The other day, someone asked me how I feel about 401(k)s. They told me that they weren’t sure about them and that they wanted to invest riskier but they hate not being able to touch it for so many years.
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Should I Buy A Home?
7 minute read
I think that many people want to purchase a home as soon as possible because they feel like it’s a responsible thing to do and they’ve generally been told that owning a home is a better financial decision than renting. However, most people have never done the research and run the numbers for themselves to actually confirm this thought, but have simply agreed with it because it “sounds right”.
I’m a skeptical person and I prefer to research and make decisions for myself rather than do what society tells me I should do. When it comes to purchasing a home and “living the American dream”, I believe that too many allow society to dictate their actions rather than actually taking the time to think through such a significant decision themselves. I prefer to let research and math dictate most of my financial decisions, but this is a subject that most people have a hard time letting go of their emotions to think through.
Most people who own their home love it and the lifestyle that it provides and they simply cannot fathom that owning a home may not be the most financially optimal thing that they could do with their money due to that emotional attachment. Below, you’ll find some of the research that I’ve found both for and against owning a home.
Lifestyle Decision Vs Financial Decision
Buying a home is usually more of a lifestyle decision than a positive financial decision, when you consider all factors involved and the alternatives available to you. There are a lot more factors to consider when evaluating the decision that most people don’t take into consideration, but my research shows me that purchasing a home is not the most optimal thing that I can do with my money in my situation.
However, most people probably wouldn’t take advantage of what’s most optimal anyways and would rather opt for something they feel more comfortable with. I’m not saying that I’ll never buy a home, I will at some point, but I’m trying to do what is the most optimal for my money right now so that I’ll have greater financial flexibility in the future.
Why Buying A Home May Not Be The Best Financial Decision
I wrote about this last year and received a lot of feedback from people trying to tell me that I was wrong. However, most of those people weren’t considering all of the points that I’ve researched and none provided any numerical data to back up their claims. On the other hand, I also received quite a bit of feedback from those who own homes and agreed with the facts that I presented and my point of view but were not willing to rent due to the lifestyle that owning a home provides them.
“You’re throwing money away by renting.”
Alright, maybe I am. But you’re throwing money away by paying closing costs, interest, PMI if you have it, homeowner’s insurance, property taxes, HOA fees, and maintenance and repairs on a home. That’s all money that you’re paying just so that you can make some principal payments towards your mortgage.
Simply comparing the cost of rent to the cost of a mortgage isn’t accurate – you don’t have these additional expenses listed above when renting. Depending on your interest rate, the majority of your mortgage payment may be going towards paying interest for over half of the life of the loan before you ever turn the corner to where the majority of your payment is going towards paying down your principal balance. That’s a lot of money to be “throwing away” that’s not going towards making your personal finances better.
Don’t underestimate home maintenance and repairs. You never know when unexpected expenses will come up that you have to pay for when owning a home – bursting water pipes, a new roof, new water heater, HVAC repairs or replacement, replacing appliances, flooding, termites, mold, renovations, upgrades, routine maintenance etc. It all adds up and may not be as predictable as you’d like to think. If you’re not properly insured some of these could be huge out-of-pocket expenses. Even if you do have the perfect insurance in place, most of these things won’t be covered.
You may say that you’ll build equity by owning a home, but that may not be the best argument given the amount of time that most people own a home. Most people don’t stay in the home for very long and each time you move you have to pay realtor fees to sell your home, closing costs to purchase your new home, and potentially moving fees. Then, you’re going to be starting back over at the beginning of a mortgage where most of your payments are going towards interest.
Additionally, you’re going to be more likely to want to continue to make improvements to your home, especially as your income increases. Some improvements can be very costly while not actually increasing the value of your home. That could be money that you spend and never see again.
“But I can pay more on my mortgage”
True, you can, but the question of whether you should do so or not depends on the interest rate on your mortgage and your expected rate of return by investing that extra money instead. Would you be better off by investing your money at a compounded rate in the market or paying extra towards your mortgage at an amortized rate? As with most things in personal finance, the answer depends and could be different depending on whether you want to take the mathematically optimal approach, the emotionally optimal approach for you, or a hybrid.
“But home prices appreciate.”
Do you know how much home prices appreciate? Historically, in the United States, home prices have appreciated at about the same rate as inflation. In real terms (home price appreciation % minus inflation %), this means that you haven’t made any money through the appreciation of your home. Keep in mind, regional date could be much different and there are places where home appreciation has outpaced inflation.
Even if your home price has outpaced inflation, it doesn’t really do you much good unless you sell your home and get the money out of it or you pay to refinance/pull the equity out of your home. If you’re refinancing to use the equity out of your home, then you’re going to be paying interest again to use that money.
If you took all of those extra expenses that you’d otherwise have to spend to own a home and invested them in the market, which has significantly outperformed the appreciation of home prices historically, then history tells you that you’d end up ahead. The problem with this is that most people aren’t disciplined enough to “invest the rest”.
Depending on how much you plan to use as a down payment on the home, you could be losing out on quite a bit of returns by having that money in cash until you have reach a significant down payment rather than investing it in the market. Even if you were to calculate the rate of appreciation on your home, you’d still need to back out ALL of the money that you’ve put into it, including ongoing repairs and maintenance, to get to an accurate number of how much it has appreciated on a % basis.
“I own my home outright.”
If you’ve been diligent enough to pay off your home and you can say that you own it outright, that’s amazing! You’re in the minority. But, take a minute to think about what that does for you financially. As I mentioned above, in order to have access to the equity in your home you have to either sell it and incur the transaction costs of doing so or you have to use a financial instrument such as a home equity line of credit or a reverse mortgage to have access to that wealth. With a home equity line of credit or a reverse mortgage you’re going to be limited to the amount of equity that the financial institution will allow you to use.
You Aren’t Prepared
Most people don’t have a properly funded emergency fund in place or a significant down payment to put down on a home purchase. You want to have a cash reserve of 3-6 months of expenses in addition to a down payment before considering purchasing a home. You also want to make sure that you’re purchasing a home that you can actually afford and that you’re ready for the extra responsibility and potential unforeseen expenses that come along with homeownership.
Concentration Risk
As a financial planner, I’m expected to preach diversification to my clients. If someone has all of their money in one stock and something happens to the company, there’s the potential for the client to lose all of their wealth. Many people are in a similar situation with their home in that it holds the majority of their wealth.
If a home is not properly insured, or a homeowner doesn’t have a cash reserve in place, a disaster could mean a total, or near total, loss of wealth. Yes, the value of the land will still be there, but the home price for most people is probably worth more than the land alone. Many people live in a situation where their hopes for a positive financial future would be gone if their home were destroyed. Even if your home weren’t destroyed, you probably only own a house in one place. If that place experienced a significant housing market decline, your net worth would significantly decline along with it. It’s important to diversify your net worth outside of your home.
The Argument For Buying A Home
There are arguments for buying a home, but I don’t believe that there are many financially viable arguments for doing so in most situations. (Notice I said “most”.) One such point that could be made is that most people wouldn’t follow the plan I’ve set out above of investing the money that they would otherwise have to pay towards additional expenses to own and maintain a home.
Forced Savings
Yes, paying a mortgage is almost like forced savings, but remember that the majority of your payment is likely going towards interest on a 30-year mortgage for quite a while. Additionally, when most of your net worth is tied up in the equity in your home you can’t use it without selling or using another financial instrument that is going to cost you money.
Emotional Investment
Buying a home is a much better emotional investment for most people than it is a financial investment, given the available alternatives. Some people love completing house projects, working in the yard, and maintaining a home and making improvements without having to ask permission. They enjoy being able to come home from work to a house that they love and that they don’t have to follow rules in set by a landlord. I believe that the emotional aspect of owning a home is the most viable argument and one that I would concede with much more readily than a financial argument for doing so.
First Time Home Buying Process
Not everyone is willing to live the renting lifestyle, even in a standalone home, and I understand that. Some people want a place that they can call their own and that they can personalize without having to answer to anyone else. I’ve asked one of my friends who has recently purchased a home to write a post about his experience of buying his first home. Be on the lookout for his article at the end of this week.
Additional home purchase consideration resources:
- Episode #100: Elroy Dimson, “High Valuations Don’t Necessarily Mean That We’re Going to See Asset Prices Collapse” – Meb Faber, Meb Faber Research Stock Market & Investing Blog
- I’m a financial planner — here’s why I won’t buy a home – Eric Roberge, Business Insider
- Why your home is a worse investment than you think – Ken Fisher, USA Today
- I hear you, but your home is still a lousy investment – Ken Fisher, USA Today
- Point/Counterpoint on Real Estate as an Investment Option – Ben Carlson, A Wealth of Common Sense
- The true cost of homeownership is higher than you think – Wealthy Nickel
- How Much House Equity Are You REALLY Building? – Eric Roberge, Beyond Your Hammock
Tips To Lower Your 2019 Taxable Income
3 minute read
Did you have to write a check for taxes that you owed once you filed your return? Posts with tips for lowering your taxable income are typically written at the end of the year because people wait until they realize how much tax they’re going to have to pay to try and reduce their tax bill and take advantage of any way to keep some money from Uncle Sam. Don’t be that person. Here are some things that you can do to help save some money on taxes this year, starting now.
Save To Tax-Advantaged Accounts
There are many options for you when it comes to saving that will help you to decrease your taxable income. Contributing money to an employer provided retirement account such as a 401(k) or 403(b), saving to an IRA, or contributing to a Health Savings Account (HSA) are all ways to decrease your taxable income, which in turn will decrease the amount of taxes that you’ll have to pay. An even bigger benefit to saving to these accounts is that you’ll be helping your future self prepare for retirement and/or large medical expenses.
Another option is to save to a 529 College Savings Plan. Indiana residents who file taxes in Indiana receive a 20% tax credit on up to $5,000 in contributions to Indiana CollegeChoice 529 Savings Plans. That’s up to a credit of $1,000 taken directly off your tax bill ($5,000 contribution x 20% credit). Tax credits are better than tax deductions because they reduce your tax bill dollar-for-dollar whereas deductions only marginally reduce the amount of taxes that you pay.
Maximize Your Employee Benefits
Besides making contributions to your employer retirement account, there are often other employee benefits that employers provide that you can take advantage of to reduce your taxable income. Some of the best, but often overlooked, benefits that you may have available to you are the dependent care FSA and the HSA, which I mentioned above.
An HSA will not only allow you to save on Federal taxes, but you also do not pay FICA (Social Security & Medicare) taxes on money that you contribute to the account, if the contributions are setup through your employer’s payroll system. (if you make contributions directly, then you’ll still have to pay FICA taxes on that money).
If you’re paying for daycare or before/after school care for your kids, then contributing to a dependent care FSA is a no-brainer. You’re already paying for the care for your child and using the dependent care FSA allows you to do so in a tax-free manner, up to a limit. You should be taking advantage of this benefit if it’s available to you and you’re currently paying for dependent care expenses.
File A New W-4
A W-4 is a the Employee’s Withholding Allowance Certificate that you file with your employer (you probably did this when you first began working there). This document tells your employer (or more likely your employer’s payroll company) how much to withhold from your paycheck for taxes.
If you owed a significant amount in taxes this year, or even if you’re getting a hefty refund, you may want to consider filing a new W-4 with your employer to have a more appropriate amount withheld from your paycheck. This can help to make sure that you don’t end up in the same situation come tax time next year. While updating your withholdings through filing a new W-4 doesn’t decrease your taxes, it can help to make things easier when it comes time to file next year – making sure that there’s not a large balance due when you file or making sure that you keep more money in your pocket throughout the year and receive a smaller refund.
Start Saving On Taxes Now
Articles about how to save money on taxes are usually written towards the end of the year when people begin to think about how much they will owe and start trying to figure out if there are any last minute things they can do to decrease their taxes. Being proactive and starting to implement some of these strategies now will help you make sure that you’re able to relax while everyone else is searching for end-of-year tax savings tips.
Daylight Saving(s) Time
3 minute read
This weekend, we sprang forward an hour in an attempt to have more daylight during the hours that most people are awake and active, However, as my friend Cody pointed out, some people seem to be having difficulty getting the name right. (Don’t worry about his Twitter name. I have no idea what it means, either.)
Lafferty, Daniel on Twitter
Daylight SAVING Time not Daylight SAVINGS Time
Start Simple
3 minute read
Many people don’t do something that they perceive as being difficult because they feel like they don’t know enough about it and have no idea where to start, feel intimidated and/or embarrassed, or just don’t like change. Whether it’s starting a new diet, beginning to exercise, or searching for a new job or career, too often people are content with the status quo because change is overwhelming and they don’t want to have to do something uncomfortable. This is often the case with personal finances.
Most people have never received personal finance education and have no idea where they should start to begin creating a better life for themselves. The great thing is that you don’t have to fix everything all at once. Starting with anything and progressing incrementally should be the goal. Hopefully this post helps you figure out where you are today and what the next steps are that you can take to begin making progress in your financial life, which hopefully spills over into all other areas of your life as well.
Get Organized
Getting organized is the most basic, but also potentially most daunting task for some. Depending on how in-tune you are with your financial life (and how organized you are in general), this could be a time-consuming project or could just be some tidying up.
I’m very organized in all aspects of my life because I find that it makes things easier for me, helps me to be efficient and accomplish my goals, and relieves stress. Organizing your financial life can do the same things for you and can be your first step towards financial freedom. I’ve already written about this before, so I’ll list the three basic steps that you can take to help you start easing some stress and become more aware of your current personal financial situation:
- Figure out where you’re going to store your documents and passwords
- Gather your login information and important financial documents
- Evaluate your financial situation and set goals
With your financial life organized you’ll be able to evaluate what your current financial situation looks like and where there’s room for progress to make sure that you reach your goals. You can click here to see a list of things that you may want to gather to help you understand where you are and figure out what you need to do to get where you want to be.
Evaluate The Foundation
Once you’ve got your financial life organized, it’s time to evaluate where you are. Three of the most basic, but also most vital things that you can do to create a solid financial foundation are to establish an adequate emergency fund, make sure that you have the proper insurance coverages in place, and pay yourself first by saving for retirement and other goals before spending any of your income. If you have a significant amount of debt that you’re paying off, then you can evaluate whether you should save more or pay it off more quickly.
The process is much simpler than many make it out to be and there’s no need to complicate it more than necessary. Consistency is the hardest part for many in making changes to their personal finances. When something pushes you off track it’s best to get right back to it rather than let it derail you completely. It takes a while to form a habit, so you have to be diligent about focusing on the fundamentals and changing your actions before things begin to come naturally to you. Changing the course of your personal finances, and your life, is worth it.
Do the easy things that will provide you with the most value and bang for your buck and then you can get more complex from there.
Take the Next Step
No matter where you are in the process, do something today to take the next step towards bettering your financial life. Whether you need to get organized, increase your savings by 1%, or you’re ready to seek out a financial planner, progress is progress. Too often people wait until something significant happens in their life to consider their personal finances and the changes that need to be made. Be proactive and make sure that you’re on the right path before a life event forces you to make changes that you didn’t want to.
Saving When You Receive A Large Employer Contribution
3 minute read
Many of us who are employees of a business receive a matching contribution to our retirement plan that ends up being equal to around 3% of our pay. However, there are some people who are fortunate enough to have their employers contribute a much larger percentage of their income to their retirement account without the employee having to contribute anything. If you receive a large contribution to your retirement account without having to contribute anything yourself, should you still save your own money for retirement?
I’ve seen a handful of retirement plans where the employer contributes 10% – 15% of an employee’s pay to their retirement account without mandating that the employee contribute anything. Most of the times when this is the case the employee doesn’t contribute anything to the account themselves because they think that the employer contribution is sufficient. However, this may not be the best way to go.
Vesting
First, the employer contributions to your retirement plan could be subject to a vesting schedule. This means that the money that your employer contributes to the account may not be all yours until some point in the future. In other words, if you were to leave your job, then you may not be entitled to take all of the money that your employer put into the account for you. It could take years for the money to “vest” and become yours. This is definitely something to consider if you are someone in this position.
Saving Reduces Lifestyle Creep
Saving inherently decreases the amount of money that you spend, which is a good thing because it means that you won’t have to figure out how to replace as much income when you decide you want to retire. On the flip side of that statement, not saving inherently increases the amount of money that you spend and the amount of income that you’ll have to replace to maintain your lifestyle in retirement.
Often when people receive raises or bonuses they let their spending increase without increasing their savings. This is called lifestyle creep. If you’re someone who receives raises and/or bonuses annually but you don’t increase your savings annually, then your spending could increase quickly which will make transitioning into retirement, and potentially a less extravagant lifestyle, more difficult.
Changing Jobs
The stats say you’re going to change jobs. If you have a large percentage of your pay contributed to your retirement account by your employer and you don’t contribute anything yourself, what happens if you switch jobs and your new employer doesn’t contribute nearly as much or requires you to contribute to receive a match?
This could mean that you have to decrease your spending and lifestyle significantly to ensure that you maintain an adequate savings rate.
It’s Up To You
Even if you’re only capable of doing so for a limited period of time, saving your own money to your retirement account early will provide much more flexibility in the future. Saving doesn’t have to be an all or nothing game – depositing a few dollars tomorrow that aren’t in your account today can pay off over time. Additionally, saving more while you’re young and have less financial responsibilities may mean that you have more flexibility to save less in the future or save less in certain periods of your life that call for spending more.
Sure, it’s more fun to spend the money that you make rather than save it, but no one else is going to be there to be there when you want to retire waiting to pay for all of your expenses. While I’m not someone who works at a company that provides a 10%-15% contribution to my retirement plan, I am fortunate enough to receive a 3% contribution as well as additional profit sharing contributions. When I calculate my personal savings rate, I do not include any of those contributions that my employer provides. Partially because some of them are on a vesting schedule, but mainly because I know it’s important that I save a significant portion of my income to ensure that I reach my long-term financial goals
A Little Late
3 minute read
I’m a terrible blogger. Valentine’s Day has come and gone, and I didn’t even write a stereotypical V-Day money post. So, here it is. Most people probably aren’t in love with their current financial situation, but most people also aren’t proactive about doing anything to make it better. Working towards a financial state that you love doesn’t have to be too difficult, but it does require making positive decisions on a consistent basis. And that can be hard for some people.
Income
No matter whether you’re not happy with your income, your savings, or the amount of debt that you have, there’s always something that you can do about it. Yes, you can earn more income, no matter what position you’re in.
There are so many ways to do so but most people just either never take the time to put in the effort or just don’t think that the possible solutions will work so they ignore them: find a side hustle or part-time job, list an extra room on Airbnb, list your whole house on Airbnb while you’re on vacation, Uber/Lyft, monetize a blog website (mine isn’t monetized at this point), sell things that you don’t use, do a job on a website like Fiverr, talk to your boss about getting a raise, learn a skill that makes you more valuable at work so that you will get a raise and/or bonus
There are tons of ways to increase your income that I haven’t even listed here but most people would rather not put in the work that it takes. Yeah, you might look at most (or maybe even all) of these things and think that you’d never do that, but you can’t say that there aren’t ways for you to make additional income if you wanted to.
Savings
Increasing your income will allow you to increase your savings, but that means that you’ll have to keep your spending in check. The biggest ways to take control of your cash flow and save more to reach a financial situation that you love are to control your spending on The Big 3: housing, transportation, and food. Too many young families allow society to pressure them into purchasing a house and/or car that they can’t afford so that they can impress their friends and show off how successful they are, which can lead to not having much, if any, leftover to save after paying bills.
This is the wrong way to go about it. You should establish your personal savings rate first, and THEN figure out how much you can afford to spend on a home or car without affecting how much you want to make sure that you can save. The size or price of a house doesn’t make it any more of a “home” and a cheaper, used vehicle does the same exact thing as a new one (just maybe in less style). Eating out is typically much more expensive than buying groceries and cooking at home and the costs can add up quickly. Compare the cost of a meal at a decent restaurant to your weekly grocery bill and you may be surprised how far you can make your money go.
Something that too many people do is allow subscription services that they don’t use, or could very easily live without, continue without receiving value from them. Paying for a subscriptions each month that you don’t value is only taking money out of your pocket and putting it in someone else’s. There are so many things that we sign up for on an automatic monthly subscription model that it can be worth it to review what you’re paying for quarterly and see what you feel comfortable cutting.
Spending money on experiences rather than things has been proven to provide more happiness. Maybe it’s time to reconsider where your money goes and if that actually makes you happy.
Debt
Some people don’t worry about how much debt they have. Some people hate to have any debt at all. Some people have no idea how much debt they have and they’re scared to know so they ignore it – this is scary.
If you’re one of those who isn’t in love with the amount of debt that you have, then increasing your income and finding ways to cut expenses without significantly decreasing your happiness can help you to have more cash to pay down the balances. Some people will go to great lengths to get rid of the debt that they have. Sometimes this is a good idea and sometimes it may actually not be optimal for their long-term finances.
If you’re not in love with your current financial situation, then it doesn’t mean that you have to move mountains to get to a place that you’re happy with. Making small positive financial decisions consistently and building on them can lead to a ton of progress in a relatively short amount of time. Where you are right now doesn’t have to be where you are forever. You just have to begin making intentional changes and realize that no one else is going to do it for you.
What Are You Going To Do With Your Bonus And/Or Tax Refund?
3 minute read
When you receive a large lump sum of cash what do you immediately think of doing with it? Spend it? Save it? Invest it? Pay down debt? There’s no one right answer and there may even be room to do all of the above, depending on your personal financial situation and goals.
Invest
Look, I’m a financial planner. My immediate thought is to pay yourself first and increase your savings and/or investments. If you’re not saving and investing a significant portion of your income already, then this can be a great way to get started. By now we all know how important investing for our future is, but most young professionals don’t take it as seriously as they should. Any extra money that you get from a bonus or tax refund could be a great opportunity to do something that your future self will thank you for.
Pay Down Debt
On the other hand, if you have high interest rate debt, then applying your extra cash to pay that down may be more beneficial. Using your money optimally is just a math game that depends on the interest rate on your debt and your expected rate of return of your investments. However, not everyone is motivated by getting the best rate of return possible for their money.
Some people really hate debt and would rather pay it down as quickly as possible, no matter whether it’s the most mathematically optimal decision or not. That’s a fine option as well, but we need to make sure that it makes sense within our overall financial plan.
Spend
I’m not telling you that you shouldn’t spend any of your tax refund or bonus. Everyone needs to be able to spend on things and experiences that they want and that make them happy, but you shouldn’t let doing so get in the way of reaching your financial goals.
This is why it’s so important to have your goals for what you want your money to accomplish for you explicitly stated. Otherwise, you’re likely to waste a lot of money (and a lot of progress towards your true goals) by spending on things that don’t really make you happy or provide you with much value because you’re trying to keep up with the Joneses.
Save For A Short-Term Goal
If you don’t have high interest rate debt and you save an adequate amount, then why not get started on saving for your summer vacation or plan a trip if you don’t have one already planned? I’m always going to value spending on travel and other experiences much more highly than spending on “stuff”, but if stuff is what makes you happy, and you’re in a good spot, then go ahead and buy that thing that you’ve really been wanting – within reason of course.
My Goal
My goal is to save/invest 50% of my bonus and tax refund, at least. Not only will this help me get a jump start on my annual savings goals, but it will also help to reduce lifestyle creep which can become a problem if spending increases over time without savings increasing as well.
The beginning of the year has seemed even busier for Amanda and me than the end of 2018 did, which has led to a little bit more spending than I would have liked. However, most of that spending has been on experiences that I’ve enjoyed, rather than things that I’d probably not care about in a couple of months, so I can’t be too upset. We still have a couple more weekends left that are booked, but I’m confident that I’ll be able to save at least half of my bonus and tax refund not only for long-term investing, but also for short-term goals such as our wedding and travel.
The 3 Financial Tips Young Professionals Need
4 minute read
You see articles all the time talking about creative ways to cut spending and telling you that you need to give up your morning Starbucks to become financially independent. Yes, you could save a significant amount of money over the course of a year by making your own coffee and working out at home instead of paying for a gym membership, but that’s probably not going to be life changing savings. There are 3 areas that young professionals should focus on to ensure that they set themselves up to live a financially successful life that will allow them to reach their goals.
Keep The Big 3 In Check
The Big 3 are the 3 biggest expenses that most people have: housing, transportation, and food. Keeping these 3 costs in check will have a much more significant impact on your cash flow than skipping your morning coffee from a shop. Not only will being intentional about keeping these expenses low allow you more flexibility with your cash flow, but it will also allow you to maintain a higher savings rate (the next key we’ll speak about).
A rule of thumb that’s thrown around is that your monthly mortgage payment (including principal, interest, property taxes, and homeowner’s insurance) should be a maximum of 28% of gross income. However, many people fail to recognize this is a maximum. You’re probably already having a third of your income taken for various income taxes when considering FICA, Federal, state, and local taxes. If you’re spending nearly another third on your mortgage payment, then where are you going to get money to save, pay bills, or accomplish your goals?
Stretching your cash flow just to buy the house of your dreams probably isn’t a good idea. Adjusting your mindset and being willing to live in cheaper housing will provide much more financial flexibility in the long run. Once you’ve made a mortgage payment you can’t get it back unless you pay to take out the equity in your home.
Yes, we all want to drive a nice, brand new car, but is it worth sacrificing other goals over? New vehicles are expensive and transportation costs count towards a large part of many people’s cash flow. The point of having a car is to get from point A to point B and a cheaper, but still reliable car, does the exact same job as an expensive one – just not in as much style.
If cars are your thing and you’re willing to make significant sacrifices in other areas of your life to make sure that you’re able to reach your goals, then that’s fine. However, since experiences provide more happiness than things, I prefer to spend part of the money that I would on an expensive car on experiences that I’ll value for much longer and save part of it to help me reach financial independence. Cheap transportation still gets you to where you need to go and provides financial flexibility while doing so.
Cooking at home can be very time consuming, but it can also save a lot of money. The convenience of eating out is relatively expensive compared to buying groceries and cooking at home and can be much more calorically dense. Just consider the amount of meals that you can prepare with the $50 you might spend at a decent restaurant on a date night. Eating out doesn’t need to be cut out of young professionals’ budgets completely, especially if trying new foods and restaurants is something that really makes you happy, but it shouldn’t happen as often as you preparing your own meals. Cutting back on eating out can provide significant savings if it’s something that you do often.
Maintain A High Savings Rate
Starting out with a high savings rate is extremely beneficial to young professionals because of the significant amount of time that we have to invest the money. Additionally, saving a large percentage of your income can help to mitigate too much lifestyle creep and it can provide flexibility in the future when life happens and you’re not able to save as much as you need to.
Maintaining a high savings rate doesn’t mean that you have to save as much as possible or even have a high savings rate every single paycheck, month, or year. There will likely be periods of higher savings and lower savings – what’s important is that your savings rate remains high over time. Most young professionals won’t have pensions available to them and the future of Social Security for younger generations isn’t certain; it’s up to us to be responsible and create successful financial futures for ourselves by saving now.
Develop Good Financial Decision-Making Skills
Keeping The Big 3 in check and maintaining a proper savings rate are great financial habits, but what happens when something pops up that you weren’t necessarily ready for? It could be a financial emergency or a financial opportunity, but either way you need to be prepared to make the right decision for any situation. Having goals clearly stated for what you want your money to do for you can help with this.
How will you react when your car breaks down and can’t be fixed? Will you buy a brand new one that you’ll need to move on from in a few years because it isn’t practical long-term, buy a new car that you know you’ll be able to drive (and enjoy) for the next 10 years, or will you buy a cheaper, used vehicle that still has significant life left in it?
What about if you’re presented with a financial opportunity to help start a business or purchase a home for below market value? It’s important to revisit your goals and see if these decisions fit into them. Even if you’re able to buy it below market value, you probably wouldn’t buy a home if your goal is to find a job in a different city in the next 6 months.
Keeping The Big 3 in check, maintaining a high savings rate, and developing good financial decision making skills can all be invaluable to young professionals in the long run. These skills will not only allow you to develop a solid financial foundation now, but will likely carry with you throughout your life to help you to be financially successful. Money is a tool that we can use wisely to help us reach our goals or something that we can waste away without being intentional with it – I think that making sure it helps us reach our goals is a much better option.
Reflect & Start Fresh
4 minute read
You didn’t really need a new year to have a fresh start but you’ve got it, so you might as well take advantage of it. The beginning of a new year is the time when many people vow to be better than the previous year and to start being more intentional about reaching their goals. Maybe you spent more than you planned on over the holidays. Maybe you didn’t quite reach your financial goals in 2018. Maybe you reached all your 2018 financial goals and you’re hungry to push a little further this year. Since the new year is time when people focus on setting goals and making changes, we can do the same in regard to our financial goals.
Take Time To Reflect
First, take some time to reflect on 2018 including what went right, what went wrong, and what needs to be changed to make sure that you reach your 2019 goals. If you didn’t keep track of your personal finances in 2018, then this could end up being a time-consuming process. Don’t let that dissuade you from taking the time to complete it. Knowing what you did with your money last year, even at a high level, will help you make decisions about what you want to make sure that your money does for you in 2019.
Complete A Review Of Your Spending
As I mentioned above, if you didn’t track your spending in 2018, then you don’t need to go back and categorize every single thing that you spent money on. You can simply scan through your bank and/or credit card statements and make mental notes of where it seems like most of your spending went and where big purchases happened.
On the other hand, if you kept good records of where you spent your money, then you’ll be able to complete a much more in-depth and reflective dive of your spending habits.
Here are some questions to keep in mind as you evaluate where your money went in 2018:
- What did you spend your money on?
- Where did you spend your money?
- Are you surprised by anything?
- Did you spend your money on the things that make you the happiest?
- Did you spend more money on certain things than you wanted to or thought that you did?
- Do your 2018 spending habits reflect your values?
- What adjustments do you want/need to make in 2019?
Complete A Review Of Your Saving
Just as with the review of your spending above, you don’t have to go back and evaluate every single dollar that you saved in 2018 but it’s good to have at least a ballpark estimate of how much you saved. Not only do we need to save for retirement, but there are other goals to save for as well including things such as an emergency fund, a new home, a new vehicle, medical procedures/bills, children’s college education, etc.
Were you able to save as much as you wanted to? Knowing the percentage of your income that you saved is a better measure than the dollar amount (although it’s better if you know both).
The reason that it’s important to know where you spent your money and how much you saved last year is to make sure that it aligns with your values. If you have a dream of buying a home for your family in 2020 but you bought a brand new car in 2018 when the vehicle that you had still ran fine which means that you didn’t save anything for a down payment, then this goes to show that you didn’t always keep your money values and long-term goals in mind.
Knowing where you spend your money, and if it really aligns with your values, can show you if you have more room to save. You can use that information going forward to be more intentional with your money to help make sure that you reach your goals.
Create Processes
Create processes to make things easier on yourself and help make sure that you’re successful. It’s fine to create goals that you want to reach for the year, but without processes in place to reach those goals you’re probably not going to accomplish them.
Want to save 10% of your income in 2019? Setup automatic savings to help make sure that you reach that goal. You can setup payroll contributions to your 401(k) or other employer-provided retirement account as well as automatic contributions from your checking account to your savings account each time you’re paid. By automating your savings you’ll be “paying yourself first” and won’t be tempted to spend the money. You can do the same things by automating any debt payments and other bills that you have.
Want to travel more this year? Set a process goal of reviewing your spending and budget on a weekly basis to determine if you’re on track or if changes need to be made.
By reviewing your spending on a weekly basis you’ll be in-tune with where your money is going and you’ll be able to adjust on the fly. If you have a significant other or spouse, then set a specific time each week to sit down and reflect on your finances over the past week as well as discuss your finances for the week ahead.
Be Consistent
It may be cliché, but it’s cliché because it’s true: consistency is key. Don’t set your process goals and then let them fall to the wayside. You have to be diligent in going through your processes on a consistent basis (daily, weekly, monthly) to make sure that you reach your broader, long-term goals that your processes are in place to help you achieve.
Whether you reached all of your financial goals in 2018 or you didn’t reach any of them, a new year represents a fresh start. Reflect on last year’s financial situation and whether what happened accurately represents your values, your goals, and if it helped to properly prepare you for the future. Put processes in place to keep yourself accountable and track your progress and make sure that you remain consistent in following those processes through so that you’ll be successful in reaching your 2019 financial goals.
