There is something that I view as obvious that is not discussed much in the mass-media popular financial advice business. So I was happy to see it mentioned on Yahoo recently – although it appeared in an article entitled “5 counterintuitive finacial tips”. http://finance.yahoo.com/news/5-counterintuitive-financial-tips-194318086.html
Now, I have absolutely no idea why this would be counterintuitive. I suppose it’s because no corporation will make money from having people follow it – so it’s never promoted in the mass media. Things like buying annuities, investing in big houses, and having huge 401k balances all make corporations money. Those are the types of advice that populate the mass media financial columns.
The tip is this:
“people should focus on the expenses that can’t be changed quickly, including a mortgage or debt payments. “It shows how quickly you can adapt to a traumatic event [like a job loss],” he says. He uses the term “lifestyle cash flow” to describe the cash flow required each year to pay the bills. “
The inelastic payments that are due each month really matter in the case of an emergency.
One common reference to this amount is your “nut” (hence the picture at the top of the post). Things that have to be included in the nut are taxes, rent, utilities, barebones food, etc. It’s what you need to live. It’s also the highest utility you will ever get from money – getting food and shelter. Everything on top of that is just gravy.
By keeping your nut low, you free up any income above and beyond it for a higher purpose. You can save it, invest it, buy experiences, provide gifts, etc. Most importantly it gives the greatest freedom.
How big is your nut? Can it be shrunk? I will try to lower mine today.
The Independent Penguin already has a right-sized nut. It’s enough to provide everything he needs and is a small fraction of that iceberg which is submerged. He has a stable foundation to live on.