JD talks about the stages of personal finance:
1. learning the basics
2. practicing the basics
3. what next?
4. financial independence
A lot of folks follow these stages with step 0: having lots of consumer debt, step 1 learning that they can get out of debt, step 2 actually getting out of debt, step 3 realizing they can do things like save for like travel (because in steps 1-3 they started disliking stuff), and finally step 4 being able to quit the job they hate and become full-time bloggers (etc.)
Some of us started out not only naturally frugal, but kind of skin-flinty. I strongly identify with Jacq, FGA, and Donna Freedman in this respect. Some of us never got into consumer debt and our only debt was student loans or mortgage debt if that. We were gazelle intense before we ever heard of Dave Ramsey.
We have our own levels of personal finance.
This post is inspired by a recent article by Donna Freedman in which she’s contemplating how she needs more time in order to make more money without killing her health. Doing every tiny thing from scratch is no longer worth her marginal wage. Occasionally it’s worth more to her to *gasp* order a pizza.
So I present to you, the terrified-of-debt-ultra-responsible-perhaps-too-thrifty-by-US-standards levels of personal finance.
1. In this stage you’re just starting out. If you have any debt (specifically: education debt, car debt because you need transportation to work, emergency medical debt, or debt your ex-spouse left you) you’re scrambling to pay it off. You don’t live beyond your means. You eat a lot of rice and beans, or potatoes and onions and you know how much everything you ever buy costs. You watch every penny and every wasted penny is mourned. (And you beat yourself up over its loss.)
2. In stage two, your debts are gone and you have a tiny emergency fund. This allows you to feel comfortable adding a little meat and fruit and vegetable to your diet, even if these items aren’t scavenged from the “odd ends” or “eat today” section of your grocery. You still keep close eyes on every penny.
3. In this stage, you have a nice emergency fund and your income has gone up so you feel comfortable that an emergency isn’t going to kill you. Additionally, you realize that your time is valuable because your real wage is pretty high. Instead of saving $5 soaking beans, you could be making $25 working the same amount of time. You start doing cost-benefit analyses, you realize you can outsource things you dislike (or that are just time-consuming) if the monetary trade-off is high enough. You spend nickels and dimes, but mindfully and optimally.
4. In level four you have a really big emergency fund and your income is high enough compared to your spending that you could replenish your emergency fund in a month or two. Say you’re saving 40-60% of your income and you’re not feeling particularly deprived doing so. One day you suddenly realize that you can slip up and it’ll be just fine. Rather than beating yourself up over a lost penny you say to yourself, “it’s only money, and I’m still doing fine.” You stop watching the pennies. Instead you put away dollars and feel free to spend what is left. It’s ok to mess up because the dollars are already saved. At this stage you may even decide it isn’t worth your time to argue when a company mischarges you for something, but you probably will anyway, just out of the principle of the thing. (Even if it’s not an optimal use of your time.) You may do cost-benefit analysis from time to time, but sometimes you decide it is not worth your time to do so. You’re a lot more relaxed about nickles and dimes so long as you’re keeping tabs on the dollars and hundreds and thousands. A certain zen slips in. You’re still frugal on the whole, but that frugality allows you to stop worrying so dang much.
In one of my favorite MSN articles not written by Donna Freedman, Liz Pulliam Weston talks about when you no longer need a formal budget. Basically it’s when you’re out of debt and spend a lot less than you earn just naturally. Your savings are on auto-pilot and an emergency isn’t going to wipe you out. This happens in level 4.
Where’s Donna? I can’t really say because it’s her income, her savings, and her comfort level that determines that. But, based on her recent blog post (the one that inspired this one), it sounds like at level 3. But (hopefully) at some point she’ll be able to look at her savings and at her regular income and realize she’s suddenly at her own level 4. And that will be good for her blood pressure! That level of peace is well worth the hard-effort that built up to it.
I’m not sure if level 4 was what I was aiming for back when I lost my ability to digest red meat back at level 1. But having gotten to level 4, I never ever want to go back. And that’s what keeps me saving a large portion of our income and keeps me wanting to earn more than we spend. If necessary we could go back to level 3, but I’d really rather not.
Do these levels describe you, or are you more the standard, “got into consumer debt and saw the light” or something more moderate entirely? What level are you at? When do you think you’ll be able to stop worrying so much? Or do you maybe not worry enough?