Category: Saving Money

19Aug

Save Today – Sleep Better Tomorrow

Life today is stressful for all of us at times. Some of the things that may stress us out are things that we can’t control, such as political conflicts, natural disasters or the pandemic. These things affect everyone and it’s only natural to feel some anxiety about these things. 

There are also things that may be stressed about that we have a little more control over. Our health for instance. We can’t guarantee perfect health, but we can improve our health to varying degrees through diet, exercise and lifestyle changes. Health is something that is partially in our control. 

Finances are another major stressor for some. People worry about making ends meet, losing their job, or dealing with an unforeseen expense. This can cause them to suffer emotionally and their quality of life is affected. 

Finances are something we have a great deal of control over. While everyone’s circumstances are different (and we should never discount the advantages some have had just by where they were born), almost anyone can manage their finances and lift themselves to financial stability. The results are not guaranteed. However, just the feeling of taking ACTION on the problem will help to alleviate some of the stress that is felt about money problems. 

No Savings = Stress! 

One of the best ways to reduce stress about money is to save money. Some may feel that saving money is impossible, especially if they feel like they are living paycheck to paycheck. However, no matter what your circumstance, there is likely a way that you can save at least some money, or bump you income in some way to save.  

The crazy thing is this. A large percentage of people in the US do not have anything saved. There was an article on CNBC that said that 40% of Americans would struggle to handle a $400 financial emergency. That is a shocking statistic! No wonder so many people feel stressed about their finances! 

Living life with nothing saved is like walking a tightrope without a net. No, sorry, it’s like walking a tightrope, blindfolded with no balancing pole in a hurricane. Oh, and the rope is greased up and there are man-eating sharks waiting for you when you fall. 

The point is, bad things are going to happen. It’s inevitable. If we are not prepared for them, they become major life changing catastrophes instead of small bumps in the road that we can handle. Some common examples: 

  • The car that you need to drive to work breaks down. 
  • An appliance fails
  • You get a leak in your roof 
  • You need emergency surgery or other medical procedure 
  • There is a glitch in payroll and your check is delayed a week 
  • Your uncle in Phoenix dies and you need to buy a last minute plane ticket to attend the funeral 
  • Your landlord decides he is selling your rental and you need to find a new place to live 

Any of the above problems would be stressful enough on their own without money being an issue. Bring a financial aspect into the mix on top of the problem and it makes it much more stressful and difficult to handle. 

How To Get Started Saving 

Even $20 taken from each paycheck and earmarked for savings can go a HUGE way towards building a financial cushion that can give some peace of mind. $20 to save every 2 weeks should be able to be found in almost any budget, or income level. Some examples: 

  • Eliminate three lunches at McDonalds ($6.66 x 3) 
  • Make coffee at home instead of going to Starbucks ($3.33, 3 times a week ) 
  • Downsize (or eliminate) your cable package 
  • Sell stuff you aren’t using 
  • Take on a handful of extra hours at work 
  • Develop a modest side hustle 
  • Get your haircuts at home

If you were able to save $20 per paycheck (assuming you get paid bi-weekly) after about 10 months you would have $400 saved. This would put you ahead of 40% of Americans in terms of having a safety net. This would be a really big financial milestone and a great first step towards having some peace of mind about money. 

In reality though, $400 is just a start. While many emergencies could be handled with $400, there are many that could not. I would recommend that the absolute bare minimum to have saved for an emergency should be at least $1000. Dave Ramsey recommends having a $1000 emergency fund before tackling any debts.  

If you have worked your way up to $1000 in savings from $0, congratulations! There is at least some breathing room in case of an emergency. Hopefully you are able to sleep a little better at night knowing that you should be able to handle many common financial emergencies. 

However, I encourage you not to stop at an emergency fund. Saving money for unexpected problems is a basic first step, but savings can unlock even greater things, if you keep building continually. 

Taking Savings to the Next Level 

Imagine if tomorrow your manager called you into their office and informed you that you were being laid off. How long would you be able to last without steady employment? Sure you may get a few weeks of severance pay and unemployment, but it’s likely you will very quickly start having financial problems if you only have a $1000 emergency fund. 

Now picture that you have saved six months or a years’ worth of living expenses. Perhaps this money is in savings account, money market, CD, or even invested in a brokerage account. How would having this larger cushion impact how you feel about getting unemployed? 

If you know you have six months plus of cushion against unemployment this may give you a lot more peace of mind about the situation. Instead of getting laid off being a catastrophe, maybe it’s just an annoyance as you have to go through the process of getting another job.  

On the other hand, maybe it’s even better than that. Perhaps you are even (wait for it) HAPPY that you got laid off. Now, instead of unemployment being a disaster, its actually an OPPORTUNITY! Here are some of the reasons why you might be happy about losing your job if you have a decent sized cushion: 

  • You didn’t really like the job. You felt underappreciated and under paid. You knew you could do better but didn’t have the motivation to look for a new job. 
  • It’s been years (or decades) since you had some meaningful time off. You have the opportunity to take a few months off and then start looking for a new job in earnest. 
  • Turns out you have no passion for accounting (or whatever you were doing) anymore. You use your unemployment as a chance to take photography classes at the local community college. 
  • Since you were a kid, you always wanted to see all 30 major league baseball parks. You take your severance and unemployment and embark on an epic summer road trip, make memories and have the experience of a lifetime. 
  • You are a great baker. All your friends say you should start a business selling cookies for events. You always thought it was a crazy idea, but now that you have the time… 

The list could go on and on. Insert your own dream here. Think about what you would do with a period of unemployment if you didn’t HAVE to go back to work immediately. Maybe getting laid off isn’t so bad after all. 

Saving a year of living expenses is not easy. If you only save 10% of your income, it will take you 10 years. On the other hand, if you save 50% of your income, you can do it in one year. The key is to get started. Make savings a habit. Over time you will see your savings rate grow and you will have increasing peace of mind about the level of problems you will be able to handle with a cushion. 

Longer Term Opportunities 

Remember what we said about savings giving opportunities? Well, the real value of saving money for the longer term goes beyond being able to handle unexpected bumps in the road. Options and opportunity expand as your savings (and net worth) grow. A basic emergency fund, or savings/net worth of a year’s worth of living expenses is a great start, but there are other amazing opportunities with expanded savings. 

For instance, imagine if your net worth was 10 times your annual expenses. That would mean you have a 10 year cushion. Things like needing a new roof, an appliance breaking, needing a new vehicle or other major expense does not really put much of a dent in your savings. If you are properly investing, your net worth is expanding without you having to do anything. This is basically where I am currently on my financial journey. 

Maybe with that type of a cushion, you wouldn’t wait to get laid off to find a new job. Perhaps a job that pays less, but that is more fulfilling or in a field that you are more passionate about. Or, maybe your cushion will give you the peace of mind to take a big risk and jump to something completely new and exciting, perhaps starting your own business, or joining a startup. With a big chunk in savings, you don’t have to worry that your next big move will completely derail your finances. You have more confidence to try things and take risks. 

The Ultimate End State 

The ultimate end state of savings is achieving financial independence. For many people, this is when they have accumulated a net worth of 25 times or more of their yearly expenses. This total is based on a concept called the “4% Rule” which basically defines a “safe” withdrawal rate for a large sum of money that will result in probably never running out of money. 

When you have saved enough to be financially independent, your options increase exponentially. You have gained the most precious asset that is out there.. Time. In addition, you can sleep well every night knowing that your basic needs are cared for and that you can weather financial storms both big and small. I am about 40% of the towards financial independence, so I can’t yet tell you what this feels like. But for me, time and options are the most exciting parts of the savings process. 

Bottom Line 

Saving money is a must if you want financial stability and eventually financial independence. Start small and accumulate enough savings so you can handle the inevitable things that come up in life. Make savings a habit and build bigger cushions and net worth to open up more peace of mind and options to you! 

31Jul

Slippery Slope Spending & the $200 Haircut

Buidling wealth on the road to financial independence can be hard. One of the keys to success is to manage your expenses and avoid wasting money on things that don’t really add value to your life so you can invest as much of your cash as possible to build for the future. 

Let me tell you about how I used to get $200 haircuts… 

No, I didn’t actually go to some upscale salon and pay $200 for a haircut. However, what was INTENDED to be a quick run out for an average priced haircut regularly turned into a much more pricey affair. Let me tell you how. 

Roughly once every 4 weeks, my son (age 13) and I need haircuts. There is a chain salon about 10 minutes from our house. You know the cool place where you can watch sports while you get your hair cut, and they even have hot towel treatments and massages while you are there! Of course, none of this is free, and if we both got a haircut and the towel treatment, we were looking at $60 total, including tip. It felt like a bit more than what we should pay for haircuts, but it was so much fun! 

Well the fun didn’t end there. My wife and daughter would usually come with us. Conveniently, just a few doors down from the haircutting place there is a nail salon, and often my wife would get her nails done to pass time while we were getting haircuts. Again, this is an enjoyable experience, but not cheap and she would usually spend about $50 including tip. 

Running tab so far.. $110. 

Now the haircutting place and nail salon are in one of those typical suburban plazas. Starbucks, Moe’s, and ice cream shop, Jersey Mikes, an upscale liquor store, yoga studio and two sit down restaurants (among other places) conveniently located mere feet away from where we got our hair cut. Since we would usually go out for haircuts on a weekday evening, it would be 7:00 PM by the time we were done and we would be hungry with no dinner plan. Naturally, it was very easy to go the convenient route and walk across the parking lot to eat at one of the fun/hip restaurants in the plaza. Three adult entrees, a kids meal, milk, apple juice and a couple of beers later and our bill would be in the $60-80 range, including tip.  

Running tab for the evening $190. 

Just like that, in about an hour and a half, we went from getting haircuts to spending 20% of a GRAND! How did this happen? What led to this snowball of unplanned and unnecessary spending? 

The Slippery Slope of Spending 

We had hit the slippery slope of spending. What started out as quick errand out had morphed into a large purchase. And our story isn’t some crazy outlier. Lots of people (and maybe most typical American consumers) have evenings like this all the time and think nothing of it. I know this because in this particular plaza, its actually hard to get a parking spot and the restaurants regularly have 1 hour waits, on a WEEK NIGHT! 

WARNING, WARNING, WARNING – This is the type of spending that over time will completely derail a journey to achieving financial independence! Sure it seems small, but over time, these types of purchases add up and the opportunity costs actually compounds. 

So what can you do to avoid the slippery slope of spending? Here are some things that have helped us. 

See The Problem 

You won’t realize you have an issue with slippery slope spending unless you actually LOOK and THINK ABOUT what you spend. This requires a few actions on your part: 

  • Track your spending! If you can’t see where your money is going, you may not realize you have a problem. Don’t worry, there is a really useful tool out there that can help. I have been using Personal Capital to track my spending and net worth, and it makes analyzing your spending trends REALLY EASY. 
  • Review your spending trends consistently! You may track things for a while and think you are doing fine. However, these trends can change slowly over time and bad habits can creep in without you even realizing it! 

Plan Your Spending 

Slippery slope spending is unplanned. We had the intention of just going and getting haircuts and then going right home, but we added on more spending because we saw them and they were “convenient.” That is how advertising works. In fact, the plaza was probably DESIGNED in a way to maximize people’s spending by packaging everything they might need for a “regular night out” with very minimal effort. If we had a firm plan in our minds, we would have stuck to the singled errand and saved $120. 

Also, please do not underestimate the “hunger factor” especially if you have kids. If you choose to run to the store on an empty stomach, or during the time dinner normally takes place without a plan, it’s very likely that you will end out eating from a restaurant unplanned.  

  • Plan shopping trips and errands for times that are between meals 
  • Bring snacks if you will know you will be hungry 
  • Eat before going out 

Batch Shopping Trips 

Reduce the opportunity for slippery slope spending by batching your errands into larger, less frequent chunks (maybe weekly) instead of more regular (or daily) trips out. By batching your trips you will be more efficient and have less opportunity for unplanned spending. Other benefits include: 

  • Less driving from fewer trips = savings on gas and reduced wear and tear on your vehicle 
  • More time from fewer trips 
  • Opportunity to plan a shopping trip during a less busy time of day (early mornings, etc), reducing stress and saving time 

Eliminate Certain Errands 

You know what the best way is to stop paying for haircuts? Get your hair cut for FREE at home. When the pandemic hit, my wife purchases a basic haircutting kit from Amazon for $33, watched some YouTube videos on haircutting and started cutting our hair. Sure the first few cuts were a bit rough, but with some practice she has gotten really good at it and our hair looks just fine! We save $60 a month vs going into the fancy salon and we have reduced the opportunity for slippery slope spending. Additional benefits: 

  • My wife learned a fantastic new skill. Not only can she cut our hair, but it’s possible in the future she could expand on this skill and pursue haircutting as a career 
  • Time is saved. Haircuts went from an evening out (2+ hours) to a 10 minute affair in the living room 

Reward Yourself 

All this saving talk doesn’t mean that you don’t reward yourself for making these choices. For us, the biggest reward is saving for financial independence and building for things that have real value. We know that a fancy haircut or a meal out is not what will make us happy and content. We have been saving the $60 saved in haircuts in a brokerage account and are having fun watching that account grow over time! We also plan meaningful meals out that we know we will really enjoy and remember as a treat.  

Financial independence will not happen overnight. It is achieved slowly over time with good habits, discipline and planning. Contentment with what you have is a huge help along the way. Avoid the slippery slope of spending on your journey to building wealth for the future! 

24Jul

Money Lessons From a Basketball Hoop

During the early part of the spring, my son (13) started to get into playing basketball. Since we didn’t have a hoop at home, we would hop into my car and drive to a county park that is less than 5 minutes away and play together. Good times, good exercise and a fun shared activity. After a few weeks of this, my wife found an ad for a home basketball hoop from Target on sale for $225.99. We figured that was a good deal and decided to go and make the purchase, especially since with the weather being good, we would get a lot of use out of it. I went down to Target and picked up the hoop (which came in a huge box), assembled my tools and took a look at the instruction booklet.  

I will be honest. I am only moderately handy, and the instructions were a bit intimidating. There was a lot more hardware included than I expected, and thus more work (and time) that I would need to put into setting it up. It was also already 2PM on a Sunday, and to be honest, putting together a basketball hoop was not exactly how I wanted (or planned) to spend a precious day off.  

I took a deep breath and said to myself that I just needed to get started. After about an hour, I had the rudimentary shape of the hoop coming together. As I worked, my neighbor came outside and saw what I was doing. As it turned out, his family had essentially the SAME hoop set up in his driveway. We talked for about five minutes while I took a break, and finally he said “You know, I paid a handyman to put mine together.” 

“Oh really?” I asked. “How much did you pay him?” 

“$75. I could give you his number if you want.” 

My neighbor is super nice and we are about the same age. It’s likely we have very similar household incomes and to any other observer live a similar lifestyle. The big difference is my neighbor spends for services that make his life “more convenient.” Grass cutting service. Car detailing. House cleaning service. Professional basketball hoop setup. The list goes on and on. As I went back to work on the hoop, I started thinking about what all these services must COST. And not only cost once, but on a continual basis, because you know, the grass grows back, the car and house gets dirty and there is ALWAYS some new purchase that you need to hire a handyman for to put together. $75 here, $50 there, $100… it all adds up. 

Have you ever heard those stats put out there where if you make your own coffee instead of going to Starbucks, you will have $10’s of thousands of dollars in 20 years? I decided right then and there as I was working on the basketball hoop that I was going to create an account and start actually SAVING what most people would spend on things they could be doing themselves. 

I started here: 

  • Basketball hoop installation: $75 (one time) 
  • Grass Cutting: $50 (recurring) 
  • Haircuts at Sports Clips for me and my son: $30 each (recurring) 
    • NOTE: During COVID, my wife got clippers and started cutting our hair at home. We plan to never return to paying for haircuts 
  • Any other thing that I choose to do for myself vs. Pay someone: $50/hour 

Starting that day, I put the money I saved by doing the above things for myself into a brokerage account and invested into a low cost total stock market ETF (VTI). Every time I got paid from work (every two weeks) I would add the appropriate amount to the brokerage account based on the last two weeks’ worth of savings. 

So what happened? Well that was back in April, and just three months later, I have $914.05 in that account. Over the course of a year, that is well over $3600. All easily obtained by just developing simple habits like being willing to roll up my sleeves and work hard for myself. Crazy, this stuff actually works. 

Thing is, the money isn’t even the most important thing. There are so many other awesome benefits to NOT paying someone else to make your life more “convenient.”  

  • Exercise – I get a workout and fresh air when I do projects outside or cut the grass. This lifts my mood and boosts my health, especially since I have a desk job. 
  • Learning – Putting together the basketball hoop was hard and I made some mistakes along the way. But I learned how to do it. I also learned more about the tools I using. I now feel confident that I could put together a hoop a lot more efficiently the next time 
  • Satisfaction – I get the awesome feeling of satisfaction from doing a job well myself. Every time I walk past my grass or the hoop I feel great thinking “I did that with my own hands!” 

So what is the lesson? Going the “easy” route and paying someone to do work that we could easily do ourselves literally drains our banks accounts AND deprives us from some pretty awesome side benefits. Don’t be one of those people! Even if a project looks a little scary at first, you CAN do it. You may make some mistakes, but you will be successful, you will develop some “grit” and feel an amazing sense of accomplishment when you are done! Also, find a way to actually capture your savings. A lot of people make choices to save money in an area by not spending, but don’t actually save/invest it. Thus that money probably gets spent on something else, instead of increasing and compounding over time. 

As it turned out, putting the basketball hoop together took about 3 hours. I paid myself $75 and so I guess I was working for $25 an hour. I learned something, got some exercise and feel great that I did it myself! I’ll be sure to keep you all updated on how this account grows over time and other ways I find to do things for myself (and pay myself.) All small baby steps on my journey to financial independence.