The Simple Dollar
There are a lot of tactics that work well in both the personal finance world and the business world. Cutting your spending works in both worlds if you do it in an intelligent way. Investing in resources that will last for a long time is a good tactic in both worlds.
However, there are things that work in business finance that don’t really work in personal finance.
The biggest one, from my perspective, is the concept of leverage. Leverage, for those unaware, refers to any technique that can be used to multiply gains – but, if it fails, it also multiplies losses. Examples of leverage include borrowing money and using derivatives.
Here’s an example of what I’m talking about. Let’s say you borrow $1,000 with the intent of putting it in the stock market. You put $1,000 of your own money with it and invest it in stocks. ( Continue… )
I have a very busy life. I have three kids, each of which are in different activities. I have three different community committee responsibilties, which means multiple meetings a month and other activities related to each one. I have writing responsibilities that involve two articles a day for The Simple Dollar, an ongoing effort to write a novel, and multiple other freelance opportunities. I have an ongoing social calendar that involves spending time with quite a few friends and family. I have a home that requires maintenance and upkeep. On top of all that, I try to maintain at least some free time for myself to exercise, read, and enjoy other personally fulfilling activities, and I also try to set aside daily time to meditate and keep my mind clear.
The only way I can keep all of this balanced is through careful organization. I use a series of tools to make this work, most of them electronic (though not all). I keep desktop versions of these applications on every computer I work on and a mobile version of these apps on my phone. In addition to what’s listed below, I keep a pocket journal with me virtually all of the time, along with a pen.
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Without these five free computer programs, I would find my day-to-day life very difficult to manage. I find these five tools to be absolutely essential. I’ve mentioned each of these in the past, but I felt it was worthwhile to update how I use each of these in my current day-to-day life. ( Continue… )
“An allowance is not a salary or an entitlement. It is a tool for teaching children how to manage money.” – Joline Godfrey
When our oldest child turned four years old, we started an allowance system. Each week, we gave him fifty cents per year of his age (so, $2 as a four year old). He had a piggy bank with four slots – one for spending, one for saving, one for giving, and one for investing.
At first, he mostly put money into the “spending” slot. We required him to put one quarter minimum in each slot, but after that it was up to him, so the remaining quarters were put in there to spend. He found lots of little things to buy at first.
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After a while, though, he began to start appreciating the “saving” slot. He saved up for a $50 toy over the course of several months when he was five years old, which was truly impressive to myself and my wife. ( Continue… )
Every so often, I’ll get a question like this one, from Gina:
I am a federal employee and I get my paycheck every two weeks but all of my bills are monthly. What’s an easy budgeting system?
This is a pretty consistent problem, actually. Many employees receive their pay on a weekly or biweekly schedule. Meanwhile, most bills come on a monthly basis, some even less frequently.
How do you easily reconcile the two and take on a budgeting plan?
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This is a problem I had to deal with in the past. Prior to 2008, I was employed in a situation that paid me every two weeks. It was a bit of a struggle to find a good balance between the paycheck and the monthly bills. My wife was also on a biweekly system, but her paydays were on different days than mine. ( Continue… )
A few days ago, I came across this interesting post by Kelly McGonigal in which she describes the vital role of mindfulness in losing weight, citing scientific studies. This paragraph stood out to me:
"Why are we so easily influenced by external factors? According to Wansink, most of our eating decisions are automatic. To demonstrate this, Wansink asked people to guess how many food-related decisions they make each day (Wansink & Sobal 2007). Consider the question yourself. Do you have any idea? If you’re like most people, you don’t: participants guessed an average of 14.4 choices. In reality, when the participants carefully tracked their decisions, the average was 226.7. That’s more than 200 choices that participants were unaware of initially. And without awareness, it is hard to listen to the body’s wisdom or make conscious choices."
Participants guessed an average of 14.4 choices. In reality, they averaged 226.7 choices.
That’s a startling fact, and it’s one that doesn’t just center around weight loss. It’s highly relevant to every single positive change we make in our lives, whether it’s weight loss, kicking a bad habit, or controlling our spending.
We make far more decisions every single day than we ever realize when we reflect on it.
How many times a day do you think you make a decision that affects your personal finance? I’m guessing that a lot of readers of The Simple Dollar who have been around for a while will probably have a higher number than newer readers, but I’m going to guess it’s still low. ( Continue… )
A few times a week, I’ll hear from a reader who’s really worried about imminent economic collapse. They’ll usually send me a video or a link of some sort in which some economist is talking about how the stock market is about to lose almost all of its value or something similar.
One example of this I’ve seen three times in the last few days is this article from moneynews.com, in which economist Robert Wiedemer is proclaiming that the stock market is on the verge of a 90% loss in value. His evidence for this is that some large-scale investors appear to have sold some blue chip stocks in recent days.
Here’s the truth about any article you read or video you see from someone who is announcing such economic doom: they’re either trying to sell you something or they’re trying to make a profit for themselves.
For example, in that article, the only links a person can find are links either to videos of Wiedemer promoting his book Aftershock or direct links to an order page so you can buy that book for yourself. Furthermore, if you look at his Amazon page, you can see that he’s been selling books that talk about financial apocalypse for the last decade. ( Continue… )
It’s a pretty common story. Boy (or girl) wants something. Boy discovers that there’s easy credit available. Boy convinces self that they can just pay the debt later. Boy buys that thing on credit. Boy gets more credit and buys more things. Boy starts realizing the bills and interest are drowning him. Boy decides to start repaying debt.
That’s the point when people often discover sites like The Simple Dollar. They’re in a financial pickle and they want to start getting out of it.
So, they set up a sensible debt repayment plan. They start making triple payments on their highest interest debt and before long the balance of one of their credit cards is empty. They’re happy. They keep paying down their debts.
Along the way, though, they begin to face what I call the hidden side of debt repayment.
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When you’re accumulating credit card debt, you’ve experienced a level of lifestyle inflation that’s beyond your means. If you’ve suddenly switched to repaying those debts with any level of speed, you’ve suddenly switched to a lifestyle that’s a bit below your means.
In other words, you’re experiencing lifestyle deflation.
Lifestyle deflation is a very challenging thing to deal with. It means you’re losing some of the creature comforts you’ve become accustomed to. You’re now having to make very careful buying decisions, ones that were handled without thought before.
For some people, this change happens easily. They adjust themselves to their new levels of spending and even revel in it. This was the case for me, for the most part. I took it all as a personal challenge and, after a while, the changes just began to fit.
For others, that change is much more difficult. After several months of debt repayment and lifestyle deflation, they begin to reassess their situation. Their head is well above water now and they have credit cards with low or zero balances on them. What’s wrong with a little indulgence.
There are two real problems here.
One, doing this just makes for a neverending debt cycle. If you simply look at a debt repayment plan as something to do for a few months to give yourself some breathing room, you’re always going to have a big fat monthly payment that goes straight to your lenders.
Every extra monthly bill you have is a stress in your life. It raises the amount of money you must have each month to keep yourhead above water, which means that you have less career freedom and your employers have more power over you. It’s awfully hard to walk away from a miserable job if you need that extra pay.
Two, your lifestyle can easily inflate a little without debt if you just hold on until you’re debt free.
Let’s say you’re dumping $2,000 a month into your debt repayment plan (including your cars and your mortgage). that money’s being used to make minimum payments on all of your debts and a big extra payment on whatever your highest interest debt is.
What happens when all of your debts are paid off? Suddenly, you have $2,000 more a month to spend. That might enable you to switch jobs to something that fulfills you more or allow you to start investing for the future or it might just let you indulge in a healthy bit of lifestyle inflation without debt hanging around your neck.
Giving up on a debt repayment plan just because it’s making you “miserable” due to a bit of lifestyle deflation is a double mistake. Not only are you simply committing to debt payments for a very long time (which gulps down money every month and makes the professional tightrope that much scarier), but it also denies you the chance to eventually enjoy life without debt. You might get to “rebound” from your lifestyle deflation a little, but it costs you now every time you’re miserable at work and every time you have to write another check that just keeps the wolves at bay, and it costs you later when you’re not free from debt and enjoying the perks that come with an absence of debt payments.
My philosophy? Embrace the deflation. Use it as a reason to try the many, many things out there that don’t cost much of anything but that you’ve always wanted to try. Fill your time with all of these new activities and before you know it, you’re free from the weight of debt and the opportunities of your life are wide open.
The post The Challenge of Lifestyle Deflation appeared first on The Simple Dollar.
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A few days ago, I watched an old recorded episode of Extreme Couponing. I’d caught bits and pieces of the show before and had always intended to watch a full episode of the show.
Clearly, the people shown on the program were very organized with their spending – and that organization reaped significant rewards for them. I recognized, of course, that some of these shopping trips were basically staged – no one actually completes a shopping trip to the store for well-rounded meals for their families and comes away with the carts full of items that were purchased in these examples. That didn’t take away from the fact that it’s pretty impressive how many items these people could buy for so little.
As I was watching, though, I couldn’t help but reflect on the incredible time investment that these people had to go through to get these bargains. The amount of planning, watching websites, reading grocery circulars, and cutting out coupons on a nearly endless cycle that the people on the show demonstrated was, frankly, amazing. It is a very large and very organized time investment. ( Continue… )
Greg writes in:
"I don’t see how a person making minimum wage can ever become financially independent. It’s basically impossible."
It’s far from impossible. It’s just a matter of priorities.
Let’s say you’re single and live in Washington state, where minimum wage is $9.19 per hour. You work forty hours a week for fifty weeks a year, earning $18,380. According to this Washington state tax calculator, you’ll end up bringing home an amount very close to $295.20 every week throughout the year.
The first step is to find an inexpensive place to live. If you’re willing to work for minimum wage, you can find work in a lot of places. This site reports that a single parent and two children can live in Wahkiakum County on $32,997 per year, which means a single adult should be able to pull it off on $18,380 per year.
Once you’ve done that, you have to pay attention to your expenses, starting with the big ones. Do youreally need a car in the area where you live? If you live close to work and have access to groceries and the doctor, you can probably do without it, which saves you a lot of money each month. Do you really need extra living space as a single person? Just rent a small space with one bedroom or even an efficiency, or rent an apartment or a small house with some roommates.
You should also whittle down your monthly bills. Use a pay-as-you-go cell phone. Use the internet at the library and skip it at home. Don’t have a cable bill – instead, just stick up an antenna and enjoy the dozens of over-the-air channels that are now out there (most stations now have two or three digital channels).
Food can be tricky, but you can live pretty cheap if you stick to generics, eat a lot of whatever produce is on sale, and watch for food sales. A single person can easily eat on $150 to $200 a month if they’re careful.
Afraid you’ll be bored? Cultivate a network of friends that do free stuff. See if the town has a parks and recreation department and get involved. Start an ultimate Frisbee league in the park. Invite people over for movie nights and have everyone bring a beverage to share. Get involved in any local organizations, as they usually have a lot of activities that are free. Go to any and all community dinners as you’ll usually get a good meal at the same price or lower than what it would cost at home and you can meet a lot of interesting people.
Channel the rest of your spare time into earning extra money. Mow lawns for $10 a pop. Deliver groceries. Deliver pizza. You can do these on a part-time basis to supplement your income.
Allot yourself a little money for incidental spending, but make absolutely sure that you’re socking away at least 10% of your paycheck each week into a savings account. That’s going to be about $30 a week. Do nottouch that money. When it starts to build up, invest it. Spend time at the library learning about how to invest properly and start putting that extra money to good use. If you earn extra money from a side business or other jobs, sock some of that away, too.
Let’s say you’re able to save just $30 a week following a plan like this. $30 a week for 52 weeks adds up to $1,560 per year. Let’s say you invest that in stocks that return 7% over the long haul. After nine years, you’ll have more than a year’s worth of your income in the bank. After 20 years, you’ll have over $60,000 in the bank.
Now, let’s say you find a way to stick another $30 per week into the bank. At the thirty year mark, you’ll have $294,000 in the bank. If you continue to live on about $17,000 a year, that money will last you for the rest of your life – you can live off the interest.
If you start this at age eighteen, you’re done working at age 48.
This is just an example, of course, and I’m not figuring in things like life changes (getting married, having a kid) and I’m not worried about inflation, either (I’m assuming that minimum wage keeps up with it and that you raise your savings to match your raises along the way).
Still, the point is clear: anyone can do this if they choose to make savings a priority in their life. If you choose not to do that, you pay for it over the long haul. Every frivolous thing you throw your money at pushes financial independence further and further away and, if you have a low income, every little bit matters.
It’s not a matter of “I can’t do this.” It’s a matter of “I choose other things instead of doing this.”
Every investment you make requires you to balance three different factors.
The first factor is risk. How likely is it that you’re going to get the return you expect over the next year, or the next five years? Generally, lower risk is better.
The second factor is liquidity. How easy is it for you to get money out of that investment? The easier it is, the greater that investment’s liquidity. Generally, higher liquidity is better.
The third factor is return. How much do you expect to earn off of your investment over the next year? This is, of course, heavily tied into risk. Generally, higher returns are better.
Everything you invest in is going to require a sacrifice in one of these areas.
If you want high liquidity and low risk, you’re going to have a low return. You’re probably going to be putting your money into something like a savings account.
If you want low risk and high return, you’re going to have to give up liquidity. You’re probably going to be putting your money into something like real estate.
If you want high liquidity and high return, you’re going to have to take on some significant risk. You’re probably going to be putting your money into something like stocks.
There are different life situations that call on different investment options.
For example, if you want to have an emergency fund that will help you get through painful situations in your life without having to dive into debt or touch your retirement, you’re looking at something that’s high liquidity and low risk, which means you’ll have to accept a low return. Thus, it makes sense to keep an emergency fund in a savings account.
If you want to buy something and sit on that investment for a very long period while it earns you a fairly steady income, you’re going to want something with a low risk and a high return, which means you’ll have to sacrifice some liquidity. Thus, it makes sense for people to invest in rental properties to generate a steady income.
On the other hand, if you want to be able to invest in something that provides a great return, but also want the freedom to jump out of that investment quickly if something in your life changes or if something about that investment changes, you’re going to need something with high liquidity and a high return, which means you’re going to be adding risk to the mix. For many people, it makes sense to invest in stocks for the ease of rebalancing and selling them off.
These descriptions are very broad strokes, of course. Different people may have different opinions on how to specifically invest and so on.
The key thing to remember here is that your life is in the lead. You make investments based on what you actually need in your life above all else. The situation you’re in and what you need out of the investment will lead you to what you should be doing with your money.
Yes, it takes research and time, and yes, you’ll sometimes find contrasting viewpoints, but without a plan for your life before you invest, you’re likely to make a giant mistake, one that will cause you to have your money locked up tight when you need it or be facing a severe loss when you least expect it or be facing very small growth over a long period.
Figure out your life before you figure out your investments. If you know your goals first, the right investment becomes much more clear.