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Saturday, March 27, 2010

How Tight Is Too Tight?

As someone who is selfly admitted as "frugal" (and reminded constantly by his friends and family), the question comes up to me is when are you setting yourself up without enough "wiggle room" in your finances. I have my finances balanced so that a certain percent goes to savings, a certain percent goes to mortgage, certain to monthly bills, certain to spending, etc.

By setting an emergency fund up, this allows some wiggle room, so that you may be tight with your weekly spending allowances for yourself, but if something comes up that is unexpected you can still handle it. Also a key to remember for the "frugal" among us, who are frugal because they have to be, rather than that they want to be, is to remember that life always gets easier, especially in a financial sense. There is never any competition between where the average 25 year old and the average 45 year old should be financially. This is the difficulty that some young people have, accepting that things are tough for everyone when they start out and get easier over time.

When I purchased my house, I was literally "house poor". This means that I had a house, and my assets and liabilities were working quite nicely, but I had no disposable income at all. Two years later, because of an increased cash flow based on increases in income, I think to myself "Why didn't I buy a house sooner?", but advice like this is easy to give on the other side. My advice will be to give yourself a plan, and stick to it. I personally revisit my plan every time I get a raise (annually for me) and modify it then, but whenever a significant life event changes things it is time to revisit your plan.

FatcatC commented the other day to me that although my net worth has improved by whatever amount over the last year do I know if that is good or bad or what (because I have nothing to compare it to). My response is that because I am saving at least 10% of my income towards my retirement, am building a emergency fund, and paying off all my debts (plus more than the minimums) that I am doing well for myself and living within my means. Does this mean that my plan is perfect and that it couldn't be improved? Obviously not, because I have nothing to compare it to, but the plan fits my goals and that is enough for me.

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