Measuring Financial Independence Progress and the arrogance of idiots

Last night I was in Messenger, and I said hello to a contact that I haven't met in person, but he was someone with whom I'd chat with about 2 years ago.  All was well until I mentioned to him that I started sharing my bedroom in the apartment I rent.

He didn't ask me why, but he quickly went on to judge me (someone he hasn't even met). He asked my age. I'm 36. Then he went on to ask me about my posessions. Do I have my own house? no
Do I have a car? no, and I don't want one. I live only a few minutes walk from the subway and a major avenue. I definitely don't want to waste money on a car. Then he went on to tell me that I don't even know if I'll have food to eat tomorrow.  That isn't the case, but I didn't feel like correcting him since he didn't seem to care about my situation only my posessions.

He then told me that I have nothing. Then he continued to tell me how he has his own house and furniture and he pays his bills.

The difference is that he lived with his parents most of his life and his parents gave him for free the lot to build his house on. The hardest thing in a megacity is to find WHERE to build a house and actually buy it. The actual construction here is very easy to manage once you own the land. It is very likely he never rented.  I'm not saying anything he did to have his house is wrong.  What I'm saying is that his arrogance is wrong since he basically lived off of his parents while I have had to pay rent and bills and yes, I buy my furniture too.  If he had been renting since his early 20s like I have and had he bought the land his house is on then I'd admire him. Since that's not the case, I think he's a jerk who deserves retribution for being so arrogant.

Should I have my own place by now? I suppose I really should, but my income isn't high, and I'm single. Most of my income isn't considered when applying for a loan. He also works independently, but since his parents gave him the land, he didn't even need to request a loan to build.  Land in a megacity/metropolis is very expensive. If I lived in a small town or even a small city, I probably would be able to buy an empty lot for not so much.

As for his scolding me for sharing my room, I think that was just stupid, but that shows you how backwards people are. Instead of praising you for making a sacrifice to finally get ahead financially, they scold you since you really should spend as much money as possible and somehow manage to buy a house of your own while single on a low income.  Sorry, but I'm not going to buy into that backwards thinking.  That's what leads people into mortgage foreclosure and living on the street or with family, because they spent instead of saved.

No, I don't regret not living off of my parents during my 20s and then have the option of being an arrogant idiot like him.  I'm very proud that I've been able to survive without having to ask my parents to support me or to give me land for my own house.  I only regret not posting the roommate advertisement years ago! I'd have a lot more money saved today if I had a roommate sharing a room not only an apartment. I also wouldn't have had to move  a few years ago when times were tough if I had shared the rent of my room with another.

I definitely want to continue to live with roommates and yes share my room (I started sharing this month).  Some of the money I save will go toward bunk beds. The rest of the money I save goes toward my financial independence and early retirement.  I definitely hope to have my own home, but I'm not going to be a jerk about it when I do.  As long as I am single, I plan to have roommates! It just makes sense to share.  Housing costs are normally the biggest expense and rent money isn't an investment. You pay it and it is gone. When I buy my own place, I also plan on having roommates. If I'm lucky their rent money will pay the bills or most of them. I will be able to have my own place and still retire early.

I actually could get a small loan for a tiny house without a yard on the outskirts of the metropolis, but I wouldn't be able to live there while I am working since it would be about 2.5 or 3 hours away and since there is no yard I wouldn't be able to have a garden. Those houses only have 1-2 tiny bedrooms so I wouldn't be able to share. It wouldn't be a very good investment since it wouldn't be a place I'd want except in an emergency. It makes more sense for me to invest in dividend stocks and bonds.

What do you value? Do luxuries like a car make you feel like you have more value that someone who takes public transportation?  I think a better measure of how you are doing is in stability, the ability to cover your basic needs, and safety for the future. Having your own home gives stability, but only as much stability as being able to live in it and pay the bills.  A car doesn't make you more stable, it eats money. A car is a convenience.  How many months could you survive if you stopped working your regular job today?  If I stopped earning money today, I could easily live 7 months and 10 months if I only cooked basic food at home.

Is life really too short to invest for your future?

I had an interesting chat with my other new roommate two nights ago. We were discussing my philosophy which isn't really new to me. Many people believe in living simply and saving for the future unfortunately here in Mexico and apparently in most of Latin America (this roommate is from Venezuela), the habit of saving is only for very short term savings typical reasons for saving money were for a party, for vacation, and for home electronics. Only about 8% of Mexicans according to the survey I read in a newspaper actually are saving anything for their retirement even though over 50% say they have the habit of saving.

Let me get back to the conversation. My roommate mentioned how its possible to die soon and not be able to enjoy your savings and early retirement. That is true but I think the odds are much higher that I'll live to be at least 50 and since all my grandparents ( I believe) were mid-80s or older when they died, unless I get sick or die from an accident I'll most likely live to my mid-seventies or older.

I guess it comes down to two things, how long you expect to live and if you believe that pleasure today is more important than pleasure tomorrow and the day after.  In other words, is it worth it to sacrifice the car or the apartment in an expensive area and the restaurant meals in favor of simple living in a cheap apartment sharing with roommates so that you'll be able to cover emergencies and if there aren't any emergencies in the next 6-10 years be able to retire early?

Only you can answer that question for yourself.  Like him, I also think that life is too short. I think it is very possible that I could die before I'm 67 or whatever the government's retirement age happens to be.  I would like to be able to be financially free and do whatever I want for years before that time. I'd like to travel the world and make destination photo books to sell online. I'd like to meet new people, try new food, and learn new languages. I'd like to have time to take lessons to improve my manual art skills. If I didn't have to work everyday to live, I'd have a lot more time for those activities especially travel.

It is difficult to say if I'll be able to reach the goal since I'm averaging about 50% savings even with my frugal lifestyle. My income isn't high enough to save more. I do know that even a little makes a big difference over time.

Are you one of the 92% who leaves your normal-old-age retirement to God or your children?  It is time to wake up because you might not die young as you planned and your children might be spending their money on your grandchildren instead of you.  What does life is short mean to you?  Does it mean to forget the future and be irresponsible or does it mean to plan for tomorrow?

Follow through and follow up on your new Budget

In the last two posts I introduced budgeting and how I normally create a budget. To get ahead you need to know where your money is going, plan for the future, and carry out that plan.
Once you have your fresh budget created you need to actually implement the budget by reaching or exceeding your savings, spending, and investment goals. Here are some important things to consider:

1. Follow up on expenses.

 Make sure they are accurate.  Did you forget to add your monthly haircut or your personal care products to your budget?  Perhaps you forgot to include your monthly gym membership?  You might have spent more than planned so you'll either need to save less or spend less in other areas. Make changes to your budget to reflect reality THEN change reality by reducing what you spend.  As you modify your spending habits, you'll see the change on your spreadsheet where you register expenses and income.

2. Review your goals

Once a month, reconsider your goals, their priority, and timeframe. Are you saving enough? Are your investments earning as much as you predicted?  You might have to increase savings or change the start date for your new projects. However without your budget you wouldn't have realized it.

3. Have circumstances changed?

Even a perfect spending plan will frequently change because circumstances change. If you lose your job, get a second job, get or lose a roommate, or decide to buy a new car, guess what? your budget will have to be updated. You are responsible for your personal finances regardless of whose fault it is.

4. Did you pay yourself first?

If you put your expenses before saving and investing you might discover that you didn't save as much as was in your budget. Really of all your spending plan, your savings and investments are the most crucial to get ahead financially.  Since you didn't meet your goals, check to see what the problem was and next month deposit the percent of income you have budgeted into your savings and investment accounts as soon as you get paid!  Instead of saving and investing with the left over money, use the left over money for non-essentials.

The Budget or Spending Plan that I Follow

For many years I struggled to find a way to budget that would work for my personality and time constraints. I know that having a precise record of spending and spending per category is useful, but I can't keep it up over the long term.  If you can that's great.

Then one day over a year ago, I was reading an article on MSN Money about the 60% solution.  I would have linked the original article, but it is no longer available on MSN. I searched for it and the link in their own search results is bad so I guess they pulled the article. It is too bad because it is the best budget method I've been able to find.

Here's how it works (at least how I remember it!)

Take your total income and multiply it by .6 to get 60% (and add a line in your budget to calculate it and to compare it with your current planned expenses)
Lets say you get paid $500 twice a month. 60% would be $600 for the month.
60% is the most you can spend on ALL of your normal expenses. Yes, thats everything you normally spend money on even your month's credit card expenses, food, housing, transportation, cable, insurance, telephone, cell phone, etc.)

The remaining 40% is for entertainment (10%) and Savings (30%).   That means that you can't spend more than 10% of your income on Entertainment (not 40%!).

If I remember correctly the 30% is divided into 3. 10% for irregular expenses like vacations, weddings, gifts or when something expensive breaks and you need to fix them.  10% for long term saving like for a new car, buy a house, etc. 10% for retirement.

It is a good system for most people since it will cover almost anything that comes up. That 30% savings every month will quickly grow an emergency fund and later investments or you could be strict and really put 10% in different accounts.

What about debt?   If you are in debt, you can spend 20% from Savings and 10% from Entertainment to pay the debt down.    Obviously if your current expenses are below 60% don't increase them!  any additional money that can go towards debt payment and investing is great.

What I'm doing differently from the 60% solution

I have an irregular income instead of a paycheck so my 60% is different every month. That means that I can't set up any automatic process of moving $x to 3 different saving and investment accounts on the 16th and 1st.  I calculate what I should make every month based on what I expect and as classes get canceled, I reduce the number and update the income field for the month.
If I'm having a really bad month I'll save only 30%.  If I'm having a good or normal month I'll deposit 50% of the money I receive twice a month (since I charge twice a month). Yeah, I know 50% is much higher than the 30% in the plan, but you never know when a month will arrive that won't let me save anything so it will probably average down to 40% this year.

My goals include buying a condo, house, or land outside of the city for building a small house.  30% savings won't get me there!  Therefore I've been slowly adjusting my expenses down from a 60% solution to a 40% solution. 40% solution would therefore be to limit regular expenses to 40%, consider 10% for irregular expenses and entertainment and put the other 50% toward savings and investing.

If I were to divide up the 50% up into groups, it would depend on age. I'm 36 now and I don't own my own home or even some place to camp on if I needed to so my first goal is to have enough savings for emergencies and to buy some place to call my own. If I save 50% the next 4 years, I should have enough money for a deposit on a tiny condominium here in Mexico City or pay for half of a house out on the edge of the city (about 2 hours in public transportation from where I live now!)  That money would probably pay for an undeveloped lot outside of the city  about 3 hours away from here. They all have pros and cons.

My next goal is to have money for retirement or semi-retirement. Until I buy my own place, I'm putting all the money that isn't emergency fund into a special account for retirement savings. There are no fees for taking money out before I'm old. If I don't see the money grow there, I might move it to a brokerage account.

If you are new to budgeting, you are probably thinking "60% or 40%? you've got to be kidding me!"   No, I'm not. I make less money than you'd make on minimum wage in the United States. I share an apartment in a relatively poor area. I don't have a car. I don't buy a lot of stuff.  I only pay for services that I really want. I don't have movie channels. I don't have a television either.  I pay for internet and an inexpensive cell phone plan. I don't have a home telephone right now either. I don't buy a lot of clothes and none of it is name brand.  I'm currently only struggling with my food expenses. It is easy to buy fast food or a taco going to or from work.  If I cooked and packed all my meals I'm sure I'd have 50% saved every month as long as I keep working and sharing the apartment.

If you can't save 30% every month, start by reducing the biggest expenses: housing, transportation, and food. Then go after extras that you pay for every month. Finally go after the entertainment related expenses until you can reach your savings goal at 30%, 50%, or more!

Introduction to Budgeting (creating a spending plan)

This post is for those who are new to the concepts of managing your money.

What is a budget and why is it important?

A budget is a spending plan. In its most essential form, a budget is a list of income and expenses for a specific period of time. You could have a budget for your vacation, a budget for a business trip, or a personal finance budget. I'm referring to the last one in this blog since it is about my personal finance journey.

What do I need to create a personal finance budget for me (or my household)?

To create a budget you need to decide how often you'll update your budget (typically every 15 days) , how long of a period it will cover (typically one month), and some place to write down all the numbers and make calculations.  You also need to know how you spend your money. It is good to have a pile of bills from the last month and the last of the bills that come every other month or longer like the utility bills or car insurance.  If you earn a paycheck take out the last month's pay stubs. If you work freelance, look at your client payment register and look at checks and deposits to your account. 

The period of a budget and the level of detail in a budget really depends on you, but since most regular bills come every month, it is much simpler to do a monthly budget and update it as you go even if you are paid every week, every two weeks, or twice a month.  

The frequency you use to update your budget is a matter of personality and dedication.  If you like to micromanage and you have free time everyday, you could update your expenses and categorize each one and then compare the end of the month with your plan. It can be great to see how you think you spend your money is different from how you really spend it!

Personally, I think of a budget as a guide. I don't really care where every last cent or peso got spent during the month as long as I'm making the desired progress toward my goals.  As soon as I start to fall short I'll make an adjustment.  I do however pay special attention to repeating, regular expenses since those need to be reduced, cut, or replaced when my income drops. 

Since I don't like to worry about every peso that leaves my pocket I consider my money as going to the following categories:

1. Basic Expense

2. Entertainment/ going out

3. Irregular Expense

4. Savings and Investments 

No, I don't actually make those categories on my budget spreadsheet, but that's how I think about expenses for budgeting.

On my actual budget spreadsheet I group them as follows:

1. Expenses (with a list of regular expenses and approx. costs)

2. Savings and Investments (divided by account I deposit the money to)

Basically, on my budget it is:

1. Money I plan to spend

2. Money I have saved

3. Money I end up spending on Entertainment or other misc. irregular expenses.

If you control every peso/dollar that you have then you just have:

1. Money you spend

2. Money you save

What is important when creating a budget?

The most important things to consider when creating a budget are your goals, and  to live below your means. That means that all your expenses planed and unplanned need to be well below 100%. (no, 90% isn't well below). If you spend 100% of your money every month, you are not going to have money for anything else and you'll either have to go without or go into debt (credit card!)

Your budget should reflect your goals. If you have no goals then make a list of what is important to you and what isn't important. What makes you happy? What would make you happy? Where do you see yourself in 5 or 10 years according to your current spending and where would you like to be?

Most people want to change or improve their finances, but they are afraid or they don't have established goals.  Without goals, it is too easy to just spend money on whatever you feel like and usually end up in debt. Another big problem is that with credit cards and debit cards it is very easy to spend money as long as you have one or the other in your billfold so to actually carry out a budget it is often important to keep those locked away at home most days or get used to having small quantities for cash for spending that day or week. You'll have to find what works best for you.

Where should you create your budget?

You only really need a notebook, a pen or pencil, and a calculator, but I think it is much better to do a budget on a computer since it can calculate percents and averages.  It is important to keep a monthly log of spending and/or saving along with income to get a better idea of your progress that you can compare with your general spending plan and your goals. 

I know that for USA and Canada there is a service called Mint.com that is useful for making a budget and tracking spending with reports, but that isn't available to someone outside of those countries.  There is also special software like Quicken that you can buy, but then you are stuck updating when you are on the computer it is installed on. I tried some budgeting software, but it was more tedious and of course if the hard drive crashed or the system became corrupt, I'd sometimes lose my data and configuration.  The best option (at least for those of us who don't have Mint) is to use a spreadsheet stored online (and a backup on your computer). My favorite service is Google Docs (now part of Google Drive).  I can create/edit/update my budget anywhere I can find a computer with an internet connection. I don't need to worry about software purchases or upgrades that way.

I recommend that after you set up your basic categories of income, spending, and savings, and of course the subcategories for the level of detail you want, add special calculations that will help you with your goals for example:

Make fields for % saved and % spent (including savings & investment)  If the number is over 100%, you messed up or you have unspent money from last month that you forgot to deposit!

A column for total spent and average spent in each category is also very useful. Over time, you'll know your average income, expenses, and savings either as approximate or precise depending on how regular you update it.  I'm more careful  updating income and savings and less worried about the rest.   

A spreadsheet page for calculating your net worth (assets vs. liabilities) over time is also very useful, but it is your spreadsheet so you should adapt it to your needs.

In the next post, I'll write about the spending plan I currently use.

Ten Lifestyle Rules for Financial Independence and Early Retirement.

Financial Independence and very early retirement seem almost impossible to people who are not used to budgeting and/or living simply.  Most people just believe the illusion that they can spend almost all of their money or 100% of it and that somehow their employer funded retirement account or the government will manage to take care of them while they pray they'll be healthy and have work to pay for their expenses from now until their official retirement date.

Unfortunately, that isn't true for most people. People lose their jobs and in short order they lose their extremely meager savings (perhaps enough to survive a month!)  and then they lose their home that they were making mortgage payments on or they get kicked out of their apartment (which they couldn't afford either!) because they stopped paying their rent.

We all need to budget our personal spending because there is no reason why we can't lose our income before the official retirement age or lose our ability to work before that age.

Most importantly, one needs to change his or her attitudes toward money.  Money isn't a right and we aren't entitled to any specific lifestyle or spending. Those who have the money can spend it as they can see fit.

Rule #1:

Live BELOW your means.

If you take home $1000 a month, NEVER spend 100% of it. Make a point of keeping your regular expenses at or below 60% or $600.  You probably won't make early retirement with only 40% for irregular expenses, debt repayment, and savings, but it at least your savings will cover real irregular expenses and you should be able to grow a decent emergency fund between personal finance disasters.

If you want to retire early and truly be financially independent you need to save  and invest at least half of your after-tax income. The greater the percentage that you save and invest every month, the faster you'll see the benefits. 
At first you'll see that in an emergency you can pay your bills without using a credit card or having to ask for a loan. 
Your money needs to make you more money. Eventually your investments will be large enough to pay your bills then you will be able to quit your job, retire, change jobs, go from full-time to part-time, or make your hobby your new profession. 

Rule #2

KNOW where your money goes.

It is great to believe your regular expenses are less than 60% of your take home pay, but you need to either track all expenses or periodically track them and be pretty consistent with your spending.  An easy way to verify is to add up money put in savings and investments and debt reduction (monthly credit card and mortgage payments are not debt reduction) If the total is at least 30% of your take home that leaves about 10% spending for irregular and entertainment. if it is less than you need to be more careful at planning and tracking your expenses.
Be specially careful with bank and credit card fees. Below minimum balance, late payment, and missed payment fees can be huge! There are also account maintenance fees on some bank accounts. Credit cards often have annual fees.  These should be covered in your REGULAR expenses until you get rid of them.


Rule #3

Don't give up after making a mistake.

Ok, you spent a lot of money at a night out with friends. Accept that it happened and it was a mistake if it was over budget. Just don't give up your budget. Track your expenses better and stay home some other night you normally go out so it balances out to an acceptable level.  Making a mistake doesn't mean it is time to throw in the towel. This month you had a setback. Next month you'll make progress!

Rule #4

Make lifestyle changes

If you are used to living beyond your means, you will have to reevaluate what is really important to you. Do those expensive nights out at the disco and the daily taxi drives or the expensive SUV really make you happy?  I really doubt it makes you happy beyond a few days.
Reduce or eliminate expenses that don't make you happier or healthier.  Downsize your lifestyle. Cook at home more, eat out less. Rent or own a home that is big enough for you and your family. Share your apartment or rent out extra rooms.  Make coffee at home instead of going to an expensive coffee shop every day.  Don't buy new trendy clothing every season if conservative timeless styles will do. Buy used clothing and shop at garage sales or online for used goods in good condition.
Not everything good will cost you money. Libraries have books, museums often have a free day, parks are generally free.
Limit your consumption when you go to expensive places. Buy one drink instead of 4. Buy the daily special instead of a regular menu item at the restaurant when you go out on a date or with friends.

Rule #5

Focus on big expenses, subscriptions, and simplicity.

A simple lifestyle gives you freedom. Cutting from your budget services you never or rarely use makes sense.  If you only watch one movie per month, why pay more than the cost of a visit to a movie theater for those movie channels?  If you don't use internet on your cell phone, why pay for the service?  If you don't use it or rarely use it, reduce it then cancel it.  For example start with your cable and internet bill. Start by reducing from the full package to a package without movie channels and wait a month.  Did you miss them? Probably not if you are like most people. The next month go to a more basic package or go to just what you actually used the previous month.  Do you always watch TV online? Cancel the television service and just pay for internet. Do you always use the internet on your breaks at the office, cancel your internet service at home.  The same goes for magazine and newspaper subscriptions.  If you don't read half of the magazines, then it makes more sense to just buy one at the news stand when an issue has an article you want to keep.  Better yet, go to the local library to read magazines and newspapers!
Can you walk, ride your bike, or take a bus to work instead of driving your car?
The biggest expenses are normally rent, transportation, food, and utilities.  Reducing those will make the biggest dent in your monthly expenses.

Rule #6

Record your income, savings, and investing in a spreadsheet.

You need to make a budget, but recording your general spending or every single expense will keep you honest and on track.  Personally I don't record every expense, but I do make a point of saving 40-50% of my income as much as possible. Yes that means sharing the apartment, not using a car, etc.  You need to decide what you value until you have substantial investments paying your bills.
Today, tracking your expenses compared to your budget is easier than ever since you can use Google Docs spreadsheets and update your figures anywhere you can find a safe internet connection.

Rule #7

Learn the difference between an asset and a liability and start investing your savings in a variety of assets.

What you don't spend once you are living below your means, can go to your emergency fund and investments. Start investing right away. Inflation eats the buying power of cash savings, so it is important to take some risk by investing.  Certificates of Deposit are probably the safest, but they generate little income. Stocks are high risk, but they'll normally grow faster than inflation or pay dividends. Rental property can make regular income for minimal effort, but you need a big up-front investment as a down payment and there are of course property taxes, mortgage payments, and home owner fees.  Find a balance that is right for you, but invest in assets instead of spending money on liabilities.  Assets generate income and/or grow in value.  Liabilities cost you money.

Rule #8

Pay yourself first.

Every time you get your paycheck or get paid for a service you provide or a product you sell,  put a % of the payment in your savings and investments. It should be equal to or greater than the % you decided in your budget. No, 10-15%  is NOT sufficient. That won't cover real emergencies nor your retirement unless you started saving when you were 20.
If you have a regular salaried job, you know how much money you make every paycheck so you can regularly have money transferred to your savings and brokerage accounts. A freelancer should just deposit a % with each payment received.
Why pay yourself first?  It is too easy to see money unspent and buy something that you want (but probably don't need). Once the money is invested, it isn't so easy to spend it on something trendy, or cool. Once you have time to think about it you probably will decide that you didn't really want it that much or it can wait another month or two until the price drops.

Although a 10-15% savings rate is not enough for financial independence or even a decent retirement if you are new to budgeting and saving, it is a very good start if you aren't used to living on less than 100% of their paycheck.

Rule #9

Buy basic goods more than processed goods at the supermarket.

When you go shopping you see most things at the supermarket are processed ready to heat and eat. Unfortunately most have added sugar, salt, and fat. If you are busy it is nice to have something to eat quick, but eating mostly processed food will increase your food expenses. Natural oatmeal is easy to prepare and much cheaper than processed cereals. Potatoes can easily be sliced on a cutting board (carefully!) and fried in canola oil for much less than a bag of precooked french fries. Fried rice is extremely easy to cook and of course it is much cheaper than precooked fried rice.  Tea is cheaper than soda and much healthier too.

Rule #10

Only buy deals for things that you'll actually use before they go bad.

Couponing is one example. Yeah, you'll save money with coupons, but you'll notice that coupons are not available for unprocessed natural goods. Eggs, oatmeal, fresh fruit and vegetables, are already cheap. Processing adds costs and makes them expensive therefore the coupons. If you buy basic goods then coupons don't make sense.   If there is a promotion on your shampoo then you're probably safe, but if you live alone you probably won't eat 2 kilograms of tomatoes before they spoil.  It is hard to guess how much you'll consume, but if you know you don't eat more than 500 grams of something every week and normally less, then don't buy more if it will spoil. I know I never eat more than 2 kilograms of carrots in a week. Sometimes I eat only one so I try to plan according to my average consumption.

Saving and Investing are essential for a volatile future

I wrote in previous posts about saving money for emergencies and for financial independence which could eventually become early retirement, but today I want to share some thoughts about change.

It is important to think beyond monthly expenses and just think about all the what-ifs. What if you lose your job tomorrow?  What if there is a disaster and your home is damaged?  What if there is a plague or severe drought and food prices double for a few months?

How adaptable are you? If one of the above occurred today, would you survive?

If you depend on your job for survival, it is essential that you start your emergency fund (cash) right away.   If you lost your job today, you'd need money for food, rent, and essential bills for as long as it takes you to find a new job.  You might need to take a course to learn new skills or get a new certification first. If you know where the market is going, have enough savings to cover those expenses and time. You want to have at least 3 months of expenses covered in your emergency fund. See my earlier post on that topic to estimate how many month's you'll probably need to set aside (typically 3-12 months) Once you go beyond 6 months, it makes more sense to put the money in Certificates of Deposit or other investments since if you have an emergency you'd first spend your cash savings and then you could plan to convert investments to cash with little penalty (as the CDs expire, etc.)

Of course if you don't have very expensive things the second scenario isn't terribly important if you have savings available to replace your stuff. However if your savings is limited or you have a priceless collection, it is time to investigate the cost of having home owner or renter insurance. If you can replace what you have with the money you'd have spent in 1-3 years of premium payments, it would make more sense to me to just save more money for emergencies. If your house is made of wood then I'd understand the need for insurance for fire damage. If your house is built on a flood plain then you should either sell it or get flood insurance since a flood could destroy everything very easily.

In the case of plague or drought, there are several things you could do.  First, if you have the space you could always have one or two months of long lasting food which you actually normally cook and eat.  Lentils, beans, rice, pasta, oats, and canned goods are normally good for months to years. Be sure to only buy what you eat though. It is also nice to have extra staple food in case you have a financial emergency. You could just eat the extra food and spend less on food until the emergency is over. If you eat one kilogram of rice a month, buy a couple extra bags, use the oldest bag and buy another bag when you go shopping.
This could also work for other basic things you use like shampoo, deodorant, toothpaste and soap. Buy more basic goods that you use when on sale, but don't buy more than you'll use before the expiration date, and don't buy more than you have space to keep them (and keep them organized)

The typical suggestion of saving 10% of your income is not realistic unless you spend a high % on insurance which is of course money you'll never get back. 10% of your net income probably will only cover retirement at age 65 if you start in your 20s and you never have an emergency or lose your job in all that time. That is NOT very likely. Most people will have many jobs in their lifetime and company paid pensions are a think of your grandparents' generation.

Don't forget that most things especially electronics and appliances don't last forever. All those things that make life easier could break down. Repairs and replacements are not free! It wouldn't be a bad idea to set aside 10% of your income for a repair and replacement fund.  If you don't use it by the end of the year, you could put the money into your retirement fund investments or use it to save for a house or use it to pay down your mortgage loan early.

It is essential to be prepared for what you can't anticipate. Save at least 30% of your net income (take come money) and you'll have at least some level of safety.Save 50% for a year and you'll have enough money to live off of for another year, but don't stop there. Life is about more than an emergency. Keep it up and you'll eventually be prepared for almost anything including early retirement. (many people have to stop working long before 65 due to health reasons so don't just plan on working until you die!)

The Joy of using cash for spending

When I look back on the last 12 years of my life I see that many things I didn't need were bought with a debit card and some where bought with a credit card.  You might not find that to be significant, but it really is.

Everytime I wanted something and had a debit or credit card available, I could purchase without thinking and then I'd have something that would make me happy for a few days to a few weeks or perhaps it was something I consumed in the moment otherwise it would end up in the clutter with all the other stuff I had accumulated.

I wouldn't want to get rid of it right away because I just spent money on it.  That's how it usually works for most of us. It made us happy in the moment, but now we need to find a space to put it, something to put it in, or we have to take time to clean or maintain it.

Yeah, it seems the more stuff we have, the less money we have and the more money we spend.  That's why living on cash is easier when you have a budget.

How do I do it?  First you have to keep a budget. I recommend following something like the 60% solution on MSN (basically no more than 60% regular expenses, 10% entertainment, and 30% savings (10% short term, 10% long term, 10% retirement).   Once that gets easy you can start increasing your savings to a decent level. 50% savings would be good for most people, but if you haven't kept and followed a budget before, 30% will seem huge and impossible at first.  I lived on the 60% budget for almost a year before deciding to start my extreme retirement or financial independence journey.

Once you have your budget and cash your check, separate into envelops or piles the money for that month's rent (or better yet the next month's rent), entertainment, and daily spending money for that period.  If you are paid weekly then separate daily expenses and entertainment for that week only.  Before you leave work or the night before separate the money you need to survive that day and put it in your billfold.  If you spend less, you can keep it for another day. If you spend less everyday, adjust your daily expenses down a little in the budget and put the rest back into savings. Don't spend more than you budgeted + left over funds from other days. If your budget is $10 a day in transportation, food, and misc. don't spend more. In fact, don't put more than your daily allowance in your pocket.  Keep the rest locked away in a safe place where it won't get stolen.

Don't make a point of spending it all either.  When you make a purchase ask yourself if you really need it or if there is an alternative.  Could you cook at home today instead of going to the restaurant? Could you cook one day and bring the left overs to work the next day or two for lunch?

Once you get used to using cash for every day expenses using this method, you'll break the debit & credit hard habit, you'll spend less on things, food, and bank fees!