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MartinB comments on I want to save myself - Less Wrong Discussion
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I suggest a different definition. Having your finances in order, and having a net worth of at least n years worth of income. I read n=0,5 a lot, but feel more comfortable with n >3 or more depending on your distance to retirement.
Income is irrelevant, you measure this in typical level of spending.
No, it serves as a metric. Many people treat their income (or their income minus what they've decided to save) as a budget where they must fit expenses. (Except some rare expenses which are allowed to eat savings.) So "six months of income" is immediately grasped, whereas "six months of typical spending" requires computing your average expenses and hoping nothing unusual happens.
I think either number is fine. Ballparked. The better your financial tracking the more complicated the number can be.
Make that "net worth not counting primary residence".
Why?
Presumably because the point of having n years' worth of income is that if you need to, you can live off it for n years; whereas if much of that is tied up in your home then some of those n years are only available if you sell your home, which is a pretty drastic step to have to take. And because if your surviving-for-n-years plan involves selling the place where you live and using all that money, your measure of "income" needs to include any extra rent you'd be having to pay.
No. With decent assent management you can oversee the time delay to access each of the items you own. Cash is good, but not all the reserve needs to be in cash. In a country with a good capital market you can borrow against your house. In severe case where you are unable to acquire income for month that is a decent thing to do. I find it strange to just ignore the biggest asset one owns completely.
Of course this only makes sense if the house/appartment is actually paid for. If you still have a mortgage on it then the house is worth about (house - mortgage - transaction costs) for your reserve.
Yes, since you can borrow with your house as collateral its emergency value (so to speak) isn't zero, but it also doesn't equal its sale value. So the right thing would be something between "net worth" and "net worth not counting primary residence". (Other illiquid assets also need treating specially, for the same reasons.)
Yes, that. The omission was glaring to me because I'm in a situation where net worth is pretty comfortable overall, but discounting my apartment and looking only at my liquid assets and income, well, it's a different picture.
I wonder what other blind spots exist in standard financial advice. I'm unlikely to happen to fall in the one and only category that reveals a blind spot.
It is not a blind spot. The problem with financial advice is how to tailor it to the receiver. The idea of treating the house as special is good for everyone that otherwise would start to spend on it. For someone who one might call a real rational acting financial sound person it is possible to analyze his situation wholy.
I used to find it weird when people start cutting up their credit cards. It makes sense if you other wise use them, but if you do not, then you can just store them in a nice place and decide to not use them.
"<time> worth of income" only works if your income is stable. I don't have a job yet.
I'm also afraid of vague criteria like "in order", because it gives me excuses to put it off. Do you have a precise criterion in mind?
You can also use 'expenses x time'. I just wanted to point out that a job in itself is not a security guarantee. Way to many people have high paying jobs, and no savings - which I consider stupid.
When you just start out, than having the job is a better situation than being unemployed. Having some savings later is even better than that.
'in order' means that you have a general overview about your finances, reasonable bookkeeping, keeping up with outside demands like taxes. It also means you are able to keep up with your bills. Keyword: liquidity management. There is a wide area on how to do it. And then there is the state of being completely lost.
To put it more general: everything strategic that needs to be taken care of is actually taken care off. Savings, special offerings for retirement, if you have dependents that also includes a live insurance.
Consider dealing with financial issues as applied rationality. One could probably estimate how one is saved by a reasonable dealing with the issue, and then donate that to SIAI.
Your advice seems optimized for... well, adults. Sure, if you can use your income as a metric, or your expenses, or some other way of measuring your financial situation - great.
Donating a fixed percentage of your income, then doing as you normally would if you had only gotten this reduced income in the first place, can apply to almost everyone. (People like you who don't have an income have other problems.)
Saving is a very good idea - actually, my idea of "financial security" is "being able to save money". It's just not compatible with the "starving undergrad" model. I'm not a responsible adult, I'm a crazy kid. I don't do responsibility. Sure, when I get a job (and it'll likely be high-paying) I'll start saving (also a fixed percentage, at least until I get the hang of things).
Prioritizing saving and vaguely defined necessary expenses... that's what I'm afraid of. If I say "I'll wait until I have enough savings to live on for six months", I'll just spend a little more every month, notice I haven't saved enough yet, and wait a little more. If I say "I'll wait until I can reliably pay the bills and track spending and get necessities like insurance", I'll just keep moving the goalposts - I'll start thinking I need a car, and I might get sick so I need to save more, and I'll have a big crash and drop accounting for six months.