What these overly dictatorial suggestions miss is that the size of your emergency fund will depend on the uniqueness of your situation.

Let’s take two people, Jack and Jill, to illustrate what I mean.

Jack
Jack is a 24-year old recent college graduate working as a video game designer for a top firm in LA. Jack lives on Hot Pockets and Ramen noodles, and treats himself to the occasional Lean Cuisine. Jack’s hobbies are playing video games and tooling around on his Mac, downloading free songs. Jack has low monthly expenses; he only needs a minimum of $2,000 per month to survive. The video game industry is growing rapidly, and he and his friends all got jobs right out of college. A couple of his peers even waited for a month to weigh job offers against each other. Further, in the past 2 years that he’s worked at his firm, no one has gotten fired; in fact the company has been hiring like crazy to keep up with demand. Most of the senior executives have been there for 5, 10 and 15 years.

Jill
Jill is a 42-year old investment banker and mother of 3 children. She works for a mid-size bank in NYC. Jill and her husband have grown accustomed to the fine dining available in the Big Apple. They have a mortgage on a new house, two car payments and are financing their oldest son’s college education. Jill needs a minimum of $6,000 per month to survive. There has been turmoil in the financial services industry, and people are getting fired left and right. Several of her coworkers who have been let go have been searching for jobs for more than 6 months; some have left the finance industry completely because no one is hiring. Many of the senior executives have been let go.

What would be the ideal size of the emergency funds of Jack and Jill? Obviously, they would be vastly different.

For Jack, the likeliness of getting fired is relatively low. The video game industry is growing, and talented designers are not on the job market for long. Even if he did get fired, due to his low-cost interests, it wouldn’t be a terribly expensive event. Jack might want an emergency fund that’s sufficient to cover 2.5 months of job searching.

• Jack’s Emergency Fund: $5,000

For Jill, the likeliness of getting fired is relatively high. The financial industry is laying people off, and it takes a long time to get a new job. The cost of getting laid off is higher for Jill, because she owns a home and has a family to support. Jill might want an emergency fund that covers 7 months of job searching.

• Jill’s Emergency Fund: $42,000

How big should your emergency fund be? What factors should you consider when determining its size? Please share in the comments!

What do I mean by an emergency fund? I define an emergency fund as a zero interest, liquid asset that will get you through expensive, one-time events that are likely to occur. Usually, this means cold, hard cash.

The fact of the matter is that we live in an uncertain world, and we never know what may befall us in the future. We may lose our job and need to cover our expenses without a salary. We may need an emergency medical procedure that isn’t fully covered by insurance. A close family member may need a loan. Our best friend may need to be bailed out of jail. Depending on your situation, there are innumerable things that can happen, and it behooves us to have an emergency fund that we can draw on to avoid financial disaster.

There are several attributes that I use to describe an emergency fund, so let me break them down one-by-one.

Zero interest. This means your emergency fund SHOULD NOT be a credit card. Having a credit card that charges 14.99% interest if you don’t pay off the balance is a very expensive emergency fund, and will likely worsen your financial predicament. Zero interest means cash that you can draw on where you don’t have to pay any interest on the money. Even better, your emergency fund will be earning interest, as I do with my ING Direct Orange Savings Account.

Liquid. You must be able to draw upon your emergency fund as you need it. If you lose your job and need to buy groceries, trying to sell your rare coin collection will probably mean you go hungry. Again, this usually means cash, but could also include financial instruments like a CD ladder.

One-Time, Expensive, and Likely. I know, these are three attributes packed into one, but they’re all related in that they will determine the size of your emergency fund. For example, if we’re building an emergency fund to tide us over until we find a new job, we will need to know roughly 3 things:

1. our bare-bone monthly expenses
2. the median amount of time it takes professionals in your industry and geographic area to find a new job
3. how likely it is that lay-offs will occur at your company.

In a future blog post, I’ll use two hypothetical situations to show you how to calculate the size of your emergency fund. For now, I just want to introduce you to the 3 things you need to consider when building one.

Do you have an emergency fund? If so, is it zero interest, liquid and enough to cover one-time, expensive and likely events? Please share in the comments below!

An opportunity cost is the cost of the best alternative foregone.

How does this relate to money? This means that every dollar you spend has an opportunity cost in that you could have spent that dollar somewhere else. Once I started consciously thinking about the opportunity costs of my money, I finally got the mental fortitude to cut spending and start living below my means.

Let me explain. I have written several blog posts on how to save money on small things like haircuts, cable and gym memberships. Some of my friends have told me that they can afford to go to a salon, pay for a thousand channels, and work out at a gym. Some of them even have zero credit card debt and an emergency fund. That’s great, but just because you can afford those things, doesn’t mean you should. You could be missing out on even better ways to spend your hard-earned cash.

When you start to calculate the opportunity costs of the dollars you spend on the little things, they add up quickly. Many of us have the good fortune to be able to spend $50/month on haircuts. That’s great. But ask yourself: what else could I be spending that $50/month on? Perhaps I could enroll in that training program I’ve always wanted to attend that will boost my earning potential by $10,000/year. That’s a 600% return on your investment.

Or perhaps you don’t want to invest the money, but you’ve been saving up for that sweet Chevy Camaro from the Transformer movies.

Using my tips on how to save money on the little things could free enough cash flow to buy the Camaro. In the case, the opportunity costs of the dollars you were spending is a brand spankin’ new, engine roaring sports car.

We all subjectively value different things. I’m not here to tell you what to buy. Some of us are miserly savers who get a kick out of optimizing our credit score, and some of us just want to be able to afford the new iPhone 4S so we can talk to Siri. I’m here to help you learn The Art of Money so you have the ability to choose.

The big takeaway from this blog post is that you should be looking at all your expenditures and asking, “what’s the alternative?”

If you can find a better way to spend your dollars, you will be able to prioritize your spending, saving and investing activities and more rapidly achieve your money goals.

What spending, saving or investing goals are you foregoing because of wasteful spending? I’d love to hear from you in the comments.

I never wore that costume again.

Spending money on a Halloween costume you wear once is a losing investment. It’s no different than spending $200 on an expensive dinner or a long night at the bar. At least if you spend $200 on a pair of designer jeans you can wear them more than once!

Lots of personal finance bloggers have written articles about how one can save money this Halloween. How about not buying a costume in the first place?

Personally, I’m a Halloween grinch. My favorite holidays are Thanksgiving and Christmas because you get to eat good food (not overdose on candy that will eventually lead to obesity for 1 out of 3 American children) AND the focus is on spending time with loved ones. High-quality food and quality time with friends and family yield much higher long-term investments.

Now I know many of you love Halloween and it’s worth it to you so spend money celebrating it, so I’ll throw out a few suggestions for ways to celebrate Halloween in a financially responsible manner.

• Have an all-night scary movie marathon.
• Spend the night in a cemetery.
• Jump out of the bushes to scare small children.
• Watch the Party Rock Anthem Halloween Light Show!

You see, the traditional accounting definition of an asset includes things like your house, car, golf clubs, computer, flat screen TV, etc. If you ask most accountants to calculate your net worth, they will tabulate 75% of the supposed market value of these items, as well as the difference between the home resale value and the amount you owe on your mortgage. This is how people get to say, “I have a net worth of $100,000!” even if they have $10,000 in credit card debt and are living paycheck-to-paycheck.

While this is technically accurate according to traditional accounting standards, this definition is NOT useful for the layperson who just wants to make better financial decision. The reason is that it dupes you into thinking you’re richer than you are.

Robert Kiyosaki suggests an alternative definition of an asset and liability that I’ve found infinitely more useful. Here it is:

• Asset: something that puts money in your pocket every month.
• Liability: something that takes money out of your pocket every month.

By this definition, if you’re paying $1,000/month on your mortgage, your home is a liability, NOT an asset. If you owned and lived in a duplex where rental income exceeded your mortgage by say, $200/month, then your home is an asset, because it puts $200/month in your pocket every month.

Similarly, all your crap that your accountant will count as “assets” are really liabilities by this definition. Your car may deliver real benefits to you in that it gets you to work every day, but if it takes money out of your pocket every month in the form of loan payments, gas, insurance, maintenance and repairs, then it’s a liability.

The maxim then becomes simple: spend your life buying assets, not liabilities.

Most people do the exact opposite. They trade their time for money in the form of a job, and use that money to buy liabilities. Wealthy people may start off that way, but they spend their life buying assets that put money into their pocket every month, and eventually they don’t have a traditional job, because they receive enough income from cash-generating assets that they don’t need to work.

For all you visual learners, here is a video by Mr. Kiyosaki himself explaining the difference:

Do you or someone you know spend their time buying assets? Share your story or perspective in the comments below.

Just go to your local drug store or supermarket and grab a complete personal trimmer kit. Make sure to get the one with the guards. They usually range from 1/8″ to 1″. You attach the guards to the razor so you can cut your hair at different lengths. I bought this Remington HC5550AM Professional Cord/cordless Rechargeable Beard Trimmer and Haircut Kit with Turbo Boost. Here’s a video on how to give yourself a buzz cut if you’re completely clueless and need some “professional assistance”.

I’d suggest starting with the 1″ guard, buzzing your head, and if you want to go shorter, you can incrementally place shorter guards on the trimmer until you achieve the length that satisfies you. Here’s a picture of me after the damage was done:

sipping coconut juice at a street fair in London

I used to be paying $48/month on a fancy-schmancy salon to get my hair “styled”! That’s $576/year to get a haircut that looked like the Mitt Romney comb-over. Granted, I live in the DC metro area so that might be a turn-one for some women, but it’s not worth all the dough I had to give up!

me with a combover

And don’t worry about the ladies; some of the world’s sexiest men have been known to rock the buzz cut!

With YouTube, Hulu, Netflix, wwiTV, FreeTube and others offering free online movies and television, why pay for hundreds or thousands of channels that you probably won’t watch? Seriously, their business model doesn’t make any sense. They force you to pay for a bunch of channels you don’t want when you just want the 3-5 channels you watch all the time.

Specific networks often offer their shows online a week or two after they air on TV. My roommates and I watch Jersey Shore (I know, I’m guilty) on MTV.com all the time. I also watch my favorite Daily Show and Colbert Report clips right from their website.

There are plenty of ways to get that media content you crave without paying for it. So save the $600/year you’d otherwise pay for cable and pay off your debt.

Do you pay for cable? Do you think it’s worth it? If you don’t, where to get your TV fix? Please share in the comments!

Well, yes. But you can go even further. Why go to a gym at all?

There are a variety of exercises you can do at home. Pushups, squats, pullups (with an Iron Gym Total Upper Body Workout Bar), situps, burpees, handstand presses, a multitude of jumps, etc. The list goes on. Here’s a video demonstrating 5 pushup variations to get you started.

If you want, you can even invest in home-workout programs like Insanity or P90X. At $145 for Insanity and $140 for P90X, both alternatives are cheaper than years of gym memberships. Or you can pay $40 for the Naked Warrior, a book that outlines a complete body-weight strength program.And let’s not forget about running outside or playing sports with your friends!

The point is there are a lot of different ways to get a good workout without paying for a gym membership, and it will save you LOTS of money.

Just doing some quick back-of-the-napkin calculations, if you are 20 years old and figure you can workout at home for the next 40 years until you’re 60, at which point you’ll HAVE to go to the gym and do all those wimpy machines, and you’re gym membership costs $40/month, that equals $5,080 in savings! (discounted for inflation).

So run the numbers and decide if the gym is worth the money.

Do you work out at home? What routine do you use? If you go to the gym, do you feel it’s worth it, and why? I want to hear your thoughts in the comments!

You can use BillShrink.com to analyze your usage for you, or you can just log-on to your wireless carrier’s website and do it yourself. I have T-Mobile, and when I did this I realized that I was paying $85/month for unlimited talk and text, when there was a perfectly good plan that cost $65/month for the same service. It was called “unlimited talk and text + value”. Don’t ask me why they had two different plans; perhaps one was to attract new customers (new customers often get better deals than existing customers, who are locked into 2-year contracts).

Anyways, I switched to the cheaper plan online. I didn’t even have to visit a T-Mobile store or call anyone on the phone. It took me about 15 minutes to save $240 per year. These little wins add up to big wins, and pretty soon you’re achieving your financial goals.

The only downside is that I had to sign up for yet another 2-year contract, which is a bummer. But for what I need, it’s still worth the savings, and I’ll be eligible for a phone upgrade in about a year.

How much do you pay for your cell phone each month? How can you cut that spending without sacrificing the service you need? Share your ideas in the comments!