Taxes and Home Ownership – The mortgage interest deduction is not the only game in town

Two weeks ago I finished the Certified Financial Planner introductory course to personal taxes and learned about a very attractive benefit of home ownership: Internal Revenue Code Section 121. Sec 121 allows the gain on the sale of a residential home to be excluded from income. The exclusion is up to $250,000 for a single person or up to $500,000 for a married couple filing jointly.

That’s a lot of money that can be excluded from taxes. However, there are some caveats if the residence was used as a rental since 2008. Yes, I know these concepts might bore some, but I was deeply intrigued. As a California native I’ve seen the housing market do amazing things. One day I may get to give someone the good news that they get $250k/$500k of income tax free. Or I may even get to benefit from it myself. The specific requirements to qualify for Sec 121 are below.

Continue reading “Taxes and Home Ownership – The mortgage interest deduction is not the only game in town”

How Do You Live on $2 a Day? – How the World’s Poor Manage their Finances

According to Portfolios of the Poor written by a leading group of researchers, 40% of the world’s 7 billion people live on less than $2 a day. What makes matters worse is the irregularity of their income. If they knew they were going to earn $2 every day it would be possible to build a budget around it. But they don’t know. During harvest season they may have plenty to eat and even be able to save. At other times they may have to live on one meal a day and borrow to make ends meet. How can someone deal with those massive changes in income? To make things even more dire are expensive emergencies, such as an illness, a burial, or a whole host of other things. Continue reading “How Do You Live on $2 a Day? – How the World’s Poor Manage their Finances”

Sufficiency and your True North – Celebrating Enough

The Soul of Money by Lynne Twist is not your typical personal finance book. It does not go into how to get out of debt or where to put your retirement investments. Instead, it is a thoughtful book that reminds us that we already have enough. We have probably all heard that the endless pursuit of more does not lead to an enjoyed life. It only leads to a need for more. The issue for many of us is that we forget this simple idea, especially when we listen too closely to the consumerism in society. Twist shares her transformation away from the mindless pursuit of more towards a more aligned lifestyle for herself and her family. Continue reading “Sufficiency and your True North – Celebrating Enough”

Financial Flourishing and Kids: Saving for College

As a society we want to see children flourish and part of flourishing is being financially capable. Financial capability is a term coined by the Center for Financial Inclusion that goes beyond financial literacy. It describes someone who knows how to solve money questions and feels confident in their ability to take care of themselves financially. Whether someone has a high income or not is not an indicator of whether they are financially capable of caring for themselves. Becoming a financially capable person takes work because you are actively evaluating situations to see if they will work out to your benefit. It often feels easier to simply do what others do.

In addition to teaching a child to be financially capable, parents are also instructed to save for their child’s future. The common reasoning states that for your child to succeed he or she will need to go to college. It follows that if you want your child to be able to attend college it makes sense to put funds away for them. This leaves you with some big questions: How do you manage the expense of having a child today with the desire to provide for their future? How can you raise your child to be financially capable and make good use of any funds you may be able to provide for them?

Saving for college

David Hulstrom, an experienced CFP from Georgia, clearly states the route to take when it comes to saving for your child’s education and it may not be what you expect. Hulstrom advocates saving for your own retirement first and paying off your mortgage. He points out that there are more funding opportunities for education, such as scholarships and subsidized loans, than there are for retirement.

I would add that taking care of your own needs first teaches your child to care for themselves first. In the long run your child will benefit from knowing that you are taken care of just as much as you will. As the child of parents without a retirement plan, I can attest that I have felt more stress in regards to my parents’ aging and their finances than I did in regards to my student debt. I was confident I would one day be able to pay off my student loans, but I am still unsure of how my family will handle my parent’s aging.

At first glance, saving for yourself and paying off your mortgage without saving for your child’s future may seem selfish. Also, it may be uncomfortable to answer the question, “Are you saving for your child’s future?” with “No. I’m saving for mine first.” A second look reveals that savings for yourself first will increase your child’s chances of receiving government aid for school since retirement accounts and paid off houses are not used in determining financial aid. Plus, you can withdraw from Roth IRA accounts for education and if needed take out a home equity line.

It may make sense for you to save for your child and open a college savings account even if you have not maxed out your own retirement for the the year and/or are still paying off your house. This is especially true if you have family that wants to contribute to their college fund. Plus, it will show your child that you encourage them to go to college.

Once you do decide to set aside funds for your child’s education, you’re left with the question of where to do so. Given the long term horizon of saving for a child’s education it is a good idea to invest the money in the stock market through index funds. Saving money in a bank as cash is best if you will need the money within the next five years. When your time horizon is longer, you have the opportunity to invest in the market. Hulstrom describes the two main tax-sheltered investments vehicles for saving for your child’s education with technical detail; he recommends you first max out the Coverdell if you are under the income limits. Below is a brief overview of both accounts:

Coverdell Education Savings Accounts

    • Greater flexibility of investments than 529s, thus the opportunity to invest in funds with lower fees
    • Annual contribution limit of $2,000 per child
    • Funds can be used for K-12 expenses, including tutoring
    • Funds must either be used by the time the beneficiary is 30, or they must be transferred to someone else

Qualified Tuition Programs, also known as 529s

    • Many states, such as Colorado, have favorable tax treatment for in state 529s
    • Annual contribution limit varies by program, as much as $28,000 per year for a couple
    • Funds are only for higher education, cannot be used for K-12 expenses
    • Funds do not have to be used by a set time

These accounts are considered the parent’s assets, so they will not negatively affect the beneficiary’s ability to qualify for financial aid for college. Both the Coverdell and 529 are subject to federal tax and a 10% penalty if they are used for non-educational expenses. If your child decides that higher education is not for him or her, they can weigh the pros and cons of paying taxes and the penalty for withdrawing the funds. Or you can decide to transfer the account to another family member. On the other hand, if you save for your retirement and pay of your house you definitely know who will benefit from the effort…

What if they don’t go to college?

Keep in mind that college is not the only route to adulthood. I personally think college was a great time for me to expand my care-free adolescence. In fact, I tell every kid I know to go to college so that they can postpone working for another four years. So far, they have all been very interested by this hook. However, they quickly get confused once I start to tell them to avoid taking out student loans as much as possible. I remember my 14-year-old cousin’s eyes glazing over when I listed the scholarships I applied for during my senior year of high school. He stopped me when I began to describe the academic effort it took to get the grades to apply for said scholarships. In fact, he pointedly commented that it sounded like I had not taken full advantage of my care-free adolescence in high school. He may have a very good point.

In addition to applying for scholarships providence also gave me a huge source of financial help: my parents divorced a few years before I went to college. My mom’s income during my entire college career hovered around $20,000 per year. My obvious financial need, partnered with my strong grades, and my dad’s help with rent made it possible for me to attend a well ranked state college and graduate with only $5,000 in loans for my Bachelor’s. I’m not advocating that divorce be part of your financial plan for your child’s education. Instead I am pointing out that we never know how things will work out.

Right after receiving my Bachelor’s I went on to earn a Master’s degree with enough debt to teach me what debt feels like to me: a ball and chain. Truthfully, I am grateful for the experience of being in debt because it pushed me to re-align my finances. Maybe your child would benefit from some educational debt. A word of caution, it is almost impossible to get away from student loans, even bankruptcy is not a cure for student debt.

If you do decide to save for your child’s higher education keep in mind that the money could be used a different way. Your child may use it to buy a home, start a business, or a myriad of other options. The best way to ensure the money you set aside for your child’s future is put to good use is to raise your child to be financially capable. In my next post I’ll report back on what experts say is the best way to teach kids about money.

Neal Gabler Publicly Exposes Himself – Taking Shame out of the Money Conversation

Last month The Atlantic published a very moving article on financial insecurity. Author Neal Gabler shared his private battle with financial illiteracy and shortsightedness in an article entitled The Secret Shame of Middle-Class Americans. If you are struggling with your finances, or know someone that is, I strongly recommend you read the whole article. 

Gabler begins by stating that he is one of the 47% of American who would need to borrow in case of a $400 emergency. He goes on to detail the decisions and assumptions that got him to this place. He assumed he’d make more money next year; that his children needed to go to a private school; that he didn’t really need to tell his wife what was going on with their finances. He did not do anything wrong or irresponsible, he simply went for the American Dream using reasonable amounts of debt and risk. He ignored any signs of financial distress until it was too late. Pair this with the fact that his income after adjusting for inflation is the same as it was twenty years ago and you get a perfect storm.

The article ends with Gabler sharing how he now manages his finances; it is not what he had imagined twenty years ago. Although he has a good income, a long career, and a graduate degree he has not taken a vacation in ten years. He no longer uses credit cards. He and his wife only eat out a few times a year. He is now doing the things that we all know we should do to do well financially. But why is it so hard for us to start here and to do these things by choice rather than necessity? And why are we so ashamed to talk about finances?

Guilt vs Shame

Gabler powerfully points out that as a country we feel ashamed that we cannot attain the American Dream. In my opinion the American Dream may be the cause for all of this financial overextending with debt. In his own words:

In a 2010 report titled “Middle Class in America,” the U.S. Commerce Department defined that class less by its position on the economic scale than by its aspirations: homeownership, a car for each adult, health security, a college education for each child, retirement security, and a family vacation each year. By that standard, my wife and I do not live anywhere near a middle-class life, even though I earn what would generally be considered a middle-class income or better. A 2014 analysis by USA Today concluded that the American dream, defined by factors that generally corresponded to the Commerce Department’s middle-class benchmarks, would require an income of just more than $130,000 a year for an average family of four. Median family income in 2014 was roughly half that.

It looks like most of us are destined to feel ashamed that we cannot reach the American Dream. To make matters worse we have a tendency to hide anything that goes wrong, especially in our financial life. Personal finances are rarely discussed openly because we feel it is a private failure. People are more likely to talk with someone about breaking their diet than the amount of credit card debt they carry. This secrecy around finances means people may be slower to see they have a problem. Not only does the secrecy mean we continue to dig a hole longer than needed, but we are ashamed of it.

Professor and vulnerability researcher Brene Brown says shame is “highly correlated with addiction, depression, violence, aggression, bullying, suicide, and eating disorders.” In her Ted Talk on shame Brown defines shame as feeling “I am bad,” whereas guilt is “I did something bad.” Shame withers you down, while guilt can teach you. In order for shame to grow it needs three things: secrecy, silence, and judgment. You can definitely see all three of these ingredients in personal finances.

In his article Gabler shows us how he moved from ignorance to shame to guilt and now to growth. Many of us can relate when he describes how small decisions and assumptions led him down a path where he lived beyond his means. A lot of the time we ignore how our decisions impact our financial well-being because we think we’ll use debt just for a short while until things get a little better. We may even completely neglect acknowledging our finances if we feel uncomfortable talking about money. From there shame can creep in as we see our finances in the red.

When I had to go into debt to cover groceries I felt ashamed. I felt I had failed to manage my money and angry that I was unemployed despite my post graduate degree and years of work experience. Thankfully I talked about this with a friend who let me know I could change. She helped me look at my situation and make a plan that moved me in a better direction. Her encouragement gave me hope and I plan to return her service to my future financial planning clients.

Gabler mentions visiting a financial counselor who had him get rid of credit cards and start paying off debt. When we share what we are ashamed of with a trusted friend or professional we can then begin to look at the behaviors that got us there. We may be tempted to try and change the behavior on our own, but if that fails seek a trusted friend to discuss the issue with. Once you find one behavior you can change, or make a plan to get out of your current situation you will feel empowered and begin to let go of shame. Keeping in touch with your friend will help you stay accountable. Moreover, he or she can encourage you when you are tempted to go back to previous habits.

Changing the American Dream

Gabler is incredibly brave for sharing his story. I hope that many people will take a look at their own financial decisions and focus on changing behaviors that got them in trouble or are heading them down that road. Moreover, he does a wonderful job of showing us how 47% of Americans find themselves in similar straits. Wages are not growing the way they used to. People are graduating from college with crushing debt to a lukewarm job market. Our expectations of ever increasing income and better gadgets are making matters worse. All of this is blatantly apparent whenever an unexpected expense comes up and we need to use debt to cover it.

Gabler made decisions that aligned with his values, but they ignored his financial reality. A lot of stress comes when we’re unsure of cash flow and have no savings for those always reliable unexpected emergencies. My call to action is that as a society we can save more so that when life throws us an extra expense we can take it in stride without digging a debt hole. We can plan more so that we do not need to saddle teenagers with mortgage size debts in order to get an education. We can learn to live within our means to enjoy the freedom of being satisfied. We can learn to be happy while paying off debt because once the debt is gone we’ll know how to be happy without spending more.

The decision to include financial reality when making life choices can feel like an unwanted chore. Talking about money can awaken a fear of uncertainty and a sense of being overwhelmed. That fear is a signal growth is needed. Maria Popova wrote a beautiful article on how fairy tales can teach us the importance of being scared. She reminds us that “the terrible and the terrific spring from the same source, and that what grants life its beauty and magic is not the absence of terror and tumult but the grace and elegance with which we navigate the gauntlet.” 

How do you navigate the gauntlet of finances? Money isn’t everything, but avoiding planning can make it feel like it is. Gabler says financial worry crowded out everything else from his mind. By sharing his path Gabler gives us an opportunity to share our own experience with financial illiteracy and insecurity. Shame tells us that we are wrong for being where we are. Talking about what shames us is an act of courage. Changing behaviors that no longer serve us is the way of growth. My hope is that as a society we move away from shame over being unable to reach a materialistic dream. My hope is that we move away from the dream of a rich bank account to a reality of a rich life.

Have you ever shared a financial issue you were ashamed of? What was the experience like?

Is it time to align your life? – Does your Spending Reflect your Values

Have you ever thought that it was time to consider downgrading your lifestyle to cut expenses? Downgrading your lifestyles sounds painful. It sounds like something is being taken away from you. Instead we can call it aligning your lifestyle. You can ask yourself: Does your lifestyle enable you to become the best version of yourself? If it doesn’t then there’s the option of aligning it.

In my life I’m considering a re-alignment because of several reasons. I am going to deplete my savings to replace my car within the next couple of months. In four months I will be purchasing a certificate program to become a Certified Financial Planner, further depleting my savings. Within the next year I plan to re-start my career at an entry level position in the financial planning industry. In other words, I will most likely experience a drop in my income. And finally, in the next few years I would love to launch my own practice and become self-employed. This will require a nest-egg to get me through the initial three years.

I am very vigilant about avoiding lifestyle inflation, however, I rarely look at cutting things out. The last time I seriously looked at cutting expenses was five years ago when I began my debt payoff journey. Given all the upcoming changes in my income and the major upcoming expenditures I have begun to consider what else I can cut out. And let me tell you a little secret: it is painful to consider cutting anything out.

What’s the why?

I’ve shared what has led me down this path, but what would get you to consider re-aligning your lifestyle? It could be one of the following:

An unexpected expense that is beyond your current savings

Examples of this abound. Say your car needs to be replaced, you’re having a baby, your house requires major improvements, a recurring medical issues comes up, etc., etc. You get the idea. Regardless of the reason for the expense, it is more than you can afford without going into substantial debt

You expect a decrease in your income (or are currently experiencing it…)

Maybe you’re going back to school. Maybe you’re retiring. Maybe you’re taking time off work or will be working part-time in order to care for family. Or maybe your boss gave you a pink slip. Whatever it is, your income is no longer what it used to be.

You want to build up your savings or pay down your debt faster than you can with your current lifestyle

What if you dream of traveling across the world? Or of stating your own business? Maybe you want to give a substantial amount of money to a cause. Or maybe, you just want to be free of the ball and chain called consumer debt. These are just some examples of the many dreams that require a drop in expenses before they can be achieved.

You are unhappy with your current lifestyle

It may be that you are tired of having so much stuff to maintain and insure. Last year I visited Cuba and I came back feeling my lifestyle was too extravagant with all of the eating out and an entire 750 square foot apartment all to myself. Or it could be that you have realized that you cannot actually afford your current lifestyle and are paying for it with debt and loads of excess financial stress.

There are many other reasons for wanting to align your lifestyle. The list above is a sample of broad categories. Regardless of your reason I’d suggest you proceed deliberately.

Aligning your lifestyle can have a painful adjustment period. Robert Cialdini, an expert on the science of influence and Professor Emeritus of Psychology and Marketing at Arizona State University, states that this is due to the scarcity principle. This principle states that when something becomes less available we value it more and thus want it more. For example, I currently live alone and I am completely free to to use whatever part of the house I want and listen to music as loudly as I want with or without pants. Where I to get a roommate to lower my housing expenses I would need to adjust. My first instinct is to imagine the changes I’ll need to make will be overwhelming. In reality however, I spend most of my time at home at my desk in silence wearing a skirt. I am certain I can find a roommate who would be okay with this.

What do you do to align your lifestyle?

Once you decide that you need to align your lifestyle in order to reach your dream, you then get to decide what needs to be changed. Start by writing down your expenses and placing them into buckets of what can be changed from easiest to impossible. The easier things are anything that would have little effect on your quality of life. The harder things would require major life changes. Then there’s the sacred expenses that cannot be altered. Put it all on the table and recognize that whatever you decide is okay. Below is my list with some of my expenses.

  • Easiest: Starbucks, video games, new clothing
  • Hard: gym, wine membership, eating out
  • Sacred: housing, internet, health insurance, car insurance, retirement savings

Given my dream of changing into a new career I need to look at the big expenses. I do not drink enough coffee or buy enough clothing for changes in those expenses to meaningfully affect my budget. To make lasting impact on your budget target you really need to target recurring expenses. It’s much easier to cancel your wine membership once than to rely on your will-power to pass up every opportunity of Starbucks.

The real impact comes when you look at those sacred expenses. Can you lower them somehow? More specifically in my case, can I actually give up living alone? That leads us to the next question…

How do you get through the pain?

Let’s say you’ve decided to align your lifestyle and know what you will be targeting. It’s now time to take action. Here are the steps I suggest:

1) Determine your bare minimum. What do you absolutely need?

As I contemplate getting a roommate I know that at the very least I need my own bedroom and full access to the kitchen. Maybe you’ve decided to get rid of your leased car and are thinking of buying a used economy car with no frills. It could be that instead of getting Starbucks three times a week you will now limit it to those days when you only get six hours of sleep. Or you will set a limit on how often you go out with a friend who only wants to go to five star restaurants. You can set up guidelines on what an aligned lifestyle looks like for you.

2) Easy does it

Slow and steady will get you to your dream with less scrapes and bruises than forcing your way there. Take the time to think things through. Allow yourself time to make sure your decision is really aligned with your best interest. Don’t confuse a decision with a reaction to some outside stress, like getting a pink slip or reading about another person who launched their own business and is living in the Bahamas.

When we make changes before we are ready we are likely to slide back into old habits. Will-power is not an effective way to reach your dreams because it doesn’t last long. Moreover, big lifestyle changes take time. Even if I were to decide today that I do want to get a roommate it will take time to find the right-person. As Frank Sinatra said, only fools rush in.

Of course there is always initial discomfort whenever there are big changes. However, we can become accustomed to anything. Harvard Professor Daniel Gilbert states in his book “Stumbling on Happiness” that it only takes three months to become used to anything. You can see his 2004 Ted Talk here. In other words, give yourself plenty of time and grace as you become used to life without cable, steak, or a car of your own.

One last suggestion: remember that nothing is permanent. Say I do decide to get a roommate to save money. I may later on decide that the money is not worth the headache. At that point I can change again. And I can have the satisfaction of knowing that I truly tried to make it work.

Are you ready to align?

If you have a dream that requires you align your lifestyle with its pursuit then you’ll have to consider the following questions:

  1. Why are you changing?
  2. What will you be changing?
  3. How will you do it?

Above all remember why you are doing this. It also helps if you tap into a network of friends who believe in your dream. If you’re trying to cut down on how much you spend eating out, it’s okay to tell a friend you’d rather hang out with them at home and eat ramen. When those closest to you are supportive of your lifestyle changes it becomes much easier to adjust to the changes. When they are not supportive of your dream, it’s best to avoid the subject with them rather than sabotaging it. I had a friend who once said “Don’t tell your goals to trolls” because their doubt can seep into you.

For most of what I do my “Why” is that I want to make the most of my short time on earth. I began to seriously dream of becoming a personal financial planner after reading George Kinder’s book “The Seven Stages of Money Maturity”. There is one thought in particular that stood out to me:

Our first obligation in this world is to discover the circumstances in which our souls flourish. This is the truest and deepest meaning of freedom – living under the conditions that makes us most truly ourselves.

– George Kinder

I think this resonates with everyone. For some of us, our finances may not be aligned with our new direction. Thankfully with some effort you can change your lifestyle to reach your dreams.

Do you have a dream you’d like to save up for? Is there a “sacred” expense that you may consider addressing?

Save Mindlessly, Spend Thoughtfully: Part 2

In the previous blog post I discussed Dan Buettner’s findings on financial well-being from the Blue Zones. His takeaway when it comes to finances is simple: Save Mindlessly, Spend Thoughtfully. It’s best to start by saving and setting up a system to do so automatically before attempting to spend thoughtfully. If you focus on changing your spending before you start to change your savings there may not be enough money left to save.

I find that saving mindlessly is easier than spending thoughtfully. Once you set up a savings system you can forget it. When it comes to spending we make daily decisions on it. Learning to question whether a purchase is in one’s best interest can be exhausting. Thankfully, with practice it will become much easier. This is especially true if you have a budget that prioritizes your values. You also need to allow yourself enough flexibility to avoid feeling deprived.

Figure out your Big Rocks First

In an article entitled The Big Rocks: How to Prioritize Your Life and Time JD Roth discussed his impression of Bob Clyatt’s book Work Less, Live More. Clyatt revisits one of Stephen Covey’s main guidelines: unless you prioritize your values (Big Rocks), small things (Sand) can eat up your energy and time. The same applies when it comes to spending. Imagine your life is a container and you get to decide how to fill it. In my life exercise is a Big Rock while watching TV is Sand. Where I to fill my life with Sand I’d never get to the gym…

When it comes to money the Big Rocks are housing, transportation, savings, etc. Once these are taken care of you can fill in the gaps with Sand. Sand would be discretionary spending on entertainment, new clothing, or whatever else you like. You get to decide what the Big Rocks are for you. Once you do, give them the space they deserve. At the same time without the Sand your container would never fill up: that Sand gives you space to be. As motivated as I am to work on my blog, I also make time for passive entertainment. I never know where inspiration for a blog post can come from.

What if your Big Rocks are Out of Balance?

Say your housing takes 50% of your take home income. That can be very stressful because it does not leave room for fun and savings, unless you made the decision purposefully. Many people adhere to Dave Ramsey’s gazelle philosophy of cutting out all the Sand spending when paying off debt. That did not work for me, but it may work for you.

If you are unhappy with the current percentage of your expense breakdown you can make changes. A budget is a living document because it reflects your current priorities, income, and life stage. Take the time to occasionally re-evaluate your budget to verify that it still fits your life.

However, be wary of perfectionism. No matter how much you tinker with your budget, the real work is out there when you’re making those daily money decisions. Seth Godin discussed how we can get stuck in the details because it’s easier than looking at the big picture.

When I first created a budget I used to spend too much time tracking every penny I spent. Not only did I obsess over whether everything added up, I also judged myself harshly whenever I spent any money on Sand. My current system only focuses on the Rocks. I know what my life costs, so then I figured out a monthly allowance for Sand and the remaining goes to savings.

This helps me avoid the double D’s: debt and deprivation. Since I have an allowance and targeted savings accounts I don’t incur debt. This same allowance gives me flexibility to spend. I no longer agonize over every tiny financial decision; a lot of those decisions are only Sand that round out my life.

Small Expenses do Add Up

When I began the allowance system I took advantage of my natural tendency to hoard money. You may not share this tendency, so it will take some exploring to figure out what works for you. Happiness researchers Sonja Lyubomirksy and Joseph Chancellor point out that spending money on experiences brings about more happiness than buying stuff. After some time I discovered that my favorite things to spend money are on books for friends, any type of live entertainment, and classes. I expect this list to change as I grow older and my life changes.

Small expenses definitely do add up. What are they adding up to in your life? Are they another source of stress or do they add to your well-being? Often I see friends get caught up in trying to change their daily spending habits without taking a look at their large expenses. The effort required to address large expenses, such as downgrading your car or shopping for the best insurance rates, gives more results than deciding to become a hermit and not spend any money on entertainment.

On Being vs On Having

The simple guideline to “Save Mindlessly and Spend Thoughtfully” can put money in its proper place: money is a tool. I often feel society expects me to acquire as much of it as possible. This may be in capitalism’s best interest, but is it in my best interest? How does it affect my community and environment? Does the goal of endless acquisition add to my life?

I was recently introduced to a philosopher who addresses this question in Maria Popova’s Brain Pickings newsletter. Popova does a wonderful job of distilling Erich Fromm’s ideas on being in her article The Art of Living: The Great Humanistic Philosopher Erich Fromm On Having vs Being. Fromm states that “The goal of living [is] to grow optimally according to the conditions of human existence and thus to become fully what one potentially is.” When my goal is to be who I am more fully I recognize that I’d rather read than shop.

I encourage you to visit Popova’s article to learn Fromm’s necessary conditions for human flourishing. I walked away from the article feeling inspired and energized. I can see that my focus has moved away from getting money, stuff, status, pleasure, etc. I now focus on integrating myself into a whole person; I believe we all want to be the best version of ourselves. Doing so requires self-reflection and curiosity into what my values are. Once you become aware of your values (or Rocks) it becomes much easier to spend and earn money in a way that reflects them.

I’d love to hear whether you’ve identified the Rocks in your life. Do you make it a point to prioritize them?

Save Mindlessly, Spend Thoughtfully: Part 1

When it comes to money we all hear different messages. Some may say money is the root of all evil. Others may say that you can never have enough of it. Dan Buettner, international renowned speaker and National Geographic fellow, has looked into what part money plays in happiness. In his book, Thrive: Finding Happiness the Blue Zones Way, he sums up the key to happiness in your financial life with this simple statement: Save Mindlessly, Spend Thoughtfully. On the Blue Zones website you can find the following description:

Financial Life

Ed Diener, author of Happiness: Unlocking the Mysteries of Psychological Wealth, says that the key to greater well-being is to have money but not to want it too much. The best long-term strategy for financial affairs puts in place the disciplines and mechanisms that help you save mindlessly and spend thoughtfully.

When it comes to finances take time to remember your goals. Go beyond the things you’d like to have. Imagine what you’d like to feel. When I started my debt payoff journey I felt stressed and guilty whenever I bought any non-essentials. So I began to image the ease I’d feel debt free, and that became my guiding principle. From there I looked at my finances as an opportunity to improve my life rather than a burden. In this post I will discuss what saving mindlessly can look like and in the next what spending thoughtfully means to me.

Save Mindlessly

Saving has been good for my health; I no longer feel the stress of living paycheck to paycheck. Mary Beth Storjohann, CFP outlines the way to step away from this cycle in her article Stop Living Paycheck to Paycheck. A new survey from Bankrate.com states that a third of Americans would go into debt if they had an unexpected expense of over $1,000. For years having debt, especially credit card debt, felt like a ball and chain. I didn’t feel like I could build an emergency fund while paying crazy interest rates. At the same time every little emergency dug my hole deeper. In my experience, saving and paying off debt are very similar because they focus on the future. In both instances I need to keep my dream of financial ease at the forefront.

How do you save mindlessly? The same way you do anything mindlessly: by building systems. Systems are habits. Say you have the habit of dropping your loose change into a piggy bank or buying a $5 latte on the way to work. Both are habits, or informal systems.

The easiest way to build systems around saving is to automate as much as possible. If your workplace offers retirement plans start putting money aside through them. You can start with a low number and build yourself up over time. Most banks will let you open targeted savings accounts where you can build an emergency fund worth 3-6 months of living expenses. Or you can save for big ticket items like a car or a vacation.

The point of saving mindlessly is to create grace in your budget. Unexpected expenses are normal. Unfortunately, the amount of the expense cannot be predicted. If you were to have a $5,000 emergency come up, what would you do? Could you pay it from your cash flow, your savings, or would you take on debt? All three are valid options, but focus on which one works towards your overall well-being. Think back on what you have done in emergencies before and decide which experience worked out the best overall.

Where to start?

When it comes to savings my first goal was an emergency fund because I was tired of stressing out every time something in my car needed to be fixed. More than that, I hit a bottom when I could no longer deny that my entire personal finance situation was stressing me out, not just emergencies. I remember the day I paid all the immediate bills and realized we only had $32 for the next two weeks. Fortunately my boyfriend at the time had been saving money for my birthday and we were able to use that for groceries. Otherwise, we would have resorted to more credit card debt. This experience clearly told me my lifestyle was not working.

At this point I asked a close friend for help. She had her own financial house in order and had done very well for herself. She worked with me to figure out how much of my income could be put away. I then created an automatic transfer out of my checking into savings. Once we had $1,000 we began to pay off debt as follows:

 

  1. Credit cards – finished Dec ‘13
  2. Student loans – finished Feb ‘15
  3. Extra money??? This is when I began saving to replace my car and set up a vacation fund

For four years I have consistently been putting away money for my future well-being. At first I paid off debt, and now I can save for large expenses. Today saving is mindless, I never think about it. Contrast this to before I built this system. Five years ago I was always thinking about saving and paying off debt: I constantly scolded myself for not doing enough of it…

How much should I save?

I don’t remember how much I saved when I started, but it wasn’t much. I didn’t really have a budget so I guessed at what might work and used the book All Your Worth by Elizabeth Warren to find what was feasible. Elizabeth is a US Senator and previously a Harvard Law School professor, you can find a wonderful review of her book at Get Rich Slowly. Also, JD Roth created a worksheet that can help you find out where you stand and where you can start moving towards. Regardless, start with an amount that will not deprive you, while at the same time it must be substantial enough for you to see progress.

Adjust your savings rate whenever your income changes. Adjust it when you reach a goal, either funding your Roth IRA for the year, paying off a debt balance, or going on the vacation you’ve been planning. Adjust it when you become re-energized about reaching a savings goal and want to be more frugal with your discretionary spending. The point is adjust your savings rate. It is YOUR savings rate. It is meant to put your future self in a comfortable place and to allow yourself to be financially confident today. After a few months of consistently saving I felt the psychological benefits. I saw that I could one day be debt free. I then saw I could fully fund my retirement for the year. I now see that I can replace my aging car and go on vacations.

What could go wrong?

You could have an emergency before your emergency fund is fully funded. You could get laid off. There could be a really great sale on shoes, Groupon vacations, or a once in a lifetime concert. You could have a bad day and decide you need retail therapy. It could be Christmas/Hannukah/wedding season. You get the idea…

All of those are valid reasons to stray from the saving system; doing it once will not wipe you out. However, be conscious of whether emergencies/sales/etc are coming up very often. You might be saving too much thus not giving yourself enough room to enjoy your money. One thing I have done is set up a “discretionary spending” savings fund. I put away $200 every month not for savings, but for things like birthdays, weddings, or sales. At first I did not set anything aside for those things. I quickly learned it was almost impossible to have no discretionary spending funds after spending all of my week’s “allowance” on a wedding gift. It left me wondering whether I should be resentful at my friends for getting married or at myself for having a budget. The reality is that I was learning what works for me when it comes to discretionary spending, and I’m still learning about it.

Another possible reason you may be dipping into your savings too often is that the money is too easily accessible. One of the best things about saving for retirement in an IRA is that I cannot access the money for another 30+ years. When it comes to my emergency fund I have it in a spate online bank. When I need money from it I need to look for my password, sign on, initiate a transfer and wait three days before it clears. For me that’s enough of a hassle that I won’t do it unless it’s absolutely necessary.

How do I stick to it?

I have always been a saver, or at the very least I have always thought of myself as one. However, for a long time I dipped into my savings account almost monthly and my paltry emergency fund would not have covered any real emergency. Like I mentioned earlier, after I hit my bottom I talked with a friend about the stress I felt. From there I recognized I had been both oversaving and overspending, thus the mounting credit card debt. She helped me create a more balanced budget; I could not do it on my own just by reading personal finance blogs and books.

After our talk I felt accountable. She never asked me about my finances, but I knew she wanted my best interest and I reached out to her whenever I had any questions, doubts, or concerns. I also focused on the progress. After saving a $1,000 I felt empowered. From there I mapped out how long it would take to pay of each credit card. I focused on the smallest balances to keep myself motivated.

Lastly, be gentle with yourself. Maybe you didn’t grow up with people who modeled financial prudence. Maybe you don’t make enough money to save. Maybe you have someone that always bales you out of financial emergencies so there is no real need to save for them. Regardless, if you want to enjoy more ease in your finances having a mindless saving system is the way to go.

Do you have a system that allows you to save? I’d love to hear what it looks like and how you developed it.

Beyond Hoarding: My experience tracking my spending for a year

I decided to get myself a big ticket item after tracking my expenses for a year. I often feel I spend too much, that I should be saving more money and eating out less, that I can’t afford to travel or go see shows. So I took a suggestion from Barbara Stanny’s Secrets of Six-Figure Women and decided to track my daily spending. I’ve yet to achieve the six-figure income, but Stanny points out that building habits early has big payoff’s in the long run. As I explained in my post What Type of Financial Planner Will I Be? I follow the Balanced Money Formula from Elizabeth Warren’s wonderful personal finance book All Your Worth so I already know where most of my money was going.

Balanced Money Formula
  • 50% Must-Have’s (rent, groceries, phone bill, min debt payments etc)
  • 30% Wants (internet, gym membership, eating out, etc)
  • 20% Savings (retirement savings, debt payments above min, etc)

I focused my tracking on my “Wants” spending, basically on all the non-essentials I could live without if I were to become unemployed. After a year of tracking this I am very happy to report that in 2015 I only spent 18% of my net income on Wants. How do I balance this with the nagging feeling that I’m much too extravagant for having an entire apartment to myself and that it’s ridiculous for me to buy any new clothes given my abhorrence of materialism? By giving myself grace. In order to enjoy my life I remind myself that I can spend money; that hoarding at the expense of enjoyment is not a virtue.

I started off by writing down everything I spend and building a simple tracker on Google docs. I already include internet and my gym membership in my recurrent expenses, for this exercise I was looking at everything I spend in addition to those two things. I had a lot of fun building the tracker because I am a data analyst by trade and I enjoy myself as much working in Excel as I do swing dancing or spending time with friends. My love for numbers is beyond words. After tracking my spending for a few days I began to create categories that reflected what I tended to spend money on.

You can see my main spending categories below with the percentage of the total, and below I’ve listed the smaller ones in order of largest to smallest

40% – Hobbies & Rec
Self-Actualization: Classes on spirituality or other growth related activities
Travel: Includes transportation, lodging, souvenirs, etc
Swing Dancing: …or line dancing, or clubbing, or anything related to dancing including drinks
Toastmasters: Club dues, or events
Entertainment
: Going to shows, comedies, anything related to random hobbies
CFP: Events with the Financial Professionals Association or educational materials

30% – Gifts
Celebrations: Weddings, baby showers, Christmas gifts, etc
Birthday: My birthday or other people’s birthday, includes presents and dinners
Self-Care: I treat myself to a Korean Scrub every once in a while, and tattoos!

24% – Eating Out
Friends: This includes eating out with family and anything outside of work
Coworkers: Eating out during work hours
Treat: Mostly Starbucks runs or anything for my sweet tooth aside from a full meal with friends
Convenience: Anytime I forgot to pack a lunch, or needed a snack on the go

4% – Clothing & Other Stuff
New purchases: This includes thrift shops, shoes, jewelry, etc
Dry cleaning: Includes car washes too, I figured my car falls under stuff maintenance
Repairs: I’m a big proponent of wearing out what I own rather than throwing it out

2% – House Misc
Decorating: Anything extra to redecorate or upgrade my house
Make-Up: Includes getting my eyebrows done and hair-cuts

After a year of faithfully tracking everything I am pleased with what I see and very grateful for the experience. My biggest expenses are in “Hobbies and Recreation” along with “Gifts”, that’s exactly what my Wants money is for! Happiness researchers Sonja Lyubomirksy and Joseph Chancellor point out that spending money on experiences brings about more happiness than buying stuff, and I completely agree1. The first few months I did this I felt uncomfortable with the amount I spent eating out, however, after a closer look I saw that I almost exclusively eat out in the company of others. I really enjoy cooking so I always take lunch to work, which means that when I do eat out it’s because I’ll be sharing a meal with someone, and not because of convenience. Eating with coworkers is not only fun, but it can also be good for my career since I often learn about things going on outside my department and potential opportunities. Eating with friends is extremely enjoyable, and as a single person it’s one of the few times I don’t eat alone. I often invite friends over for a meal at my house because like I mentioned earlier I love cooking, however, given traffic in Southern California it’s easier for us to meet halfway rather than one person trekking across traffic.

The experience of tracking my spending increased my trust in myself. I learned that I can be trusted with money, that I do not spend carelessly, that I can relax! For others, it may teach them that they spend too much on things they don’t enjoy or that they would like to focus their spending on bigger items. Regardless, tracking your spending for at least 30 days will be a very enlightening experience. If you feel uncomfortable around your spending knowing your patterns will shine a light on possible changes. I follow the Balanced Money Formula because it combats my natural tendency to hoard and deprive myself when it comes to spending money. I believe everyone needs to take a close look at themselves to see what their money style is and figure out a system that will enhance their life. From this experience I learned that I could comfortably afford a lot more extravagances, in fact, it’s changed my definition of what’s outside of my budget.

One of the extravagances I have always been curious about is having a personal trainer. I work out consistently, but only in gym classes or on the treadmill because I am very intimidated by strength training. I had considered getting a personal trainer, but I felt uncomfortable with the thought of paying someone for something I could potentially learn how to do on my own. However, after two years of going to the gym I have still not learned how to use any of the machines and have never stepped close to the bar bells. During this time my stamina and sleep have improved, plus I definitely benefit from the stress management of exercise, but maybe I could be more effective with my time at the gym.

I recently switched gyms and attended their complimentary personal training session. The cost of a personal trainer is comparable with the monthly fee of having a financial planner, and in fact, there are parallels between both professions. Financial planners and personal trainers are motivational coaches with specialized knowledge. Rather than expecting myself to be an expert at everything I can hire someone to teach me new skills and help keep me accountable. After a review of my Balanced Money Budget I’ve included the personal trainer annual cost by reducing the amount I save down to 36% of my net income. I am excited about learning from a personal trainer and deliberately spending money on an experience I thought I could never afford.

How do I financially flourish?

A Financial Life Planner acts as a sounding board for people who want to experience more ease and balance in their financial life, who want their financial life to work in their favor, rather than against them.

I chose this career because I enjoy working with people and seeing them grow. I chose this career because while getting my own finances in order I learned I love personal finance! More specifically I love being confident about the state of my personal finances, and although many people share this love not everyone is able or willing to look at their finances this closely without outside support. I have friends who love treating their bodies well and can stick to balanced meals and regular exercise easily. I on the other hand have seen a fair number of nutritionists to figure out what works for me and I routinely have to motivate (bribe) myself to work out. We all have our strengths.

My own financial journey

I really grew from the process of getting my own financial life planned out. With the support of a mentor I went from not being sure where my money was going and feeling very guilty whenever I spent anything to a feeling of ease and grace around my money. I currently record every dollar I spend and pat myself on the back for enjoying my money so thoroughly. I moved away from my money hoarding tendencies to a much more balanced life. I use a cash flow budget that gives me space to enjoy the now while taking into account my long term goals. I love to tell people that I give myself a weekly allowance, and that if I wanted to I could literally burn it. All this while saving for retirement, a car, travel, and living comfortably.

It took a lot of work to get from where I was to where I am now. It all started because a friend agreed to take an hour of her time and look at how I was spending my money. She gave me a few quick tips and pointed out that only $21 of my $154 student loan payment was going towards the principal. That shocked me.

In my mind I was financially savvy because I occasionally clipped coupons always ordered the lunch special if available. Moreover, I took pride in the fact that I had paid for my BA with scholarships. After an hour with her I saw that I really had not been paying attention to my finances at all. A few weeks later this was confirmed when I realized that I only had $32 to my name after paying off my credit card bill, because as a rule I did not carry a balance. My monthly budgeting plan was to worry and hope I’d somehow miraculously spend less the following month. This was my bottom; this was when I realized that what I was doing was not working.

From there I began exploring personal finance blogs. I started off with Get Rich Slowly, dabbled a bit in the Mr Money Moustache and Dave Ramsey mindset, and then fell in love with “All Your Worth” by Elizabeth Warren, specifically the elegant simplicity of the “Balanced Money Formula”, which is a way to simplify cash flow.

  • 50% Must Haves: rent, car maintenance/payment, insurance, food, min payments on debt, etc; basically, if I were to become unemployed I’d be able to live on unemployment if my life style only cost 50% of my take home income
  • 30% Wants: gym membership, internet, eating out; basically, anything I could go without where I to become unemployed
  • 20% Savings: payments towards debt above the minimum, retirement savings, travel savings, emergency fund savings; basically, anything that’s meant to be used in the future

I found freedom in having a balanced budget that allowed for miscellaneous life expenses. In order to drop my Must Haves to 50% I cut my cell phone bill to a basic plan and increased the deductible on insurance. After these changes I came in at a comfortable Must Have rate of 53% of my take home pay. I took a hard look at my savings and increased it from 14% to 18%, this left me with a wants budget of 29%. From there I started to relax, I started to feel that my money was my own to spend, rather than money that would be better spent sitting in a bank or paying off debt.

My hope is that as a Financial Life Planner I will support people as they go through their own journey to a healthier financial life.