Patience vs. Urgency with Personal Finance

patience_or_sense_of_urgencyThere are many people, including myself, that have the belief that life truly is a journey.  To put a running spin on it, this would mean life is a more like a long marathon than one big sprint.

Going gangbusters every day burning both ends of the candle isn’t a sustainable approach, and there are sacrifices to be made along the way.  Its possible working long hours can be bad for your health too.  Sometimes, it’s all about balance, at least from my experience.

That being said, I’ve come to look at things another way too.  While I still buy into the approach I just mentioned, I also think that there are times where it can be beneficial to move fast without any haste.  Taken in that context, maybe life isn’t a marathon, but maybe a series of sprints along with periods of walking.  Okay, maybe these are too many metaphors to handle:)  But what I’m getting at is that sometimes it’s smart to be patient and take our time, while other times it’s good to hustle and get things done as quickly as possible.

When it comes to money and our finances, I think it’s important to figure out when we need to take the right approach.  Here are a couple of examples that have come to mind for me, for each.

Being Patient with Money

Panicking With Stocks

For some reason, there are many people that get scared when stocks decline.  As in, fearful that they will lose everything.  If the market declines 20% over a couple of years, that’s no fun for most of us.  But some folks panic and get scared that their entire investment portfolio will be reduced to ashes.  Thus, they sell when things are headed downward.

Tell me, when have stocks as a whole declined to zero?  Now, individual stocks have the possibility of declining to low levels permanently, and destroying wealth.  But this is why we focus on diversification and investing in large baskets of stocks or even index funds.  When tracking the market, you’re highly unlikely to permanently lose wealth based on historical data.

For example, do you remember the fear regarding stocks and the U.S. credit downgrade in 2011?  There was fear that stocks would plummet, and they did in fact decline for a short period of time.  The sky was falling!  Except, it really wasn’t.  It actually turned out to be a money-making opportunity, as prices rebounded and the market went back up.  Those that sold in a panic lost out.

The same could be said for those selling at the market depths of 2008 and 2009.  Things recovered.  Even when looking at the financial impact of the Japan tsunami of 2011, we can see that this terrible tragedy did not cause a long-term impact on the NIKKEI.  After an initial decline, it bounced back in a matter of a few weeks.

Bottom line:  think long-term with stocks, and realize that with the broader market there will be ups and downs.  We don’t want to get caught selling on the downswing.

Buying Expensive Things

I think this is a trap that many people very easily fall into.  There is a desire to feel like we have made it, to live the good life we see others living.  The reality is that many of these are big hat, no cattle people.  Meaning, they have material things that convey an image of wealth that is misleading considering how modest the savings or income they have actually is.

I have several friends that bought highly expensive cars when younger.  One I’ve known forever since childhood, and he has always liked nice cars and driving very fast.  He bought a car right after graduating college that was probably 3/4 of his annual income in terms of its purchase price.  Another friend bought an expensive new SUV within a year of graduating, in order to “feel like I’ve arrived”.

Thankfully, both people rebounded and are now doing really well for themselves.  They’re smart guys.  But if they had just driven modest cars at that time and invested that incremental money that they had spent, think about what that could grow to in the future after investing?

This same concept can be applied to many other things, such as vacations, clothes, and homes.  With respect to the latter, I think that buying a “dream home” before having the means to buy it can be a dicey proposition.  Look at the people that stretched to buy a home before the housing bubble, only to see their mortgages go underwater?  Better to buy a home based on what you need, and within pre-defined financial parameters.  Sometimes emotions and money getting mixed up can lead to some unintended consequences!

Bottom line:  If we don’t have the money to buy expensive things, then we shouldn’t.  Being impatient with the desire for upgraded purchases can only hurt one’s long-term finances.

Having a Sense of Urgency With Money

Saving Money for Retirement

When someone is 30 to 40 years from an age that is generally considered with the “retirement” age bracket, it seems like a long time in the future.  I know, as I have felt the exact same way.

The thing is, time really moves fast, and seems to accelerate even more with each passing year.  Putting off saving and investing can really be harmful in the long run.  Conversely, the better we are at putting money away when young, the better our finances will be in the future.  There is something to be said for the time value of money, as barring deflation a dollar today is worth more than a dollar tomorrow.

For example, let’s say two people, John and Jane, are both 25 and want to ultimately retire at 55.  John enjoyed traveling, buying a nice car, and all the latest gadgets from ages 25 to 30.  Meanwhile, Jane cuts out those and similar extras and instead focused on saving more money during those years, to the tune of $5,000 per year.  Then John gets serious at age 30 and starts to save and invest at the same rate as Jane.

What does that $5,00o per year for those 5 years get Jane?  Reinvested and compounded at 8% annually, she would have greater than $200,000 more than John by age 55.  Just for setting aside that modest amount of extra money each year and investing it in her 20s.   By taking his time and not worrying about the future, John would lose out on a big opportunity.

Bottom line: understand that time is a powerful factor in growing net worth, and the earlier we save and invest our money, the better.  Start ASAP!

Paying Off Debt

When in debt, we are impacting our net worth in a negative way.  Even if someone owns a home worth $300,000 for example, if there is a $250,000 mortgage on it, the net ownership comes down to $50,000.  When we start adding student loan debt, car loans, and – worst of all – consumer debt, the picture can get murkier.   How can we build wealth if we carry such non-valued added liabilities on our personal balance sheet?

I’d say the best thing to do is avoid debt, and try to work toward a goal of debt-free living.  It may not be an overnight process, but eventually we can get there.  The sooner the better, as interest charges make debt balances grow.  It’s almost like a spiral with a gravitational pull downward; debt can get more onerous if not addressed quickly.   Effectively managing it and paying it off can help us move back in the right direction faster.

Bottom line:  have a sense of urgency in staying out of debt and paying off existing debt quickly, in order to help you build long-term financial stability and prosperity.

My Questions for You

Do you balance patience and a sense of urgency with your finances?

How do you approach each of the 4 examples noted above?

Are there any other areas of personal finance in which you think its important to demonstrate either patience or a sense of urgency?

Teaching Basic Money Skills for the Greater Good

financial_educationIf you’re reading this right now, you most likely have some interest in personal finance.   Everyone coming here to Squirrelers probably cares about money in some way, shape, or form.  Along those lines, there is probably at least a basic level of personal finance knowledge that many people have when reading posts here or on other personal finance blogs.  Some of you go well beyond that, and might fall into the “expert” category.

Sometimes it’s a good idea to stop and think about this for a moment, while realizing that there is probably a staggering number of people out there with zero knowledge of money or how to handle it.   One thing that reminded me of this reality is a study showing that many people don’t know with whom the U.S. fought for independence in the 1700s.  Sure, that’s not exactly a topic within the personal finance sphere, but it jumps out as an example of how basic knowledge can be missing in so many people.

1 in 4 people apparently did not know that the U.S. obtained independence from Great Britain.  Some people were unsure, and others even thought the U.S. broke off from places such as France, China, and Mexico.  Seriously.  And yes, these were actual U.S. residents surveyed.

I mean, if that’s the case, you can be sure that there are a ton of people with even less knowledge of money!

Here are some concepts that might be missing from the knowledge base of such folks:

  • The reason to have one’s expenses be less than income
  • Why a person shouldn’t automatically take on the maximum home loan for which he or she is approved
  • The difference between wants and needs
  • What rate of return is
  • What stocks and index funds are
  • Why saving for retirement is important
  • Why social security, “the system”, or anybody else won’t be there to automatically take care of you when you’re old
  • Why carrying credit card balances can be so bad

Not making fun of anybody, but just realistically saying that there have got to be plenty of people who simply just don’t understand the basics with money.  If there are people thinking that the U.S. declared independence from France, China, or Mexico, you can be sure that there are people who think credit cards are a source of free money.  Or something similar.

What’s alarming about this is that grown-ups with such knowledge (or lack of it) are actually advising their kids on careers and whether or not to go to college.  While education can lead to wealth, going to the wrong school with high expenses and low ROI compared to cheaper alternatives could saddle a kid with massive student loan debt when young.

The blind leading the blind?

Anyway, where this all leads me is to the idea that there really should be a lot more basic financial education in schools.  As in, starting at a young age.  If we’re teaching history in school and 25% don’t retain basic historical facts, then you can bet that a far greater percentage don’t know money basics since those aren’t as much of a focus academically.

Actually, if we could get it to where only 25% of people don’t know simple financial concepts but 75% do, that would probably be a huge improvement.  All that collective financial savvy could help a country make good financial decisions as well, including operating on a balanced budget and avoiding national debt.  Keep going at our current rate, and we’ll have to fight for independence once again – this time financial independence.

So, for the greater good, here’s to teaching kids about money at a young age!

My Questions for You

What are your thoughts on personal finance basics being taught in schools?

Do you think that those of who read (or own) personal finance blogs sometimes lose sight of just how many people out there don’t understand simple money concepts?

As a side question, what do you think about those findings about knowledge of U.S. history?


Knowing Your Limitations Can Be Financially Beneficial

Do you believe that each of us can really do just about anything, if truly put our mind, energy, heart, and soul into it?

I don’t.

At one point in time I might have, but as I get older, I realize that we all have our strengths and weaknesses.  Which isn’t exactly a revelation, but the degree to which we can or can’t do certain things is probably more than meets the eye.  And the absolutes, particularly in terms of our ceiling with certain things. 

Admittedly, I’m generally a huge fan of how being persistent can lead to success.  There is much untapped potential that we probably have on a vast array of different things.

However,  there are probably other things in which we simply have little chance to succeed. Maybe the trick is finding out what we can succeed doing, what we really have a chance in.  Then, make a reasonably quick, calculated decision to invest our time and money where it can make an impact and help us achieve our bigger goals. 

Anyway, this topic is one I’m writing about after reading a post by Evan at My Journey to Millions about knowing when it’s time to give up on a dream.  Basically, the premise as I took it was that at some point during adulthood, we should grow up and accept that endless pursuit of pie-in-the-sky dreams just might be dumb.  If we have others depending on us, it could even be selfish!

I can’t really disagree with the premise, honestly.  While not everyone will agree, I think that there are times when some people just don’t have what it takes to succeed in certain things.  No matter how hard they try, they just won’t make it.

My comment there, which I’ll summarize here, was an example of someone I knew who should have given up his dream.  There was a guy from college who left school well before graduating, dropping out with a sub-2.0 (on a 4.0 scale) GPA.   He just didn’t strike me as a serious student, and didn’t demonstrate a grasp of priorities or how important his college record would be for his future endeavors.

Yet, a few years later, I ran into him at a car repair place.  He was actually talking about how he was taking college classes again – albeit on a part-time basis of 1 or 2 classes per semester.  At that pace, he would have YEARS of classes ahead of him.  The crazy thing is that he was telling me how he wanted to get into medical school.

As I listened to him tell me this as he was in his car mechanic uniform with greasy hands, I couldn’t get past the reality that he had a GPA in the “ones” before dropping out.  That he was the type of person who would be one of the last you would expect to go to graduate school, never mind medical school!  Frankly, he didn’t even seem like someone serious enough to complete a college degree, period.

You absolutely knew that he had zero chance to reach this grand goal of his.  It was never going to happen, because he was not capable of doing that.  I don’t care if he put his heart and soul into it and studies as if the fate of the world depended on it, and the whole world was cheering him on.  His ability was limited.  He should have given up on the dream long ago, knowing that he did not have what it took to succeed, since he was sure to be a failure in that specific instance.

That’s not to say he couldn’t be very successful in other endeavors, or even other aspects of life.  But his life dream is one that he should have realized was not attainable due to his not being good enough.

But wait? Is that mean to say he wasn’t good enough? Is it wrong to limit ourselves, perhaps selling ourselves short?

I say no.  I think it’s good to realize that we are not capable of doing anything we want to.  Yes, there are some things that we could put everything into, but won’t succeed.  Others just might succeed much more, because they do have what it takes to get that particular dream.

An example: I would have loved to be a professional baseball player when I was younger.  I was obsessed with baseball.  However, I got cut in tryouts my junior year of high school.  I could hit, had very good fundamentals, and knew the game exceptionally well.  But I was of purely average athletic  ability, and had very modest potential at that level. Thus, it was clear that the party was over .  Obviously, no matter how much I put into it,  the dream would never materialize because I wasn’t good enough.

I’m okay with it :) But the thing is, sometimes physical limitations are easy to spot.  It’s clear I couldn’t with a slam dunk contest in basketball, given that I’m 6’0′ tall but could never dunk a basketball.  And that I’m now 40+ anyway, it’s never going to happen.  However, mental or talent limitations are harder to grasp because they aren’t as visible.  Thus, it’s easy to dismiss them as being non-existent.

There’s a line in an old Kenny Rogers song, that goes like this:

You’ve got to know when to hold ‘em,

Know when to fold ‘em,

Know when to walk away,

Know when to run

Perhaps it’s a matter of being able to differentiate the situations where persistency can lead to great things,  and conversely where persistency might lead to nowhere. 

What it comes down to is that realism is a good habit to get into, and maybe a profitable one.  Not only can we recognize dead end situations, but we can steer our time and energy toward situations that are better investments! I’m just thinking that sometimes calculated realism can trump unwavering optimism, and yield more profitable results.  That’s where realism can actually be more exciting!

My Questions for You

Have you ever found that giving up on something was actually a winning decision?

Do you agree with the notion that while we do have a lot of untapped potential in a lot of areas, there are some where we simply have limitations?

Do you find realism to be an important part of sound financial decision making?

The Value of “If I Won the Lottery” Thinking

How many of us have ever wondered what we would do if we won the lottery? I know I have! This despite not having any interest in playing it.

Actually, in addition to not playing the lottery or even buying tickets, I’m not too big on casinos either.  When younger, I enjoyed going to Vegas every so often, but my last trip there a few years ago ended up being the Vegas Cheapskates trip I wrote about back then.  None of us played much.

So, we have to pay to play sometimes.  Regardless, I’m sure the notion of what to do if you win the lottery has come up at least once.  It’s something that might have come up in conversation at some point, or been something that was the focal point of a daydream.

If you ask yourself that question, what comes to mind.  What would you do if you had a financial windfall all of a sudden?

For me, thoughts come to mind around the idea of financial independence and security.  Also, a future with more time spent with kids, and even WAY down the line grandkids.  More time traveling, and exploring.  Time to spend with friends and family, and time to focus on living a healthy lifestyle.  Every day would be fully enjoyed.

This got me thinking: if this is what I would want life to be like if money was no object, maybe it’s what I can work toward anyway? And, in some instances, maybe I can simply live out this life now as best I can.

If this so-called “ideal” life would be so incredible, maybe we can use this “if I win the lottery” question to get some clarity as to what’s really important to us and what we would really love to do with our lives.  Then, just try to do it – without the lottery of course, and without expecting to win it (because that’s incredibly unlikely to be happening) And, with a sense of financial responsibility while simply viewing this as an exercise in focusing on what’s important.

What it comes down to is that when we think about the role of money in our lives, it certainly helps us. But, it’s not the only thing.  Relationships and health are paramount, and are interrelated to finances as well.  They all feed off each other!

My Questions for You

What do you think about this type of thinking as a way to understand what’s really important to us if money was no object?

Have you ever wondered what you would do if you had a big financial windfall?

I shared what I would do – so I’m naturally curious, what would you do with a windfall?


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:


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. 


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.