Finances, Budgeting and Keeping up with the Joneses

The New York Times recently posted an article on finances and how many of us compare our own lot with those around us.  Too often, we might be reminded of what we don’t have rather than what we do, perhaps leading to feelings of ineptitude or inadequacy.  It’s human nature, I suppose, and these feelings might be more acute in the United States, where the individual is mythologized so vehemently with tales of the self-made millionaire.  We want to believe that what we have is a result of what we’ve earned, and if we don’t have as much as our neighbor, it must surely be because they’re doing something right and we’re doing something wrong.  I generally don’t harbor strong jealousies, but I must admit to being bewildered by the sheer volume of opulence that surrounds me in the Chicago suburbs.   Surely, there can’t be that many investment bankers and surgeons, can there?

But as the Times article highlights, when it comes to finances, things may be a bit more complicated than they appear.  A successful friend of mine once touted that he was a self-made achiever, failing to mention that his parents had paid for his college education and his first car.  People can be very sanctimonious when it comes to finances.  Sure, some people are well-off and have earned every penny, but for others wealth might be – in part – due to a sizeable inheritance or familial assistance with a home purchase or college expense.  Hell, if my wife and I hadn’t saved money for our three kids to go to college, we might be living a fairly opulent lifestyle too!  For others, opulence might merely be a mirage paid for with massive amounts of debt.

Regardless of the circumstances, we all make financial decisions, and it’s important to align those choices with our values.  Far too many of us make short-sighted and boneheaded financial choices, as I’ve written about before, but if your choices are guided by your values, then it doesn’t matter what your neighbor has or doesn’t have: you’ll be putting your money where it matters most to you.

So as you drive past your neighbor’s house, keep in mind that they might not have saved for college tuition as you did, or that they don’t put away a large percentage of their income for retirement as you do, or they don’t give a sizeable amount of money to charity as you do.  Or maybe they do and still have enough leftover for a Tesla and a luxury vacation to Tahiti.  If so, good for them! 

And if you’re someone who hasn’t been able to do any of the above, who maybe has made poor decisions in the past, try making a financial plan according to your values, align your choices according to that plan, and stick to it as best you can without worrying about keeping up with the Joneses.  You might find that you have more money available than you realize to put towards what’s important to you. And consider reading my blog from three years ago about twenty pieces of financial advice that I wrote for my children.

The Times article mentioned a blog I had never heard of before: Mr. Money Mustache.  Next week I’ll write about this, the FIRE movement it espouses, and some personal money-saving strategies I’ve found useful.

Financial Advice for my Children

I’ve made a few (hundred) bone-headed financial blunders in my past, probably starting with my purchase of a poorly made Yes t-shirt in 1984, but I wish I could say my financial ineptitude ended there. Within the last two years I was late with a credit card payment (really dumb) and didn’t consider the tax implications of some of my family’s finances (also dumb, but more forgivable, unless you conclude that we should have hired an accountant years ago and called it a day). But of course blunders can be and should be avoided. Last week I wrote about the essay Neal Gabler authored in the May issue of The Atlantic, wherein he too admits to his financial gaffes, albeit in the context of a larger national epidemic of financial illiteracy. But here’s the thing: financial illiteracy isn’t a condition. It’s a choice, at least for those who know better (and Gabler certainly does). Yes, I’ve made my mistakes, but I’ve kept reading and over time have done less harm and more good for my family’s finances. 

(Of course, someone could simply argue, “You want to do good for your family’s finances? Get a fricking job!” Fortunately, my wife is not among those someones.)

But even those who've managed to do a fairly good job of staying on top of the myriad of investment choices, saving maxims and cryptic tax laws might find themselves doing a piss-poor job of passing on that education to their children. I’ve found that while my parents had good sense and certainly taught me the value of a buck, most of my education was self-initiated by way of living and screwing up royally from time to time. I would like to see if I can spare my children of too much learning by living, because it seems as though these days the stakes are a bit higher. Growth is down, good jobs are more scarce, college costs are higher, housing is through the roof. It’s all gotten a little more insane.

So, recognizing that I’m offering nothing new here that hasn’t already been stated countless times before, I offer my children my twenty pieces of financial advice.

1)      Become educated. Hey, some people might make fun of Suzy Orman, but the gal can teach. Clark Howard is also a personal favorite. There is a ton of material out there, whether on TV, radio shows, books, DVDs or simply the Internet. I started way back with the books The Wealthy Barber and The Millionaire Next Door and went on from there. Sometimes it helps to read a well-written book instead of plowing through dozens of articles on-line. Whatever method you choose, there is no excuse to be financially illiterate.

2)      Avoid dept.  Aside from a mortgage, a car, a personal business investment, and (maybe) higher education, never pay for something you can’t pay off at the end of the month. Never.  

3)      Start saving now, gradually building to an amount equal to six month’s salary for emergencies. Yes, it will take time to establish such a fund. Start saving now. Even setting aside a few hundred dollars a month for a while will be helpful. And don’t settle for the crap interest rates that your bank offers. Consider looking at online banking (Barclays is currently paying 1%) or joining a credit union. 

4)      Always pay off your credit card bills each month. Always. I’ve missed I think three in my life, and that’s three too many.

5)      Start saving for your retirement immediately. Parents, you can open up an IRA for your child and invest any money they make (and that you claim on their taxes), even if they personally keep what they earn. I opened up IRAs at eTrade for my daughters when they turned sixteen and managed to match what they earned for a couple of years. Now that they’re in college they certainly can’t afford to invest all they earn, but even a small percentage is preferable to nothing. Five percent would be a nice place to start. Once you have access to a 401K that has a company match, max out your 401k up to the point of the company match, and then invest the rest in a Roth IRA, if eligible.

6)      Once you do start saving for retirement, never, ever, ever (this is for you, Neil Gabler) take out money from your 401k for something as stupid as a wedding. By definition, spending a ton of money on a wedding, a bar/bat mitzvah, a confirmation or quinceanera is stupid. Paying for it with a 401K is beyond stupid.  It’s colossally moronic.

7)      Stop eating out so much. You have an oven and a stove. Use them. When you do eat out, if things are tight play it smart and don’t pay for a $10 martini. Go to BYOB places, or pack a picnic and watch a free concert in the park. You can live well without living like a king.

8)      Don’t indulge in every desire, and if you do want to indulge in something, have a plan. If it’s going to take six months of saving before you can buy that musical instrument or take that vacation, then save for six months.

9)      Try not to take any loans out for college, but if you have to, don’t graduate with more than $30,000 in loans, and I would argue that this should only be for majors that will definitely result in a good paying job. $30K in loans means $333 a month for ten years, before rent, before food, before insurance, before utilities, before anything else. That’s a lot of money if you’re intending to major in political science. I can’t recommended highly enough Frank Palmasani’s book Right College, Right Price and I wish many of the parents I’ve spoken to had read it before sending their kids to college that will result in a degree and $80,000 of debt. You’re not doing your kids any favors by having them graduate with whopping debt.

10)   Don’t buy life insurance unless you have people dependent on your income, but once you do have dependents, buy a long-term term life policy while you’re young and healthy.  Lock it in.

11)   Once you have a legal partner and/or dependents, suck it up and pay an attorney for a will.  Don’t leave the government in charge of your death and your assets.

12)   Don’t get divorced. Seriously. Yes, the idea of marriage being a financial partnership isn’t sexy, but if you can avoid leaving your partner, you’ll be way better off financially. Of course, if there’s abuse of any kind, get the fuck out. But if not, see if you can work it out.

13)   Speaking of marriage, don’t wait until the wedding day to find out your partner has $150K in debt (think it doesn’t matter, that love conquers all? Think again.) or wants to open up a pizza joint in Little Italy. For goodness sake, talk about some of this stuff while you’re deciding to spend the rest of your lives with each other.

14)   Budget. Back in the day my wife kept a written log in a notebook of various things we were saving for (a wedding – which we paid for – musical instruments, a down payment on a home, etc.). Of course, once I transferred this log into Excel it became my responsibility, so my next piece of advice is: don’t transfer your wife’s written log into Excel.

15)   Give to charity. You’ve got to be one sorry sack not to give some of your time and money to others in need. And I don’t mean donating your old clothing. I mean feeding the hungry, housing the homeless, protecting wildlife, teaching a child or an adult. Help someone other than yourself.

16)   Don’t lease a car and don’t buy a new car, at least not until you’re in good shape financially. You could consider leasing if you’re someone who truly gets pleasure out of having a new car and who wants one every couple of years. Most of us can get by without this.

17)   Speaking of cars, drive your car until it costs more per year to repair it than it does to buy a newer used car.

18)   And one more about cars – don’t skimp on the obvious: change oil according to manufacturer’s instructions, check brakes and tires regularly and stay on top of other maintenance issues.

19)   Of course, the same can be said for a home once you own one. Take care of it. That doesn’t mean indulging in additions and renovations you can’t afford, but at least maintain the property.

20)   Speaking of mortgages, when rates are low, lock in and pay the minimum. If rates go up at some point (and they will) lock in but pay attention and refinance when appropriate (and don’t pay for the refi). I refinanced I think seven times in nine years when we first moved to Illinois.

So there you are. I’ll probably think of another twenty in the next few weeks, but this is a good place to start. Children, read and take heed. 

Oh, The Financial Mistakes We Make (part 1)

Want to have a quick lesson in real-life economics? Check out the May issue of The Atlantic and read Neal Gabler’s essay, “The Secret Shame of Middle-Class Americans,” in which he summarizes the financial plight of many Americans – which is enlightening enough – but then boldly summarizes his own life and the mistakes he’s made that helped lead to his rather precarious financial position. I admire his candor and plan to share it with all three of my children because his story reads like a what-not-to-do manual. If you ever wonder how someone who makes good money can become a financial mess, this is the article to read.  Gabler did virtually everything wrong, and though I suspect there are many other people who’ve gone down similar paths, he may have undermined his argument by lumping his experience into those millions of Americans who’ve done everything right yet still find themselves in financial dire straight. Gabler has no such claim.

(After you finish the article, scan through the comments section over a glass of wine or two or three – some are critical, some are empathetic, some are self-righteous, but nearly all are illuminating.)

The essay begins with frightening statistics about American’s lack of savings, lack of liquidity and lack of assets. Nearly half of Americans couldn’t cover a $1000 emergency room visit or $500 car repair out of their own pockets. This should scare the hell out of all of us, because how long can a society thrive and survive when half its population is “financially fragile”? These are real problems with real ramifications, no matter what your financial situation, and I suspect it’s why we find ourselves in such a heated and unexpected political campaign this year.

But then Gabler takes the courageous step of telling us his story, and in it he comes clean. He writes, “I am a financial illiterate, or worse—an ignoramus.” He’s not joking, and it’s troubling because he – like many Americans – not only hasn’t learned from his mistakes, he seems determined not to learn from them, as if being financially illiterate is a condition instead of a choice. In a world where TV and radio have made mini-celebrities out of financial self-help gurus like Suzy Orman, Dave Ramsey and Clark Howard, there’s no excuse not to become at least somewhat educated on financial matters. It’s as important – hell, it’s more important – than learning how to swim or throw a curve ball or learn a Bach prelude.

As parents we need to do much more to help our kids grow up to be financially-functioning adults. I’m going to do my part by forwarding Gabler’s article to my kids and I encourage you to do the same, but I also recognize that the odds of them actually reading the article are low. So next week I’m going to write a quick summary of financial no-brainers that I hope encapsulates all the what-not-to-do’s that Gabler did (and probably many he did not do) and then discuss it with my kids over dinner.  Stay tuned for part two...