In what seems to be a recurring topic, let’s continue with the series of “How to” articles I’ve published recently. Today’s topic is: finance… …
Thrilling, I know…I’m sure you’re really excited. Hold on now…don’t leave just yet! Give me a chance here. I guarantee you’ll find something interesting here or your money back. I promise.
I’m still basically a young whippersnapper, but I’ve had my fair share of experiences through life thus far to know what is good and what is bad for your financial health. Most should be common sense; some, aren’t as obvious. Still, there should be something to glean from this post regardless of your age; that’s my hope any way. Without having a good solid financial backbone, you’re pretty much crippling any prospect of being able to buy a car or buy a house (or whatever else it is you fancy).
In no particular order, here are the topics that will allow you to get control of your financial situation and put yourself in a great position to be able to go through life not worrying about the financial hassles that come with it. If you’re one of the 76% of Americans that life live paycheck-to-paycheck, you might want to take some advice from someone who doesn’t.
Get a Good Career
A career. Not a job…a career. Absolutely the most critical thing you can do. If you nail this, most everything else will fall in line (even if you stumble here, it’s not the end of the world, but…it sure helps). This is probably the most important thing you can do in your entire life. The problem here is, well, it takes years, sometimes over a decade to achieve. The sad thing is most people are completely focused on the short-term, no one looks at the long-term. Start small. Take low-paying jobs in your field. Work hard. Distinguish yourself. Move up the ranks.
So how do you do that?
- Choose a career that is in demand or will be in demand (engineering, healthcare, science, technology are safe bets).
- A field that innovates, makes something, provides a vital service that requires actual honed skills (scientists, doctors, lawyers, programmers).
- Work hard, don’t slack off, don’t be tempted by short-term pleasures.
- Learn. Don’t memorize. Don’t study. LEARN.
- Be interested in learning. READ. Better your mind.
Education is the easiest thing I can recommend here. With the internet, huge amounts of knowledge are at your fingertips. There is no excuse! NO EXCUSE!
Notice how I say nothing of “formal” education here. You’re going to need a good education, but not falling for the pitfalls that come from the journey are hard to avoid (student loan debt, not knowing what you want to do at first, doing stupid college things, etc). The best I can recommend is the following:
- Go to an in-state college
- Go to a university that is economical (whether that’s a community college, or community college to university after two years program, it just depends)
- The goal is to have as little student loan / other debt that you can possibly have and obtain an associates or bachelor’s degree coming out of college
- Major in something that makes a difference in the world and society wants; tread carefully liberal arts majors
- Utilize college work-study, internship, and / or co-op programs; just because you’re in college doesn’t mean you don’t work…
Let’s elaborate on that last point a little further. If you don’t get experience in a field of interest while you’re in school, you might as well just have wasted your time. Why would anyone want to hire you? You’d better have connections, some great luck, or outstanding academics. People and businesses in the real world want results. Not pieces of paper that say what you might be capable of achieving something.
That said, in the end, it doesn’t make one damn bit of difference what you did in college. Not a single unit of damn. Which is why the love of learning, and the love of growing your intellectual capacity is far more important of a “skill” to have. All that piece of paper that you got for graduating says to an employer is, “hey, this one might work out”. It doesn’t entitle you to anything.
Until you’ve got a real job in your career, you mean nothing. Throw away the trophy you got for getting 3rd place in the science fair in high school. Until you do something that someone will pay you for, you haven’t done anything. The earlier you realize this, the better off you’ll be. Understand that the piece of paper (i.e. diploma) you got means almost nothing. It only allows you to get your foot in the door and your initial starting salary, that’s really it. If you prove that you’re capable while you’re on the job, that is far more important to your overall career. Which is why it’s so critical to work as hard as you can early on and never stop growing and learning.
Now, of course, if you’re innovative enough not to need to join the “work force” and you have a great entrepreneurial spirit, great! I’d have to say that’s pretty hard to do though as a young adult. You’re probably going to need to experience the corporate world before understanding how much it sucks.
You’re going to end up falling into one of these buckets, most of America these days seem to fall into the lower left quadrant. Which one do you fall in to?
|Hate Your Job
|| Love Your Job
Good luck becoming a leprechaun (psst…they don’t exist)! Your best bet is probably “The American Dream”! Just try to steer clear of the drunks and the hippies.
The Waiting Game
There are two ways of living life: deferred rewards or immediate gratification. If you knew exactly when you would die, I suppose the latter could conceivably be the better alternative, but since you probably don’t (and expect to stay around awhile), I would highly suggest start deferring your short-term expectations.
You want to know the secret of long-term success? Take your hits early. Otherwise, financial pain will be compounded the rest of your life. What do I mean by this? Well, I could go through some examples, but it’s basically this simple, ask yourself this question:
- Can I buy X without needing a loan or a payment plan? (where X = car, house, TV, computer, etc).
If the answer is “no”, then you should not be purchasing X. That simple.
Of course, life doesn’t work on such idealistic terms, sometimes you don’t have a choice. If you follow the other suggestions I’ve outlined though, you should put yourself in a better position to minimize the potential for this scenario.
Nobody owes you a car, a house, a yacht, anything. If you want it, you have to work for it. If the utility that you provide through said work is not good enough, hey, guess what? You aren’t getting it. You can try to put it on that credit card, but you will always fail in the long-term, if this isn’t a rare event.
Avoiding Death by a Thousand Paper Cuts
Remember, even if that cactus looks harmless, he can beat your ass with 1000 tiny needles! Ahem…
I see a lot of advice from people that say, “don’t sweat the small stuff; focus on the big picture”.
I have to tell you, that’s the most ridiculous nonsense anybody could ever say. Your entire life is the small stuff! Don’t underestimate the power of the small stuff being the biggest piece of your financial life! It’s a pretty big damn piece of that big picture if you add it all up. What am I talking about?
- How much do you spend on food and drinks?
One of the deadliest killers. You’d better not have a vice, or you’re pretty much screwing yourself. If you drink (I don’t even care if it’s coffee or alcohol) or smoke, you might as well just shoot yourself in the foot.
- How much do you go out to eat? Where?
Are you eating out with your co-workers, friends, and / or family every night? Every other night? If you’re doing this more than once a week, you may want to add up your bills and see just how much money you’re wasting. Have you ever considered…gasp…making your own lunch?
- How much do you go out to “party” or go out to bars?
Yep…anything that forces you to “tip” someone is pretty much a cancer on your wallet. Enjoy paying 200-300% markups on items you could get at the grocery store? You’re crippling yourself here. Watch out.
- How much do you pay for entertainment (e.g. cable TV, movies, video games)?
If you’re paying more than $100 a month for these services, you’re doing it wrong.
Right way: you shouldn’t have cable to begin with, leverage the internet; use Netflix/Redbox for movies; buy used and / or games that have dropped in price. Simple.
- How much do you pay for services like phone, internet, wireless?
If you’re paying more than $100 a month for these services, you’re doing it wrong.
Right way: do you even need a landline, if so, there are some cheap alternatives with voiceover IP; there’s a lot of competition in this space, don’t stick to a particular company, go with the one that gives the best deal; probably the biggest killer, I pay $25/mo for unlimited data and text. You probably can’t beat that, but you should get as close to it as you can.
- How efficient are you at using water and electricity (or gas)?
Do you really need to have your house at 72 degrees all day, every day? Do you need to flush the toilet 10 times a day? Could you speed up your shower time just a tad? There are small easy ways to conserve here. Some do it for the environment, I’d just rather not pay for it. Turn off the crap you’re not using when you’re not using it!
- Do you use coupons (physical or digital)?
No? You’re dead to me.
- Anything else?
Think really hard here. What are you doing that’s wasting money every day / week / month? Don’t just go off of memory, look at your checking / credit card statements. Where is the money going? Do you use that gym membership? Did I really need to buy that thing off of eBay? See how much money you would save if you cut back all of these expenditures by 30 to 50%. Scale it out a year. What does it look like? I think you’d be surprised. Note: Some people swear by “budgets”; I’ve never found the micromanaging helpful (although I’ve never had problems with spending). There are plenty of free budgeting apps / tools that can help you narrow down just what is siphoning your money. I’ll talk more about that shortly.
Don’t Overpay for the Big Things
Want to know a sure-fire way of crippling your future? Overpay for a house or a car. Did you just drop $30k+ on a car when you make that or less than that from a year’s pay? Did you happen to account for depreciation? By the time you pay the thing off (I assume you took out a loan), you will have paid a hefty premium for it; after that interest portion bleeds away your money. And then…surprise! It’ll be worth nothing on the open market in a decade or less. That’s depreciation folks! A foolish move. Why not buy a used car, outright, instead? People’s love affair with automobiles seems to be the #1 contributor to financial ruin. Guys…it’s a metal box that gets you from point A to point B. Don’t over-complicate this.
Even better. Did you just drop half a million dollars on a house, but you only make a fraction of that a year? Shame on the loan officers that let that go through, but what were you thinking? I have no sympathy for people in this situation. That’s just bad management, and is the definition of short-term satisfaction over long-term stability.
If you need to have a car or a house as a status symbol, then…look…you have to take a real good look in the mirror and figure out your values. Stop trying to impress people that don’t care. Don’t add months or years of conflict and pain for short-term benefits.
What should you do instead? Save. Save until you have the money to buy the item outright. Or in the case of a house, a significant down payment. At the very least, 20%. 40-50% if you can. Ideally, no financing. I realize that can take a lifetime of working. Slow and steady wins the race though. Do not buy into the lie that it’s impossible. It can be done. You are the owner of your own destiny.
Account Management / Budget
Sometimes it’s hard to see how the little things are damaging your finances. I get it. People just don’t do a good job at seeing the big pictures sometimes. What can you do about this? I would recommend mint.com.
What is that? Well, first…ask yourself this question. How many accounts do you have that have some form of “payment” tied to them? Electric bill? Gas? Phone? Wireless? Cable? Credit card? Home loan? Car insurance? Home insurance? I’m sure you can think of more. It’s a lot of stuff man. It can be hard to keep track of it all.
Well, what mint.com provides is a free service that let’s you aggregate all your services into one interface so you can view all your account data at once. I will say it’s not for everyone, some people just aren’t comfortable giving one company all that info. That’s fine, I can dig it. All I will say is I’ve been using their services for over six years now, and I’ve not a bad thing to say about them. They’re extremely helpful in letting me see my big picture. It’s a very powerful tool.
That said, you don’t really need something like mint.com. You can always do this yourself. They provide easy tools to view what you’re spending on a month, but whether you use these tools or not, you should be creating some form of a budget.
How do you create a budget? Well, here’s the basic breakdown for a short-term budget:
- What is your total estimated weekly / monthly (after taxes and fees) revenue stream (per household or person)?
This shouldn’t be that hard to calculate. Unless you have some significant secondary revenue streams, this is most likely just going to be what you make from your job (after taxes).
- What are your total estimated weekly / monthly costs?
Little more complicated, and this is obviously where people get lost in the weeds. As this is an unknown variable, a lot of people just don’t bother because this is too hard. Hint: Not really that difficult.
Most likely, you probably have a checking account and a credit card that you pay bills with. Get the average monthly expenditures for both and add them together, don’t forget to add any interest (if you pay things with cash…gah, you just made it a lot more complicated, read the next section…).
Almost all major credit cards or banks have some sort of software tools that make this very easy to obtain. If not, you may need to do some simple math! Oh no..not that!! I’ll wait until you’ve calmed down… … … you good? Great. Let’s keep going. I’ll wait…
- Subtract what you make vs what your average costs have been per month
You crunched the numbers? If you’re finding that you’re paying more in bills than you’re taking in…you’ve got major problems. You’d better start cutting something, otherwise, you’re going to drown. Nothing should be off the table to get rid of. You’d probably at this point want to break down things item by item to see how they’re impacting your overall budget.
Obviously emergencies or unforeseen complications…complicate this process. You can budget in a disaster and see how that affects your situation or just bake it into the average (let’s say the last 24 months).
Was that so hard? Creating a budget doesn’t need to be that stressful. You should at least know whether or not you have the ability to save any money per month (if not, well…you have some greater systemic problems that need addressing).
That said, the most important piece of this entire section is: online bill-pay. My heart literally goes out to all the old people out there that needed to “balance a checkbook” (if you still do…you’re doing it wrong). With online bill-pay, you should never have to manually pay a single bill ever again. Ever! I can’t remember the last time I wrote a check for something… Almost all major credit cards / banks offer automatic monthly bill payments for no cost at all. For those that do charge a fee…find another service.
Using and Building Credit
You know what the credit card companies despises most…? Seriously, give it some thought. I’ll wait.
People who pay their balance on time every month, without exception. Which is what you should be doing, without exception.
First of all, you should never, ever use cash. Ever! Unless the merchant is giving you a discount for using cash (and more than 1%), you should, never, ever, ever use cash. Unless you have insanely bad will power to resist the temptation of using a credit card (i.e. going on a buying spree), I assume you’re an adult, and you understand the value of a dollar, so you won’t. There is not one argument that you could try to use to convince me otherwise.
You want to know why?
- Using credit cards and keeping the monthly balance low (read: none) improves your credit score; one of the most critical things necessary to get good rates if you want to buy a car or house (or any other type of loan or services)
- Using a credit card normally has no fees involved for having it open (if you have a credit card with an annual fee, call and get it waived or close it)
- Using a credit card correctly will net you 1% or more in cashback; that’s at least $1 for every $100 you spend…for doing nothing, but using the card!
- Using a credit card gives you much more power over the transaction by being able to dispute charges if a merchant has wronged you
- If you’re worried about theft…you really shouldn’t be, there are a number of safety mechanisms in place to prevent unauthorized access, and almost all credit cards have fraud protection services…for free; you won’t have to pay for any of the illegal purchases
- A credit card actually gives you a greater time window to pay for purchases than straight up through cash / debit
Why then, would you not use a credit card? If you’re using a debit card, I presume you have the funds in a checking account to cover the purchase?? Well if so, why not just use the credit card for that? Almost all major credit cards have very easy ways to set up automatic payments. You simply set up a rule to pay your credit card balance, in full, every month. That’s it. You literally have to do nothing at all, and you get a bunch of free services and improve your credit score in the process. You just have to follow one simple rule:
DON’T CHARGE IT, IF YOU CAN’T PAY FOR IT TODAY!
As long as you follow that one critical piece, you’d be a fool not to do so. You’re literally being paid for no reason. Tax free.
Deferring Children Until Financially Ready
What’s arguably the biggest drain on the finances of an adult? A child. What’s worse than that? Children. On average, a child will cost over $200,000 to feed, cloth, and amuse over 18 years. Even more if you feel you are obligated to fund their college education 100% (I don’t).
Consider this to be the equivalent of buying a house. You’d better be damn sure you have all your ducks in a row, eggs in one basket (oh wait, sorry…you aren’t supposed to do that), err…house in order (oh, that’s much more apropos!) before embarking on this strange journey (can you tell I’m not exactly thrilled to start this…don’t tell my wife)?
What’s the best way to avoid this cost? Pretty easy. Vasectomy!
Save and Invest
OK, so you’re actually “in the black” every month, what should you do? Well, you should be looking to get paid. Whether it’s a savings account, CD, stocks (mutual funds, ETFs, index funds), bonds…whatever! Find something that meets your needs. Huge topic, and well outside the scope of today’s rant. Don’t forget your retirement account! Do you have access to a 401(k) or 403(b)? Put as much as you can in it (at least employer matches).
Do not underestimate the power of compound interest. Do not underestimate the tax savings one can yield by deferring taxes on contributions to things like a traditional IRA or a 401(k). My advice is to save as early as you can.
Did you just get a raise? Never let yourself be tempted by money. Assuming you were functionally “OK” prior to the raise…save it. Save it all. The more you detach yourself from these temptations, the less likely you will find yourself in financial ruin.
There is soooo much more to talk about here, but the takeaway is this: save something, anything, today. It will look so pathetic in the short-term (is this $100 really doing anything for me…?), but again over the long-term, you win. Here’s one piece of advice I’ve heard over and over again, from multiple sources: no one has ever complained about saving too much money. Future self: Man…why did I have to save soooo much money!? Not happening. Pay your future self, they’ll love you for it. There’s not many guarantees in this world, but this is one of them.
Secondary Income Streams
This is an “advanced” suggestion. It may not be possible for you to achieve, depending on your situation.
So, you’re saving money, you’re cutting back on expenses, you’ve got some capital to play with (this may not even be necessary). Well, you may want to consider doing something that can make you some money on the side of whatever your primary income stream is. It really can be anything:
- Are you creative? Can you create something of value? Try selling it on Etsy or Ebay.
- Got a bunch of junk? Sell it on eBay or Craigslist.
- Like going to yard sales? Why not sell things that you find deals on?
- Have something that’s maybe not common? A truck? A riding lawnmower? A special tool? Why not rent out its use to someone in your neighborhood?
- Start a small business; doesn’t have to be anything crazy, some of the best companies in the world started from someone’s garage; my mantra in life has been, get a job that pays well so you can funnel in that money to do what you really love
- Think of something else!
Read More “Oatmeal”
The man is a scholar. I’m not sure how it fits in with the financial angle of this piece, but…it’s funny, informative, and free. Free things are good.
That’s all I got. I’ll summarize really quick:
- Don’t buy things if you don’t have the money for it
- Don’t let little things eat away at your savings
- Understand what your costs and income are; make a budget if you have to
- Don’t overpay / get started on the big things too early
- Use credit cards, but pay them off immediately
- Do something you’re good at; that makes a lot of money
- Always have a backup plan, have hobbies that keep you sane
- Don’t make stupid decisions
That doesn’t mean you can’t have fun. I have plenty of fun. I just do it in much more economical ways than most people. To each his own…just don’t come to me for a loan if you don’t follow my advice!