I’ve seen or heard this question posted in many different ways throughout the years, the gist of it being that one needs to make a fundamental decision between enjoying their life or saving for the future. I’ve heard the argument that you must “live” for today because you could be hit by a bus tomorrow. Young people have screamed YOYO! (Did I just coin that?), as in, “You’re Only Young Once”. They maintain that they must spend and “live” for today while they are young enough to enjoy it. But I don’t see it as a black and white, either/or situation: Save OR have fun. I believe that if you are wise with your money you can do both. Saving your money does not mean that you have to be a miserly scrooge sitting in your lonely attic counting your money and never having any fun. In fact, with a little planning and wise money management you can easily have a very pleasurable life and also save for your future at the same time. The one equation that people need to let go of is “Spending Money = Fun.” There may be some correlation to that sometimes, but it is certainly not a given. You can spend lots of money on something and have a terrible time, and even more importantly it is very possible to have a great time spending no money at all. I’m sure you can think of several examples of both these facts in your own life. Let’s start with the young (my newly coined YOYO philosophy). Yes, they can certainly save and also have fun. First of all, they have one huge advantage in their favor… the magic of compound interest. The fact is if you start saving (investing) early you will only need to save a fraction of your own money in order to build up a very tidy nest egg for retirement. Most of the money in your IRA at retirement will be growth on the returns you accrued through the years (not the money you actually put in). Pretty neat trick, huh? With a little prioritizing and forethought young folks can also be saving for their other more near-future needs/wants (a car, a house, a wedding, et.) by putting those savings on automatic pilot and just living on what’s left. The prioritizing comes in as you make the conscious decision to forego (instant pleasure X) which is not really adding a great deal of joy to your life in order to save up for that something that will bring you great pleasure indeed. The one joy that seems to be mentioned a lot is traveling. And here is where the young have another distinct advantage. They can travel for practically nothing, staying in youth hostels, or other low cost accommodations. There are even many temporary internship/job opportunities overseas that can allow them to see the world while sometimes even making a little money. The possibilities of low-cost travel are only limited by the imagination for the young (or young at heart). Google “traveling on next to nothing” and see what you come up with. I read a great memoir on the subject a while back called “No Baggage – A Minimalist Tale of Love and Wandering” by Clara Bensen. What about if you are not young? I see people of all ages squandering their money on daily instant gratification pleasures without even realizing that they are doing it. Once, when I was telling some friends about a trip to Singapore that I had just returned from, somebody asked me “I don’t understand. You can’t afford cable TV, but you can afford a trip to Singapore?” My answer to that is you can afford anything (within reason, of course), but you can’t afford everything. I chose to forgo all those channels at $150/month in order to save my money for something better. I even found a way to get TV for free (an old fashioned roof antenna). I also put my frugal skills to use to make the trip possible without breaking the piggybank. If fun is your priority, then go ahead and have it! Have as much as you want. Live! Take advantage of all that free fun that is out there for the taking. If there is some kind of fun that you must have money for, then just look at your spending habits and give something up that does not bring as much joy and save up for what you want. I see absolutely no reason why you can’t do both. Save and have fun! After all, you only live once! Wishing you a happy life today and a bright future tomorrow!
2 Comments
Someone I know recently bought a house and my 24-year-old son was asking me about the details. His number one question being “How do people save up that much for a down payment?” As I answered his questions it got me to thinking that I never addressed this topic in these blogs, so here goes: How do you know when you are ready to buy a house? Well some people think it’s just a matter of saving up that down payment, but really a lot more preparedness needs to go into it. First of all, how settled are you? Many young people move around quite a lot for job changes or other purposes so even if they are very lucky enough to have that down payment at such a young age, it is not necessarily the best time to be putting down roots into home ownership just yet. Unless you are sure that you will be staying put for at least the next five years, buying a house is rarely a smart move financially. You will sink a lot of money into the act of buying the house (in closing costs, realtors fees, inspections, lawyer’s fees, etc.) Then once you buy there is the cost of moving in, and often on top of that people will do some work to the house to make it more to their liking. And there is even the inevitable furnishing and decorating, especially if you are starting from “scratch” with nothing. And if you have put down a small down payment, you will typically not be gaining much equity in the house for the first few years, at least, as most of these initial payments are going to the interest on the mortgage. It is not until the principle starts to go down a little that the mortgage payments will start to chip away at that principle. And of course it also depends on the housing market. Your house could go up in value, giving you more equity but there is also the possibility that it could go down in value and put you in a situation of being “upside down” on your mortgage. That is actually owing more on it than the house is worth. This is what happened to all those people when the housing bubble burst in 2008. So with all that said, it will take a while before you will get enough principle back when you sell to offset the costs you put in when buying it. If you sell too soon you will not only not gain any money on the sale you could very well come out in the negative for your years of home ownership. If this is the case you would have actually have been better off to continue renting and saving your money. Next, other than that down payment you have saved up, how is your financial situation? Do you have any debts? If you do, it is very smart to pay them off before embarking on your homeownership journey. Do you have an emergency fund (of three to six month’s expenses) saved aside? I would recommend at least six month’s during this transition into home ownership as you never know what can happen. Is your job secure? You don’t want to take on all this extra monthly expense only to be caught high and dry with a loss of income. This type of scenario sends people scrambling and can result in a disastrous situation. Even if your job is secure, you have a good down payment saved up and you know you will be staying put, have you crunched the numbers to see of you can afford the cost of homeownership? A common mistake people make is this line of thinking. “I am paying X (say $1,500 per month) on my rent so I might as well be paying that amount on a mortgage and actually owning my own home.” The trouble with that is that you must consider all the other costs of owning. Some things that were covered by your landlord before are now your responsibility. Have you thought about taxes, homeowners insurance, (PMI if you have a small down payment), electricity, heat, TV, internet, water, rubbish removal, etc.? And in addition to all those fixed expenses, if the house is yours, you are now responsible for the upkeep. And no matter what great shape that house was in when you bought it, something always needs attention. Sometimes it seems barely a month goes by without an unexpected household expense. Even non-household expenses can derail you if you are “living on the edge”, just making all your monthly bills without a penny to spare. This is why it is so important to have that emergency fund set up before you move in. Now what about that down payment? I just mentioned PMI in the previous paragraph. What is that that? If you put less than a 20% down payment then you have to pay Private Mortgage Insurance. And although you are responsible for these premiums this insurance does nothing to protect you. It is to protect the bank from losing the money they lent you should you default on your payments. So, this brings us to my son’s question. How much of a down payment should you put down and how do you save up that kind of money? The answer to the first question is as much as possible, at the very least 20% (to avoid that PMI) If it’s home ownership you are after (and not living in a bank-owned house that you are paying dearly for (in interest payments) you should set your sights on the biggest chunk of money you can plop down. Another way to keep your down payment at a higher percentage of the cost of the house is to buy a less expensive house. This way that same down payment you have saved is now a larger percent of the total cost. You can always move into bigger house (or expand the one you are in) down the line should the need arise and your finances improve. Here’s a dirty little secret the banks don’t want you to know. They will approve you of a mortgage that is really out of a comfortable price range for you. Why? Because they are really not interested in how comfortable you are making the payments. They are just looking to get the biggest mortgage for themselves (the more you borrow, the more interest payments they will get). So buy a house that you are comfortable with (monthly payment wise), not what the bank approves you for, and ideally this monthly payment should be no more that ¼ of your monthly income. And one more thing on the subject of mortgages. The bank will automatically default to a 30-year-mortgage, but you are much better off to get a 15-year. The quicker you can get that house paid off, the less total interest you will pay on it. You can save yourself many thousands of dollars (even hundreds of thousands) by just doing this one thing. Now to Jesse’s question of how to save up for that mortgage. The same way I recommend you save up for anything else. Make it automatic! Open up an online account and set up automatic monthly payments going into it. Take the total amount you want to save and divide it by the months until you want to have the money. If you want to save up a $75,000 down payment in four years that would mean you need to save about $1,500 per month. *See Easy Peasy Make it Automatic If your timeline for savings is actually more than five years then you might want to consider investing (all or part of) the money into a low cost (relatively safe) mutual fund (such as an S&P 500). Putting those payments away each month will also help you to be living below your income and able to make all those extra expenses when you do move into that house. Owning your own home is the American Dream. It is a great feeling to live in a house of your very own and can also be a real plus to your total financial picture if you are indeed prepared for it, but please make sure you are fully ready before taking the plunge or it has the potential for turning into a nightmare. Do it right and make it your dream come true! Best of luck to you if you are looking to embark on this exciting new chapter of your story. Wishing you a bright future in your own home sweet home!
I have been talking in this space for years now with tips about how to save money and especially lately, of course, with so many people feeling the financial pinch of this Covid lockdown, saving money has become crucial. But someone posed the very legitimate question of where exactly they should be putting their savings. Some people just keep it in their regular (everyday) checking or savings account. That is not a good idea, and I will l explain why. You (should) have more than one savings goal for your money, and keeping it in a lump sum actually tricks the mind into thinking you have more money than you do. And for some people this makes it very tempting to spend it. This is the other reason to keep it separate from your everyday money. Once you break it down into the various needs you have for your money you get a more realistic picture of how much you have and how much you still need to save. Here is a breakdown of some goals you might have and where you should be putting the money for them: #1 Retirement: This can be a 401k or other workplace IRA account, or an IRA you have set up for yourself. At least 15–20% of your income should be going into that. Within that 401k or IRA, the money should be invested, of course. Low cost (index fund) mutual funds are fine. If you want to get fancier than that it is entirely up to you. #2 An emergency fund: This is especially important in these uncertain times we are going through. If you don’t have a fully-funded emergency fund (at least 3–6 months-worth of expenses), money should be going into this each month. In fact, during this time you might want to beef this up even more. When you reach the 3–6-month goal (or more) then just leave that sitting in a separate account for when you need it. This should be a liquid readily accessible account (not invested). ,#3 A car fund: Most people own a car and should always be saving towards the next one (paying car payments to yourself) so that you never have to finance one. Get off that car payment carousel! This will save you untold amounts of interest payments thrown away to the bank during the course of your lifetime. If you have no need for a car, then obviously this one does not apply to you, #4 Other savings goals: I recommend you separate them out into separate accounts. This is anything else you are saving for, a wedding, down-payment on a house, home repairs, trip, kids college, etc. For most of these savings I recommend you open up an online bank account (or more than one) and then set up automatic payments going into them (from your regular checking/saving account), calculating how much you will need for that goal and the amount of time you have to save for it. I suggest this for two reasons. One, the online banks have a slightly higher interest rate than brick and mortar’s do, and two, they are (at least psychologically) less accessible (out of sight/out of mind), so you will be less tempted to dip into them. And labeling them with a certain goal makes them more “off limits” to impulse spending too. One more thing. If any of these goals is on a long-range timeline (you will not be needing this money for at least five years or longer), then you might consider buying a (low-cost index fund) mutual fund to be putting that money into for better returns. Since the market is volatile by nature, I would not recommend doing this for any shorter range goals as you risk losing (some of) your money. But for longer range goals, it is a pretty safe bet that, with the usual returns on the stock market, you are likely to do better with this money than putting it into a savings account. So now you have an exact blueprint of where and how to save your money. Just plug in your particular goals and you can have the whole thing set up in one afternoon. And the beauty of this automatic savings is once it’s done you never have to think about it again. All you have to do is tweak it from time to time as your goals change (and/or are met). You can just get on with your life and stop stressing about money. And that’s what this whole money saving business that I’ve been teaching you is all about! 😀 A peaceful stress-free life! Wishing you a bright, stress-free, peaceful life of savings!
This strange lockdown we have found ourselves in and the resultant loss or decrease in income has left many people to ponder their financial situation and ways they have been managing their money up until this point. As I mentioned in the previous blogs, some people are just now waking up to the need for setting money aside for times such as this. The idea of the emergency fund has resurfaced into people’s consciousness, and the term is being batted around quite a bit of late. So I thought I would dedicate this space to the topic. First of all, what is an emergency fund, and why do we need one? The general consensus is that we should have about 3-6-months-worth of living expenses put aside, that is there to be used strictly for emergencies only. This money is best kept in an online bank account (slightly better interest rate) and completely separate from your everyday checking/savings accounts. The exact amount in there is up to you. If your income is very variable or otherwise unstable, then the larger amount (6 months) would be advised. Some people prefer to have even more than 6-months-worth if their income is very unstable, or they are very risk averse, or prefer more of a cushion. Everyone, no matter how stable they think their income is, should have at least 3 months at the bare minimum, because no matter how good things are going for you right now, “s#@t” happens! The purpose of having that fund is to keep your finances from being derailed when the unexpected happens. If you have that cushion put aside you can just dip in, pay that medical bill, or home repair or live on it through a job loss and get right back on track where you left off without throwing your whole finances into a tizzy. And even more importantly you won’t be forced to reach into your wallet for the credit card and put yourself into debt over the situation. Someone posed the question to me recently: “How do I determine when to take money out of my emergency fund?.” An excellent question, and that is why I chose to address it in this month’s blog. The bottom line is this, the more you budget for the unexpected, the less you will ever have to dip into your emergency fund. It’s as simple as that. So how do you determine when you really do need to break that piggy bank? Before dipping into the emergency fund you should ask yourself: “Do I really need to use this money right now?” Do you have some time to save up the money that you need, and get by without it for a while. Can you get by without whatever the expenditure is altogether? “Is this something I really need to buy?” Can you borrow something (at least while you save up)? Can you make do without it in some other way? “Is buying this thing right now really necessary?” Maybe it’s not the “need” you think it is, but more of a “want”. “Is this purchase right now really worth the sacrifice it will take to replenish my emergency account?” “If I don’t spend the money right now on this emergency will this situation cost me more money in the long run?” (i.e. a car or house repair that will get worse if left unfixed). In that case, by all means, do it. And after you have dipped into your emergency fund consider if this expense is something you should be adding to your monthly budget so that you are prepared for this type of emergency in the future (I.e. beefing up your “car repair” or “home repair” fund, or adding a new category to cover whatever the expense was). Ideally, if you have budgeted for every possible “unexpected” expense that may come your way, your emergency fund becomes just a big fat luxurious cushion for you to sit on and enjoy the security of. Wouldn’t that be a nice feeling! Wishing you a bright secure future!
Having spoken with a few millennials lately, including one young lady who was very motivated to get started on the right financial footing, (this is not always the case with the young people I encounter), I thought I’d devote this blog entry to those just starting out on their lives’ journey. This is the stuff that I wish somebody had told me when I was just starting out. I figured it out along the way, but it would have been nice to know it all from the beginning. And some people, unfortunately, just never do figure it out for themselves. Would I have listened? Who knows? But, as they say, if I knew then what I know now, and followed the advice I am about to impart to you, I would very easily be a multi-millionaire by now. And you can be too. Anyone can do it. Often I find myself very frustrated that young adults, who have the most to gain from learning to be smart with their finances, can be the most resistant to hearing (and following) it. And the sad thing is that if they don’t do it now, although they can still do alright whenever they decide to start, they can never make up for that lost time and the money they could have made by investing early. The magic of all those years of compound interest can never be regained. So, without further ado, in a nutshell, here are my most salient tips for millennials: #1. The golden rule of finance: Always, Always, Always Live Below Your Means! Start out that way and get used to it. As your income increases you can increase your lifestyle, but always stay below what you are making. 15% of your income should going into your retirement fund at all times. #2. The other golden rule of finance: Pay Yourself First! You will be paying out a lot of your hard earned money to other people and businesses in your lifetime (your landlord, the mortgage bank, electric company, insurance companies, gas company, food producers, goods manufacturers, health care providers, etc., etc., etc.,…..), but don’t give all your money away to other people or you will have nothing to show for it. Always be keeping something for yourself… up front, before any of your money goes out to anyone else. #3. Make it Automatic Set up that money to go into your retirement account (401k or Roth IRA) and your other savings (goal) accounts straight out of every paycheck before you even see the money. Out of sight, out of mind. #4. Keep track of your expenses Set up a system so that you know exactly how much you are spending, every day, every month, every year, and on what. You can do this by hand (simply writing it down) by computer (i.e. your own spread sheet) or with a website (such as mint.com) #5 Prioritize your budget: Spend your money on what is most important to YOU First comes dire needs, housing, food, transportation, etc. Then prioritize the rest according to your income and needs. Wants come last, and only if you can afford them. Think carefully about wants-vs-needs. Do you really want to sabotage your future goals for some frivolous indulgences today? #6 Plan for your goals Write them down and save for them systematically (how much do you need to save and when do you want it?). Do you want to get an education? Plan a wedding? Buy a house? Buy a car? Go on a vacation? Always be saving for your future purchases so that you will… (see #7) #7 Never borrow money! (AKA buy things on credit) Don’t get into the interest paying trap. It is a slippery slope once you start on the debt quagmire. This includes education (student loans), cars (car loans), and those insidious credit cards. Always save up and pay for things in cash. If you don’t have the money, you can’t afford it. The only possible exception to this is buying a house. But even here, if you can manage to save up and pay cash that would be awesome. People do it. I did it for my second house (after I paid the first off by ten years). Certainly aim to put down as large a down-payment as you can and take out a 15-year mortgage. Then (pre)pay that down as quickly as possible. And don’t buy a more expensive house than you can afford. Though the lending banks will pre-approve you for a much bigger mortgage than you can comfortably afford, don't fall for it. It’s really as easy as following these 7 very simple rules and you will be set for life. It’s not rocket science. Anyone can do it, at any income level. Stick with this lifestyle and you will go from millennial to millionaire, a very bright future indeed! Which one are you? Hopefully in the green! You can do it!!
|
Archives
June 2022
Categories
All
|