Today we have a guest post from my friend Aaron! Or A-A-Ron as our group of friends like to call him. Aaron is another one of my friends who is so passionate and knowledgeable about personal finance that he could easily pass as an expert! For his first post, he decided to share less about the tips, tricks and hacks that he uses and instead, shares about how he views money in relation to happiness.
I love putting things in a different frame of reference.
It’s Thanksgiving week so before I get into how to view/save/earn money, let’s take a minute to see what riches we already have.
- Every time I take out the trash I think to myself “This is awesome. I have an ‘inside’ where I live. Many people live on the streets or in makeshift housing. I have trash, which in many places people might be scavenging through to find useful bits.”
- When my past roommates were messy and I found myself cleaning after them, I would tell myself “Man, I’m lucky to have this opportunity to practice perseverance, patience, and humility. My future wife will be happier and if that means a few less arguments, great!”
- Traffic irks me, but when it happens, I remind myself “Many people probably don’t get to experience traffic, let alone drive their own car. I’m chillaxing and listening to music or an audiobook.” If it’s the summer and I’m really feeling mentally ambitious I’ll push it and realize that some crazy people PAY to sit in this free sauna I’m getting right now! (Ok that’s maybe a bit of a stretch)
Basically, think positive. Think different. Count the blessings you already have. Reframe your current situation. After all, Happiness = Reality divided by Expectations, but more on that in a sec.
Today I’m actually not even going to talk about saving or earning money. If Annie invites me to write a follow-up post(s) I’ll touch on those, but for now, I’d like to simply start with how we should view money; how it should play into our happiness, and how much we’re actually earning/spending.
Are we working for money, or are we working for happiness? I won’t go so far as to explore what the purpose of life is, but I’m pretty sure we can all agree happiness is more of an end goal for us than to simply accumulate wealth. Some studies have shown that higher income does bring happiness, but only up to a salary of about $75,000. Additionally, experiences bring more happiness than possessions. Here’s even a story of a guy who realized he worked half his life away for money, finally realizing he really screwed up. Ultimately, money is not the goal. It’s a tool for us to reach the goal in our proverbial pursuit of happiness.
Money should be seen as a security blanket, a way for us to not need to worry if we’ll have a roof over our heads or food on the table. Money can’t buy things like time, relationships, health, generosity, youth, and character. How much is peace of mind worth to you? I envision having and raising a family to be one of the best experiences life can bring. Is it more important to provide in excess for your family, or to be part of your family? No one on their deathbeds ever muttered “I wish I made more money.”
These notes are all very quintessential, but when talking about money we can’t ignore the numbers. One good equation I’ve come across is the following:
There are two ways to increase happiness. Either lower your expectations, or enhance your reality. Or do both! Enhancing reality in a fiscal sense can be working towards that next raise, beginning a healthier lifestyle, or finding ways to improve your character. When I say “lower your expectations” I don’t mean in a lowly downtrodden sense. (Tie-in to intro here!) I mean to reframe your outlook on the way you expect things to be in life. Instead of being happy when the trashcan is finally emptied, only to be disappointed when reality reveals a full trashcan, lower expectations until happiness happens even when the trash can is full. If every day you rush out the door and hope for less traffic during your commute to work, you only leave room for disappointment when there is traffic as usual. If however, you leave for work five minutes earlier, expecting there to be traffic, on the off chance you arrive at work early, all is good.
Let’s tie this into some hard numbers. Here’s how I like to see how much I’m really spending/earning. This isn’t a rule of thumb or anything, just a point of view I find useful when putting earnings and expenses into perspective, and being more realistic about finances. Assuming one has a salary of $50,000 a year. After taxes, it’s looking closer to about $40,000 a year. If you tithe, it’s probably closer to $35,000. That’s 30% of your income right off the top. In effect, every $10 meal at a restaurant, including tax and tip, is actually closer to $15 of pre-tax income. (A multiplier of 1.5 of what you’re actually spending!) When you signed on to that $50,000 job, you expected to have $50,000 to spend. Right off the bat, you can see how very quickly the reality is that it’s actually closer to $33,000 ($50,000/1.5). Isn’t that so disappointing?! With our earnings getting taxed and our spending also getting taxed, the reality of our spending power quickly diminishes.
If we reframe how we see our level of income and calibrate it to be lower (lowering our expected spending power), our reality stays the same, resulting in a higher level of happiness. “For some reason, even making $50,000 I can only afford this much?!” sounds very different from “$33,000 of effective income totally makes sense for where I am right now!”
I hope you found this insightful and an impetus to your happiness. Next time I’ll talk about some fun stuff like making at minimum $7,500 from spending money like you normally do, what credit cards I keep in my wallet, and why I withdraw money from an ATM only once a year.
Aaron has agreed to write more so expect to see another post from him in December!
Rebound! Stocks erase much of October losses (CNN Money) – This is why you shouldn’t pay too much attention to what’s going on in the stock market on a day to day basis.
Young tech millionaires keeping 1-bedroom lifestyle (Seattle Times) – This is an old article but I stumbled upon it only recently.
New 2015 Contribution Limits: Advisors Take Heed (Investopedia) – The maximum amount you can put into your 401ks and IRAs will change in 2015. This site has all the new limits for your reference.
Ways to Increase Your Wealth When Your Income Is Flat (NY Times) – Great resources for making side income, getting out of debt and investing are provided in this article.
Because everyone’s personal finance story is different, I thought it might be nice to start featuring some guest posts on this blog so we can all take a peek at how other milliennials manage their finances and maybe pick up a tip or two. I’m so excited that my friend Michelle from Millennial Career has agreed to share her personal finance journey with us today! She’s so knowledgeable and on top of her finances that you’d think she does this for a living!
I was 17 when I got my first job at Coldstone Creamery, making $6.25/hour and singing embarrassing songs to earn tips. During college, I had a few jobs: $8/hour working at the student store, $10/hour as an online tutor, and $12/hour (trying) to sell Hoover vacuum cleaners at Walmart. Despite my side jobs, at one point in my undergrad career, I had less than $350 in my bank account. When I graduated from college 4 years ago, my starting salary was $30k.
Why am I sharing all of this? Because I come from a background where I understand how hard it is to make and manage money. Trust me, I’ve been there. Though I am in much better financial shape than I was 4 years ago, those horrible wages and sad jobs really encouraged me to be smart with my money. My motivation for studying personal finance was simple: 1) I never want to be in a situation again where I felt helpless or tied down because of my money. With $350 in my bank account, I had a taste of how that felt, and it wasn’t fun. 2) I work pretty damn hard to make money, so I should fix anything that is erroneously chipping it away. 3) True wealth is when your money works for you, not vice versa.
Over the past few years, I’ve been very disciplined with how I manage and budget my money. For those just starting out on their financial independence journey or need a kick of motivation, here are my general suggestions.
Take control of your money
You hear of surprising statistics where nearly half of Americans live paycheck to paycheck. I knew that I didn’t want to be part of the population that lacked financial preparation, nor do I want to be in a situation where my future spouse and I have a strained relationship because of money issues. That lifestyle is way too stressful for me; if I can prevent that from happening, then I will. I want to feel financially free of debt; I want to treat myself right to certain “luxuries,” take vacations when I want, and not feel guilty for my purchases. If I didn’t have a nest egg (meaning, at least 6 months of living expenses saved up), I knew that the short term materialistic things that I wanted would need to wait. If this sounds like you, be disciplined and pay off your debt; stick to a budget. Stop letting your loan interest grow and start saving for your emergency fund.
One of my favorite personal finance books is called “I Will Teach You To Be Rich” by Ramit Sethi. He has really powerful behavioral changing techniques, especially when it comes to managing your money. One of his suggestions was to keep separate checking and savings accounts; withdraw money only from your checking account. Transfer your income into a savings account even before you can touch or see the money, and keep your checking account numbers low. The psychology behind it is unbelievable.
For example, say my employer direct deposits $6000 every month into my checking account. Before I even get to touch (or see) this $6000, I immediately use that money to pay off my credit cards, pay for rent, contribute to my IRA’s, and transfer healthy amounts of money to my savings account. After paying everything off, let’s say the $6000 decreases to a mere $900 in my checking account. In my head, I freak out about having so little, (because I never touch my savings!) but I know on the backend, I’m taking control of my debt and growing my nest egg. It might sound silly, but try it.
Make your money work for you
I don’t know about you, but I really don’t want to work forever (unless it’s at my own company). Ugh. The thought of having to work for someone from 9-6 for the next 40, 50 or even 60 years sounds absolutely miserable. When I retire, I want to be free to travel with my retirement money, not waiting to cash my next Social Security check. For this reason, I started my personal finance journey early so I can hopefully retire (early) and enjoy life with the money that I worked so hard to earn.
As you can probably tell, I’m anal about finding ways to keep the money I earn and grow it. What this means is:
- Being responsible with checking my mint.com and credit card statements for anything that looks out of the ordinary. Waive out of fees you don’t need to pay (like delinquent credit card payments when you forget)
- Finding high interest savings accounts where your money grows for just sitting there (ya, rly). I currently use Capital One 360 for ALL my savings (money that I need within the next 5 years) and it’s sits there untouched (because I only withdraw from my checking account, remember). Plus, I get an extra $XX in interest per month. Pretty sweet.
- Not having to pay more interest than you need, whether it be on credit cards, car payments, student loans, or personal loans. If I could save an extra $400 by paying off my loan a bit earlier, then hell yeah. Paying for interest on your interest sucks and digs you into a deeper hole.
- Making smart investments with your money. Find a brokerage with low trading fees or funds with low expense ratios. It’s all about dem fees. Plus smart people know to diversify their portfolio, so that it’s not just all in one place.
- Maxing out your 401K and IRAs, to reduce your taxable income, because you don’t want to owe more money than you need to the government, duh :)
- Understanding that low monthly installments with high interest rates means that you pay more in the long run. Don’t get shortsighted by shiny low monthly payments, and strive to pay off debt aggressively.
- Doing your research on what you can write off as a tax deduction. For me, this means taking my taxes to a professional who might know the loopholes better than me, and keeping clean track of what is deductible.
They say money doesn’t grow on trees, but you sure as hell can do your best to water it to make it grow.
Stop trying to keep up with the Joneses
This one is huge. Many people get caught up in this rat race about showing off their latest gadgets, purses, cars, houses, etc. It’s really easy to want to “one-up” others and buy into consumerism. It’s fine to splurge every once in a while, especially if you’ve been diligent about growing your nest egg and savings, maxing out your 401k, and paying off your debt — but if you are living paycheck to paycheck or have massive amounts of loans, then stop. Stop trying to impress other people because newsflash: they don’t care. If you’ve ever read “The Millionaire Next Door” by Thomas Stanley, you’ll understand that the wealthy don’t necessarily drive the fanciest cars or rep the most luxurious brands.
There are so many (free) resources out there on how to attain financial freedom, and it’s not impossible. Stay diligent and motivated, and of course, be patient — your future self will thank you.
Work lunches are probably one of the biggest money suckers out there for professional millennials. It’s definitely my biggest expense after major necessities (rent, gas, phone, etc.). Don’t get me wrong, I’m all for spending money on delicious food and the occasional fine dining experience. But work lunches aren’t something we really take the time to enjoy, especially if we’re just scarfing it down while multitasking at our desk. We tend to grab something that’s quick and easy without giving it much thought. But at $8-$12 a meal, before you know it, you’ve mindlessly spent $50+ a week just on work lunches!
I’ve tried to remedy this in the past by bringing lunch from home but I was never able to keep it up consistently. I didn’t always have the time to cook the night before and bringing something simple (like a cold sandwich) wasn’t very appealing. I realized that after a morning of work, I tend to crave something hot and hearty.
The best solution I’ve found so far is microwavable lunches. In particular, Lean Cuisines. They’re quick, easy AND affordable. My local grocery store sells them for $2.50 on sale. I don’t eat them every day. But for those days I’m not craving anything in particular (which is most days), they’re perfect. And since my work has a freezer, I always keep 2 or 3 of them in stock.
If you’ve been spending more than you’d like on work lunches, why not give this method a shot? I’ve already convinced a few of my colleagues to follow suit ;).
My roommate recently got a promotion and a raise (congrats again, roomie!). And over brunch this past weekend, she asked me for advice on what to do with her new monthly surplus. The first thing I suggested was that she should put an X amount of dollars into her savings account every paycheck. Saving money is always the easiest when you first get a raise or any type of windfall because you’re already used to living without that extra cash.
Our conversation eventually turned into talking about the three different “cups” we could put our money in. I literally used 3 different cups on our table to explain.
The Savings Cup
The first cup is the savings cup, which is your savings account. This is the first cup you should consider putting any extra money in because everyone needs an emergency fund. Emergency funds should typically cover 3-6 months worth of expenses.
The Retirement Cup
The next cup is the retirement cup. This is your 401ks and IRAs. The reason why this cup is second most important is because of all the tax benefits it offers. All the dividends you receive from your investments in these cups are going to be tax deferred (aka you don’t pay taxes until later when you take the money out during retirement). And if you’re using a Roth 401k or Roth IRA, you have the added bonus of not having to pay any taxes when you withdrawal from the account.
The Investment Cup
The third and final cup is the investment cup, which is your personal investment account at Schwab, TD Ameritrade, Fidelity, etc. You often hear people say they put their “play money” in here. It’s not because the “account” is inherently more risky (a common misconception). It’s because people like to try their luck in finding the next “Apple stock” with this account. But you could technically do the same thing in your 401k and IRA because they’re all just accounts; they hold your money and YOU decide what to invest in. So why is this the 3rd cup if it’s almost like a retirement account? It’s because it offers the least amount of tax benefits. When your investments pay you dividends each year, you have to report it on your tax return, increasing the amount of taxes you’ll have to pay.
Stimulate the Economy Like a Minimalist (The Minimalists) – The Minimalists debunk a popular consumption (or lack thereof) myth.
How to eat on $4/day (Get Rich Slowly) – Eating cheap, while eating well.
Learning to Shun the Instagram Life (NY Times) – A reminder of how that feeling of envy will always be there until you choose to feel like you have enough.
There’s More to Estate Planning Than Just the Will (NY Times) – It’s never too early to start your estate planning because it’s hard to predict our own death. This article covers a lot of the important documents to have in place.
Thanks to my roommate wanting to switch us over to a different internet provider (they were offering lower rates), I was prompted to give our current provider a call. I wanted to see if they’d be willing to match their competitor’s rate since it’s a bit of a hassle to cancel your current service and set-up a new one. Time off work and waiting around all morning/afternoon for a technician is usually involved.
The result? Our current provider gave us a promotional rate they had going on, lowering our bill by over $30 a month! That’s over $360 a year – $120 each of us could’ve saved each year these the last two years. I wanted to kick myself for not making this call sooner. Turns out, internet service providers always have a “promotion” going on, especially for new customers. When my first promotional rate ended, it never occurred to me to ask them to give me another one, which probably what they were hoping for. I specifically remember calling them when I saw the bill spike asking them why my bill was suddenly so much higher. They casually said “your 1 year promotional rate is up so now you’re paying the regular rate.” Of course they didn’t bother telling me that had other promotions I could use so I just quietly paid the increased amount like I thought I was supposed to. But now I know better. And I hope anyone reading this will learn from my naivety.
On the off chance that they don’t give you a promotional rate, the worst thing that could happen is that you do end up switching providers.
One final tip: do you research before you make the call. Find out what rates their competitors are offering so they know you’re not bluffing!