How Much Can You Afford to Spend on this Remodel?

Block Woman, with a pile of pennies on either side, looks at a blueprint paper with white outlines of a house.

First comes love, then comes marriage, then comes a baby in the baby carriage.

Ooops, I mean:

First comes love, then maybe comes marriage? Baby? Probably. But definitely then comes home ownership and oh yes, we’d like to completely remodel this home, please.

Remodels are expensive. On the other hand, your income is high, or you already have a large investment portfolio. So…maybe you can afford to spend $500k (to use a not-uncommon cost for my clients) on a remodel? How do you figure that out? You really want this remodel!

Let’s walk through whether doing a remodel is a reasonable choice for you, depending on the current state of your finances.

You don’t already have the money for it.

If you don’t already have $500k, you have two choices:

  1. Start saving the money, and then wait until you have the full cost saved up.
  2. Borrow the money.

I’m pretty traditional (unsatisfying, conservative) when it comes to this sort of thing. I think there are only a few reasons in life you should intentionally go into debt, notably:

  1. To buy a home (i.e., get a mortgage)
  2. To buy your first car (because you usually need a car early enough in life that you haven’t had the opportunity to build up any savings)

Outside of this, if you want to buy something (that isn’t absolutely necessary), I believe you should save up the money first. This applies to remodels, too. There could be exceptions, but you’d have to really convince me!

Why am I so conservative in this way? There are just too many ways to regret spending money you don’t have.

For example, you take out a big loan that is totally reasonable for your current income…and then you get laid off. Or, you take out a loan and then five years later you really wish you had the freedom to switch careers/start a business/take a sabbatical but you’re still paying off a giant HELOC and can’t afford to take zero or lower income for a while.

So that’s the first rule: If you don’t already the money to pay for it, you can’t afford the remodel.

But I work with lots of people who have meaningful wealth at an early age and already have $500k saved up in cash (it happens!) or (more likely) invested in a taxable account or in the form of company RSUs that vested and the person never sold them so now they have a bajillion shares of Apple or Google or Nvidia.

If you have meaningful wealth early in your life, how do you decide whether it’s prudent to take money out of that existing wealth to pay for a remodel? You don’t want to be foolhardy, but at the same time, the point of money isn’t to have the most of it. It’s to have enough money to spend—now and in the future—on the things that make you happy and give your life meaning.

Let’s look at a few scenarios, in decreasing order of wealth:

  1. You are already financially independent. You have so much money that you likely won’t need to work again for the rest of your life.
  2. You are already “Coast FIRE” (to be explained below) and would still be Coast FIRE after spending the money.
  3. You still have to save money for retirement, but assuming you continue to do that, your retirement projections look healthy.

You are already financially independent.

The OG “financial independence” is just plain ol’ Retirement, when you turn 65, quit your job, take up fishing or pickleball, and now live on your investments, Social Security, and this thing they call ‘“pensions,” whatever that is.

Financial independence in the tech industry can look very different. If you’ve had a windfall (through an IPO, tender offer, or persistently generous RSUs, say), then it’s possible you have so much money at the age of 37 (or 45 or or or) that you possibly never have to work again.

In any case, you’re living off of your investment portfolio, and you have to make sure you are taking a “sustainable” amount of money out of your investments each year to live on. You don’t want to take so much out that your portfolio will be too small in the future to support your spending.

I think the approach here is actually kind of stupidly simple.

Let’s say you have a $5M investment portfolio and you’re living off of your portfolio. There are a variety of ways to determine how much money you can sustainably take out of a $10M portfolio each year. The best known is the “4% rule.” (You can get more nuanced than that using additional calculations and different spending philosophies. That doesn’t matter for our purposes here. I just need to use a calculation to illustrate the “affordability” analysis.)

If you have a $10M portfolio, the 4% “rule” tells us that a sustainable withdrawal from your portfolio is $400k (4% of $10M) that first year. In each subsequent year, you will adjust that number up by the reate of inflation, and you can feel pretty darn confident that your portfolio will last you the rest of your life.

If you want to see if you can afford a $500k remodel, reduce that $10M by the $500k. Now you have $9.5M. 4% of $9.5M is $380k.

Can you fit your life within $380k/year (increased by inflation each year)? Yes? Well, then, it’s reasonable to do the remodel.

You are already Coast FIRE. And you would still be after the remodel.

Being Coast FIRE in your 30s or 40s is rare in general, but quite common in the tech industry, at least among my clients. (A bit of self-selection bias going on here, for sure.)

What is Coast FIRE? It is the state of your finances where you don’t need to add to your retirement savings anymore, as long as you don’t withdraw from it. Your existing pile of wealth, if you simply leave it invested, will grow into a big enough pile of money to retire on by the age you want to retire. In the meantime, you need a job that pays you enough to cover all your bills. It’s a wonderful financial position to be in. It gives you so much flexibility in your life and career. (Read more about all the nuances of Coast FIRE here.)

There are a bunch of Coast FIRE retirement calculators out there that you can use to determine whether you’re Coast FIRE. I have my own internal calculator.

One thing my calculator shows me is how much “extra” money the client has on top of their Coast FIRE number.

For example, let’s say you plan to retire (i.e., stop earning money and start taking money out of your investment portfolio) at age 60. We calculate that if you have $1M in retirement savings now and never add more money to it, you should have enough to retire at age 60.

And hey! Would you look at that! Your retirement portfolio is already worth $1.6M. Congratulations! You’re Coast FIRE.

(N.B.: Your Coast FIRE status can change on a dime as your portfolio balance changes and as your retirement plans—age and spending needs and habits—change. Coast FIRE status is a more a trend than a single calculation, in my opinion.)

Not only are you already Coast FIRE, but you also have $600k more than what you need to be Coast FIRE.

We could use that $500k of that “extra” to remodel your home and you’d still be Coast FIRE. How about that?

(I feel compelled to remind you that a “$500k remodel” never ever costs $500k. They cost more, often much more. I work with several clients whose remodels have gone $100ks over budget. And this is the rule, not the exception. The analyses I discuss in this blog post require using a realistic number for the remodel cost, not just what the contractor tells you initially.)

After the remodel, you still have to save, but you’re on the path to a good retirement.

The essence of Coast FIRE is that you don’t have to add any more savings to your retirement portfolio.

But what if you plan to/are willing to continue saving to your retirement for many more years? You know, the way Normal People do? Just plugging away, year after year, putting money into their 401(k)s and taxable investment accounts?

That could also work.

Let’s say you need $1.5M to be Coast FIRE. You currently have $1M. You are not Coast FIRE. Paying for the $500k remodel would make you even more not Coast FIRE.

Is that okay? Are you being irresponsible?

Now is the time on Sprockets—but alas, not this blog post—when we run some numbers!

You should work with a financial planner or use online software (that you can competently use…these things get complicated!) to determine whether your annual savings habits—to your 401(k), HSA, IRA, taxable account—on top of what you already have saved (now $500k smaller) will be enough to help you retire when and how you want to.

I mean, it’s not like we have to pretend that by the age of 37, if you haven’t already fully funded your retirement, it’s hopeless! That’s ridiculous. Most people work and save consistently for retirement year after year, decade after decade.

So, if you reduce your retirement portfolio from $1M to $500k to fund this remodel, but then plan to save, steadily each year until you retire, for example:

  • $24,500 to your pre-tax 401(k)
  • $30,000 to your after-tax 401(k)
  • $8750 to your HSA
  • $40,000 to your taxable account

Will you still be on track for a good retirement?

If so, then we can say it’s reasonable to fund the remodel.

Why am I being so delicate in my word choice and phrasing? Because sh*t happens. And a lot of choices based on high tech-industry compensation don’t look so smart anymore when you get laid off and can’t get consistent employment for a few years and kick yourself for having spent so much money in the past when the fish were jumpin’ and the livin’ was easy.

You have to choose for yourself whether the lifestyle improvement of having the remodel done is worth the increased risk it inevitably creates for you because now you have less money.

Other Thoughts about Remodels

Your remodel is not an investment. It’s an expense. And that’s okay!

Please don’t think of this remodel as an “investment” that you’ll get a good ROI from when you eventually sell your home. You might increase the value of your home, sure. But historically the ROI on home remodels are way less than what you’d get by keeping your money invested in the stock market. And also, getting that ROI usually requires that you sell your home! “But I like my home! It’s where I live!”

I think it is behaviorally/psychologically very useful to think of a remodel as a voluntary expense. Spending money on voluntary expenses is perfectly fine! Often good! These are things that bring joy to your life: a night out with your sweetheart, a vacation you’ll always remember, etc.

Do you think you’ll get enough enjoyment out of this remodel to justify not having the money to spend later? Or having to retire later (because keeping that $500k could have allowed you to retire a few years earlier)? It’s okay to say yes! I just want you to seriously consider the question.

You could use a loan even if you already have the money.

Let’s say you have plenty of money in a taxable investment account to pay for this remodel. It still might make sense to pay for it with a loan.

We have a client in this exact situation. Instead of selling their investments (which they can afford to do and still have a nice retirement), we’re using a securities-back loan so we don’t have to sell the investments (and pay capital gains taxes).

For such young clients, I’m not generally a fan of taking on unnecessary loans that last for years and years (The interest payments! The additional complexity!). In this client’s case, however, they anticipate earning enough income over the next couple years to pay back the loan fully. You might instead anticipate getting an inheritance or proceeds from selling a property in the near future.

The interest they’ll pay in the meantime will be far less than the capital gains taxes would have been, had we sold their existing investments to pay for the remodel. And if push comes to shove and they don’t get that income, we can choose at that point to keep the loan or sell the investments to pay it off.

So, you can optimize using a loan. But I still think you should use a loan only if you already actually have the money.

While I have focused on remodels in this blog post, the framework can be used to evaluate any major expense (remember, expense, not investment).

You don’t want to jeopardize your current financial security or your eventual retirement or other non-negotiable goals by spending the money. But if you can spend the money and still be currently secure and also remain on a reasonable track to retirement goodness, then you can likely afford it (whatever “it” is).

Happy (responsible) remodeling!

Manage Your Complicated Cash Flow: Fund the Fun Stuff While Still Knowing You’re Safe.

The pink heads of two Block Women look up at 3 white spinning plates on poles.

Ahhhh, remember when your parents received a steady salary and paid, like, four bills a month? Times were simple. Times were good.

Your finances—on both the Income side and the Expenses side—are way more complicated. And that, my dear, is why managing your cash flow is so maddeningly difficult to do well.

But there is a way to set up your cash flow so that it’s logical, repeatable, and largely automated. 

Why Is It So Hard to Manage Cash Flow?

If you had just a salary, and it came twice a month, and all your bills came once a month, you might not need help managing your cash flow.

But instead of that setup, you have income that comes on several different schedules:

  • A salary that comes twice a month
  • RSUs that vest monthly or quarterly
  • ESPP shares that come every six months
  • A bonus that comes annually

On top of that, while you know how big your salary paycheck is going to be (it’s the same every time), all those other sources of income? You don’t know how much money they’ll be until they come. Hard to plan too much around that, eh?

Now let’s look at the expenses side of things.

Some of your expenses are “must haves” (ex., groceries, mortgage). Many more are “nice to haves” (ex., travel, remodel). Some of your expenses come every month, nice and predictable-like (ex., rent, groceries), while others come far less frequently (ex., summer camp for your kids, vacation, a new car).

I, too, find myself in this complex situation. I’m not in tech, but, by running a business, I have multiple sources of income: A salary and quarterly profit distributions. Those quarterly distributions act very much like your RSUs, in that they come infrequently and the dollar amount isn’t entirely predictable.

I have figured out a cash flow system that works well for me, so that’s what I’m going to discuss for the rest of this blog post. I think it can serve as a good framework for you and your cash flow.

Using Different Accounts for Different Kinds of Expenses

I keep my cash in two different places:

  1. Checking account at my credit union. These are the accounts I live out of, day to day. All of the money for my “regular” expenses goes here. I basically get no interest on the cash, but I get lots of convenience!
  2. High-yield savings account at Ally. I keep my money for less-frequent expenses here. I like being able to cordon off this money from my day-to-day money. I like getting a higher interest rate. And I like using Ally’s “buckets” to save specifically for each of my many goals over the next couple years (ex. vacations, house projects, gifts). It’s less convenient to access the money than my checking account is, but that’s ok because I access it so infrequently.

Setting Up the Cash Flow for My Salary

Let’s start with my salary, more specifically, the amount of money that I actually receive in my paycheck, which is to say, after taxes and 401(k) contributions are withheld.

This is the same amount of money, each time, so I can automate how much goes where via direct deposit. Most of you probably already do this, too.

Enough of my take-home salary to cover all my ongoing expenses and ongoing savings gets deposited into my checking account.

  • I figure out my ongoing expenses by tracking my spending. I use Monarch Money. I encourage you to get a sense of how much you’re spending on “the regular stuff.” Let’s say I spend $7k/mo on ongoing expenses. (And yes, I realize that many of you spend more than that on just your mortgage; it’s an example, people!)
  • I also save to various investment accounts from my salary: our HSA, our kids’ 529 accounts, and my husband’s and my joint taxable brokerage account. Now, how much to save to these accounts is a giant question that is what real financial planning can help you determine. For now, let’s say that I determine I need another $3k for this, as a “minimum viable” savings. (More savings to come later.)
  • So, I need a total of $10k going into my checking account each month.

And then I set up automatic transfers out of my checking account to my savings accounts, and all my regular bills get paid from my checking account in one way or another.

All of this happens automatically. I don’t have to do anything, month to month, to have my ongoing bills paid and ongoing savings accomplished.

[Now, you might be thinking, “Woman, after I contribute to my 401(k) pre-tax, my 401(k) after-tax, my HSA, and the ESPP, I’m taking home $14 each paycheck! I can’t pay any of my bills with it!” Understood. I have a special blog post just for you, because this is a very common challenge in tech: “Is Your Take-Home Pay Too Tiny to Live On?”]

I do have one more account at my credit union, and that’s a small Emergency Fund. The bulk of my emergency fund is at Ally, but it can take a business day or two to get money from Ally to my checking account, so I like to have a little extra cash lying around that I can access instantly.

My required expenses and minimum viable savings don’t use up my entire salary. So, whatever is left over (which is, again, a dollar amount I can calculate) gets pushed automatically from every paycheck into our Ally account.

 I Ally is where I hold my emergency fund and also where I save up for the bigger, less frequent expenses. I have many such expenses!

Some are fun (50th birthday trip to Puerto Vallarta!). Some are just responsibilities (annual insurance premiums). Some of these expenses are predictable in size and timing (like those insurance premiums). Other goals have varying price tags and timelines. One year we want to go to Vancouver Island, which we can drive to. The next year we want to splurge on a long trip to Italy.

How does the money get out of Ally? When one of those goals or expenses I’ve been saving for comes due, I manually move that money from the Ally account (from the relevant bucket) into my checking account. All the actual spending happens from my checking account.

Here’s what the full cash flow looks like from my salary:

Setting Up the Cash Flow for My Quarterly Income

Now let’s look at my quarterly, less-predictable income.

This part I can’t automate, just as you can’t automate movement of your RSU (or ESPP or bonus) money, because we don’t know ahead of time how much money it will be.

When my quarterly income comes in, the first thing I do is set aside enough cash to pay the taxes on it. I do this simply by putting cash into a “tax” account out of which I will pay my estimated taxes later. With your RSUs, hopefully you can accomplish this automatically by electing to have your tax withholding raised to a high enough level (the default withholding on RSUs and bonuses is 22%, which isn’t enough for a lot of people).

With the after-tax money that remains, I manually move it into my Ally buckets until all the buckets are filled. 

My quarterly income is really how my “fun” gets paid for. Note that, not at all coincidentally, this is the easiest kind of spending to turn off, if somehow my income dropped a lot (or if your RSU values dropped a lot) and I was unable to fill those fun buckets. Also note here the embedded assumption that you save up for these big expenses before you spend money on them. You don’t put them on your credit card, assuming you can pay them off with future income.

When that is accomplished, I can start pushing this quarterly income into long-term savings (our taxable investment account) and paying down our mortgage more aggressively.

My husband and I fully fund the goals at Ally before saving more to our long-term goals. We can reasonably do this for two reasons: we naturally spend less than we can, and our existing long-term savings is already robust and doesn’t need to grow much. This doesn’t necessarily work for you! You could reasonably set up your cash flow to follow different rules. You could, for example, choose to put 50% of after-tax quarterly income towards goals and put the other 50% into long-term savings.

Here’s our entire cash flow for my quarterly income:

And If I Get a Small-ish Windfall, It Fits Right In!

If I ever get a small-ish windfall (a monetary gift or tax refund, for example), I can slot it right into that “quarterly income” side of the diagram. I can use it to fund big, infrequent expenses or to boost my long-term investments and pay down my mortgage even more.

If you get a significant windfall (like a $3M IPO or inheritance, but really it’s all relative), you probably want to revisit your whole financial plan. Have your goals changed? If they have, then you probably need to redo how money moves through your life.

Finally, here’s what my entire cash flow, for all my income and savings, looks like:

Setting Up Your Own Effective and Easy Cash Flow

You likely shouldn’t use my exact cash flow setup.  Your cash flow is different from mine, in quality and quantity.

I don’t get an annual bonus; you might.

You might be in a stage of life where you need to save way more (or less!) than I do.

While I can pay all our ongoing expenses and do our minimum viable savings with my salary take-home, you might not be able to. (That’s very common among my clients, in fact.) You might need to use some of your RSU or other infrequent income to help cover your monthly expenses.

Even though my exact cash flow isn’t the right fit, I do hope that you’ll take away from it some good governing ideas from this discussion:

  • It’s essential you get a good-enough grasp on how much you’re already spending and, to the extent possible, how much you want to spend on goals in the future
  • Use separate accounts to hold money for different kinds of expenses or goals. I generally like to have “1 goal per account (or bucket)” and to separate monthly ongoing expenses from bigger, less frequent ones. This makes it easier for me to tell if I’m on track to pay for each individual goal.
  • Fund as much of your “must-have” spending and saving as possible out of your consistent, predictable income (salary) and reserve your variable income (RSUs, ESPP, bonus) for “nice-to-have” expenses and extra savings. In the event that variable income is lower than expected, you can simply slow roll saving for a nice-to-have expense (as opposed to falling behind in your retirement or college or other essential savings).
  • Automate as much as you can. Your variable income will likely just have to remain entirely manual. My advice? Put a recurring entry in your calendar to remind you to sell RSUs and ESPPs and move the cash around. That way, you at least don’t have to remember anything.
  • Try to get some higher interest for big, static piles of money, but not at the expense of too much inconvenience.

It is far easier for me to showcase how logical and tidy this arrangement is in the current moment than it was to set it up and tweak it over the course of years. Yes, years. My advice: Set up something that you think works for your income and and expenses, see what part of it breaks or Just Doesn’t Fit Quite Right, and then fix that one part. Rinse and repeat.

Keep in mind: This cash flow setup didn’t just come from nowhere. It flows logically out of my family’s financial plan. It is not the financial plan itself. And your cash flow setup won’t be your financial plan. It will be one way of implementing your financial plan.

You first have to get clear on what you want in your life, both now and later, and how much all of it costs, to some reasonable degree. If you don’t know how much your kid’s college will cost or how much you need to have saved for retirement or how much that trip to Italy will cost in two years, how can you ever set up a system that puts the right amount of money in the right place at the right time? It’d be like answering a math problem when you don’t know what the question is. “I don’t know…2x? Or maybe the square root of 77?”

Do you want your cash flow to just work, no muss no fuss? The right dollars in the right place at the right time?

Build Some More Room for Error into Your Finances.

Block Woman stands next to a small dog that is looking into its white doghouse, with the name ROVER over the doorway.

How are you feeling? After the chaos of the last few weeks and months in the markets, the economy, and national politics? After the last couple difficult years in the tech employment scene?

When things are going well in your life and career and the markets and the economy, you probably don’t think much about having “room for error” in your finances. Error, what error?!

Welp, I’m guessing so-called Recent Events have made “error” very obvious, and the idea of making room for it might sound pretty good, eh?

Three stories from my life in just the last two weeks have made me think about how valuable “room for error” is. [To give credit where credit is (probably) due, I think I got this specific phrase from the engaging, thought-provoking book The Psychology of Money.]

Story #1: Air travel

Last week, my family and I went to San Francisco for my girls’ Spring Break. Though we took Amtrak down (and try as they did, Amtrak couldn’t ruin the awesomeness of long-distance train travel), we flew back.

On that return flight, we arrived at SFO a full two hours before our flight.

We went directly to the TSA Precheck line in Terminal 1… where they told us we needed to go to TSA Precheck in Terminal 2. The whole thing probably added only about 20 minutes to the time it took to get to the gate and was ultimately pretty straightforward. That said, I tend to be a somewhat nervous traveler, especially when I have my kids with me, and uncertainty unnerves me.

Thankfully, that two hours—plus the fact that we’re all able-bodied, my kids are old enough to take care of themselves, we didn’t have bags to check, and we have TSA Precheck—was our “room for error.” Even with the addition of 20 minutes and some uncertainty about the new security process, I felt pretty unharried. 

Story #2: The possibility of losing your job

While we were in San Francisco, we had dinner with a couple, both of whom work at a major hardware company. I’m no economist, but even I know that this company will be majorly impacted by tariffs.

I asked them how they were feeling about their jobs. The wife agreed that if tariffs were imposed for any meaningful length of time, the company would simply have to lay off a lot of workers, possibly her and her husband included.

I asked if, in anticipation of that very real possibility, they were trying to build a really big cash cushion. Turns out, they didn’t need to build one; they already had one. One that could last at least two years.

So, despite the fact that this couple had a pretty good chance of losing both their jobs in the current economic landscape (and being deposited into a nasty environment for finding a new job), they were fairly undisturbed by it. That cash cushion was a giant “room for error” that allowed them to still enjoy eating out with friends from out of town.

Story #3: Stock market gyrations

As you must know, the US stock market has been positively insane this year so far, and especially in the last couple weeks.

Here’s the US stock market year-to-date (as seen through the eyes of Vanguard’s Total US Stock Market ETF (VTI)). Just check out the last couple weeks, at the right of the chart!

Source: finance.yahoo.com April 14, 2025

It’s down “only” 9.48% as of April 14, having reached a nadir of 15% down just a few days ago. A lot of the big-tech company stocks are even worse off, down 15%+ after hitting a nadir of 20%+. And it’s going up and down wildly for the craziest of reasons, like maybe some dude whose last name is Bloomberg but not that Bloomberg posted something on Twitter/X about Trump calling off tariffs?

If you pay too much attention, you can start to get sea sick. If you need money from your investments now or soon, and you are invested in the stock market, this sort of craziness might make you feel a little nauseated.

But! Of my clients who don’t need their invested money for another 10+ years, I more or less haven’t heard a peep from them. (Now, let’s hope that’s because they’re not that worried, and not because they’re afraid to talk to me. I’m nice! I swear I am!) They have a lot of “room for error,” that is, they have a long time until they need to sell any of their investments to pay their expenses.

Of the clients who are living on their portfolios right now, I haven’t heard a peep from them either. Hopefully that’s at least in part because I’ve oft explained that when you have a diversified portfolio (very basically, both stocks and bonds), it’s kinda okay if stocks go down, because your bonds probably won’t. (Thus far, bonds—if you look at Vanguard’s Total Bond Market ETF (BND), which seeks to own the entire investment grade US bond market—are pretty neutral this year.) The bonds—which don’t tend to grow fast…but also don’t tend to lose value fast—are these clients’ “room for error.”

The few clients who are the most stressed out are the ones who have run through their cash cushion—or are close to doing so—and might need to start selling investments in a way they didn’t quite anticipate. They have depleted their room for error.

Your own “room for error”

How have you felt this last couple weeks, or this year so far? Have you been scared? Anxious? Thinking about making drastic changes in your life or finances? If so, you might need more room for error in your finances.

If you’re not yet in a pickle, then you have time to create room for error for your future self, who might find themselves in said pickle.

You could:

  • Build a bigger emergency fund. Instead of setting aside enough cash to cover 3-6 months of spending, build one to cover one year (or more!) of living expenses.
  • Save more for upcoming expenses than you think you’ll need. Saving for a remodel or a trip or a new car or a home purchase? You should, of course, do your best to estimate how much that thing will cost. But maybe then save, say, 25% more than that. You know and I know that things “have a way” of being more expensive than we think they’ll be. If you don’t use all that extra, great! You can deploy it, at that point, to other uses.
  • If you are approaching retirement, consider buying some sort of annuity. Annuities are tremendously varied, some are very complex, and some are “sold, not bought.” But the simplest of annuities—give an insurance company a lump sum of money in exchange for them giving you a monthly paycheck for the rest of your life—can ensure you have a steady paycheck no matter what. the markets do. (I am personally a big fan of this kind of income annuity. Research shows that this sort of guaranteed income vastly increases the amount retirees spend, which is a good thing.)
  • Ensure your living expenses are well under your current income. For example, if you have a salary + bonus + RSU income, live on your salary and save and invest your RSUs and bonus. In my world, as a business owner, with two types of income, I have a similar dynamic: I live on my salary and save and invest profit distributions from the business.

Intentionally not optimizing

In my view, creating “room for error” is in opposition to optimizing.

A full year of expenses in cash? My goodness, I could be investing some of that money! And, the stock market goes up 74% of the time, so I would be better off in the long run!

(I got that percentage from this article, which says that “Since 1980, the S&P 500 has been positive in 32 of 43 years.”)

Buy an annuity? Good grief, I could keep all that money invested and, statistically speaking, will end up with way more money upon my death!

Live just on my salary? But I could be living so much “larger” instead!

I am not persuaded of the merits of optimizing. It usually takes way more effort to optimize than it does to get to “good enough,” and the pursuit of optimization gets you closer to the edge of “Sh*t’s gonna break if something goes awry.” In general, it can create a lot of stress. 

One of the roles of money in my life is to reduce stress so I can enjoy the rest of my life.

In good times, optimizing might seem the obvious approach. But when times turn bad, I think you’ll thank yourself for having built in more room for error instead.

Do you want someone to help you figure out how much financial room for error is right for you?