Steven here from munny.club, a weekly newsletter where I share a different perspective on personal finance concepts. If this doesn't interest you or you don't find it valuable, you can unsubscribe at the bottom of this email. If you have feedback, just shoot me a reply!
Is $10,000 a lot of money?
It depends.
Most people will say it depends on how much you already have. If you’re a millionaire, $10,000 is just 1% of your money. If you only have $50,000, this represents 20% of it. I want to argue this is actually less important than another anchor: how much you spend. Though these two are often correlated, they are not inextricably linked: many people spend far more than they earn, while others manage to spend far less. My argument is that money’s value comes from what it affords you.
Have I saved enough?
One common question people have is whether they are on track with their savings. For example, is $60,000 of savings good by 30? Well, it depends. I spend about $2,500 a month on food, rent, books, memberships, life expenses. This makes my annual spending rate $30,000/year. This means that $60,000 of savings would be 2 years of annual expenses. Decent.
But what if I only spent $10,000 a year (purely hypothetical and practically impossible)? That makes your savings worth 6 years of expenses by 30. That's far better. And my total savings didn’t change! Heres the key lesson: the more you spend, the less valuable your savings are. This is how I want you to start seeing money and your savings. It's not a fixed value, it's entirely relative to you and your situation.
This is where I see flaws in traditional writing; they tell you how much you should have saved compared to your annual salary. But just like we saw last time, if your salary goes up, you’re instantly behind the benchmark! Expenses are something you have far more control over and are far more important. Let’s use another example.
Example
Note: this is purely hypothetical, I’m not telling you how much to save.
You have $100,000 in savings and you spend $25,000 a year. You have 4 years of expenses saved.
What if you cut spending by $5,000 a year, just over $400 a month. Those same savings are now worth 5 years of expenses, just like that.
If you were to try to hit 5 years’ worth of expenses with your old spending, you would need to earn more than $5,000 more per year, for multiple years, to get to the same value of your savings.
A relatively small change in expenses can have an outsized impact on your savings.
This goes both ways. Like lifestyle inflation, increasing your expenses by $5,000 a year will devalue your savings far more than earning $5,000 more will increase it.
Quick Caveat: this is not an endorsement of a slash-and-burn style approach to budgeting. I hate that. This isn’t about nickel-and-diming to save $0.50 on your morning coffee. I’ll expand upon this further in the future.
Know what you burn
In startups, your monthly spend is called your burn rate–how much money you’re burning through each month. Knowing your burn rate helps you understand how long your money is going to last you. Your goal should be to stabilize this number, in life, as early as possible. This isn’t about reducing it, just ensuring it’s consistent. A stable burn rate allows you to effectively plan for the future.
Recommendation: Always know your personal burn rate. This is one of the most important numbers for you to have and will be important for next week's note where we tie it all together with a look at net worth.
What should this newsletter cover next?
Reply to this email or leave a comment. Tell me what money things you have on your mind.
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PS: I tried a photo in today’s note. What do you think? I am trying something different.