Image via Wikipedia
With the current economy, many of us spend a lot of time worrying. That’s a lot of energy evaporating into the ether. So, what if we directed it to making new plans, plans that might actually make a difference no matter what the economic picture? Last week I was pretty snarky; I’m more straightforward this week. Basic overall principle at any income level: save a lot, spend less, invest the rest. The rest is all expansion:
Control your housing costs. At any income level, this is perhaps the biggest ticket item for most people, and the place where smart decisions make a huge, lifelong impact on wealth. Once upon a time, I was the first realtor to sell a million dollar home in Lincoln Park. It was fascinating to see who looked at it. Other realtors trotted out clients with some of the most famous inherited-wealth names in Chicago. None of them ever made an offer. Why? Too expensive. As one told me, there were plenty of great homes (at the time) in the $750,000 range and they intended to content themselves with the quarter of a million savings. All of them could have afforded it. And who was interested? Folks who were living large: traders, personal injury lawyers with a recent big win, people who had recently sold businesses. They paid cash, so I have no idea whether they had any OTHER cash.
Be smart from the start. Stay friends with your parents so you can move back in for a year or so after college and save money. Get a roommate. Give your spouse the house in a divorce. Have a house or rent payment 28% of your income OR LESS. Don’t upgrade your housing when you make a lot more. Everyone admires Warren Buffett’s acumen with money—look at how he lives. I see so many people whose entire wealth is their home. We all know what’s happened to that.
Cut the cars. The second one and all subsequent ones are costing you a fortune. How much? The financial writer Liz Weston has suggested that you can estimate your true monthly cost by taking the purchase price, doubling it, and dividing by 60. Whew! That includes maintenance, insurance, wear and tear, etc., and assumes you drive the wagon for 5 years. Now see what happens if you drive it 10 years, instead. If you own a car (or worse, cars) that’s parked most days, really, you don’t need it. A huge amount of families could get by with one car. Nearly everyone did in the suburb in which I grew up, and there was no such thing as public transportation. Kids (gasp!) walked to school, walked to the mall, walked or rode their bikes to friends’ houses.
Unless you drive for a job where you must impress people with your car, or you have more than four kids, you can probably go with a car that’s smaller than what you’re driving now. Really, who cares? Wouldn’t it be more fun to make jokes about your old heap while smiling inside about how much you have in the bank? At least, more fun than writing out that lease payment every month? Don’t even get me started on Hummers, Suburbans, and Sequoias.
Automate. The more decisions we have to make about finances, the more excuses we can come up with, and the more we can forget. Why throw it out the window? Put all your bills on autopay, and have your savings goals automatically taken out of your check or checking account every month. BTW, some credit cards have become hip to this and don’t offer auto-pay—they know that sooner or later you’ll forget a bill and they’ll get their interest payment and the penalty charge. Unfortunately, I know about this.
Establish actual goal amounts and segment your savings. It’s easier to feel like you’re getting somewhere if you can see the total rising towards a goal. I see people with accounts all over the place—that’s not what I’m talking about. I mean something much simpler—have a savings account earmarked for short to medium term goals (new furniture, travel, new car), a tax-favored account for retirement and possibly college goals, and an investment account because your 401(k) isn’t going to be enough (really). And a cash jar. Why?
At least one of the online savings accounts (ING) allows you to create sub-accounts and I highly recommend them: call them estimated taxes, travel, new car, etc. Then, each month you set up an automatic transfer (or transfer a specific percentage of each check if you’re self-employed or freelance). Have enough to take that trip? You can tell at a glance. Keep putting in that car payment after you’ve paid the current one off and you’ll buy for cash next time. The IRS won’t send you letters.
No matter what your paper statements say, having a cash jar is weirdly satisfying. We put all spare change and all credit card cash rewards in it. With the cash rewards added in, it’s definitely not chump change and it’s a great reminder that it’s real money going out the door. Ours is earmarked for vacation spending.
With a specific dollar goal attached to a specific account, you can see how close you are, and know when you’ve achieved it. Also, this helps control the fuzzy math that says, “I have $X in my cash management account, so I can take a vacation/buy a car/new iPad, yadda-yadda”. Problem is, it’s all the same amount. Hardly anyone can really afford “it all”, whether you’re making $50K or $500K. Okay, maybe Bill Gates.
Get some financial education. Okay, maybe if you’re not a financial planner, it’s boring. But even if you get good advice from your friendly fee-only advisor, it helps to have some understanding of what you’re being told. Take the time to understand and learn at least a little bit about investing. It’ll cost you less in both time and money, and it won’t take “the long run”. At least read a magazine on personal finance (I recommend Kiplinger’s).
Don’t put it off. Saving yourself is a lot easier the earlier you confront a mess. If you’re under 30, just take the maximum contribution to the 401(k)—yeah, I know you’ll never get that old and retirement is inconceivable. So don’t think too hard, just do it. By your 40s, you should start worrying. In your 50s or 60s, you ought to be mature enough to take a steely-eyed look at your finances. People can change at any age, and muster the courage to make choices.
Raise kids who are frugal. Maybe the best gift you can give your kids is to limit your giving. Kids who learn the connection between work and price are equipped to make savvy choices. Kids who have mild contempt for consumerism make savvy choices. Kids who see the money they’ve earned grow in investments make savvy choices. Especially, respect your adult children enough to let them stand on their own two feet. It’ll simplify your financial and estate planning. A lot.
Notice how all this stuff is under your control? No matter what the economy looks like, you have the power to make a huge difference in your personal finances. So, go do it!
