What are savings for?

Last week, I wrote about a conversation with my investment adviser. In the article, I mentioned that my current income roughly covers my current spending except that I’ve been spending an average of $2,000 per month on travel. Because of that spending deficit, I’ve been drawing down my medium-term savings, which should last me until the end of 2014. Meanwhile, I’m exploring a variety of options to bring the income and spending into equilibrium.

Some GRS readers were taken aback by this.

“Maybe the name of this blog should be changed to Get Poor Quickly,” Marsha wrote. Brian from Debt Discipline expressed the common concern that withdrawing from my investments seems like a step in the wrong direction. And Greg wrote that this blog must be losing its way if I’m writing about “stealing from the future to maintain a current lifestyle of travel.”

Other readers, however, took a different view.

Frugal Scholar noted that there’s nothing wrong with taking withdrawals if my total savings can support them. The always-perceptive Sam wrote, “If J.D. is living a life of semi-retirement, which it seems to me he is, then it would make sense to pull money from investments as that is what one does in retirement.” And EMH was even more direct: “Why have all those investments and not use them?”

I spent a lot of time replying to comments on last week’s article. In doing so, I noticed that I’d done a poor job of sharing all the facts about my situation. I’ve been timid about total transparency, which means readers don’t have all the info they need to make a judgment. Today, I want to change that.

It also occurred to me that there are differing opinions about what savings are for. On some levels, those differing opinions are a result of each of us having different plans and priorities. But I think something that gets missed is that money is used differently at different stages of life.

The Stages of Personal Finance

In February 2009, I wrote a meditative article about the stages of personal finance. This then led to a series of articles on the subject. Here’s how I defined them:

  • In the zeroeth stage of personal finance, we’re fumbling in the dark. We have no financial skills and has no idea how to best use our money. We live impulsively, reacting to life around us.
  • In the first stage of financial development, there’s a candle in the darkness, and we’re drawn toward the light. We become aware that certain actions produce better financial results. We learn basic skills like frugality and saving and debt reduction. We still make many mistakes, but we now have some idea of where we ought to be headed.
  • During the second stage of personal finance, we can see the light at the end of the tunnel. We’ve moved beyond the basics to create a solid foundation for future growth. We’ve eliminated debt, built up our savings accounts, established emergency savings, and begun to set aside money for retirement. We learn that we are in control of our financial future and not at the mercy of some vast, uncaring universe.
  • In the third stage of financial aptitude, you light the way for others. (Boy, my metaphors were strained!) Our foundation is solid, and we now spend years (or decades) constructing a financial edifice that will support us for the rest of our lives. That generally means paying off the mortgage, supercharging our income (and thus, our saving rate), and preparing for the ultimate goal…
  • The final stage of money management is financial independence. At this stage, we no longer need to worry about money. We have enough saved to do whatever we please. Because we each have different goals, strengths, and weaknesses, financial independence means different things to different people. Financial independence is really just another way to say “retirement.”

When I started this blog, I had just progressed from the zeroeth stage of personal finance to the first. Over the next few years, I documented my progress as I achieved greater knowledge and control of my money. Today, I am fortunate to be in that final stage of personal finance. I am financially independent.

What do I mean by financially independent?

Some people believe you’ve achieved financial independence only when you can live off the dividends or interest your savings produce. Others — including me — take the stance that you’re financially independent if, given reasonable assumptions (4 percent inflation, 6.5 percent long-term real return on stocks, 4 percent withdrawal rate, etc.) you’ll also draw down your principal.

As I shared in the comments last week, I could stop working today and live off my savings for the rest of my life. In essence, I could choose to retire early — if I wanted. But I don’t want to, and for several reasons:

  • By continuing to work, I earn more money, which does two things. When my income exceeds my expenses, I add to my stockpile. When my expenses exceed my income — as they do now — income mitigates how much I need to draw down my savings.
  • Work gives me meaning. I enjoy writing about personal and financial freedom. It’s fun. Plus, the emails I get indicate I’m able to help other people pursue their dreams as well. So long as work gives me purpose, I’ll continue to work.
  • For me, work creates social connections. I get to meet readers and colleagues and financial professionals, which helps me expand my knowledge and learn about lots of other things.
  • And so on.

When people choose to continue working even though they could call it quits, they’re said to be semi-retired. I think that’s an apt term, and that’s how I classify my current state. I am semi-retired.

What Are Savings For?

Saving is a key part of personal finance. In fact, I’ve come to believe it’s the key part of personal finance. When we save money, we build smart habits today while protecting and providing for our future.

That said, saving plays different roles in different stages of personal finance.

For instance, when you’re accumulating or repaying debt, saving ought not be a high priority. Aside from a minimal emergency fund (of $500 or $1,000), your money is better directed elsewhere. That’s why in my beloved Balanced Money Formula — which urges folks to spend less than 50 percent of after-tax income on Needs, more than 20 percent on Saving, and the rest on Wants — debt repayment is actually classified as saving. There are few uses for money that provide a better return than paying down credit cards and other high-interest loans.

Once debt is eliminated, however, saving becomes a high priority. During the second and third stages of personal finance, we work to build three types of saving:

  • Short-term saving, such as in an emergency fund. Most experts urge people to save between three and twelve months of their current spending so that they’re prepared if something unexpected happens, such as a job loss or catastrophic illness.
  • Long-term saving for retirement. This is why we save in a 401(k), Roth IRA, and other retirement accounts. We’re saving for the far future when we’ll be unable to produce income at the level we can today.
  • Medium-term saving is what I commonly call targeted saving. For most folks, this takes the form of saving for a car or a house or a vacation or for college education. But other people use medium-term saving as a way to fund sabbaticals and mini-retirements. Others use this money to quit their job and take a chance on a new business or a new career.

We save money for two purposes: To protect against an uncertain future and to help us fulfill our dreams.

Short-term savings and long-term savings are generally defensive. They’re a form of self-insurance to shield us from the slings and arrows of outrageous fortune. Medium-term savings is used more for offense; it’s to pursue the things that provide us pleasure and purpose.

There seems to be a subset of people, however, for whom it’s never acceptable to spend savings. We’re all familiar with folks who spend too much and never save, but there are also people who save too much and never spend. They’re mocked in books like A Christmas Carol and Silas Marner. They’re demonized in movies like It’s a Wonderful Life. But for some reason, in real life, these types are often considered heroes. This puzzles me.

I see nothing heroic about dying with a fortune. I see nothing noble about saving and saving and never spending. Money is a tool. Its purpose is to provide comfort and pleasure for ourselves and for others. Saving isn’t an end in and of itself. We accumulate savings so we can do the things we want to do.

My Own Situation

In the past, I’ve been close to the vest regarding my financial situation. My attorney, my accountant, and my ex-wife all wanted me to keep things quiet. However, after some recent conversations — including one with Pat Flynn — I’ve decided to be more transparent. I can’t (and won’t) reveal everything, but I’ll share some broad info.

I’ve already shared that I’m currently outspending my income by about $2,000 per month because of travel. That’s what got some people riled up last week. I’ve also shared that I have enough medium-term savings to maintain this deficit until the end of 2014 (meaning I have about $25,000 saved for this purpose). I also have about $5,000 in emergency savings. Plus, I’m fortunate to have over a million dollars in long-term retirement savings.

Note: Yes, it’s true: While writing a blog about how to get rich slowly, I got rich quickly. This irony is not lost on me. One commenter last week suggested that this could cause problems since I didn’t have time to build the necessary mindset to manage the money. This is a valid concern, and one reason I’m trying to be cautious and make only “small moves.” I’ve read plenty of horror stories about people who squander sudden wealth.

In an ideal world, I’d be earning an income that meets my expenses. And, in fact, that was the whole point of last week’s article; I’m looking for ways to bring earning and spending into alignment. At the same time, I feel no shame about outspending my current earnings by $2,000 per month. Why not? Because that’s what my money is there for.

If I were still in debt, this $2,000 monthly deficit would be a concern. If I had only minimal savings, it would still be a problem. But I’d argue that even for somebody in the third stage of personal finance, deficit spending for a short time is perfectly acceptable. And if you’re in the final stage of personal finance? Well, then that’s actually how you’re expected to be living. When you’re retired, you’re drawing down your capital.

Note: Last week I wrote that Mr. Money Mustache would probably advise me to be more frugal. I was wrong. After reading the article, MMM e-mailed me to say: “Just enjoyed your latest post on GRS. I think you might be underestimating your passive income from savings…Since this is more than your spending by a wide margin, I would feel very confident that all your work income is 100% optional. Of course, you should still do enjoyable work because it makes you happy just as it makes me happy. But the paycheck is really just some icing on the cake.”

In fact, the fundamental problem of personal finance is figuring out how much to save so that you can live off your investments in retirement and die with a zero balance. (Or, if it’s your intention, to leave money to others.) A quick calculation (using conservative assumptions) shows that I could choose never to work again and even if I lived until 80, my assets would allow me to live on about $4,000 per month for the rest of my life. If I sold my condo, that number would climb to $5,000 per month.

And if I chose to spend $2,000 per month, which was the idea that created such a fuss last week? According to FIRECalc, my money will probably never run out! And, in fact, because of the extraordinary power of compounding, my savings will continue to grow forever.

The Bottom Line

Last week’s discussion was fascinating. If I were to draw down my savings in one fell swoop in order to buy a car or to purchase a house, I doubt anyone would object to my actions. After all, that’s how we think savings should be spent. But because I’m choosing instead to use my savings to fund travel and to buy time while I look for additional ways to make income, some people think I’m being foolish.

I suspect that even after this long discussion of saving and retirement, there will still be folks who believe it’s irresponsible for me (or anyone else, for that matter) to draw down savings for this sort of thing. If that’s you, tell us what you find objectionable. Under what conditions do you believe it’s okay to draw down savings? Does it matter which phase of personal finance you’ve reached? How do you decide when it’s okay to use the money you’ve saved to do the things you want to do?

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There are 62 comments to "What are savings for?".

  1. Ingrid says 21 November 2013 at 05:01


    My father is 81, and my mother is 73. Thanks to a lifetime of conservative spending, they have accumulated quite a lot of cash. It has always been difficult for them (especially my father, the youngest of 9 children during the Depression) to spend money on luxuries such as traveling. A couple of years ago I talked them into spending a bit of their money on a cross-country trip. They had a wonderful time and in no way regret spending the money. So what is the point of my comment? Well, because of quickly declining health, my parents are no longer well enough to travel, even short distances My father’s regret is that he didn’t allow himself to start enjoying his money sooner, when my parents were both well enough to enjoy it.

    So right now, my husband (age 36) and I (age 46) are trying hard to strike a balance between stashing money for later on, and enjoying some amazing trips while we are both young and healthy.

    As you can probably guess, I don’t think there is anything remotely irresponsible about how you are spending some of your money. In fact, I quite admire it. Thank you for sharing so many personal details and for being a great inspiration to many people, myself included.

  2. robert says 21 November 2013 at 05:25

    We do not live forever. Many of my patient’s regretted not doing things that they wanted to do when they were physically able to.

    It’s about balance.

  3. El Nerdo says 21 November 2013 at 05:41

    Nice followup! I appreciate the clear explanation of the money management situation and I’m sure other readers do.

    For me however the concern last week was not the spending in itself– the spending can evidently be arranged for a purpose. My concern had to do with last week’s apparent lack of purpose or meaning– which as you say here comes from work.

    And I get it that you need to stop and think. Everyone has to do that at some point. And maybe I have a bias towards writing as work– let’s not discount the fact that you write well enough to get rich quickly. So from all many options mentioned, two stood out for me:

    1) Continue to write your new book.

    2) Write fiction.

    I suppose I could add a third one from what we’ve gleaned here:

    3) Continue to travel, and write about travel.

    Among those options, some might be able to pay for themselves with greater ease and speed than others. Of course we can’t predict the future but you could hedge your finances according to each scenario.

    The nice thing that your position gives you is the option to experiment, and this is a huge freedom, but one can sometimes get overwhelmed and paralyzed by choices, and beer, and distractions, and that can be bad if it goes on for too long.

    Money cares aside, any kind of serious creative pursuit requires a definite commitment: whether it’s writing a book about money, or writing a book of fiction, or launching a business enterprise, or going on an expedition to the South Pole, the situation demands commitment and clarity of purpose, and the money is there only to serve that commitment and purpose. Yes?

    Look if you like, but you will have to leap, etc., etc. Or: Rocky 3!

    Break a leg.

    • Ben says 21 November 2013 at 16:02

      El Nerdo – you strike me as someone who is very impressed with yourself. I get the impression that you believe that you are really very clever.

      But I find your comments (and your posts, back when you were posting) to be some combination of off-base or downright rude. I hope that you get some sort of personal satisfaction out of writing these long missives on the interwebs for people you’ve never met, because you’re certainly not contributing anything meaningful to the discussion.

      • Sally JPA says 21 November 2013 at 22:09

        What a rude and uncalled for response to El Nerdo leaving some thoughts for JD about the post. I’m often shocked at what people will say to others on the internet that you expect they wouldn’t say otherwise. At least I do hope the lack of civility you’re demonstrating here, Ben, doesn’t represent how you respond to people in the rest of your life.

  4. Rose says 21 November 2013 at 05:46

    I personally think spending money on travel can be looked at as an investment as well. Seeing new places and meeting new people enhances your life and knowledge. If you have the money, and your article indicates that you have more than enough, go for it. Doing things that you enjoy gives your life meaning.

    • El Nerdo says 21 November 2013 at 06:26

      I enjoy ice cream, but after the 5th pint it’s all meaningless. 😀

      • Anne says 21 November 2013 at 09:34

        That’s you, not him. It doesn’t make any difference what you find meaningless after five times. This is HIS story.

      • imelda says 21 November 2013 at 19:19

        Travel is not ice cream… you’re not getting the same experience over and over. Not even just a different “flavor.” Believe me, try traveling to Amsterdam, and then Kiev, and then Kyoto, and then Sydney, and then Cape Town, and then La Paz… at no point in this journey will you feel like you are repeating yourself.

        • Beth says 22 November 2013 at 05:44

          Sometimes I enjoy travelling to the same place again and seeing new things — or I travel to see people, not the destination.

          I’m not a big fan of travel, so I’m skeptical of studies that say it’s “the” best way to spend money. If people love travel, go for it! If they don’t, that’s okay too. I think we can all agree to spend our disposable income on things that bring us value, otherwise it’s a waste.

    • El Nerdo says 22 November 2013 at 06:31

      I didn’t at all mean to dismiss the joys of ice cream, or travel, or other forms of enjoyment– I just tried to point out that pleasure, however great, tends to wear out and does not give life enduring meaning or purpose.

  5. El Nerdo says 21 November 2013 at 05:49

    The spam filters ate my post, so here I’ll repost in case it was permanently ingested:

    Nice followup! I appreciate the clear explanation of the money management situation and I’m sure other readers do.

    For me however the concern last week was not the spending in itself– the spending can evidently be arranged for a purpose. My concern had to do with last week’s apparent lack of purpose or meaning– which as you say here comes from work.

    And I get it that you need to stop and think. Everyone has to do that at some point. And maybe I have a bias towards writing as work– let’s not discount the fact that you write well enough to get rich quickly. So from all many options mentioned, two stood out for me:

    1) Continue to write your new book.

    2) Write fiction.

    I suppose I could add a third one from what we’ve gleaned here:

    3) Continue to travel, and write about travel.

    Among those options, some might be able to pay for themselves with greater ease and speed than others. Of course we can’t predict the future but you could hedge your finances according to each scenario.

    The nice thing that your position gives you is the option to experiment, and this is a huge freedom, but one can sometimes get overwhelmed and paralyzed by choices, and beer, and distractions, and that can be bad if it goes on for too long.

    Money cares aside, any kind of serious creative pursuit requires a definite commitment: whether it’s writing a book about money, or writing a book of fiction, or launching a business enterprise, or going on an expedition to the South Pole, the situation demands commitment and clarity of purpose, and the money is there only to serve that commitment and purpose. Yes?

    Look if you like, but you will have to leap, etc., etc. Or: Rocky 3!

    Break a leg.

  6. Adam P says 21 November 2013 at 06:53

    It’s so personal finance cliche, but travel is the only item I let my budget slide on (apart from gifts and charity spending).

    This is deliberate because I’m looking to maximize happiness (my personal meaning of life), especially as a ratio of happiness to dollar spent.

    Most of the research I’ve read says that paying for a trip, up front not on debt(!), and anticipating that trip to come, then remembering it fondly after its over is among the best ways to get happy from spending money.

    On top of that, giving to a charity you believe in or spending on others you care about (or even just know will need the money) is also great.

    When I look back at the stages of finance I went through and my budget, it seems I entered a new era when 1) I stopped noticing when I got paid and 2) my gift/charity and vacation spend lines starting going up and everything else starting going down.

    Thanks for the follow up JD. I hope you gave the editor(s) of the website an earful after what happened with Sunday’s post. The old GRS would never have fallen for that. My 5 year old wouldn’t have fallen for that.

  7. Brian@ Debt Discipline says 21 November 2013 at 07:02

    Now we have a clearer picture. As I said in my commented last week we didn’t know how much were in these investments. I believe it’s perfectly fine to begin to draw on them as you’ve outline, with a plan. A set amount over time lasting you the amount of time you need them too. That’s the point of saving the money in the first place isn’t it? To eventually be able to spend it?

    I’m in debt repayment mode, and hope to have this issue someday. Thanks for the mention JD.

    • Mark Battle says 28 November 2013 at 15:09

      Brian @ Debt Discipline well said (about the debt repayment) I too am in this mode. JD, reading about the short term/long term savings streghthens my resolve, BUT I never thought about the intermediate term savings. What a fantastic concept (and another avenue that I had not considered!!!)Brilliant!!! Thank you JD and all the respondents. You have made my decision to mark GRS as a favorites site one of the better moves I have accomplished in a
      LOOONNNNGGG time

  8. Matt says 21 November 2013 at 07:02

    Looking at your proposed inflation, drawdown, and return numbers, it would appear that your money will run out in 37 years. 37 years is a long time, but not exactly the rest of your life.

    • Scooze says 21 November 2013 at 09:16

      I don’t think we enough enough information to know this. All JD has said is that his long-term savings are over a million dollars. That could be $1.2M or $10M – or anything in between.

      • Matt says 21 November 2013 at 11:05

        Actually, since he listed his withdrawals as a percentage of his account value, it is irrelevant what the starting balance is. It doesn’t matter if he has $10 or $10M, if he withdraws 4% annually the money lasts the same amount of time.

  9. AZ Joe says 21 November 2013 at 07:21

    Hey JD,
    Thoughtful post. I do have a quibble with your statement:”A quick calculation… shows that I could choose never to work again and even if I lived until 80, my assets…” I suspect you would do well to extend your calculations to at least 85 or 90! You seem to make substantial efforts to take care of yourself. Given the current mortality tables it is very possible that you could live that long or even longer. That said, I suspect the numbers and calculations will not change all that much even with that extended time frame.
    I always enjoy your thoughts and comments, keep up the good work.

    • J.D. says 21 November 2013 at 09:05

      Joe, I hold two contradictory ideas in my head at once: That I will live to be about 80, and that I will only live to 50.

      The men on my father’s side of the family die young — in their forties and early fifties. Admittedly, I’m doing better than most of them at maintaining fitness. (Although I’ve introduced a different risk factor: alcohol.) Still, part of me plans to die young.

      On the other hand, both sides of my family have people who lived a l-o-n-g time — into their nineties, even. So, you’re right: I do need to keep a possible long life in mind.

      Planning for both of these ideas at once is a bit of a challenge…

  10. The Warrior says 21 November 2013 at 07:52

    IMO, drawing down from savings depends on what the savings were intended for.

    In my case, we are in the extreme building phase right now. We don’t have much savings and need the savings for emergency purpose. Thus, drawing down from savings for any reason besides emergency’s would be unwise.

    If we had built our savings for a specific goal and had met that goal, then the savings should be applied accordingly.

    The Warrior

  11. partgypsy says 21 November 2013 at 07:58

    Thank you for being more transparent. The initial post was concerning, where you are talking about drawing down savings “living above your means” but also not having a clear plan of action. Myself if I was in your shoes, I would probably be living similar, in that I would be writing and traveling, but also I have some pretty specific projects I would devote to (that I don’t have time to do given having a full time job). My only difference that I would travel more locally within the US and visit friends.

  12. Kali @ CommonSenseMillennial says 21 November 2013 at 08:00

    It’s all about balance! Like you said, we save for more than just safeguarding ourselves against an emergency – we save so that we are able to take our dreams and turn them into realty. If you have a set amount of money that you’ve saved for the purpose of travel, how can it be wrong to pull from that savings fund to travel?!

    Maybe this resonated with me in a positive way because we share the same want to travel, and because I’m currently putting aside a bit of money every month to allow me to achieve my goal of traveling the world.

    Yes, we save money for our futures and we’d all love to become financially independent. But we have to balance that with living now and making the most out of life in every way that is available to us. If that means using some of your massive amount of overall savings/investments, then that’s what you do. I think as long as you’re not completely depleting your entire stash o’ cash, you’re doing alright!

  13. Jane Savers @ Solving The Money Puzzle says 21 November 2013 at 08:14

    Money hoarder is a better term than extreme saver. People who only know how to save and accumulate and don’t know how to enjoy their money themselves or help others.

    Scrooge McDuck is my favourite money hoarder.

  14. Ramblin' Ma'am says 21 November 2013 at 08:19

    Hi J.D.:

    Thanks for the clarification. In your case, I think spending a few thousand dollars a month from retirement savings is not a big deal. Those people who win millions in the lottery and end up broke don’t get there by spending $40K a year.

    I think people reacted the way they did because the idea of spending more than you earn is contrary to most of the advice on personal finance blogs. But obviously your method of spending modestly from retirement savings is not applicable to people in the earlier “stages” of PF.

  15. Gaming Your Finances says 21 November 2013 at 08:54

    We’re aiming for early retirement in a few years. Our goal is to live entirely off dividends and the cash flow from a rental property. Hopefully we never have to touch our savings.

  16. SavvyFinancialLatina says 21 November 2013 at 09:13

    I would enjoy life, continue working part time with what you love, and travel. You have to travel now that are young before you are older and can’t do it anymore.

  17. Kylie says 21 November 2013 at 09:18

    Cliff notes:

    I could stop working today and live off my savings for the rest of my life. In essence, I could choose to retire early – if I wanted.

    Thank you for the clarification…

    • J.D. says 21 November 2013 at 11:09

      To be fair, I said that in the previous post (and many times before), but it got overlooked. I figured it was time to be less subtle about it…

      • Steve says 21 November 2013 at 14:51

        But to be fair to us, you may have said that but it was buried in a long post about whether or not you could afford to/or should draw down your savings. You seemed to want advice about whether or not you should do just that.

        If, in fact, you knew that you COULD do just that, without any financial repercussions, what was the point of the post?

      • J.D. says 21 November 2013 at 15:22

        The point of the post was to show what it’s like to talk to a financial adviser, not to ask GRS readers what they think I should do about my current circumstances. Re-reading it, it still seems pretty clear to me.

        • Beth says 22 November 2013 at 05:51

          Of course it seems clear to you, you’re the writer 😉 I’ve done a lot of writing and editing in my time and I know how tricky it is to “step outside” oneself and one’s expertise and focus on what your audience may or may not know. It must be especially tricky when you’ve got a group of loyal followers who know a lot more about your life than those of us who come across the occasional post.

          You can’t write for everyone. I think this is a great follow up to your original post. Just be careful not to criticize your audience for not picking up on something that seems obvious to you. We all bring our own knowledge and experiences to what we read, and hence we all read things a little differently.

  18. Scooze says 21 November 2013 at 09:21

    I get your point and agree that you can spend your money as you see fit. I would also love to spend that kind of money on travel!

    Just one question – did I read correctly that you only keep $5k in emergency savings and another $25k to get you through 2014? Is there more that is easily-accessible?

    Thanks for the greater transparency – it makes things more relatable (even if we don’t have that kind of dough ourselves!).

    • J.D. says 21 November 2013 at 11:11

      I don’t think I need more that’s easily-accessible. In fact, I’ve come to side with Liz Weston. For those who don’t have problems with spending, I think a credit card is actually the best emergency fund. It’s simple enough to get access to other cash within 15-45 days, so there’s no need tying the rest up in low-interest savings accounts.

      That said, it’s tough to recommend the “credit card emergency fund” as a universal policy. There are still millions of folks who have trouble controlling their spending. I used to be one of them. 🙁

      • Chance says 21 November 2013 at 12:26

        Hi JD. Hopefully there is more explanation to your explanation ( 🙂 ) as the $5k emergency fund really surprised me as well. I also have more than $1m in liquid net worth and consider myself to be semi-retired. My emergency fund, however, is large enough to support me for several years. If there’s a market downturn and you need more than $5k, do you really want to live off of credit cards?

        • J.D. says 21 November 2013 at 14:36

          The point is I don’t have to live off credit cards for several years. I only have to live off credit cards for the length of time it takes to withdraw the money necessary to cover the emergency, whatever it might be. In the meantime, however, it’s earning (theoretically) an average of 10% per year before taxes while invested in the market instead of just 1% per year (or less) in a savings account. Does that make sense?

          Liz Weston isn’t saying that you should plan to live off credit cards indefinitely. She’s saying they’re a solid emergency fund for folks who can handle them responsibly. Pay for the emergency with the card, and then pull out the cash from elsewhere (your investments, most likely) to pay off the bill.

      • imelda says 21 November 2013 at 19:25

        JD, could you please talk about the types of accounts you use for holding your money? I agree that it is excessive to keep 6 months of emergency savings in a 0.9%-earning online savings account, as I do. I would like to save maybe two months there and invest the rest. I also want to do this with money I’m saving for a down payment, since I have no plans to buy a house in the foreseeable future but may want the money in 10 years.

        But I’m not sure how to invest outside of a 401k or roth ira. Do you just open a money market fund and buy mutual funds? Where? I know this sounds ridiculous, but no matter how much I peruse the Vanguard website, I can’t figure out how to open a NON retirement investment account.

  19. Matt YLBody says 21 November 2013 at 09:38

    We all have our things we like to spend money on. Food is mine.

  20. Michelle says 21 November 2013 at 09:55

    J.D., I think some people forget that you are not worried about descendants. People get into this automated mindset of “send kids to college, leave them a nest egg” and those of us who have chosen not to reproduce don’t fit into that schema. It seems that saying “I want to spend down my savings as I age” invokes a gut reaction of “And leave nothing to your kids, you selfish *@!#%* ?” People shy away from the idea because they instinctively expect everyone to have kids and to leave those kids their money.

    As an aside, I don’t think the thousands of hours you’ve spent building this blog count as “getting rich quick”.

  21. PawPrint says 21 November 2013 at 10:15

    In 2012 when my husband took early retirement, we lived off our savings for 8 months until he got another job. While he actually could have retired, he chose to do something new and different that involved moving to an (expensive) urban area in a another state. Frankly, it was difficult for me to watch our savings dwindle, although I’d kept almost two years of expenses in our emergency fund, and we could have lived off retirement savings. Once he retires, I do wonder how I’m going to react when we have to start living off our investments.

    My father was a Depression-era product, and he had a difficult time spending money. I ended up buying him clothes and necessities because he would wear underwear until it was threadbare. He did enjoy, however, looking at his bank balance. I do, too, but I really want to be able to enjoy spending the money we’ve saved.

  22. Tyler Karaszewski says 21 November 2013 at 11:14

    More than just “what are savings” for, I’ve been thinking about “what is money for?” We, here in our industrialized, relatively rich nations, have a variety of tools available to us, like savings, but also cheap loans for things like homes and vehicles.

    There are a few different things we might try to do with these tools. Things like:

    1) Keep our standards of living as high as possible.
    2) Keep our exposure to risk as low as possible.
    3) Reduce the number of hours we’re required to work to 0.

    Now, there are categories of people that are doing all of these things. The typical “financial independence” aficionado is in category three. Usually, the person in a ton of credit card debt is in category one (and this isn’t necessarily a character judgment. Sometimes “as high as possible” is still pretty low, if you lack the means). The over-saver is in category two.

    Personally, I’m not all that interested in the third category right at the moment, though I would like to be eventually, and so I have a strategy for paying off my home by a certain point in order to free up more work options, but that’s a long-term thing for me. I am actually more interested in category one, but I’m doing it with special regard for category two. I’m only willing to take on so much risk, so I limit myself based on that. I allow myself to carry two loans: A mortgage and a vehicle loan. These are both fairly cheap, so I’m not concerned with the small amount of money they cost me, and they’re secured, which limits the lender’s liability, but also my own. When I make financial decisions, I try to think about the risk involved, which basically means I say to myself, “What if I lost my job tomorrow?” The mortgage, given my current position in life, is no big deal. The worst case there is that I am forced to sell my house. If that happens, I have a significant amount of equity in my house, meaning I’d likely walk away from that deal with $100,000 or more in my pocket, with which I could rent an apartment for quite a while. If I had opted *not* to get the mortgage in the first place, I’d be living in an apartment anyway. So, overall, I get to keep my higher standard of living with minimal risk of anything truly horrible happening to me. Even for a vehicle, I put enough down when I buy them so that I’m never underwater on a loan, which means I can always get out of a car payment on short notice simply by selling the car. This mitigates my risk a lot.

    Part of this strategy work for me because I have enough resources and reserves that I can deal with transaction fees and cover time gaps that happen, for instance, as I’m trying to sell a car but haven’t sold it yet. I’m also OK with certain inefficiencies, like the fairly trivial amount of money I pay in interest on a car loan. I appreciate that some people strive to absolutely maximize every dollar they bring in. I’m not doing that. I’m OK with basically writing off the cost of a car loan entirely, where I can sort of pretend I just make 5% less salary than I do (a car loan generally costs me about that much) but always get a nice vehicle. Yes, these changes if I lose my job, but I already have a plan to handle that.

    So, it’s not just savings, but financial tools in general that I’m using to maximize my enjoyment of life while keeping the risk to a minimum. I’m not aiming for *zero* risk, because it’s impossible, but also because it takes so many other opportunities away when you’re making these tiny, tiny improvements to your ability to handle a catastrophe. The chances that I need 10 years living expenses in cash available by tomorrow is infinitesimal, so I’m not going to give up on owning a house or buying a boat to avoid that particular risk. Oh, and yeah, in 2014 my vehicle loan will be or a boat instead of a car, and I’ll drive a used car.

    I’m also currently contributing $17,500/year to a 401k and otherwise preparing for the future, which is why I feel I can afford inefficiencies and a certain amount of calculated risk right now. I also work in a fairly in-demand field, and make a higher-than-average salary, and I’ve factored all these things into what is and isn’t reasonable expenses given my goals and level of risk-aversion.

  23. getagrip says 21 November 2013 at 11:34

    I’ve always been a fan of balance in that if you are meeting your saving and spending goals, then use whatever you have extra for personal enjoyment. Isn’t that the point of being frugal, to reduce your spending in areas you don’t find value in so you can spend in areas you do?

    I’ve also always skoffed at this idea that you should never touch your retirement principal and leave some huge fortune to your kids. If you die on the younger side 60-70’s there should be plenty there for them. If you die on the leaner side 80-90’s, they should have their own retirement saving and not be counting on yours. Otherwise, as long as you pay the life insurance bills, that should take care of them.

  24. caromba says 21 November 2013 at 13:17

    When I saw the reactions to your previous post, I thought: I guess the readership here are not followers of Mr. Money Mustache! To those of us who have been reading MMM since you left GRS, it made perfect sense!

  25. Sam says 21 November 2013 at 13:27

    Whoo-hoo, I got a shout out from JD. 🙂

    Mr. Sam and I go back and forth on the definition of savings. I think if I am saving up for a trip to Iceland, which I am, that counts as savings even though I plan to spend that money. Mr. Sam thinks of savings as money you put aside and don’t touch until . . .

    Here, in you situation your until is here so it makes sense to draw down. But at your age, $1 MM really isn’t all that much so I hope its more or I assume you have plans to continue semi-retirement which would mean that you would continue to work and bring in some income along the way. I think the real challenge for this type of lifestyle is health insurance and health care but hopefully with the ACA we will have more flexibility in obtaining reasonably priced health insurance not tied to employment.

    • Ed says 25 November 2013 at 14:22

      Agreed on the health care risk. My aunt is married to a self employed realtor, both in their 60s. They are wealthy, with a net worth north of one to one-and-a-half million dollars.

      Due to preexisting conditions for both from their twenties, neither has had health insurance, due mainly to cost, pretty much ever. Why this matters is because Auntie needed something called a “back fusion” four to five years back… requiring 6 months recovery and a half million dollars out of pocket!

      Now they are still wealthy, even after that financial hit, but Unc decided to delay retiring for a few years, just in case. This is an example of the large one-time costs I was kind of dreading before the arrival of ACA, considering how few people I know who can get resonably priced health insurance outside of a wage-earner job.

  26. Brooklyn Money says 21 November 2013 at 14:16

    I am so going to the wrong financial adviser because all I heare is I need at least $2 million saved at age 65 to have my savings last. I can’t imagine having less than that and being in my 40s and being okay with drawing down.

    • J.D. says 21 November 2013 at 14:40

      Financial advisers have a vested interest in getting you to save as much as possible. Many make money on the balance you have invested with them. Others make money giving you advice or encouraging you to buy certain products. Listen to their advice, but don’t heed it blindly. Do your own research. Read. Talk to others who have retired, especially those who have retired early. Learn what their experiences have been like.

      For me, having $2 million saved at 65 seems extreme. To need that in retirement, you’d have to be living a lavish lifestyle.

      • mike says 23 November 2013 at 08:46

        Actually 2 million is the # I’m shooting for and I have 23 years to get there, We are on target but who knows what life throws at you.

        2 million by the way isn’t a lot now much less in 23 years. The problem with your retirement plans is that it makes way too may assumptions. Your assuming X amount of return, your assuming you will be dead by 80, your assuming low costs in old age or a less than lavish lifestyle won’t be money, etc.. Right now the countries of the world are in a race to the bottom of the barrel on currency devaluation.

        If 1 of your assumptions is off you will be fine, multiple and you might be up the creek without a paddle. Lets say the market crashes again multiple times, your income drops, you live to 95, 10 years of which is in a nursing home that costs in inflation adjusted dollars $13k a month and/or the cost of living sky rockets even more, all of which are possible, some of which are almost sure to happen.

        Personally I want to be able to enjoy life now but also afford a certain style of care as necessary. I see far more people in their 70s without funds to afford the necessary care because they haven’t saved then vice-versa having to rely on the generosity of others and care that is sub-par. Finally the population is aging extraordinarily fast due to demographics, by the time we are the system and the budget is going to be overwhelmed so if you do run out of money based on your plan and if fails, good luck finding good care. I would prefer silk depends instead of sandpaper.

      • Brooklyn Money says 25 November 2013 at 10:26

        I use Learnvest. I pay for advice, not a % to manage my money. I use the same platforms (Fidelity, eTrade, Vanguard) to invest as I did before and I choose the funds, so she’s not making any money off that.

        I think location can play a big factor in how comfortable someone feels retiring as well, and I live in the most high cost area of the country, so that probably accounts for the difference in perspective as well.

  27. Chris says 21 November 2013 at 15:59

    I really appreciate this post. My husband and I are to the retirement phase – closer to “normal” retirement age than you but still some of the same issues. Our home is paid for, no debts, comfortable but not extreme savings and a modest pension. So how much should we spend and how much keep for safety’s sake?

    Reading about how others are juggling these issues is part of why I come here.

    My thoughts are that you should draw on your savings but consciously and with a plan. You’ve learned self-control so recognize that you can let go of the spending if needed.

    Enjoy life but be prudent.

  28. El Nerdi says 21 November 2013 at 16:50

    Hi Ben,

    I can’t do a nested comment over phone, but I’m sorry you get that impression. I’m simply trying to figure things out, and yes, I tend to think out loud on the internet– just the way I’m wired, and my intentions are good; sorry if it rubs you or others the wrong way, certainly there is no harm intended.

  29. Kasia says 21 November 2013 at 17:12

    Life is short. The point of having savings is that at some point we can enjoy them. It’s not supposed to be all about sacrifice and living frugally. If you’ve no debt, you’ve accumulated an emergency fund, and have worked hard for x amount of years, spending a little bit more than usual for a while is fine. As someone already mentioned above, it’s all about balance, and more importantly finding the right balance for you. Enjoy it, you’ve earned it.

  30. Elizabeth says 21 November 2013 at 17:59

    I think deciding to spend your money on travel is admirable. After recently taking up a job in retail, I’ve found myself more out of love with stuff than ever before. If I’m going to spend money, I’m going to spend it on experience rather than things.

    Actually, as I’m diligently working on paying down my debts, I’m also saving to take a trip to Russia next year. The fact that I have debt won’t deter me from taking this trip, because even while saving I’m doing everything I can to pay extra toward my minimum monthly payment. But this trip itself is a once in a lifetime opportunity. A friend invited me to visit her in her home country next summer. I don’t have to worry about paying for a hotel, just a plane ticket, food, and whatever else.

    The way I see it, I could take the money, apply it to my debt and still be in debt after I do, or I could use the money to finance an adventure, have a blast, reconnect with my friend, then come back with amazing stories and start my fight against debt right where I left it.

  31. LMaS says 21 November 2013 at 18:12

    My 2 cents: the post was on the wrong website 😉 A question about the balance between spending down savings and earning more in early semi-retirement belongs on an FI blog like MMM. As you noted, there is an inherent irony in anything you post now on a site called Get Rich Slowly, having Gotten Rich Quickly (all relative I suppose). Needless to say anyone still working on the former probably won’t relate too well with the latter.

    Also, when you say you net -$2000 due to travel a month, that sounds like some serious traveling. Awesome! But expensive. We currently aim for 1 or 2 good trips a year, and I don’t even know if I could take that much traveling. Maybe if I didn’t have a 9-5 my mindset would be different…?

    • Mark Battle says 28 November 2013 at 15:31

      LMaS, ditto for the 9-5 mindset introspection ( did I spell that right..??) Mine is the 6-6 (days one week, nights the second, and coverage for others in-between)

  32. Micro says 21 November 2013 at 18:33

    I think sometimes people get so caught up in the process of being frugal and saving that they forget to ask themselves “then what”. I’m spending less money and saving. Then what? Well, I’ll pay off my debts and start investing more. Then what? I’ll increase my nest egg until I become financially independant. Then what? … You should be able to answer question of what you plan to do after you are financially independant. You are saving money for a reason and will eventually need to spend it.

  33. zoranian says 21 November 2013 at 19:28

    I think there are numerous possible reasons to spend down your savings. Anything that is targeted savings should be spent down! For example, in the past 3 years we bought a house (20% down, so we spent savings), 2 cars (both of us were driving the cars we got in college and we are in our late 20s), and we are currently living on one income. I know some of our neighbors give us funny looks. I tell people all the time that we can’t afford a car payment, so that’s why we pay cash for our new (to us) cars. So, yes, our savings have gone down significantly. However, we do still have liquid savings equivalent to 6 months of income (not expenses) and our retirement savings is currently almost double our income.

    For us, our current targeted savings are for anything that’s not already covered by my husband’s regular income. We use tax refund checks (I know we should try not to get a refund, but I have a hard time estimating taxes with ever changing number of dependents and the taxes I pay on my flexible part-time income), bonus checks, “extra” checks from bi-weekly pay, and my part time income to fund our savings. So we use targeted savings accounts for vehicle purchases, vacation funds, preschool for the kids and long term house repairs. We do have an “emergency” fund which I would not touch unless it were a true emergency. We’ve paid everything from a new roof to an anniversary trip from our savings account and I feel no regret, because that’s the point of the savings account. We actually still have $5,000 that I’m looking forward to spending soon since we had to delay our 5-year wedding anniversary trip since I was about to give birth to our second son at the time. We have a small 6th year anniversary trip planned, but we’re planning on doing it up big at 7 years – maybe Costa Rica or Hawaii.

  34. sheri says 21 November 2013 at 19:43

    J.D. only YOU know what’s best for YOU and your future. It sounds like you have a solid plan. Keep up the good work. Life is short.

  35. Dear Debt says 22 November 2013 at 21:43

    I think if you have a flush savings account that is used for that reason, why not? Before I had all this debt, my savings account was nicknamed ‘Travel’. I now have a minimal travel fund, with a small EF, while trying to tackle debt. I wouldn’t feel that bad using savings if my EF, retirement and income were good. I do think 2k a month of overspending on income is a little high, but if it will last over a year, sounds ok. Just watch it from a habit point. It can be hard to downsize when you really need to.

  36. Anna Haugen says 23 November 2013 at 21:57

    I think in the past you’ve reviewed books on personal finance about how to save money and budget, and stuff. Maybe it’s time to review a book on how and when to spend it? If you’re interested, I recommend Happy Money. It’s about what things we can spend money on that *actaully* make us happy, and why.

  37. JabbadaHut says 29 November 2013 at 20:09

    I find it poor taste that you are talking about how easy it is to spend your money when you sold your site for multi-millions of dollars. Referring to MMM’s advice when you makes tens of thousands of dollars a month and not living by what he preaches is also poor taste.

    It’s like Jimmy and Tammy Faye Baker taking advantage of their disciples to get rich.]

    Just being honest.

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