5 Financial Lies People Tell Themselves

Accepting reality is a great habit for each of us to embrace.  The more we can see things for how they really are in life, the more likely we will be to succeed.

Being a typically optimistic person, I’ve usually woken up each day with the natural tendency to think about how it has the potential to be a really great day.  Not all the time, as there are some days you just know are going to be ones that you just have to get though.  But most days, yes.  That said, I’ve been taking a look at my own views on some things and lining them up with reality, and have been finding that blunt realism has its value and place at the table.  How I optimistically assume and hope things are doesn’t always match up with the pure, unvarnished, and sometimes brutal reality of things.

It’s not just me. I’d say this applies to all of us – and I mean each and every one of us.  We each have our own biases and perspectives that probably make it impossible to be 100% objective about everything.  Sure, maybe most things – but not all things.  This includes the way we approach health, relationships, and – yes, this too – money.

With respect to money, there is great value to being optimistic and reaching for the stars, so to speak.  If you expect to be exactly middle class, you won’t be wealthy.  If you expect to be wealthy, you have a chance to get there but you still might be middle class.  Having expectations and aligning behavior accordingly, is better than giving up before you start.

Back to that reality thing – it can only help if we balance optimism with reality.  Sometimes, our best moves can be made by avoiding the big mistakes.  Of course, recognition of such landmines requires that we be honest with ourselves and not tell ourselves financial lies.

Here are 5 financial lies we tell ourselves, and how they can impact us.

Financial Lie #1: Someday My Ship Will Sail In

No, it won’t.  There will be nobody to rescue us from anything financial.  Across the horizon, we won’t see a ship full of heroes that sail into the harbor of our lives, bestowing money upon us to bail us out of things or make us financially secure.  There is no “Prince Charming” to rescue us.  Be your own Prince Charming, whether you’re male or female!

I think that the illusion that someone will be there to take care of us is present with a lot of people.  It’s easy to just assume that things will work out, or that somebody or some “system” will help us when in need.  I’d say to that: just look at people that are homeless or begging.  Who’s taking care of them? Why would anyone take care of you or me, and who would that person or entity be?

This can also apply to aspirational thinking.  As if, someday we will just magically be rich.  Things generally don’t just happen to us magically.  Optimism without a realistic plan has marginal value.

This reminds me of a guy I knew a long time ago – as in 2 decades ago (yeah I’m getting older…realism, right?).  He expected to become a U.S. Senator someday, and seemed confident that he would be successful in that arena.  You just had to take one look at the guy and know that this would never happen (one could say the same thing about me…again realism).  If you talked with him for 5 minutes, it would cement your view that this would never happen.

Yet, he spoke with conviction that he saw himself doing this someday, as if he would be “discovered” as an up and coming political talent.  Clearly, he hadn’t thought it through well enough and had delusions of greatness.  Today, the guy is a regular middle class guy doing nothing out of the ordinary at all.  The ship never sailed in.

I think a better approach is to have dreams and try to achieve them, but be realistic about what you need to do to get there, and what your strengths and weaknesses are at the moment.  Don’t count on miracles happening without having a plan to make them happen, and be the captain of your own ship.

Financial Lie #2:  I’m Certain I Can Beat the Market

Why would anybody be sure that they could beat market returns?  Stats have shown that when looking at actively managed funds vs. index funds, in the majority of cases the latter perform better  This tells us that many professionals who specialize in this work can’t be counted on the beat the market averages.

So, if they can’t do it, why would you or I be highly confident that we could generate returns that outperform the market?  Is it that others are dumb, or perhaps not motivated enough? Or, is it that maybe we succeeded in one or two years and therefore think that we can always do it?

Now, I’m sure there are some people who can beat the market and do so.  There are plenty of very successful investors out there, and I do think much can be gained by examining historical trends and investing opportunistically.  However, counting on incredible returns to fuel future retirement dreams is delusional for most of us.

A better approach might be to consider near-historical averages as expected returns, and then strive to beat them by a little bit without blindly expecting it.

Financial Lie #3: I’ll Be Able to Work Into Old Age

No, most of us won’t be working when old.  If you’ve been visiting here for a while, you’ve probably noticed that I’ve expressed this view multiple times.

The idea that many of will probably need to work into old age is nothing to be embarrassed by, as it probably applies to most people at this point in time.  Not all, but most.  However, the disconnect is the opportunity to work when older might not be there for many people.  Sadly, being unemployable when older (ageism) is one issue, and a bigger one might be health.

With respect to that latter, there is so much rationalization out there that it’s insane!  Sentiment along the lines of:

  • I keep myself healthy, so I’m sure I’ll be fine in the future
  • My uncle (or aunt, father, etc.) worked until he was 85, so I see no reason why I can’t do the same
  • Most people in my family haven’t had any major health issues when older, so I have genes on my side
  • I’m sure I’ll figure something out, I’ve always been resourceful

Those are expressions of belief that don’t factor in the reality that if you look around you at people in old age, many simply can’t work demanding jobs much less any jobs.  Just look – how many have health issues, or simply seem too tired mentally and physically to work?  Not to mention the ageism issue alluded to earlier.

Bottom line: that nobody can count on being able to work when older, and should plan as if it won’t be on option.  If we take care of ourselves and get some good luck, maybe it will end up being feasible and then it’s a bonus.

Financial Lie #4: Education is Overrated

First off, I would absolutely say that undergraduate programs are generally not a universal slam dunk in terms of financial ROI.  The costs have really escalated, and there are many programs that are simply not comparable investments to others that are much less expensive.  So, I would say choose wisely rather than don’t choose at all!

Beyond that, I’ve heard and read a bunch of things that sound like wishful thinking.  For example:

  • All that matters is what you can prove on the job, not a piece of paper like a degree
  • Nobody has time to go to graduate school
  • You can learn anything you need to know by searching online

There is some validity to each in many cases, but ultimately they’re also excuses.  Sure, what we actually do on the job matters a lot, but some doors just won’t open without the right credentials.  Yes, graduate school can be a daunting commitment of time and money, but some people seem to make it work and even go full time.  Of course we can learn so much by doing quick online searches, but that doesn’t always substitute for structured academic programs.

I know that education is pricey, and can leave people in big trouble with massive student loans.  That can lead many to ask if it’s worth the trouble.  My opinion is that education and wealth are correlated, and the former is more necessary than ever.  However, not all schools are created equal in terms of return on money spent.  The pricey private school just might be a much worse investment than its public school counterpart.

Financial Lie #5: It Makes Perfect Sense to Prioritize Buying a “Dream House”

A home, especially one that seems really cool to us, can be very enticing.  After all, we spend a large portion of our time in the place where we live.  Plus, in our society, where one lives seems to have some impact on status and perceived social ranking for some people.

Most people I know would probably really like to have a truly amazing home, myself included.  However, where I draw the line is when we start deviating too far from the wants vs. needs paradigm.  In terms of personal finance needs, it makes sense to spend on shelter for ourselves and family.  We need to live in a place that’s safe, has decent schools, etc.  But we don’t need to sacrifice other needs to go overboard on our home.

It’s the going overboard part that I think some people rationalize.  The concept of “dream home” is one that just seems funny sometimes.  Since when it is the unalienable right of each of us to live in the home of our dreams?  Isn’t it more important that we are able to retire someday, pay for health care, and raise our kids – while living in a home that meets our needs?

It really seems like many people buy a home based on what they can afford instead of based on how much they should spend.  My line of thinking is that it’s not understandable that anyone would choose to work an extra 5 years for retirement, or neglect to help their kids, just for a home that has more bells and whistles than another home.  It seems like a lie that people tell themselves, when deciding that it’s totally sensible and understandable to stretch financially and go into deep debt to buy a dream house.

My Questions for You

What do you think about these 5 financial lies that I think people tell themselves?  I’m curious where you might agree or disagree, and why.

Do you have any others to share?

Mandatory Savings vs. Mandatory Financial Education

Here is a 3 step process to start as early as possible in one’s working years:

  • Make money
  • Spend less money than you make
  • Take the difference between the two above, otherwise known as savings, and invest it.

Do this regularly from early on, and you’re on your way to increasing net worth.  You’re also on your way to being far, far ahead of the average American in terms of putting yourself on a path toward being able to eventually retire voluntarily.

I say that because it seems as though the average person out there is simply not taking these 3 steps above.  According to this article at MarketWatch, only about 66% of Americans are estimated to save a portion of their paycheck.  What’s unfortunate is that for over half of the people saving money, the amount saved is under $25,000.

That’s simply not going to cut it for retirement.  I wonder how so many people are going to be able to handle their retirement years.  If there is no money, what do they do?  I’ve often wondered, and to me, it seems like they have to work deep into their senior years, until physically or mentally unable to do so.  Or, until they are no longer wanted in the workforce in any capacity.  Avoiding this type of scenario is a huge source of financial motivation for me.

The article I mentioned brought up the topic of mandatory retirement savings, and whether or not that should be put in place.  On the surface, I can see the appeal to it.  If people are forced to save, they might find themselves in a much better position down the line.  Lack of discipline might be made up for by the imposition of required responsibility.  That’s part of the benefit of automatic savings, right?

What are your thoughts about this?

To me, the notion of forcing people to do things isn’t one that seems like a viable long-term solution, nor does it seem to be a good fit with our way of doing things here.  I think that it’s up to each of us to figure out our own way to make savings and ultimately retirement happen.  We have the freedom to choose, whether it’s the freedom to be responsible or the freedom to lack personal accountability.

That being said, I do think that teaching people how to be financially responsible is something that would be a good idea.  A way to make that happen is to really take seriously the notion of comprehensively teaching personal finance in schools, to make sure that people graduate high school with a really strong foundation in how to approach money.  Frankly, if many parents don’t have a clue, how can the kids be expected be different without intervention or some exposure to teachings about money?

This would help many people avoid taking on out-sized student loans without really understanding the concept of return on investment.  People might then spend based on needs vs. wants, thus building wealth earlier in life through the 3-step process noted up front.

It could go a long way to increasing that overly modest sub-$25,000 savings amount that many folks have!

My Questions For You

What do you think about those findings, about 2/3 of people saving and more than half of those having less than $25,000 actually saved?

How in the world are most people going to handle paying for their needs in old age?

Do you agree that mandatory financial education is better than mandatory savings?

Easy Steps and Real Obstacles to Building Wealth

If you’re reading this, chances are that you just might have an interest in getting ahead financially.  People generally don’t read personal finance blogs if they don’t care about money.  Certainly, those run such blogs – like this one – are quite interested!

I’ve been thinking a bit about why it’s so hard for so many people to get ahead, or even to get to a point where they’re comfortable with finances.  Personally, I’m working on this every day – diligently working toward being able to retire someday, while concurrently believing in responsibly living in the present as well.  Quite the balance, sometimes!  Yet, it’s not easy all the time for many folks.

When you think about it, the steps to seem quite basic:

Earn Money

Now, the current economic climate doesn’t make it easy to get work, much less the right work all the time.  That being said, if one pursues and achieves obtaining a solid college education – and possibly graduate school – there should be a better chance for employment.  It can be said that education and net worth might be correlated, in terms of level of education.

Beyond that, there is often money to be made when people are truly driven and motivated.  Maybe not a dream job right away, but money can be earned if one is tenacious and really wants it.  I wrote about persistency and wealth before, and think there is something to that concept.

Save Money

If we make money, then we should simply make sure that we save some of it. As long as we be sure to spend wisely, and discern wants from needs, we should be putting ourselves in position to save.  The more we save, the closer we could be to retirement and financial security.

Invest Money

So, at this point, we’ve earned and saved.  If we just keep money under the mattress, so to speak, it will lose value relative to inflation.  If we keep pace with inflation, our money isn’t working for us.  Thus, by understanding the importance of rate of return, we can begin to get our money to work for us.  The long-term impact of just a few percentage points of rate of return can be quite impressive!

So why isn’t it automatic that everyone will succeed?

Bad Luck

For some people, there can genuinely be bad luck.  I know that it might not be a popular notion among some personal finance bloggers, but I don’t think we can fully plan for everything.  Sometimes there is an element of randomness that we can’t control.  The notion of a crazy driver hitting us, totaling our car and causing injury, is something that can happen to anyone. Being prepared doesn’t matter.  Also, we might get unforeseen health issues no matter how hard we try to keep healthy.  All of these thing can be luck-related.

Wrong Approach to Education

No matter what statistics come out about the value of an education – along with common sense – there will be people who think it doesn’t matter.  As in, “college is overrated”, or “college isn’t for me”, or “I know someone who’s doing great, and he didn’t go to college”.  This is fully controllable, as long as we accept reality.

Also, sometimes people who do get a college education, and perhaps a graduate degree, might pursue a path that doesn’t pay off.  Spending time on a major that doesn’t yield and marketable skills might not be the best approach.  Additionally, choosing a school that is overpriced and causes one to take out excessive student loans can really set a person back financially.  In such cases, it’s possible that getting that education might actually cause long-term problems, simply because of the cost.

Bad Debt

Someone could work hard, and have all the right intentions regarding saving and investing, but could be saddled with debt that must be paid off.  I think a lot of this is letting emotions get in the way of making sound decisions.  Sometimes a couple might “stretch” to buy a home they really love – after all, a home is a special place, right? Well, thinking clearly they would view it as a place to live and one that’s a financial liability in terms of mortgage, taxes, utilities, etc.

Beyond that, there are the obvious suspects, such as buying a car that’s too expensive, or simply piling up credit card debt for consumer purchases.  Going into debt to buy things we really crave having, or feel entitled to based on a certain standard of living, doesn’t make sense.  Yet, I think just one or two big mistakes along these lines could totally derail someone.

Life Mistakes

This category includes some things that might not always be a person’s fault, but sometimes life happens.  People might choose a career path they genuinely hate, but do it anyway.  Sometimes folks get divorced, which can wreck finances.  Other times, people might do something reckless, such as text and drive or something silly like that which could cause them big problems via accidents.  You get the idea – sometimes people might mean well, but simply either make mistakes or have life events happen to them.

Lack of Attention to Health

We’re not talking about unexpected things in this case.  Here, we’re talking about health issues that could have been prevented or perhaps minimized, if a person took care of himself.  Examples of smart choices along those lines would be maintain a healthy diet, getting exercise, understanding the importance of sleep, and managing stress.

If we aren’t healthy, our ability to make money could be impacted or – in some cases – even curtailed.

Bottom Line – While the steps to wealth can seem straightforward, it often takes more than simply working hard to make money, save it, and invest it.  There are many decisions we make along the way with our lives that can either help us or get in the way of our efforts.  I suspect that how we handle these other decisions that shape the structure of our lives will influence our ability to reach our financial goals.

My Questions for You

Do you think that it’s actually easier than people think to get ahead? Or, is it more difficult than meets the eye?

What factors do you think help drive financial success?

What factors do you think get in the way of people’s plans?

Alternative Ways to Calculate Your Real Net Worth

There’s kind of a weird saying that I’ve always thought was a bit odd, and it goes like this: “There is more than one way to skin a cat”.  Thankfully, nobody (we can hope!) actually means that they’re going to remove the fur of one of our feline friends.  Rather, they’re of course thinking about the concept of different ways of accomplishing the same goal.

In the personal finance arena, this saying can apply to the topic of net worth.  For example, we have previously discussed many ways to grow net worth, ranging from embracing continuous learning to being persistent to building relationships.  Along those lines, focusing on net worth again, there are also multiple ways we can measure it.  Yes, I really think that there are different ways we can calculate our net worth or financial “value”.

Here are 3 of them, one traditional and the other two more “alternative” in nature:

Traditional Method

The way that net worth is commonly calculated is by looking at one’s assets and liabilities, and subtracting the difference.  Hopefully, the assets exceed the liabilities! If so, you have a positive net worth according to this standard method.  Having more liabilities than assets results in a negative net worth.

For example: let’s say someone has a $200,000 home, $100,000 in retirement savings, and $20,000 in cash.  That would equal $320,000 in assets, not net worth.  If the same person had a $120,000 mortgage, $15,000 in an outstanding car loan, and $5,000 in other personal debts, that would equal $140,000 in liabilities.

Total net worth? $320,000 minus $140,000 equals $180,000.  This person has a net worth of $180,000 according this approach.

Alternative Method #1 – Months of Expenses

I think this is one approach to calculating “net worth” that isn’t considered by many, and might be dismissed by others.  But, it’s practical and customizable to each of us.  It’s what I call the months of covered expenses method.

Really, it’s simple – and we’ve talked about covered expenses here before, albeit a long time ago. First, figure out your net worth according to the traditional method above. In this case, $180,000.  Then, determine your monthly expenses.  Let’s say in this case you’re spending $4,000 per month.

In this case, you have 45 months of covered expenses.  That’s your net worth, or practical measure of wealth.  A person with lower monthly expenses would actually be wealthier with the same exact traditional net worth, based on the customizable nature of this approach.

Alternative Method #2 – Cash Flow Valuation

Thinking back to my days in business school, I recall that there were different approaches to valuing companies.  One might be a market comparable method, measuring versus other companies similar on various characteristics.  Another would be a discounted cash flow valuation.  Could we measure personal net worth based on discounted cash flow analysis?  Sure, I think it’s possible.

The concept is to take future net cash flows and discount them back by an appropriate rate of return (inflation?) to determine the present value.  This could, in turn, represent your “net worth”.  Just as a company might be valued based on a discounted cash flow model, perhaps we could apply this model to us as individuals as well.

In this case, let’s say one person (we’ll call him “Person A”) might have a traditional net worth of $300,000, and another – “Person B” – has a traditional net worth of $50,000.  They both might also have comparable spending patterns.  Comparing them based on the two methods shared above, the first person would obviously have a higher net worth.

However, if Person B had a budding career where he was likely to earn a very high salary, and Person A had a more modest job in an unstable industry, things might be different.  An objective forecast of their future cash flows might indicate that Person B might actually earn a lot more over his future years than the other guy.  Thus, he might end up having more “financial value” than the other person.

Not that we want to reduce ourselves to assets that investors can trade, but you get the idea.  If companies could be viewed this way in terms of valuation, perhaps the same concept could work in terms of measuring net worth of people.

Bottom Line:  There are many ways to “skin the cat” in terms of calculating net worth and – by extension – wealth.  It’s good to keep an open mind and view things from different angles.

My Questions for You

How often do you calculate your own net worth?

Do you strictly look at the traditional method, or do you consider other approaches? If so, what are they?

Have you ever considered the alternative ways to measure wealth as described above?

 

Living a Financially Sustainable Lifestyle Now So You Aren’t Shocked Later

The term “sustainable” can bring about many first impressions.  One might evoke an environmentally conscious mindset.  As in, long-term ability to continue without resource depletion. 

Another meaning, at least that comes to mind to me when it comes to standard of living, is the ability to continue without significant difficulty or intervention.  A sustainable lifestyle is one that you can live now and for the foreseeable future without major worry of it being degraded.  That degradation, given human nature, is often due to simply not being able to afford the lifestyle any more!

When I look at the life patterns of many people, it seems as though people simply try to live their lives based on the ability of their current income to support a desired level of expenses.  Too often, that means that the expenses equal or exceed the income.  That’s a difficult situation for many folks, and sadly – some are put into this position unfairly through no fault of their own.   However, many simply live irresponsibly whether they know it or not.

When does the lifestyle become unsustainable?  I think it’s when people assume that the good times will go on forever, without any problems.  Kind of like the mindset of people that expect to work in old age, without realizing that this might not be possible.  When they realize that their income and savings might not be able to cover their lifestyle, they end up having to change it downward. 

I don’t know about you, but the idea of having a lower standard of living when older doesn’t sound fun.  It’s a big source of financial motivation, trying to avoid money issues when older. 

Along those lines, I think it’s worth considering how much money you’re on track to have for retirement, and what your cash flow will be during that time:

Income

We may be able to work in old age, but it’s not guaranteed – even if you want to do so.  Health issues and ageism can make this a very dicey proposition to be able to count on working.

Social security? That’s not a ton of money, and many people don’t want to count on it getting it anyway.  Pensions?  It’s not like most people are going to be getting the benefits of one.  If you will, that’s great!

So, where is your income going to come from?  If you can generate passive income, that would be great.  If you have investments, income from them can be a big source of income.  Or, you just might be withdrawing money directly from the nest egg.  There is a school of thought that believes a 4% withdrawal rate can be manageable to ensure cash flow through retirement.  In that case, if you want a $40,000 per year retirement, you would need a $1,000,000 portfolio.

Keep in mind, we’re talking about today’s dollars, and purchasing power. Do you think you will have $1,000,000 in today’s purchasing power saved up by retirement age?  Whatever you project to have -  be it lower or higher – it can obviously affect your ability to generate income.  For example, a retiree having $200,000 saved would withdraw $8,000 annually based on these calculations. 

Expenses

I think a lot of us tend to have  a belief that expenses would be lower when older.  After all, there wouldn’t be any kids around day-to-day that we need to support, and our lives would be simpler overall.  However, we generally don’t get any healthier when older.  Think about the younger people you know, and the older people you know – who has more ailments, illnesses, conditions, and aches and pains?

With health expenses so outrageous for many people, I think some people just might face higher health care costs in retirement.  Especially if long-term care is needed.  So, when planning for what expenses we might have when older, let’s keep in mind that they just might be very substantial.

What Does This All Mean?

When you look at the cash flow situation we might have when older, it seems like a lot of people are on track to have to make some massive lifestyle changes.

I think it makes sense to realistically assess where you think you will be in the long-run, and live a lifestyle now that is actually sustainable.  In other words, one that you can get used to, and continue to live when older.  Why get shocked by lowering our standard of living later? Worse, why put ourselves in a bad position later because we lived it up when younger and healthier?  Let’s be nice to the future old version of ourselves :)

To the extent we can save and invest early and often, while also living within our means, maybe we can put ourselves in position to even have a more comfortable lifestyle when ready to retire.  That’s the dream many of us have been sold – or sold to ourselves, anyway.  It just takes planning to make it actually happen.

My Questions for You

Do you ever think about how your lifestyle in the future might be versus the one you have now?

Have you done the analysis to project where you are on track to be down the line? 

I’m curious how sustainable you think your current lifestyle might be (or might not be), and what assumptions you’ve made in determining this.

Take Pride in Your Past Successes!

Many of us that are goal oriented often think about what we’re going to accomplish next.   Or, in many cases, it’s simply thinking about what we think we need to do, and how we will organize our time to make it happen.  It’s all about the future!

Should it be?  Pulling back, I totally believe that we should be able to enjoy the moment and live in the present.  Furthermore, I think that it’s also good sometimes to reflect on the past.  A great way to do that can be to take stock of our accomplishments, and celebrate our successes!

Many of us have come a long way.  Or, at the very least, we have worked hard to accomplish some things that we can be proud of.   I’m willing to say that there are different ways that people view these successes.  Some people probably dwell on them too much, and live off past success.  But there are many others who simply take for granted the things they have done before, and focused on the future because after all, that’s what we can influence.  We can’t go back and impact the past!

Nevertheless, I think it can be a great thing to stop for a moment and think through some of the things you have accomplished!

Forget for a moment that you may have had failures too. Let’s think about the good things that you did.  These successes could be anything, financial or otherwise.  Whatever they may be, they represent really good things that you have done.

Examples of the types of things people accomplish:

  • Being the first person in their family to get a college degree
  • Getting into a highly rated school or graduate program, after a lot of hard work
  • Landing your first full-time job, beating other applicants for the position in a competitive market
  • Successfully giving a big, high pressure presentation at work
  • Earning that big promotion, after so many months or years of trying to beat expectations at work
  • Paying  off student loans
  • Buying your first condo or house
  • Finding your spouse and life partner, and marrying her/him
  • Becoming a parent
  • Overcoming a major illness
  • Overcoming a difficult childhood
  • Surviving a divorce
  • Improving health by giving up a habit (smoking, soda, etc.)
  • Losing a lot of weight
  • Getting back in shape

This list of examples illustrates just a few possible accomplishments that people could have had.  What is meaningful to each of us is likely unique and personal.  We all have accomplished some things that we can be proud of.  Let’s stop for a moment to take pride in what we have been able to do, just for the sake of doing it.  This doesn’t mean we need to brag - we can simply appreciate these things ourselves.

If we still can’t shake that future-oriented perspective even for a moment, then maybe we can be inspired to achieve future successes since we’ve done it before!

My Questions for You

Do you ever stop to appreciate some of the things you have accomplished in your life?

What are a few of the accomplishments that you’re proud of, but may take for granted?

Thinking Inside the Box With Personal Finance Can Have Value

Personal finance is a really interesting subject for many of us.  Obviously, you can count me in that group since I run Squirrelers!  I’m also Think Inside the Boxassuming you have an interest in it, otherwise you wouldn’t be here reading.

For those of us that blog about the subject, personal finance can be a multi-faceted, complex arena with so many variables involved.  We talk about all kinds of topics, such as various topic of making money – some of which are traditional (jobs), and others non-traditional (online).  There’s an emphasis on the latter in many posts.  We also talk about endless ways to save money and pinch pennies.  There are so many different things we need to buy or want to buy, and we talk about how to save on these different purchases.  We also discuss investing quite a bit, whether individual stocks, funds, metals, and so on.

Having said all this, I think that maybe sometimes we need to step back and keep it simple, and remember that there is value to thinking inside the box with money.  The basic framework for increasing net worth can probably be simplified as follows:

1) Get an education, without excess loans

2) Start your career or business

3) Focus on both protecting and increasing your income

4) Live within your means, discerning wants from needs

5) Maximize the gap between your income and expenses

6) Avoid debt, and strive to be debt-free

7) Invest your money, starting as early in life as possible

8) Practice smart asset allocation, while managing risks

9) Develop strong, genuine relationships with people

10) Keep yourself healthy and fit

If one does each and every one of those things, it would seem like the path to having a good financial present and future would be right there in front of us.

I know, it’s easier said than done!  There are pressure points above, and sometimes we can’t control the actions of those applying the pressure.  For example, we could have trouble finding a job in a tough economy, despite our best efforts.  Or, our employer could have trouble and we could lose our job.  Maybe our spouse is a shopoholic and we can’t save as a result.  Or, maybe we have unforseen health problems that take up our time and energy, and take away from our work.

So clearly, there are things that we might have challenges directly controlling.  But many of the other things we probably can control.

Bottom line:  Thinking outside the box of course has great value.  But by also keeping it simple, thinking inside the box in many instances, and following some clear steps – we could probably put the odds of success much more in our favor.

 

The Best Money Moves for New or Recent College Graduates

When I was younger, and just out of college, I felt like I had finally hit the “real” world.  Not that being any younger means that you aren’t in the real world, but for some people, it seems like there is some kind of bubble they’re living in all the way through 22 years old.  It’s all about academics, having fun socializing, and preparing for the future for some people, it seems.  Yes, I was one of those people. I know that many of you reading this weren’t (or aren’t) but I was.

I was fortunate enough to have a full-time job right out of college, having been recruited for the role.  After that, it seemed like things had changed.  All of a sudden, I had my own apartment with no roommates, along with a salary.  I also had some basic responsiblities, such as taking care of my place, paying the bills, and routine things like that.  Otherwise, I was free to do as I pleased.

How times change! Being older now, with kids and much bigger responsibilities, I can look back and think about how I handled myself back then and the moves I made.  Overall, I think I did fine, and really worked hard in some areas of life.  I wouldn’t have gotten to this point without that hard work, and the good decisions that I did make.

However, I certainly didn’t have all the answers back then.  Not that I do now, of course!  Yet I do have the benefit of life experience and perspective now, and can make some assessments on what moves I could have made.  Based on my own life, as well as the experiences of countless others I know, I have some thoughts as to what financial moves would be good for people in their early 20′s to consider.

Here are my ideas for 5 top money moves for people in their early 20′s recently out of college:

1 ) Build Your Career. 

Now, I say this knowing that not everyone knows exactly what they want to do.  Some people go straight from undergrad to grad school – medical school is one example.  Such people were probably highly driven early on, very bright, AND knew what they wanted to do.  There are many other people with the first 2 traits, but maybe not the notion of what they want to do.  This is okay, as we often need experience in order to figure some things out.  But figure it out we must.

For many people the first big hurdle these days is finding that first full-time job.  Once obtained, this the time to gain experience and work the long hours to get ahead.  Later in life, with kids in the picture, you won’t have as much time or energy to do this.  Get a foothold, build a professional network with value, and start making your mark.  This early experience can be a great building block for the rest of your career or even future entrepreneurial efforts.  Speaking of which, you shouldn’t be stopped from entrepreneurship early on.

2) Live Modestly

I could say live appropriately, but what I mean is that we should avoid spending excess money on pricey apartments.   Now, this doesn’t mean we should compromise safety or other basic, or purposely sign up for some rotten commute.  Rather, let’s try to spend as little as possible for housing. 

I actually rented at a very nice apartment complex right away, and it was the very best one in the area.  I could have saved a fair amount of money by living elsewhere, but I wanted to live in a certain place. Live and learn, I suppose!

A good alternative might also be getting a roommate.  Splitting rent and utilities can really help with savings efforts.  An even better move might be living with parents, if it’s comfortable enough and they’re okay with it.  I have to say, I don’t understand the mentality that many people have around their newly grownup kids not being welcome to come back home.  While I moved out on my own when young, I also realize that in many cultures it’s totally normal and perhaps expected for multiple generations to live together.  If parents and their kids could wrap their heads around the massive savings possible for the kids, instead of viewing it as shameful freeloading, people could really save money and build a financial foundation.

3) Drive a “Good Enough” Car.

Nobody needs a really nice car when just starting out.  I have 2 friends who made the mistakes of spending a ton of money on new vehicles.  One guy bought an expensive sports car that was probably 2/3 of his annual income, then traded it in for different one that was just as pricey.  He is now a successful high net worth individual who drives a 12 year old car, and says that he will drive that car into the ground.  Clearly, he figured out what is important.

Another friend bought an expensive SUV when he got his first job, and told me he “needed” it, and wanted to “feel like I’ve arrived”.  He’s now doing quite well, and seems really responsible.

There’s a good post worth checking out, with a car buying rule, that fits the concept of driving a “good enough” car.

4) Don’t Waste Time on Mr. Wrong or Miss Wrong.

This might not seem like a money tip, but it is.  I’ve seen people waste untold amounts of time and money on people who were not right for them.  It might have been apparent to others, but not them.  Just imagine if they would have valued what they as individuals brought to the table, and didn’t settle for something less?

A big thing is choosing to live in a city you don’t want to live in, just to follow someone.  Okay, maybe that can work out well and I know it does for a lot of people.  But tread carefully!  I know one guy (who was actually in his later 20′s) who found his dream job with pay that – from what I heard second hand – was truly exceptional and well beyond what he was making before.  He took the job, then quit and moved away after 1 month to be with his “true love”.  Well, the true love ended up dumping him within 1 week.  Yes, 1 week! No love, no job, and back home he moved with his finances severely hurt.

He threw away a great career and life opportunity.  Now, I haven’t kept in touch with the guy in a few years, so I don’t know what he’s up to now.  Little consolation for him, but hopefully others can learn from his fiasco, and not lose valuable time, money, and financial potential on a situation that’s not a great fit.

On the bright side, what if you do find Mr. Right or Miss Right? You’re blessed, and don’t let go!

5) Don’t Carry ANY Credit Card Debt

Credit card debt is not good to have.  Sometimes people can get into difficult situation that requires them to pursue debt as help.  However, many people carry credit card debt because they aren’t able to discern wants from needs.  When they figure it out, it can be painful.

There was a guy I worked with who also bought a nice car that was beyond his means – I suppose we can add him to the two I mentioned above, as I just thought of him now.  Anyway, this guy not only had that car, but also went to all kinds of expensive concerts and sporting events.  We were joking around with him at lunch about him not knowing what a savings account was, and he just brushed us off with a smirk and said he didn’t care about any of that stuff. Life is too short, he said!  By the way, this guy was a financial analyst. Go figure.

Well, a few years after that, he told me that he would be stuck paying bills until he was 30.  He later met a woman who he ultimately married, who shaped him up financially.  Over dinner, he told me how she hated any and all debt, and how she forced him to change.  He went on an introspective tangent where he stated that he must have learned his habits from his parents, who simply used credit as an easy tool to get money when needed for anything.  It was great to see him learn his lesson, but clearly it took him years to recover, and a smart wife to teach him how things work!

How it All Ties Together – collectively, these moves involve making sure we earn money, and then ensuring that we avoid common traps that cause us to overspend.  Ultimately, main idea here is to save as much as possible when younger.  Then, we can invest intelligently and let compounding work its magic. Later in life, you’ll be VERY glad you saved and invested.  I know I am.

My Questions for You

Did you follow (or are you following) any of these tips on money moves in your early 20′s?

Which ones have worked best for you, and what do you wish you could have done differently?

Do you have any more to add?

10 Things To Do This Year to Help You Build Wealth

Many people would like to build wealth.  Who wouldn’t want this?  Of course, the concept of wealth might mean different things toWealth different people.

Whatever your definition is – in a financial sense, anyway – there are some thing that we do that simply detract from our ability to become wealthy or simple generate more money.  If we want positive results, we should consider taking on some characteristics and behaviors that might help us get there.

Beyond those generalities, it helps to actually take action.  That’s the thing, sometimes it takes an attitude of moving forward without trying to be perfect.  In other words, action beats inertia.  Better to actually take steps to improve our financial situation and build wealth, rather than plan and hope to do it when the timing is right.  Why not now?

With that it mind, I’ve come up with a list of 10 actions that can help build wealth:

1) Prepare Personal Financial Statements

Businesses need to generate financial statements.  Two common ones are a balance sheet and an income statement.  A balance sheet is a snapshot of assets, liabilities, and equity – with a resulting net worth figure.  An income statement documents income and expenses, showing a profit or loss.

Why not take a view of our personal balance sheet and income statement?  Do this for a given time period – say, the last year – and you can get a good idea of where you are financially and where you’re going.  Having an idea of your current net worth, and the relationship between income and expenses (in other words, are you saving) is vital to being able to make progress in the future.  We need to be informed!

2) Be Honest With Yourself

Are you really on track to be okay financially? Can you see yourself saving enough money for retirement, based on your current financials (as noted above)? It’s important to avoid sticking our head in the sand like an ostrich, and instead face up to the facts as they are.  If we aren’t doing it already, we need to try to remove all bias and assess ourselves honestly.  If it isn’t possible to do so, maybe a professional or simply someone you know who’s very financially savvy can give you the straight up lowdown on how you’re really doing.

3) Set Long-Term and Short-Term Goals

These goals should be specific instead of vague.  Giving ourselves a target to aim for has a way of aligning our behavior accordingly.  This concept has applications in many areas of course, but in this case, we can of course say that it’s quite relevant in terms of finances.

I like the concept of long-term goals that are ambitious.  Now, we also need to be realistic, in that some of what we plan for needs to account for the so-called “unexpected” things that inevitably happen in many lives.  After all, life is rarely a linear straight line pointed directly to success. Rather, we want to trend upward, realizing that there might be some peaks and realistically, a few valleys too.  But let’s aim high.

Short-term goals are great because they are a way for us to quantify our progress toward long-term goals.  Just like a 26.2 mile marathon is a long journey, it’s still make of 26 individual miles, and that additional fraction of a mile too.  Success at each step along the way will help us reach the bigger target.

4) Genuinely Try to Exceed Expectations at Work

In my experience, employers seem to group people in four groups:

  • “Exceeds Expectations” (EE) group, which is maybe the top 10%.
  • “Solidly Meets Expectations” (SME) group, which is probably the next 50%
  • “Barely Meets Expectations” (BME) group, which might be the next 30%
  • “Not Meeting Expectations?” (NME) group, which is probably the next 10%

It’s best to be in the top 2 groups.  If you’re in the SME group, you’re doing a lot of the heavy lifting, and might have a decent level of job security.  But if you’re in the EE group, you have more job security, and upward mobility as well.  That’s where the money is.

5) Build Your Professional Network

Lets say you had two really good candidates for a job, both of whom interviewed well.  But one has great personal recommendations – and the other one doesn’t.  Who would you rather hire?

Knowing people matters.  It helps you learn, understand what’s going on, and might help you get the edge when looking for an opportunity.  Build your network when you don’t need it, then it will be there when you need it.  And we should be willing to help others too, as it goes both ways.  Generosity in this way, without expecting anything back directly, can be a good thing anyway.

6) Increase Your 401k Savings Rate

If you’re already maxing it out, then save more elsewhere.  If you aren’t participating in your employer’s program – or other investment vehicle – then try to start.   Whatever the case might be, it’s important to save, save, and save some more.

7) Make Savings Automatic

If savings are automatic, it accomplishes a couple of things.  First, it makes it easier to handle than constantly making separate decisions and investment amounts.  Second, it forces you to simply live on the remainder.  Even if you’re starting out very small with savings, making it automatic can facilitate your living without it and maybe even not noticing it.  To the extent that we can grow the difference between income and expenses, the better off we’ll likely be. Even if that means making saving money a habit just like brushing our teeth is a habit – we can’t imagine not regularly doing it!

8) De-clutter, and live more simply

I’ve seen first hand the effects of having too much stuff.  My parents accumulated so many things over the years, and when they had to move, there was so much clutter.  Some of it was sent to storage.  Now, I’m cut from the same cloth, honestly.  However, I’m now trying to move to a mindset of purging things that aren’t used for a long time, and being practical more than emotional about holding on to certain things.  Particularly things that take up space and are never used.  There are carrying costs, in terms of either use of space or storage costs.

Additionally, there can be money made by selling certain things.  It’s amazing the kind of market there is out there for some things many people don’t want or use anymore.  Might as well get some money and use it to either pay off debt or invest it.

9) Get Healthier

If you’re already in great shape, then maybe its a matter of keeping that way.  But many people could stand to make a few changes in how they do things, as the results of taking shortcuts or making small bad decisions can show up later in life.

If we aren’t healthy enough to work  productively, we will be hard-pressed to build wealth or prevent erosion of wealth if older.  Plus, health problems can be quite expensive for people.  Regardless, to the extent that we can make healthy decisions, we are putting the odds in our favor for living a more satisfying life.  And one with more wealth!

10) Practice Not Caring About what the “Joneses” Think

I really think that one of the multiple factors that could get people into trouble financially is the concept of keeping up with the Joneses.  Some of these people are “Big Hat, No Cattle” people with their money.  Meaning, they aren’t really what they appear to be, as they are all image and no substance.

Who really cares what others think? I’m starting to care less and less, as I realize that it’s so unprofitable.  How does it matter to me what others have or do?

I think a good way to practice this is to almost go out of your way to curb any competitive impulses, and just be yourself.  When I was younger, I would buy really good clothes. Stuff for work was from Nordstrom, and things I wore on my personal time on weekends were really kind of nice as well.  I cared a lot about it.

Not that it’s a bad thing, as there is value in putting our best foot forward. Appearance can matter in many circumstances.  But these days, I have no problem just wearing whatever I feel like wearing.  Today, as I write this, I realize that I was out shopping at a local mall in jeans and an $8 sweatshirt, with a t-shirt underneath that I picked up for less than $1.  As a younger person, I would have quietly laughed at someone my age dressed like this.  Today, I WAS that person dressed like that and I simply didn’t care too much what anyone thought.

Bottom Line - these are all action-oriented steps that can help us move toward building more wealth.  Personally, I’m applying each and every one of them this year.

My Questions for You

What are your thoughts on this list?

Do you take any of these 10 actions regularly?

What else do you do to help build wealth? Anything else to add?