you make about investment returns. There can't be a single appropriate savings rate relative to either income or expenses since it's obviously going to be significantly different if you hope to work 10, 20, or 30 more years.

https://www.mrmoneymustache.com/2012/01 ... etirement/
+1 on the link (or many others that are similar)

The interesting thing about savings rate is that you can look up how long you have to keep it up until you become independent of paid work. If you manage to get to 50% savings rate consistently, your actual time to FIRE is rather surprisingly short...short enough to be motivating for such a savings rate anyway.

Also, the whole trickery is that when you can sock away that much income and save it, you obviously do not spent it...so you condition yourself to spent on a lower level then you could (live below your means), over a significant time period (conditioning) and as such may develop skills and attitudes that prevent you to become the 2/3 of american's that live paycheck to paycheck (0 savings rate).

Does the exact percentage matter - no. Are you able to stick to your number exactly and every year - no, life happens, but as an aspirational and motivational goal it seems to work just fine
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CletusCaddy
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by CletusCaddy »

HootingSloth wrote: Wed Jun 29, 2022 8:38 am There simply cannot be a one-size-fits-all answer to this question or anything that is even particularly useful as a rule of thumb. For some, it would be nearly impossible to save one year of expenses each year. For others, it would not be nearly enough savings.

We are high-earning professionals in our mid-30s, so seem to be in the demographic you are talking about. Personally, we saved about 3x expenses last year. If we were to follow KF's rule, we would needed to have spent more than twice as much money as we wanted to. What is the point of doing that just to meet some arbitrary metric?
The short answer is, you are not spending enough.
abc132
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by abc132 »

All of the analysis on retirement spending suggest that flexibility and years of spending are the most crucial components. It's difficult to understand why accumulation can not be based on a reasonable expectation for growth and the commitment to increase savings if needed. This is how anyone reasonably plans for retirement. We should all consider what can go wrong, and have a plan that can adapt when needed.

If I'm age 25 the expected returns of saving 50% of income is something like 70x income plus social security by age 65 (That's 140x expenses!). 15% of income is more like 20x income plus social security. If we have a slower start and end up with nothing by age 30, 50% of income will still get us to 40x income plus social security. The reality is that we can reasonably start investing based on average returns, and increase savings rate as needed. Early on this can be accomplished by keeping the same standard of living as a career progresses and wages grow. 15% of income can grow into 30-50% of income quite naturally for many career paths.

We use an emergency fund to deal with periods of unemployment, and we refresh it once employed. That deals with periodic unemployment without the need to adjust our rate of investing. Periodic unemployment is not a reason for super high savings rates, as we would simply replenish this on top of our savings rate. All you need is enough discretionary spending while employed that you can tighten the belt when needed.

We all get to decide if our base plan is to work until 40, 45, 50, 55, 60, 65, 70, or until the day we croak. Those that choose 55+ start to incur the risk of ageism and loosing a primary career. Anyone still needing returns after age 55 should be prepared for the possibility of a reduction in standard of living or working longer than they would have in their primary career. Sometimes health or job decides this for you. 10-15x expenses plus social security may not be such a bad worse case scenario.
ThankYouJack
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by ThankYouJack »

AnEngineer wrote: Wed Jun 29, 2022 3:14 pm
ThankYouJack wrote: Wed Jun 29, 2022 3:03 pm I feel the opposite once financial independence is reached. Why save 1x then? Why not save $0? Sometimes Bogleheads seems like a sport where people compete to spend the least and save the most.
...
A reason why is because not everyone can easily ramp the spending back down once they get used to it. If you are financially independent based on current spending, but then increase it, you are no longer financially independent if basing it on your new spending numbers.

Just because this reason exists doesn't mean that you shouldn't spend more.
I agree that FI can be a moving target and someone may need to keep saving to reach FI (again) when spending increases. In terms of decreasing spending, don't most early retirees tighten the belt on discretionary spending during bear markets?
My spending has increased gradually over the years and sure I may not want to decrease it but definitely could if needed.
AnEngineer
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by AnEngineer »

ThankYouJack wrote: Wed Jun 29, 2022 3:58 pm
AnEngineer wrote: Wed Jun 29, 2022 3:14 pm
ThankYouJack wrote: Wed Jun 29, 2022 3:03 pm I feel the opposite once financial independence is reached. Why save 1x then? Why not save $0? Sometimes Bogleheads seems like a sport where people compete to spend the least and save the most.
...
A reason why is because not everyone can easily ramp the spending back down once they get used to it. If you are financially independent based on current spending, but then increase it, you are no longer financially independent if basing it on your new spending numbers.

Just because this reason exists doesn't mean that you shouldn't spend more.
I agree that FI can be a moving target and someone may need to keep saving to reach FI (again) when spending increases. In terms of decreasing spending, don't most early retirees tighten the belt on discretionary spending during bear markets?
My spending has increased gradually over the years and sure I may not want to decrease it but definitely could if needed.
To your question: probably, but that's true whether they increase spending or not. I'm not a fan of the idea of planning for an early retirement that is contingent on decreases in spending that isn't attached to having a job. (To consider yourself lean FI to feel more financially secure is fine, though.)
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by HootingSloth »

CletusCaddy wrote: Wed Jun 29, 2022 3:45 pm
HootingSloth wrote: Wed Jun 29, 2022 8:38 am There simply cannot be a one-size-fits-all answer to this question or anything that is even particularly useful as a rule of thumb. For some, it would be nearly impossible to save one year of expenses each year. For others, it would not be nearly enough savings.

We are high-earning professionals in our mid-30s, so seem to be in the demographic you are talking about. Personally, we saved about 3x expenses last year. If we were to follow KF's rule, we would needed to have spent more than twice as much money as we wanted to. What is the point of doing that just to meet some arbitrary metric?
The short answer is, you are not spending enough.
That's fine if you think so, CletusCaddy.

Anyone on the fence about these kinds of rules might think about the fact that some people think they know how much others should be spending without knowing much of anything about them. Does that really seem right? Some skepticism seems warranted.
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CletusCaddy
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by CletusCaddy »

HootingSloth wrote: Wed Jun 29, 2022 4:08 pm
CletusCaddy wrote: Wed Jun 29, 2022 3:45 pm
HootingSloth wrote: Wed Jun 29, 2022 8:38 am There simply cannot be a one-size-fits-all answer to this question or anything that is even particularly useful as a rule of thumb. For some, it would be nearly impossible to save one year of expenses each year. For others, it would not be nearly enough savings.

We are high-earning professionals in our mid-30s, so seem to be in the demographic you are talking about. Personally, we saved about 3x expenses last year. If we were to follow KF's rule, we would needed to have spent more than twice as much money as we wanted to. What is the point of doing that just to meet some arbitrary metric?
The short answer is, you are not spending enough.
That's fine if you think so, CletusCaddy.

Anyone on the fence about these kinds of rules might think about the fact that some people think they know how much others should be spending without knowing much of anything about them. Does that really seem right? Some skepticism seems warranted.
It is obviously a rule of thumb.

More skepticism would seem to be warranted for the unspoken philosophy behind most Bogleheads posts that saving money is an end in itself, and an unalloyed good.
carminered2019
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by carminered2019 »

I would not follow anyone's investment advice if that person only saved 25X with a saving rate of 1X per year after 30-40 working years.
ThankYouJack
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by ThankYouJack »

nigel_ht wrote: Wed Jun 29, 2022 3:27 pm
ThankYouJack wrote: Wed Jun 29, 2022 3:03 pm I feel the opposite once financial independence is reached. Why save 1x then? Why not save $0? Sometimes Bogleheads seems like a sport where people compete to spend the least and save the most.

IMO most people should either spend more, give more or work less when FI. Not be tied to some rule about continuing to save 1 year of expenses. Will I personally be able to do this or will a scarcity/anxiety mindset with money lead me to want to save more, more and more. TBD
YererMeda wrote: Wed Jun 29, 2022 8:30 am
So what would you advise someone who started making a good amount of money at 35 but has no savings or debt? How much should s/he save relative to expense, in percentage? What is a good balance?
I'd say save what you can but don't get too stressed out or worked up over certain numbers. Enjoy life and being in your mid-thirties. Financial independence takes time and enjoy the journey.
Eh, with 15 years to FI I’d save more. No need for stress but if you aren’t FI by your 50s your risks increase.

“Since 1992, the study has followed a nationally representative sample of about 20,000 people from the time they turn 50 through the rest of their lives.

Through 2016, our analysis found that between the time older workers enter the study and when they leave paid employment, 56 percent are laid off at least once or leave jobs under such financially damaging circumstances that it’s likely they were pushed out rather than choosing to go voluntarily.

Only one in 10 of these workers ever again earns as much as they did before their employment setbacks, our analysis showed. Even years afterward, the household incomes of over half of those who experience such work disruptions remain substantially below those of workers who don’t.”

“We found that 28 percent of stable, longtime employees sustain at least one damaging layoff by their employers between turning 50 and leaving work for retirement.”

“An additional 13 percent of workers who start their 50s in long-held positions unexpectedly retire under conditions that suggest they were forced out. They begin by telling survey takers they plan to keep working for many years, but, within a couple of years, they suddenly announce they’ve retired, amid a substantial drop in earnings and income.”

“Finally, a further 15 percent of over-50 workers who begin with stable jobs quit or leave them after reporting that their pay, hours, work locations or treatment by supervisors have deteriorated. These, too, indicate departures that may well not be freely chosen.”

https://www.propublica.org/article/olde ... rement/amp
Save more than what - 1 year of expenses? I'm all in favor if one easily can, but don't think one should go to any extremes to do so.

As far as the study, I would love to see a subset of those that were "making a good amount of money" at 35 / doctors / multi-millionaires in their 50's and how that compares to the original sample set.

The original post is very broad, but mentions doctors (and since this is Bogleheads) I took "making a good amount of money" in the mid-six figure range. If the topic author provides more specifics that would help and I bet most of us would be in more agreement.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by HootingSloth »

CletusCaddy wrote: Wed Jun 29, 2022 4:20 pm
HootingSloth wrote: Wed Jun 29, 2022 4:08 pm
CletusCaddy wrote: Wed Jun 29, 2022 3:45 pm
HootingSloth wrote: Wed Jun 29, 2022 8:38 am There simply cannot be a one-size-fits-all answer to this question or anything that is even particularly useful as a rule of thumb. For some, it would be nearly impossible to save one year of expenses each year. For others, it would not be nearly enough savings.

We are high-earning professionals in our mid-30s, so seem to be in the demographic you are talking about. Personally, we saved about 3x expenses last year. If we were to follow KF's rule, we would needed to have spent more than twice as much money as we wanted to. What is the point of doing that just to meet some arbitrary metric?
The short answer is, you are not spending enough.
That's fine if you think so, CletusCaddy.

Anyone on the fence about these kinds of rules might think about the fact that some people think they know how much others should be spending without knowing much of anything about them. Does that really seem right? Some skepticism seems warranted.
It is obviously a rule of thumb.

More skepticism would seem to be warranted for the unspoken philosophy behind most Bogleheads posts that saving money is an end in itself, and an unalloyed good.
I agree that saving money is not an end in itself, and we intend to spend as much as we reasonably can before we are done. Hopefully that will be about another 50 plus years, and I am confident that I will be able to ramp up spending, or ramp down income, as the future unfolds. Spending more than we want to right now, just to meet some rule of thumb, makes no sense. As I said above, we are glad we saved less than the rule of thumb said during parts of our 20s and more than it said during parts of our 30s, because we have made decisions intentionally to spend on our goals and not mechanically based on some rule.
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BogleWogle
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by BogleWogle »

I like KF’s rule because it implies balance.

It’s easy to pursue a higher and higher rate of savings, but to what end? Having an end goal that balanced future as well as present spending was a lightbulb moment for me personally.
solarcub
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by solarcub »

YererMeda wrote: Wed Jun 29, 2022 8:30 am So what would you advise someone who started making a good amount of money at 35 but has no savings or debt? How much should s/he save relative to expense, in percentage? What is a good balance?
If you are getting started at 35, save a lot. But it's best to use a retirement calculator or make your own spreadsheet to try to come up with some numbers that make sense for you, rather than target 1 year of expenses automatically.

Lots of schooling and a career change meant I didn't start making good money until I was in my late 20's, and I don't mean FAANG money or anything like that. Still, I saved a lot for the next 8 years or so, then I got married. We decided to have kids and also to have my wife be a SAHM, which meant we probably saved about 1/3 expenses in those years. I got some good raises for a while, so we eventually saved a bit more, but right now I am in "buy experiences with/for my kids" mode, so we are saving less again. No way am I going to stop doing that to hit the "1 year per year" target. However, my spreadsheet, which I update quarterly, still says we'll be ok in retirement. If that changes, we will have to change.

Also, although I have not run into Klang Fool's unemployment issues (yet), I have found it harder to get raises these last 5 to 10 years. So any plan you make should have an alternative in case things don't turn out the way you thought they would.
mega317
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by mega317 »

What's optimal is a careful calculation between every dollar you're going to earn and spend in the future. Unfortunately the future is not known.* One response to that uncertainty is to save every possible dollar because you might lose your job and get a multi million dollar medical diagnosis on the same day. That's not my response; I try to save enough to cover the likely futures, insure for some other less likely futures, and enjoy my life which at times requires some spending.

*and if the future was known I wouldn't waste the knowledge calculating optimal savings rates!

Note to self, how to title posts for lots of views.
CletusCaddy
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by CletusCaddy »

BogleWogle wrote: Wed Jun 29, 2022 4:56 pm I like KF’s rule because it implies balance.

It’s easy to pursue a higher and higher rate of savings, but to what end? Having an end goal that balanced future as well as present spending was a lightbulb moment for me personally.
Bingo.

Great to see someone gets it around here
EnjoyIt
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by EnjoyIt »

It is all about goals, vs desires, vs income, vs investment growth, vs life expectancy, vs stable employment.

All of those are competing and intertwining entities and it is impossible to get it perfect. I do believe it is better to hedge on the side of saving too much especially early. You are better off having more money early on which offers options as opposed to too little and being forced to work more than desired or worse unable to work and then not having enough money. Of course you don't want to save so much that you aren't enjoying today. And that is where the balance comes in.

I am glad we saved as much we did early on in my career because, today, we have a ton of flexibility and options and more importantly doing so has bought us free time. Most don't really realize how valuable your time really is until it is too late.
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sls239
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by sls239 »

I don’t think that makes for great consumption smoothing.

Like the year you buy a car you also have to save the price of that car?

I mean you could manually try and do some smoothing, but as soon as you start in on making exceptions, then IME the exceptions well multiply.

Income and the availability of money to save tend to go hand in hand.

Expenses and the availability of money to save don’t really IME.

It seems like it would be setting a person up for failure- like someone who suddenly has to both take unpaid leave and pay a lot of money for healthcare and associated travel because of an illness - it just isn’t going to be reasonable.

You save in good years because they won’t all be good years.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by AnnetteLouisan »

I’m at an age (mid 50s) in which I have the opportunity to see how my contemporaries (friends and acquaintances) are faring. Many of them with good career experience are having financial squeezes due to divorce, job instability, low lifetime savings rate, unexpected custody and other legal battles, unexpected illness, having to support relatives and reduced marketability in the workplace and elsewhere dare I say.

It’s hard to be middle aged sometimes but it’s much less pleasant without money. They are in varying levels of desperation but you really want to avoid that if you can. I was roundly derided for saving when I was younger but I don’t know how I’d manage today if I hadnt. It’s an enormous load off my mind, and I’m hardly rich. But very comfortable is good enough.
delamer
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by delamer »

AnnetteLouisan wrote: Wed Jun 29, 2022 5:55 pm I’m at an age (mid 50s) in which I have the opportunity to see how my contemporaries (friends and acquaintances) are faring. Many are having financial squeezes due to divorce, job instability, low lifetime savings rate, unexpected custody and other legal battles, unexpected illness, having to support relatives and reduced marketability in the workplace and elsewhere dare I say.

It’s hard to be middle aged sometimes but it’s much less pleasant without money. They are in varying levels of desperation but you really want to avoid that if you can. I was roundly derided for saving when I was younger but I don’t know how I’d manage today if I hadnt. It’s an enormous load off my mind, and I’m hardly rich. But comfortable is good enough.
Scott Burns, the personal finance writer, said that most of his mail (snail or e-) from those near or in retirement was from people who were in trouble financially. Overspending, undersaving, bad advice, financial shocks had compromised their ability to live securely once they weren’t working.

But there was another significant, although smaller, group of writers who were stymied because their savings and frugality habits were so ingrained that they were finding it difficult to spend money on the things they wanted to enjoy during retirement.* While it’s more psychological than financial, Burns did have some relevant advice.

It’s better to be in the second group than the first. But being in it is still sad.

* In anticipation of certain responses, this doesn’t pertain if you aren’t spending money that you have but also aren’t missing out on activities/purchases that you want to do.
One thing that humbles me deeply is to see that human genius has its limits while human stupidity does not. - Alexandre Dumas, fils
KlangFool
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by KlangFool »

sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
sls239,

I do not have to save to buy the new car.

At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.

"Income and the availability of money to save tend to go hand in hand."

In my affluent neighborhood with a median annual household income of 150K, most people saves close to nothing. Why should this surprise you? Average saving rate for Americans is less than 5%. It is across all income level.

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AnEngineer
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by AnEngineer »

KlangFool wrote: Wed Jun 29, 2022 6:30 pm
sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
sls239,

I do not have to save to buy the new car.

At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.

"Income and the availability of money to save tend to go hand in hand."

In my affluent neighborhood with an median annual income of 150K, most people saves close to nothing. Why should this surprise you? Average saving rate for Americans is less than 5%. It is across all income level.

KlangFool
I think the point is the lumpiness of the expense. In the year you buy the car you both have the extra expense and are expected to save to match that expense. Unless your 1X/year is meant on average, so that in car buying years you save less and other years you save more.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by HootingSloth »

KlangFool wrote: Wed Jun 29, 2022 6:30 pm
sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.
KlangFool,

And are the tradeoffs the same for a person who is not at your income level? For someone earning $30,000 a year ($15/hour for 2000 hours), presumably you could not give the same justifications. And if someone can have everything they want for $100k, should they spend $200k in order to satisfy your rule?
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by KlangFool »

AnEngineer wrote: Wed Jun 29, 2022 6:36 pm
KlangFool wrote: Wed Jun 29, 2022 6:30 pm
sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
sls239,

I do not have to save to buy the new car.

At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.

"Income and the availability of money to save tend to go hand in hand."

In my affluent neighborhood with an median annual income of 150K, most people saves close to nothing. Why should this surprise you? Average saving rate for Americans is less than 5%. It is across all income level.

KlangFool
I think the point is the lumpiness of the expense. In the year you buy the car you both have the extra expense and are expected to save to match that expense. Unless your 1X/year is meant on average, so that in car buying years you save less and other years you save more.
AnEngineer,

I don't. Most of my 50K to 60K annual expense are discretionary. I cut my discretionary expense to pay for the new car. I may buy the new car first with my emergency fund. But, I cut my discretionary expense to refill the emergency fund.

My real gross income is 150K per year. I "Pay Yourself First" and take 50K out of that income. I live like someone with a gross income of 100K per year.

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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by KlangFool »

HootingSloth wrote: Wed Jun 29, 2022 6:46 pm
KlangFool wrote: Wed Jun 29, 2022 6:30 pm
sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.
KlangFool,

And are the tradeoffs the same for a person who is not at your income level? For someone earning $30,000 a year ($15/hour for 2000 hours), presumably you could not give the same justifications. And if someone can have everything they want for $100k, should they spend $200k in order to satisfy your rule?
HootingSloth,

Is the person earning 30K per year willing to live like someone earning 20K per year? Are there not folks earning 20K per year? If the 30K person willing to live like 20K per year person, why saving 1 year of expense is not possible?

I come from a country/culture/community with an average gross saving rate of 30+%. Can you imagine what kind of people survive 800+ famines across 800+ years? The only kind that willing to save while starving. They did that because if they didn't, they would not survive. Then, why is it not possible? This could be totally foreign to you.

Are you willing to starve in order to save?

KlangFool
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by AlphaLess »

In 2021, we saved 5 years worth of expenses.

To me, optimal is: the more the better.

If I could save 100 years of expenses in one year, I would do it.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by HootingSloth »

KlangFool wrote: Wed Jun 29, 2022 7:00 pm
HootingSloth wrote: Wed Jun 29, 2022 6:46 pm
KlangFool wrote: Wed Jun 29, 2022 6:30 pm
sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.
KlangFool,

And are the tradeoffs the same for a person who is not at your income level? For someone earning $30,000 a year ($15/hour for 2000 hours), presumably you could not give the same justifications. And if someone can have everything they want for $100k, should they spend $200k in order to satisfy your rule?
HootingSloth,

Is the person earning 30K per year willing to live like someone earning 20K per year? Are there not folks earning 20K per year? If the 30K person willing to live like 20K per year person, why saving 1 year of expense is not possible?

I come from a country/culture/community with an average gross saving rate of 30+%. Can you imagine what kind of people survive 800+ famines across 800+ years? The only kind that willing to save while starving. They did that because if they didn't, they would not survive. Then, why is it not possible? This could be totally foreign to you.

Are you willing to starve in order to save?

KlangFool
Ok, you answered one question (I do not agree, but disagreement is fine). What about the other person?
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by sls239 »

I will not question the decisions your ancestors made, for their place and time.

But there is ample data that in the US today there is spending that shows positive returns. Education is the most oft cited, but I would add healthcare to that, and I’ve even seen studies that show that something like getting teeth straightened can have a positive return (because of job interviews and such).

So for this place and time, I would very much suggest that the person making $30k if they had to choose between saving $10k and getting proper healthcare that they choose healthcare.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by KlangFool »

HootingSloth wrote: Wed Jun 29, 2022 7:11 pm
KlangFool wrote: Wed Jun 29, 2022 7:00 pm
HootingSloth wrote: Wed Jun 29, 2022 6:46 pm
KlangFool wrote: Wed Jun 29, 2022 6:30 pm
sls239 wrote: Wed Jun 29, 2022 5:44 pm
Like the year you buy a car you also have to save the price of that car?
At my income level, as long as I do not overspend on the house, car, and college education like my income peers, my annual expense has enough room to cover that.

Meanwhile, my income peers overspend on their houses and they cannot eat out regularly. And, they still saves close to nothing.

I am not frugal. I spend 50K to 60K per year.
KlangFool,

And are the tradeoffs the same for a person who is not at your income level? For someone earning $30,000 a year ($15/hour for 2000 hours), presumably you could not give the same justifications. And if someone can have everything they want for $100k, should they spend $200k in order to satisfy your rule?
HootingSloth,

Is the person earning 30K per year willing to live like someone earning 20K per year? Are there not folks earning 20K per year? If the 30K person willing to live like 20K per year person, why saving 1 year of expense is not possible?

I come from a country/culture/community with an average gross saving rate of 30+%. Can you imagine what kind of people survive 800+ famines across 800+ years? The only kind that willing to save while starving. They did that because if they didn't, they would not survive. Then, why is it not possible? This could be totally foreign to you.

Are you willing to starve in order to save?

KlangFool
Ok, you answered one question (I do not agree, but disagreement is fine). What about the other person?
HootingSloth,

"And if someone can have everything they want for $100k, should they spend $200k in order to satisfy your rule?"

Folks are missing my main point. Please make sure that you save and spend the right amount with the correct assumption. If the person could be sure that they would be fully-employed continuously until retirement age, they could save less. But, if they don't, they should save more.

My problem is with folks that save 15% but refuse to acknowledge that their saving rate is based on the assumption of good job security. Aka, they would not be unemployed across multiple recessions.

You do you. But, please do it with the full knowledge of the trade off and the bet that you are taking.

KlangFool
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by KlangFool »

sls239 wrote: Wed Jun 29, 2022 7:31 pm I will not question the decisions your ancestors made, for their place and time.

But there is ample data that in the US today there is spending that shows positive returns. Education is the most oft cited, but I would add healthcare to that, and I’ve even seen studies that show that something like getting teeth straightened can have a positive return (because of job interviews and such).

So for this place and time, I would very much suggest that the person making $30k if they had to choose between saving $10k and getting proper healthcare that they choose healthcare.
sls239,

Folks overspend on the house, car, and college education. Health care is not on the list.

KlangFool
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by radiowave »

Just finished my first full year of retirement. Our plan prior was to max out tax deferred accounts, Roths, pay off mortgage, and remainder fill out taxable space and cash reserves for help in transitioning to a retirement home across the country. Fortunately I had the foresight to go back for my graduate degrees early in my career and that created opportunities at the peak of my career that I wouldn't have had access to and that more than doubled my salary last decade. After all of the above, we still saved about 1-2 yrs expenses every year. Without any recurring debt, our pensions/SS exceed our current expenses - that was the plan and worked for us. Yes, we deferred getting a new vehicle every 2-3 years, found a modest house, deferred some international travel we thought of doing, and still have the same furniture we bought mid 90s. Frugality and savings do work for some, but from an actionable standpoint for those earlier in your careers, consider what added education may do in the future to open doors (and higher salary).
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finite_difference
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by finite_difference »

Jags4186 wrote: Wed Jun 29, 2022 8:47 am The answer is to save as much as possible when you are as young as possible because that money is worth so much more than later year high savings rates.

A 22 year old, making $50,000 who saves 20% or $10,000 and earns 8% over their investing lifetime will have $273,000 when they are 65.
You need to check your calculation and edit your post. If you save $10k per year for 33 years you will have contributed $330,000 but will have significantly more than that if you assume 8% nominal growth. (I would instead work in real dollars, e.g. assume 5% real growth.)
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by Zeno »

Future historians, anthropologists and others will be able to study threads such as this one, recorded electronically in the year 2022, and draw conclusions about our species. Or more likely AI machines are “reading” these exchanges between and among anonymous Homo sapiens and learning from them. Actually, that is already occurring.

Why are Homo sapiens enticed to create anonymous online personas, then waste countless hours debating with other anonymous online personas, flinging written text back and forth, most of it unsubstantiated.

Homo sapiens evolved to be social, reading non-verbal communications, all of which are eliminated when folks are communicating via thumbs and via photons interacting between a screen and the eye.

I wish I was a 6th grader with an inquisitive mind about how the brain of a Homo sapien works. I also wished that said 6th grade version of myself went on to study data science, AI and the like. I also hope that records of these exchanges will still exist in the decades to come. If I could go back in time (and that is impossible) I could then finagle an undergraduate degree from MIT in 2032, then a PhD in the field in 2036 from Stanford. Then I would study this thread and draw conclusions about Homo sapiens.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by HootingSloth »

YererMeda wrote: Wed Jun 29, 2022 8:30 am I saw KF's comment a few times and it got me thinking about the optimal savings rate relative to expenses, not income.

Thinking savings rate relative to expenses is very appealing because it strips out complicating factors. Under KF's plan, he can be FI in 25 years without growth.

As I thought more about this, I noticed that a typical person has earning lifecycle where s/he makes the least early in their career and progress in the income ladder overtime. So KF's plan may not work well for this kind of individuals.

But KF's plan could work well for some professionals who start earning a high income from the start and have little to no income growth (e.g. doctors).

So what would you advise someone who started making a good amount of money at 35 but has no savings or debt? How much should s/he save relative to expense, in percentage? What is a good balance?
It seems to me that KlangFool has offered some good advice in this thread, namely:
KlangFool wrote: Wed Jun 29, 2022 8:10 pm You do you. But, please do it with the full knowledge of the trade off and the bet that you are taking.
Look to your own circumstances. Make the best decision you can in light of the tradeoffs that apply to your specific circumstances with eyes wide open about what those tradeoffs are. Play your own game and not someone else's.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by AnnetteLouisan »

Zeno wrote: Wed Jun 29, 2022 8:41 pm Future historians, anthropologists and others will be able to study threads such as this one, recorded electronically in the year 2022, and draw conclusions about our species. Or more likely AI machines are “reading” these exchanges between and among anonymous Homo sapiens and learning from them. Actually, that is already occurring.

Why are Homo sapiens enticed to create anonymous online personas, then waste countless hours debating with other anonymous online personas, flinging written text back and forth, most of it unsubstantiated.

Homo sapiens evolved to be social, reading non-verbal communications, all of which are eliminated when folks are communicating via thumbs and via photons interacting between a screen and the eye.

I wish I was a 6th grader with an inquisitive mind about how the brain of a Homo sapien works. I also wished that said 6th grade version of myself went on to study data science, AI and the like. I also hope that records of these exchanges will still exist in the decades to come. If I could go back in time (and that is impossible) I could then finagle an undergraduate degree from MIT in 2032, then a PhD in the field in 2036 from Stanford. Then I would study this thread and draw conclusions about Homo sapiens.
Thank you for my first good laugh of the day! Said that way it is absurd, you’re right.

American linguist John McWhorter has argued that these electronic forms of communication are a continuation of the kinds of dialogues we used to have as residents of small close knit communities (think Middle Ages where people knew and regularly interacted with people in their town), but various factors (industrialization, Urbanization) made us more isolated from one another.

He says this form of communication (text, email and social media) isn’t a radical break from the past. Our isolation was a break from the past and this form is so popular because it knits us back together. Whoa.
Last edited by AnnetteLouisan on Wed Jun 29, 2022 9:23 pm, edited 1 time in total.
7eight9
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by 7eight9 »

I don't know what the right number is. That said, in the past 20 years my wife and I have managed to grow our net worth from essentially $0 to just over $2M. We never were big earners. We have never invested anything significant in the stock market (I think the maximum percentage we ever had in the market was 15% of investable funds). I've been unemployed for more than 4 of those years. My wife didn't work the first 10 years. Basically, we live on ~$18K/year excluding vacation spend. Add in vacation spend and it is up to $25K.

Does the $18K include housing? Yes, insofar as it includes HOA and property taxes (no mortgage). Should we add in imputed rent? Maybe to be fair but it doesn't come out of our pocket. Does it include car expenses? Not purchases but all other expenses associated with two cars. We have bought 3 new cars ($22K, $21K and $30K - minus $15K insurance settlement on one) for a total of $58K. We don't include them in net worth. So we could add in $3K annual car expense if we wanted to be fair although the cars will last longer as one has 70K and one is brand new. Any other expenses excluded? I don't believe so.

So have saved more than one years expenses every year? Obviously. It it optimal? I don't know. What I do know is with a high level of savings we have no real worries.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by AnnetteLouisan »

Deleted by author.
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HomerJ
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by HomerJ »

KlangFool wrote: Wed Jun 29, 2022 2:40 pm
nigel_ht wrote: Wed Jun 29, 2022 2:35 pm The impact depends on the duration of the unemployment…
And, when the person was unemployed and size of the portfolio/emergency fund at that time.

At a young age, the size of the portfolio/emergency fund is small. It does not take much unemployment to wipe the person out.
And it doesn't take much to rebuild the portfolio.
At an older age, it may take longer to find new employment. The portfolio may not last long enough.
Good to have more saved at an older age... but still don't need 50% savings rate for most people.
At 15% saving rate, the age window for disaster is large.
Meh, the biggest problem is that you always reference "disaster". 50% savings is not required to avoid disaster...

But I agree one should, if they can, strive to increase savings rate over time.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by JBTX »

Jags4186 wrote: Wed Jun 29, 2022 9:48 am
KlangFool wrote: Wed Jun 29, 2022 9:26 am
Jags4186 wrote: Wed Jun 29, 2022 8:47 am
The answer is to save as much as possible when you are as young as possible because that money is worth so much more than later year high savings rates.
Jags4186,

I disagreed. A person may not have the life and time to enjoy the savings by saving as much as possible. Hence, I go with a balanced approach: save as much as you spend.

And, above a saving rate: 100% of your current annual expense, the increase in saving does not improve the FI date as much. The marginal improvement does not justify not spending/enjoying some of the money now.

KlangFool
It's impossible to save 100% of your spending consistently unless your income drastically increases whenever your spending increases. Someone who currently saves 1 year expenses and then has a child and picks up $20,000 in yearly childcare expenses cannot continue to save 100% of their expenses unless their income increases $40,000 after taxes or they cut back $20,000 expenses elsewhere. However, if they do not have $20,000 to cut then their savings rate will decline. That is why it is imperative to save as much as you can when young, so you can make up for later times when you cannot.

We shall agree to disagree.
I will agree the more you save early the faster wealth builds. A good chunk of what we have saved of what I saved and invested before 35.

The thing that gets lost in the savings rates discussions is somewhat counterintuitively, a 2 income household will probably have a hard time having as high as a savings rate. The total savings should increase, but probably not the savings rate. The second income is probably being taxed at 30% or higher (including FICA), then there may be child care, additional commuting expenses, additional clothing, probably eat out more, by more pre prepared groceries. Plus there is just an inevitable lifestyle creep that tends to happen a total income increases.

We have never saved anything close to 50%, but we both worked, and both always saved, so in our case 20% average savings will likely be sufficient, and we have some non typical expenses to deal with also.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by sleepy06 »

Zeno wrote: Wed Jun 29, 2022 8:41 pm Future historians, anthropologists and others will be able to study threads such as this one, recorded electronically in the year 2022, and draw conclusions about our species. Or more likely AI machines are “reading” these exchanges between and among anonymous Homo sapiens and learning from them. Actually, that is already occurring.

Why are Homo sapiens enticed to create anonymous online personas, then waste countless hours debating with other anonymous online personas, flinging written text back and forth, most of it unsubstantiated.

Homo sapiens evolved to be social, reading non-verbal communications, all of which are eliminated when folks are communicating via thumbs and via photons interacting between a screen and the eye.

I wish I was a 6th grader with an inquisitive mind about how the brain of a Homo sapien works. I also wished that said 6th grade version of myself went on to study data science, AI and the like. I also hope that records of these exchanges will still exist in the decades to come. If I could go back in time (and that is impossible) I could then finagle an undergraduate degree from MIT in 2032, then a PhD in the field in 2036 from Stanford. Then I would study this thread and draw conclusions about Homo sapiens.
I was cheering you on and loving this comment until you said you wanted to be a 6th grader.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by Exchme »

I see the wisdom in KF's approach, most folks are not disciplined enough to do it, but it's not a bad idea. I think a lot of Bogleheads are successful and thrifty folks that also experienced some unrecognized amount of luck during their career. KF controlled his spending and even though he experienced the wrong end of a cyclical business he ended up well off.

Cyclical and declining industries are no fun and you can't spot them ahead of time and once you are well into your career, it's really hard to change horses. In my business, anyone that didn't save heavily was in big trouble. There were layoffs of 50-70% every few years and folks could be out of work for a year or more. The industry eventually went into decline and much of the work is done overseas now, so with each downturn, many folks were never called back and some whole departments were eliminated. If you could keep working, it paid more than other possibilities, so I stuck it out, but the journey was a nail biter. No one knows when they start their career what things are going to change, so controlling spending to be prepared sounds like advice that would leave more people in good shape in retirement.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by PowderDay9 »

OP,

To quote one of my favorite KlangFool expressions, "When your ask the wrong question, you'll never get the right answer". :D

There is no universal optimal savings rate. Instead you should first define your financial goals and decide how much you need to save to achieve them. Some years you might save less and other years more.

KlangFool's save 1 year of expense is just a guideline. In fact, I'm not even convinced he's sticking to it. He said that he got a 40% raise last year at his current job yet he still says he spends $50-60k a year. He needs to substantially increase his spending this year to keep to his own rule. Otherwise he'll be saving more than 1 year of expense like he said would probably happen in this thread below.

viewtopic.php?t=354253&start=50#p6137771
finite_difference
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by finite_difference »

Zeno wrote: Wed Jun 29, 2022 8:41 pm Future historians, anthropologists and others will be able to study threads such as this one, recorded electronically in the year 2022, and draw conclusions about our species. Or more likely AI machines are “reading” these exchanges between and among anonymous Homo sapiens and learning from them. Actually, that is already occurring.

Why are Homo sapiens enticed to create anonymous online personas, then waste countless hours debating with other anonymous online personas, flinging written text back and forth, most of it unsubstantiated.

Homo sapiens evolved to be social, reading non-verbal communications, all of which are eliminated when folks are communicating via thumbs and via photons interacting between a screen and the eye.

I wish I was a 6th grader with an inquisitive mind about how the brain of a Homo sapien works. I also wished that said 6th grade version of myself went on to study data science, AI and the like. I also hope that records of these exchanges will still exist in the decades to come. If I could go back in time (and that is impossible) I could then finagle an undergraduate degree from MIT in 2032, then a PhD in the field in 2036 from Stanford. Then I would study this thread and draw conclusions about Homo sapiens.
Why not do it now? You can get that degree and PhD well in advance of 2036. Doesn’t need to be from a specific school. Actually, you don’t even really need a degree.

Why do we always create imaginary or real obstacles for ourselves?
The most precious gift we can offer anyone is our attention. - Thich Nhat Hanh
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by nigel_ht »

finite_difference wrote: Wed Jun 29, 2022 10:52 pm
Zeno wrote: Wed Jun 29, 2022 8:41 pm Future historians, anthropologists and others will be able to study threads such as this one, recorded electronically in the year 2022, and draw conclusions about our species. Or more likely AI machines are “reading” these exchanges between and among anonymous Homo sapiens and learning from them. Actually, that is already occurring.

Why are Homo sapiens enticed to create anonymous online personas, then waste countless hours debating with other anonymous online personas, flinging written text back and forth, most of it unsubstantiated.

Homo sapiens evolved to be social, reading non-verbal communications, all of which are eliminated when folks are communicating via thumbs and via photons interacting between a screen and the eye.

I wish I was a 6th grader with an inquisitive mind about how the brain of a Homo sapien works. I also wished that said 6th grade version of myself went on to study data science, AI and the like. I also hope that records of these exchanges will still exist in the decades to come. If I could go back in time (and that is impossible) I could then finagle an undergraduate degree from MIT in 2032, then a PhD in the field in 2036 from Stanford. Then I would study this thread and draw conclusions about Homo sapiens.
Why not do it now? You can get that degree and PhD well in advance of 2036. Doesn’t need to be from a specific school. Actually, you don’t even really need a degree.

Why do we always create imaginary or real obstacles for ourselves?
Some folks are genetically lucky and still have fairly malleable minds at older ages. Most of us, not so much…

Most important inventions and discoveries are done before age 30ish.

Einstein - theory of relativity 26
Michelangelo - David 26
Bohr - atomic model 27

And so forth.

I could get another advanced degree but age 50 it’s really unlikely to make a game changing discovery if you aren’t young.

Even accounting for the trend toward older Nobel recipients (age shifted from under 30 before 1905 or around 45 now) you aren’t going to get the grants needed as a 55 yo post doc unless fund raising was one of your skills in your first career.

I guess if you are FI and can get free lab time maybe but you don’t have the decades of prior research experience and body of knowledge.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by Dude2 »

smitcat wrote: Wed Jun 29, 2022 11:06 am
abc132 wrote: Wed Jun 29, 2022 11:02 am
KlangFool wrote: Wed Jun 29, 2022 10:51 am
Many of my peers are permanently unemployed or under-employed in their 40s and 50s.

KlangFool
That is not a rational reason to recommend everyone save one year of expenses.

Investing is about trade-offs, and people also die before they can spend their savings. Your own example shows you continue to work after you are financially independent, and that your savings rate was higher than what you needed. This was despite 1 year lay-offs and all of the market declines you experienced.
Agreed...
You missed that he also lost a bunch of funds in the past when investing in Telecoms setting him back more than most.
"Do as I say, not as I do"
I may be wrong, but I don't think that is accurate. Often KlangFool refers to the days around the dot com bubble where he worked in Telecom. I'm pretty sure he isn't talking about investing in that sector. He's addressing how the market went south for reasons that made no sense. Recall that this was a time of great optimism in tech, and the market swooned with that optimism. Massive recruiting and high salaries were in bloom. However, for no apparent reason and with little that made sense in terms of timeframe, the market cast its doubt upon Telecoms. Even in those days there was no reason not to envision a world where video teleconferencing could be a reality and that millions of miles of fiberoptics could be laid across the country to support the increased bandwidth demands -- that all of the embedded boards that process the data at the backbones needed to be constantly optimized to support technology growth. (This was pre-smart phones, so the picture includes use of PCs in office environments versus mobile). The fire was burning and then somebody dumped cold water on it. To this day I don't know why that happened -- perhaps simply that people believed they could live without it all and that there was no reason to keep up with the Joneses.

The takeaway is that markets can be irrational, whole societies can shift their behavior, your super hot job can cool off at a moments notice, etc. Therefore, be prepared.
Then ’tis like the breath of an unfee’d lawyer.
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by makingmistakes »

finite_difference wrote: Wed Jun 29, 2022 8:33 pm
Jags4186 wrote: Wed Jun 29, 2022 8:47 am The answer is to save as much as possible when you are as young as possible because that money is worth so much more than later year high savings rates.

A 22 year old, making $50,000 who saves 20% or $10,000 and earns 8% over their investing lifetime will have $273,000 when they are 65.
You need to check your calculation and edit your post. If you save $10k per year for 33 years you will have contributed $330,000 but will have significantly more than that if you assume 8% nominal growth. (I would instead work in real dollars, e.g. assume 5% real growth.)
And for your calculation, note that 65-22 = 43 years.
Wannaretireearly
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by Wannaretireearly »

CletusCaddy wrote: Wed Jun 29, 2022 5:09 pm
BogleWogle wrote: Wed Jun 29, 2022 4:56 pm I like KF’s rule because it implies balance.

It’s easy to pursue a higher and higher rate of savings, but to what end? Having an end goal that balanced future as well as present spending was a lightbulb moment for me personally.
Bingo.

Great to see someone gets it around here
Bingo + 1

The simplicity of the rule, over any time/life period is golden at providing balance.

For me the simplicity was demonstrated by how easily my 11 and 13 year olds could understand it, and why (I’ll keep reminding them too! 😂😂).

Me: if you earn $120k out of college, what should be your target saving rate and why?

Kid (hopefully): $40k of course, Pops! I’ll then have about 40k to pay in taxes and $40k to spend. Bonus: if they tell me this plan will put them on a path to financial independence in 25 years ;)

Me: happy dance :mrgreen: education session is done ✅

My reality: I now likely save around 1X, I likely did when I started working, I likely didn’t over high spending kids in private school years. Now I’m happily minus one private school payment and zero mortgage for the past year 💪.

The Klang rule provides balance, and applies over time/income growth/ER FI target/supports job loss times etc.

It does help to come from a background/family of savers. Most of my friends growing up would have a Range Rover and much higher housing costs, if they had anything close to our AGI. We prefer to frivolously spend on going out/travel etc. We’d be broke, stressed out, and SPAN if we also tried to be extravagant with cars and houses too!
“At some point you are trading time you will never get back for money you will never spend.“ | “How do you want to spend the best remaining year of your life?“
59Gibson
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by 59Gibson »

Ependytis wrote: Wed Jun 29, 2022 1:47 pm Also, what I observed, for a very small incremental increase in the grade of a product or service, you pay significantly more. For me, the "more" it's just not worth it.
This is exactly how I've lived and it's saved enormous amount of money. My view is once I have decent reliable veh with A/C and heat that's 95% of the value. For me to get the other 5%( status symbol, latest style, more gadgets) I may need to spend 50%, 100%+ more.
Same with house, electronics, etc. There is a huge cliff of diminshing returns
bling
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by bling »

i'd caution the younger folks out there from blindly following advice like "save as much as you can", because that's what i did. i would find every reason to talk myself out of spending money so that i could save it instead. after so many years of doing this my brain is all wired backwards now and i actually feel discomfort when spending money, something that i've been trying to correct recently.

the optimal savings rate is the one that benefits both future you (saving) and current you (spending). you have to constantly remind yourself that life is unpredictable so that you balance both spending and saving, otherwise one will overtake the other. you may die in a car accident tomorrow. or you may get cancer that drains all your savings. or you may lie on your death bed regretting not spending the mass fortune you've acquired.
smitcat
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by smitcat »

MathWizard wrote: Wed Jun 29, 2022 3:26 pm
smitcat wrote: Wed Jun 29, 2022 11:09 am
AnnetteLouisan wrote: Wed Jun 29, 2022 11:06 am One way to do it is assume hypothetically that your income stopped permanently tomorrow.

What would you do then? What would you sell, what services could you cut, what could you do yourself as what do you truly need to survive.

One should then save to the point that if their income stopped, it stopped. Everything else is just gravy.
"One way to do it is assume hypothetically that your income stopped permanently tomorrow."
Why would an average reasonable person want to live that way for any length of time?
Why not choose to assume that you will be dead tomorrow and live like that?
(Hint - equally as unreasonable)
Having a plan for a circumstance that could happen is just prudent.

Stage one is: if I lose my job, what would I need to do to survive?

Stage 2 is: would I be able to meet at lest basic needs if I could not find work?

Until one gets to stage 2, financial independence, they are a wage slave, they
are not masters of their own destiny.

I looked at that these stages seriously in 2008/9. We could have survived a long time
had I lost my job (my wife had already lost hers), but it would have hollowed out our retirement savings.

I moved to stage 2 as quickly as I could, while still having a happy life, and meeting all our other goals.

By 2017, we were in good shape. Kids out of college and employed, mortgage paid off, debt free,
and savings rate soared.
Please describe how you lived like your income would drop to zero the next day when you were younger.
What exactly did you give up and what exactly did you not give up at that younger age?
smitcat
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by smitcat »

Dude2 wrote: Thu Jun 30, 2022 4:28 am
smitcat wrote: Wed Jun 29, 2022 11:06 am
abc132 wrote: Wed Jun 29, 2022 11:02 am
KlangFool wrote: Wed Jun 29, 2022 10:51 am
Many of my peers are permanently unemployed or under-employed in their 40s and 50s.

KlangFool
That is not a rational reason to recommend everyone save one year of expenses.

Investing is about trade-offs, and people also die before they can spend their savings. Your own example shows you continue to work after you are financially independent, and that your savings rate was higher than what you needed. This was despite 1 year lay-offs and all of the market declines you experienced.
Agreed...
You missed that he also lost a bunch of funds in the past when investing in Telecoms setting him back more than most.
"Do as I say, not as I do"
I may be wrong, but I don't think that is accurate. Often KlangFool refers to the days around the dot com bubble where he worked in Telecom. I'm pretty sure he isn't talking about investing in that sector. He's addressing how the market went south for reasons that made no sense. Recall that this was a time of great optimism in tech, and the market swooned with that optimism. Massive recruiting and high salaries were in bloom. However, for no apparent reason and with little that made sense in terms of timeframe, the market cast its doubt upon Telecoms. Even in those days there was no reason not to envision a world where video teleconferencing could be a reality and that millions of miles of fiberoptics could be laid across the country to support the increased bandwidth demands -- that all of the embedded boards that process the data at the backbones needed to be constantly optimized to support technology growth. (This was pre-smart phones, so the picture includes use of PCs in office environments versus mobile). The fire was burning and then somebody dumped cold water on it. To this day I don't know why that happened -- perhaps simply that people believed they could live without it all and that there was no reason to keep up with the Joneses.

The takeaway is that markets can be irrational, whole societies can shift their behavior, your super hot job can cool off at a moments notice, etc. Therefore, be prepared.
"Often KlangFool refers to the days around the dot com bubble where he worked in Telecom. I'm pretty sure he isn't talking about investing in that sector."
Yes - he did heavily invest in that sector. Yes - he did lose big in that sector.
There are numerous other examples similar to this.
smitcat
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Re: KlangFool - I save 1 year of expenses. Why? More broadly, what is the optimal savings rate relative to expenses?

Post by smitcat »

bling wrote: Thu Jun 30, 2022 6:48 am i'd caution the younger folks out there from blindly following advice like "save as much as you can", because that's what i did. i would find every reason to talk myself out of spending money so that i could save it instead. after so many years of doing this my brain is all wired backwards now and i actually feel discomfort when spending money, something that i've been trying to correct recently.

the optimal savings rate is the one that benefits both future you (saving) and current you (spending). you have to constantly remind yourself that life is unpredictable so that you balance both spending and saving, otherwise one will overtake the other. you may die in a car accident tomorrow. or you may get cancer that drains all your savings. or you may lie on your death bed regretting not spending the mass fortune you've acquired.
Extremely well put.
Originally I became aware of folks that had spending problems (too much).
Later on I became aware of folks that had other spending problems (too little).
Neither one is good for a full and healthy life.

Both can adversely affect yourself and others around you with very poor longlasting results.
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