Some Thoughts about Provident Living

Two questions, actually.

Question the first: we’re all familiar with the counsel to build a financial reserve, sometimes specified as six months of income. In what form should one keep this? Do 401Ks count? Is it pennywiseandpoundfoolish to keep it in a checking account with its paltry interest rate?

Question the second: the Church’s provident living counsel always says to make and keep a budget. My husband and I have never done this because it has never been that difficult for us to live within our means because neither of us is a spender. Should we make a budget anyway? By which I mean: Are there benefits to keeping a budget if you don’t need it to avoid red ink?

Anything else you want to say about this topic?

(The Church’s page for family finances is here.)

36 comments for “Some Thoughts about Provident Living

  1. The “One for the Money” brochure has this:

    Pres. Kimball: “Every family should have a budget.”

    Elder Ashton: “Liquid savings available for emergencies should be sufficient to cover at least three months of all essential family obligations.”

  2. 1. My philosophy on building a financial reserve is that it is short term emergency money. My 401(k) or other money in retirement accounts are my savings for retirement. I keep my short term money in the following types of conservative, relatively liquid securities (FIDC insured bank account, Money Market funds, CDs, and CD funds).

    2. I’ve not been the best at living off of a budget for the reasons you mention. However, I’ve found that with a budget it’s easier to save money. I can see where I’m being frivolous and work on cutting back. Also, I find that it makes the needs/wants delineation clearer.

  3. 1/ I interpret this counsel as putting it in a liquid, risk-free account. A checking account would work if you won’t spend it, but a money market keeps it liquid and separate from your other finances…plus it earns a little more interest (well, maybe not lately).

    2/ I think that a budget is a tool to help avoid debt, so it is not necessary if you live debt free and have a savings cushion (although President Kimball’s quote above says otherwise…maybe he is assuming that most people can’t live within their means?).

    Personally, I hate itemized budgets and prefer a “pay yourself first” method of personal finance, although I see a lot of value in every few months tracking your spending so you know exactly where your money is going and you can fine-tune your spending habits to ensure you are being prudent with your income.

  4. As a self employed person, a budget in the typical sense is not possible for me. I just ensure that all bills are paid. If there are left overs, my daughter has plenty of ways to spend it.

    I have been doing a lot of thinking about finances lately though, probably because of the reports on the economy etc. Is it smart to be cash heavy? Do other investments work as well? What about investing in yourself (education, businesses, etc)?

  5. First, I think the emergency money should be six months of EXPENSES, not income. I agree that one sees the “income” version but it seems to imply that every cent that comes in is spent immediately.

    We also use liquid formats for that. We have CDs with staggered maturity dates that are linked to our checking account. When we had to buy a new car unexpectedly, one CD was maturing at the end of the month, so we just cashed that out.

    The plus is that my credit union has a program of benefits for those who have a $5,000 minimum balance at all times in all accounts including the CDs: free check printing, no overdraft fees, discount rate on car loans, free notary service, free travelers checks, free money orders. We use those services a lot since our local schools require notarized permission slips for overnight trips, and we use money orders in our church callings, etc.

  6. There is a reason to have a budget beyond the implied “you need it to live within your means”: to plan for the future.

    Do you have any definite plans to spend money in the future? Not, “maybe we’ll go on a cruise sometime” but something like “we’d like to pay for our kids’ missions”, where there’s a specific time and amount of money involved? Unless you already have all the money to do that now, you should probably have a budget so you’ll know how much you need, how much you can save, and when you need to save it in order to have the amount ready when you want it.

    Are you already saving specific amounts of money for designated spending in the future, and you know how much you need to save and when you’ll reach the goal amount? Congratulations, you already have a budget!

  7. 1. I see it as short-term, liquid money. But some fund is better than none, no? If one had to, one could access a 401K.
    2. It seems to me that you are budgeting by the way you live. But then again, we live the same way…we budget more in theory than in literal practice.

  8. Part of keeping a budget is being able to see exactly where your money is going – in order to have it go elsewhere if you desire.

    For example, it’s hard to know how much you can contribute as a “generous” fast offering if you have no idea what your “average meal” costs throughout the month – including dining out, if you do that. It’s hard to know how much you are paying in interest, to companies that line the pockets of already rich people, if you don’t see it in real dollars – and not seeing it in real dollars makes it hard to internalize as wasted money (or at least as money that could be used to bless rather than further enrich). There is a lot of power that comes in budgeting, even if it is just the power of conscious distribution of your funds.

  9. I think Ray has it right #8. I feel the real strength of a budget is making sure we’re putting money in savings and hopefully getting our family into a position where we pay cash for nearly everything, and that we’re earning interest and not paying interest. It may take a while to get in this kind of position–a budget increases and hastens the possibility of doing so.

  10. I usually stay away from advising people on their money. But I was able to retire at 55 due to my ‘planning’. Most people come to me knowing I am ‘good’ with money. I believe in a lifetime saving of 10%. I believe in writing down for a month what you bought, sitting down with your Honey, and asking “Is this what we really want to spend our money on?” A great deal of my savingsare still in ‘stocks'(Funds). In order to keep control over when I sell them, I have a 4 year ‘CD Ladder’. When the market is good, I sell and place the money in the CD Ladder. When the market is bad, I wait. But in advance, I know I have two or three years of ‘cash’ to live on. I buy most of our daily things on a credit card and pay it off each month. At the end of the year, I get a HUGH break down from American Express, charts, lists, categories, more than you would ever want to know how you wasted your money. My wife also uses Bank on Line with she loves.

  11. p.s. But I do think there is something about a written budge and specific discipline, even if I haven’t mastered that, yet.

  12. One lesson I think we learned from Katrina was that we all need some amount of emergency money in instantly available cash, in case of the need to evacuate. When communications were gummed up so that credit cards couldn’t be used and merchants couldn’t be sure checkwriters would be coming back to town anytime soon, cash was still good for gas and groceries and hotel rooms.

  13. Well, I’m 49, and been married 28 years. We’ve never had a budget, managed to live within our means nicely, and save plenty. It depends on lots of things, such as whether your income is tight, and whether one or both of you have a spending problem. I don’t really think that having a budget is a religious imperative if you’re doing fine. I guess we had a sort of a budget, meaning that we knew about what we did spend on fixed items and then could spend on other stuff. And I guess that direct deposit from paychecks to savings helped a lot. There’s plenty of other stuff to worry about– don’t develop a budget just for the heck of it.

  14. You all might also want to keep a couple hundred “cash on hand”. If the power is down (natural disaster, war, etc.) it is very difficult to withdraw 1’s and 0’s from a dead computer.

  15. The only thing from our storage that I’ve ever used for an emergency was the cash, during last fall’s evacuation for wildfires. Friends, both LDS and non-LDS seemed to think I was a genius for having the cash hidden away, so no long wait at the ATM like many others. We also benefited from having thought ahead and stored photo albums and other irreplaceables in ways that they mostly are easy to grab and go. (But I can’t say that all that wheat, etc, has ever been useful.)

  16. In addition to cash on hand, might I also recommend some other stores of monetary value? Gold, silver, euros, etc. While CDs, checking accounts, and stashes under the mattress can help get us through bouts of unemployment or other immediate need, dollars become worthless if they are hyperinflated into oblivion. One need only look to Zimbabwe for a current example.

  17. My husband and I are in our 5th year of marriage and have never made a budget. We have both been in and out of school, and sometimes when we look back, we don’t know how we managed to pay the mortgage. However, I have a feeling that once children come along, it will be more difficult to balance things… So that is definitely something that we SHOULD be working on. Near the end of last year, with income coming in from various sources, we lost track of our tithing. We ended up figuring it out, but it probably wouldn’t have happened in the first place if we kept track of our finances.

  18. I spent some time as a stake employment specialist, once upon a time, around the time that providentliving was being developed. Some thoughts:

    – 6 months of expenses is what was intended.
    – I don’t think a budget is necessarily required, but I think that it would be good to have a record showing what you do actually spend, so that you can plan.
    – To the idea of emergency income, can I suggest that households have an employment plan? What happens if you lose your income suddenly? Together with the idea of how you’ll pay for the next 6 months or so, what’s the strategy to get more income?

    I find too many people blow off the last one. Sudden, unexpected unemployment happens to the best of us. :) And it behooves us to have a plan…

  19. Haha, great article Mike. I don’t have a stash of cash, but am aware of some who do. I don’t store much of anything in dollars these days, since the FRNs are taking a huge beating.

  20. Extending Ardis’ comment (12) about Katrina/Rita and cash: Our experience was that a portion of the emergency evacuation cash needs to be in $1s and $5s. Change was scarce and demand high, so even in the absence of gouging, if all you had was $20s, you paid $20 for a $5 iterm.

  21. I was in downtown San Francisco when the 1989 Loma Prieta Earthquake hit. Electirc power was cut to prevent natural gas fires from broken pipelines. That meant no phones and no ATMs working. The Oakland Bay Bridge was broken, and the subway across the bay shut down. Some highways collapsed, and one large neighborhood was on fire. I think that anyone who is not within walking distance of home (say five or ten miles) might consider carrying some basic cash to pay for essentials if your are stranded in such an emergency, including paying for an alternate way home. If you have a chronic medical condition, a couple days of medications would also be worthwhile.

    Obviously the Church is encouraging us to invest in some basic food commodities. The very weird campaign against bottled water is in some locations making it harder to keep a rotating stockpile of this essential item. All of the arguments against bottled water apply to bottled Diet Coke (with or without caffeine), as well as beer, so I suspect that it is really a big joke, a Zohnerism (like the notion of banning “oxygen dihydride”=water, named for an Idaho Falls [LDS] jr. high student who got people to sign a ban petition).

  22. Julie,

    1. One thing to consider when talking about what type of “monetary” reserve you should have is to consider inflation. A dollar today is not worth as much as a dollar was worth fifty years ago. Simply keeping dollars stashed away under your pillow isn’t sound. Also, is the dollar the best currency to keep your money stashed in? The Euro seems to be holding better right now than the dollar. And also, many of our fiscal policies here in the United States continue to weaken the dollar. Other countries that have pegged their currency on the dollar may reconsider, further weakening the dollar. To keep the “value” of the amount you have, it might be worth it to float your reserve in other mediums that hold their value.

    2. Always keep a budget. Even if you are not close to going red. The point of the budget is to manage your financial resources, not to avoid the red. It makes it easier to see how to use your funds for whatever you desire (whether giving it to charity, creating your own charity, adding extra expenses, etc.).

  23. Ideally you should have 3 months of living expenses in a very liquid form (e.g. combination of checking account, revolving cds, and cash on-hand) so that when trouble comes you have something to fall back on. Credit cards, 401ks, HELOC are not good things to put in your emergency plan.

    The church’s discussion and advice is not on the same level as advice on doctrine and accepted morality. It’s just sound advice on what it takes to live providently. I think if we do what they say we will be more able to serve in the future. There is no moral right and wrong to exactly how you maintain your finances.

  24. If you have no other savings, you could consider your 401(k) as a “ready reserve”. But, you would have to discount it’s value by the marginal tax rate that you pay (both federal and state plus the 10% tax penalty due on early withdrawals–unless you’re over 59 1/2 years old.

    So, Julie, since you’ve got 30 more years to wait before you dodge the 10% penalty, you’d be well advised to put that six months’ of expenses anyplace else–even under your mattress.

  25. One thing consider is a Roth IRA.
    You can contribute to an account and at any time withdraw your original investments (not any earnings). Although Roth is after-tax money (unlike a 401k) the earnings are tax free when you retire. This means you can maintain access to the money for a crisis, but not pay the penalties associated with 401k early withdrawals. Plus, it’s less tempting to withdraw money from a retirement account than a checking account for an impulse buy.

  26. Use a 401(k) for emergency funds? Not advisable, since as Mark B noted, you have to discount the penalties.

    And as other people said, the 401(k) is for retirement. Somehow when you’re at the retirement age you’re going to have better flexibility and less need for the 401(k) money? Not likely unless you already have a guaranteed pension, social security payouts and/or a generous trust fund or annuity.

    For emergency savings, consider savings accounts, money market accounts, CDs, etc. Even a Roth IRA is better than a 401(k) since as I understand it and Garrick said, you can withdraw all the amount you’ve put in although not the earnings without penalty.

    The problem with emergency savings right now is that the interest you’re going to earn is less than inflation, so you’re losing buying power by keeping your savings in the money market. However, you still need to preserve your flexibility in emergencies, so for now, that’s going to come at a cost. You also asked if it is foolish to keep it in a checking account. Yes. Move it at least to a savings account.

    How much do you need? Three to six months of expenses. Don’t include tithing and payroll taxes as expenses since that would not be an expense if you were disabled or laid off and there was no income, but you would need to figure in the cost of COBRA so your health insurance doesn’t lapse and trigger preexisting condition situations. The amount you need would be based on how hard it would be to find a job in your field.

    The easiest way to save is to have paychecks automatically split into checking and savings accounts. Either your employer or your bank should be able to do this. Even if you’re paying off high interest debt such as credit cards, you need to get into the habit of saving, even if it’s just $5 a month to start.

    On the subject of budgets, was that a serious question? Every organization with income and expenses needs a budget. No exceptions.

  27. I keep a week’s worth of cash in my 72-hour kit (in case the ATM’s die in a earthquake or hurricane).

    I know a lot of people that when they got laid off for three months or more – they relied very heavily on the emergency savings account. 401K’s are only for retirement.

    Budget’s help you plan for the future and identify waste.

  28. It’s harder to live with a budget if one is self-employed and income is highly variable–but in that situation a budget is even more important than if one is employed and has a steady income.

    Among the budget items that are critical are:

    Estimated Tax Payments (isn’t tomorrow April 15?)
    All discretionary expenditures (a bunch of big fees one month can make you feel like a millionaire, and that hurts when you get to a month with high expenses and little fee income)

    Now that I’ve written that, I think I better sit down with my wife tonight and draw up a budget.

  29. Yeah, Mark B. I need to start thinking about a budget too. It is such a moving target. I keep saying “well after I have a year to look at, I can make a solid assessment.” But I have yet to have a year without major changes. With respect to taxes, retirement and that sort of thing, I have separate savings accounts that those roll into every month based on my percentages. Maybe that is poor man’s budgeting.

  30. #28 p.s. I have identified my sources of waste… and luckily they are nearly grown!!

  31. #31 – Classic! Unfortunately, my youngest is 5 – and the youngest 4 are girls. (My 2nd – and last – boy leaves home next year.) I try not to hyperventilate whenever I think of the next 13 years.

  32. Dan (#23): “Also, is the dollar the best currency to keep your money stashed in? The Euro seems to be holding better right now than the dollar.”

    Good luck negotiating those Euros at a gas station on your way out of town with a hurricane on your tail. Most of those guys don’t even recognize a Susan B. Anthony dollar.

  33. Maybe if you’re not in need of a budget yet, you could start by just tracking all of your spending. (If you’re not already doing so.) We use Microsoft Money, but Quicken works just as well. Once set up, these programs can update themselves by downloading information from your checking and credit card accounts. (You manually enter in cash transations.)

    Its a good idea to track where all of your money is going. It is a painful sometimes to see how much is spent on different categories (4K for gas last year!). However, it forces you to be honest with yourself and really evaluate your financial priorities. For us, it works better to have one spouse take the lead in keeping the program up to date and we sit down together every so often to review our spending.

  34. I work as a temp in a foreclosure assistance customer support area in a bank, and read dozens of letters from people who are losing their homes, every day. EVERYONE SHOULD HAVE A BUDGET. I see letters routinely where people say they can’t afford their mortgage and yet a cursory (as in “I just need to see what kind of document this is so I can sort it properly”) look at their credit card receipts shows they’re spending $150 per person per week in food, or that they still go to spas once a month, or have two (two!) car payments in excess of $400 a month. Other people signed up for $1700 a month mortgages when they only bring home $2500 a month. “A budget” is just another way of saying “I know how much I have, and how much I spend, and how much there is left over.”

    Also, don’t use 401ks and DEFINITELY don’t plan to use credit cards as emergency cash. The number of people who are not only upside-down in their mortgage (say, they owe $400k but are appraising at $250k) but also owe $50k+ in credit cards, have an additional $100k HELOC balance, and just lost their job… you’d think there was a book out there telling people to do exactly that, it’s so popular.

    And for the record, my family lived off of food storage and “under the mattress” type cash for several months in the 1990s when my stepdad lost his job suddenly. It’s not pleasant, and we basically only went places we absolutely had to, and that wheat really did help. Though none of us girls will probably ever drink milk made from a powder again.

  35. I would think cashing out a 401K for an emergency would be a heart wrenching experience, and I would avoid it if at all possible.

    Dave Ramsey of “The Total Money Makeover” has some excellent advice about this. He says that an emergency fund should be just that–something you can get at fast. He says 3 months worth of expenses should be saved in as liquid an asset as possible, like a regualr savings or money marketing account that has no penalties for withdrawals. He says you should have 6 months worth if your job is not rock solid stable. He makes the point over and over and over that this is not money you play with. It is not to be used to build wealth, invest in, or pay for excessive Christmas presents or car payments (which you should have payed off, according to him, before you even build your emergency fund in the first place). You use other money for that. It is a place to draw from if you lose your job, have unexpected medical expenses, etc.

    Dave Ramsey is also very huge on the budget, but I have to say his forms, etc, weren’t very helpful to us. Our budgeting is very loose, but we have a rough idea of how much money goes out, and we know exactly how much comes in. When we want to pay extra on something, however, like extra on the student loans, or something like that, our rough ideas gets clearer as we figure out exactly how much extra we have to spend, and what that does to our food budget, etc.

    And when I want to get serious about keeping myself to our rough idea, I only take cash everywhere. We usually pay with stuff with our debit anyway (and don’t tell me that’s not safe–it says right there on the card that the bank will cover expenses incurred if it is stolen,etc), but cold hard cash has a way of making sure you don’t confuse wants with needs.

Comments are closed.