Tag: 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! 

08Aug

Invest a Windfall to Accelerate Financial Independence

A “windfall” is generally a chunk of money that lands in your lap unexpectedly. Perhaps you win a prize/contest. Maybe you receive an inheritance. Your company does very well and gives out unplanned bonuses. You pick a stock that goes to the moon. All these count as a windfall. 

A windfall can be relatively small, perhaps a few hundred dollars or it can be a life changing amount that sets you up for financial independence immediately. Either way, a sum of money that shows up in your life out of the blue is a great opportunity to build wealth. It’s a chance to accelerate your FIRE journey and get to the destination a bit sooner. 

What should you do if you are fortunate enough to land a windfall? Let’s start with a story about my favorite example of someone who had money raining from the sky. 

Bobby Bonilla Day 

Bobby Bonilla was a professional baseball player from the mid-80’s until the early 2000’s. He was pretty good, going to the All Star Game six times in his career. I remember him well because he played for some really good Pittsburgh Pirates clubs (my home town team).  

In 2000, Bonilla played for the New York Mets and was owed $5.9 million. For some reason, the Mets and Bonilla worked out a deal where they would defer paying him that money. Instead, from 2011-2035 the Mets would pay him $1.19 million a year. Bonilla gets this money every July 1. Fans jokingly refer to the date as “Bobby Bonilla Day.” 

“Yes! Its July 1!!!!”

Talk about the mother of all windfalls! I would imagine that very few (if any of us) are getting a deal like that! Let me tell you though how I have my own mini version of Bobby Bonilla Day. 

My Personal Bobby Bonilla Day 

I worked for 9 years for a small, privately held company. This company did not offer a 401K plan. Instead they offered an ESOP (Employee Stock Ownership Plan) along with a profit sharing plan. Basically the way that this worked was they would put some shares of the company stock into a tax qualified account for each employee every year. In addition, each employee had a second account where the company would add some of the company profits every year. The profits account was invested in a bunch of stocks that the company pooled on behalf of the employees. 

The plan sucked. The shares were not publicly traded and so every year some accounting firm would appraise the company and set a stock price. You had no control over the investment choices in the profit plan and it was way too conservative for a younger person. There was no website to look at the real time value of your account. And in the end, it was not portable at all. 

I quit that company in 2015 and by that time, the account had grown to a non-trivial amount. It represented about 50% of my net worth at the time. However, instead of the company allowing me to immediately roll that money over to a traditional IRA when I quit, they had some pretty ridiculous rules. I had to wait 4 years to become eligible to roll over the money, and then when I did, I found out they had the option to spread the payments over 5 years1! The day of my yearly payouts? August 1.

Starting August 1 2019 and ending on August 1, 2023, I receive a windfall from my former company every year. Ok, it’s probably not technically a windfall since they are just giving me MY MONEY, but it is money that is coming into my life that I am not actively working for. I like to think of it as my own Bobby Bonilla Day. 

What should you do if you get a windfall, or some type of regular, deferred payment? 

Resist the Urge to Cash Out 

The money I get is tax-qualified. This means that I have not paid income taxes on it yet. I will have to pay Uncle Sam when I withdraw the money, and only after age 59 ½. Thus, the money is tax deferred. I have the option of taking my payment in cash or rolling it over into another tax-qualified account like a traditional IRA. By rolling it over, the money retains its tax-deferred status. 

If I would have chosen to take the cash, I would have gotten crushed with taxes and penalties. I would have had to pay income taxes at my current tax rate (24%) as well as a 10% penalty for accessing the money before at 59 ½. Over a third of my money gone! Not a good deal for me.  

To resist the urge to cash out, I actually instructed my former employer to just send my yearly chunks right to my brokerage. I get a photo copy of the check, but it’s never in my hands and simply gets rolled over. I never have the chance to spend it! 

Treat Yourself (Reasonably) 

On the other hand, maybe you are getting money that is NOT tax qualified, perhaps in the form of a prize or inheritance. It can be tempting just to spend the money on yourself. I think this is especially tempting if the money is significant, but not earth shattering. I think for me that number would be around $10K. 

Instead of blowing it all at once, perhaps leave it alone for 30 days and really think about the possibilities you have for the money. This may help to cool down any immediate desire to spend the money. 

It might also be good to treat yourself with a small portion of the money, perhaps up to 5%. This gives you a treat but also preserves the majority of the cash so it can work for you. 

Pay Off Debt 

If you have debt, especially the high interest variety that is common with credit cards or certain types of loans, by all means, consider paying this off with your windfall. Paying down debt is a fantastic use of a windfall as it helps you shed something that is eating away at your income, so you can start building for financial independence. 

Currently, I have no credit card debt and $4,500 left on a car loan (5.9%). The car will be paid off by the end of the year. My mortgage is currently financed at 3% and so personally I am not in a hurry to pay down this loan since I can get much better bang for my buck in the stock market. 

Invest For Financial Independence 

By investing your windfall for the long term, you will get a gift that keeps on giving. If your dream is to retire early or accomplish some other dream with financial independence, investing your windfall can help get you there sooner. 

I invest my “Bobby Bonilla Day” money in a traditional IRA, in low cost index funds. Currently, my account is invested in VFIAX and VGSLX. I don’t plan to touch this money for at least 18 years. Due to a bull market, my payments so far since 2019 have gone up nearly 60% in value! 

Help Someone Else 

Perhaps the greatest thing we can do if we get an unexpected chunk of money is to use it (or part of it) to help someone in need. Maybe you have a friend or family member who really could use a little bit of help. Or, perhaps there is a charity that aligns with your values who would put that money to good use. Either way, if you are in a position to help someone out when you get a windfall, you are likely to feel great happiness and fulfillment by giving. 

Bottom Line 

If you get a windfall or deferred payment of some sort, congratulations! Many people never get that experience. Understand that it’s an opportunity and think carefully before taking any action. Either way, continue to work hard, save money, build wealth on your journey to FIRE! 

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! 

28Jul

Convert Earnings to Wealth for Financial Independence

Ever see the movie “Rush Hour 2?” There is a part where Chris Tucker and Jackie Chan go to see Don Cheadle to see if the bad guy in the movie had spent any counterfeit money in his restaurant. Don Cheadle says yeah, and then Jackie asks if he still has the bills. Don Cheadle’s response is classic.  

“Still got my lunch money from the 3rd grade.” 

I love that line. The character respected money, saved and obviously had something to show for his work, going back all the way to the 3rd grade. He had successfully converted past earnings into actual wealth. 

Working for money is really hard. My first job was at Burger King when I was 16 years old. My day basically went like this. I got up at 6:00 AM, went to school, came home around 3:00 PM, did my homework, ate something and then went and worked from 5:00 PM – 10:00 PM slinging burgers, cooking fries, waiting on customers and cleaning bathrooms. It was hard work and I came home exhausted and smelling of fryer oil. All for $5.15 an hour.  

When you work that hard for so little, you build an appreciation for money. You think to yourself if a purchase was worth it before parting with your precious money. If a trip to the movies and popcorn cost $15, you think if it really is worth trading 3 hours in the back of a miserable, hot fast food restaurant to earn the privilege of watching that movie in a theater versus watching TV at home for free. Whatever it is you do with that money, you want to have something to show for it, otherwise it’s a big fat waste. 

Working in the corporate world is hard too. Sure you make more, but the hours can be long, the work can be stressful and there may be politics and drama you have to deal with. Again, if you are going to trade such a significant portion of your life for money, you better have something to show for it. I had a moment like that in 2015 when I checked my net worth for the first time and realized that I had worked for 13 years and had little to show for it. 

The key is to actively convert what you trade your time/energy for (earnings) into something lasting (wealth) that can help you accomplish your goals (in my case financial independence). This takes saving, shrewd investing and some luck along the way. But how do you know how efficiently you are converting your earnings into actual wealth? 

The trick comes from figuring out your net worth as a percentage of your total earnings. For example, if you have earned $500K in your career, and your net worth is $50K, you have converted 10% of your earnings into wealth. And if you look at it in terms of the TIME it took to create that wealth, you would realize that 90% of your time was spent earning money that is 100% gone forever and can’t help you in the future. Sobering fact. 

Back in 2015, my ratio was 13.8%. It made me sad that 86.2% of all the money I had made up to that point in my life was gone forever. But it also helped to motivate me to change my actions. I am happy to say that 6 years later I have increased that number to 40.5%!! That feels a lot better and makes me feel like my hard work has actually started to BUILD SOMETHING that will LAST. My goal is to one day see that ratio go over 100% which would mean I had saved MORE that the total of everything I had ever earned.

So how can you figure out how much of your earnings have been converted into wealth? It’s probably easier than you think! 

Step 1 – Calculate Your Net Worth 

Hopefully you are tracking your net worth on a regular cadence already, but if not, it’s pretty straightforward! First calculate the sum all of your assets (bank accounts, investments, real estate equity, cash, etc.). Next, calculate the sum of all your liabilities (credit card balance, mortgage balance, car loan balance, etc.). Finally, subtract your total liabilities from your total assets to get your net worth. 

Step 2 – Calculate Your Lifetime Earnings 

Ok, so how are you supposed to do this? Do you need to have saved every pay stub from years and years of working at various places? Fortunately, there is a much easier way! The United States Social Security website actually give you your lifetime earnings all the way back to your very first job! Here is how to get it. 

  1. Access the Social Security site and create an account. You will need some basic information to sign up including your social security number, date of birth and address. 
  2. Once you have access, you will land on the My Social Security dashboard. Click “Review your full earnings record now” 
  3. You will see a chart with your reported earnings for your entire working career! Add up the “Taxed Medicare Earnings” column. This is your total lifetime earnings. 

Step 3 – Calculate Your Earnings to Net Worth Ratio 

Here is the easy part. Take your net worth from Step 1 and divide it by your lifetime earnings from Step 2 and multiply by 100. This is the percentage of your earnings that you have converted to wealth! 

When you first see this number, you may be a bit disappointed. But don’t worry, you can totally take action to make it way better! Track this metric along with your net worth monthly and feel the satisfaction of small victories on the road to financial independence! 

Additional Reading: 

There are a ton of amazing articles on the value of the earnings to wealth conversion ratio out there. Some of my favorites are Your lifetime wealth ratio (and how to calculate it) from JD Roth at Get Rich Slowly and How Much Should My Net Worth or Savings Be Based On Income? from Financial Samurai. Check them out!