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”

Career Exploration Before Signing on for College Debt

One of my nieces is starting her senior year of high school and is stressed about college. She knows she wants to go to college, but is unsure of what she will study and how she will pay for it. This is very natural, especially for children who are the first ones faced with the luxury/burden of deciding what they will do for money as adults. A few generations ago most people grew up to do what their family did. The children of blacksmiths were blacksmiths. The children of farmers were farmers.

My niece is certain that she wants to attend college because she likes academics. However, college is not the only option. High school graduates can join the military, go to a trade school, start a business or get a job. Most high-paying jobs do require a college degree, especially if you want to move up in a company. But if you go to college just because it’s expected of you, rather than because of your own internal motivation, you may have trouble completing the degree requirements. If academics is not your thing consider trade school; the school requirements are shorter, the cost is lower, and the jobs are unlikely to be outsourced to other countries.
Continue reading “Career Exploration Before Signing on for College Debt”

Helping Kids Become Financially Capable

Most of the responsibility of teaching kids about money falls on their parents and family. This can be rather stressful, especially if you are uncomfortable talking about money and don’t want to be actively questioned by a kid. In order for kids to learn about money they’ll have to be allowed to interact with it and yes, even make mistakes with it. It’s better to make money mistakes as a kid when the amounts are much lower than to learn about money after you open up a credit card at 18.

As a parent, or even just as a person who interacts with children, we need to pay attention to our money talk around kids. Do you put money down and call it the root of all evil? Do you glorify it and act as if you’ll never have enough? How do you say no to buying something for your child or any kid you know? Do you ever say no?

There are many ways to teach children about money; you’ll get to decide what way works for you and the kids you interact with. The main thing is to keep in mind that kids clearly see your beliefs around money; make sure that you are as aware of them as they are.

Before you start get overwhelmed, keep in mind that you do not have to teach your child about every single money situation. Instead, teach them to think critically and care for themselves. We have no way of knowing what financial questions they will run into as adults because it will be a different world then. Most parents today are surprised to see their young adult children saddled with mortgage sized debt for their college degree because when they were young college was either not necessary for a good job or much more affordable for the academically gifted. Most grandparents are surprised to see their middle aged children scrambling to save for retirement because they had pensions to fall back on. I bet most great-grandparents would be surprised to see their retired children having to deal with long term care expenses because most people didn’t live through the same medical issues we have today.

We have no way of knowing what the future holds. It is better to focus on teaching ability rather than the “right” or “wrong” thing to do. The Center for Financial Inclusion calls this critical thinking ability around money Financial Capability.

What is Financially Capability?

Financial capability goes beyond financial literacy of being able to read a bank statement or fill out a credit card application. The Center for Financial Inclusion’s definition covers several topics: from feeling competent about one’s ability to make financial decisions to being disciplined when pursuing long-term goals. Someone who is financially capable is able to not only understand financial products, but is also able to decide what is in their own best interest. They can see beyond get rich quick schemes and other financial scams. They are able to balance their current and long term wants. Simply put, people who are financially capable are in charge of their money and not the other way around.

How do you teach financially capable decision making? By having your child practice making money decisions. Knowing about banks is not the same as feeling confident in front of a teller or saying no to high pressure insurance salespeople. Take a moment to think back to your earliest money decisions. How old where you? What did you decide? What was the outcome? Did you feel empowered around money or frightened by it?

Examples of Money Stories

I have two very vivid memories around money as a kid. At about eight years old I was given the opportunity to decide how to spend a whole $30 my dad had given me for a week long trip to visit family in Sonora, Mexico. My cousin wanted me to buy all the candy possible on my first day at the corner store, but I refused. For this I was called “coda” or stingy and felt put down.

My first major money decision was at the age of 12. I was getting my braces at the orthodontic school and one of the dental students offered me $200 to attend one of his exams. It turns out I had just the cavity he needed. I then spent the entire $200 on a piano keyboard I rarely used. From there I learned to think things through before big purchases. These two things: saving my money under peer pressure and regretting a major purchase were made possible by my parents’ willingness to let me own my money, the decisions I made, and the consequences.

A good friend of mine had the opposite experience. Every Lunar New Year gift or birthday gift given to her as a child was confiscated by her parents. Whenever she did have money she spent it quickly just in case it was taken away. Once she started to earn her own money it took a lot of work to retrain herself to save for long term purchases and pay off debt.

Although my friend’s parents were trying to teach her the value of saving, somehow it did not go as they had expected. In my case, my mom continues to remind me to go against my natural hoarding tendencies and spend money on myself. This goes to show that the extremes are never recommended. Also, kids are all different. What worked with one child may not work with another. Be willing to test things out and give kids enough space to learn about how to use money.

We all have different ways of relating around money. The more aware we are of our own natural tendencies, the easier it will be to change if anything is not working. I took a year to track all of my expenses to learn about my own money tendencies; you can check out the post entitled Beyond Hoarding.

Share, Save, Spend

Unless you are actively talking about money with kids they are going to learn from their peers, the media, and whatever snippets of information they overhear. Nathan Dungan, a thought leader in the financial education sector, points out that children are bombarded by as much as 3,000 marketing messages a day. All of this can teach a child that the goal of money is just to consume. Unless these messages are checked it can create an adult with compulsive buying habits and overwhelming debt. For so many Americans managing money is their main source of stress. We can teach children a different way.

Dungan advocates a Share-Save-Spend method to allow children the opportunity to learn about money. He also recommends that children be taught to track their expenses. I think it could be a very fun experience to have the entire family share what they spent money for a week, without guilt or blame. This includes parents! We all make poor money decisions at some point. It is much better to review the decision and learn from it, than to avoid it and sit in shame. Your child will learn so much from seeing you make a mistake and then get back up to try again.

Gabriel Brenner, a financial advisor at Abacus Wealth Partners, shared his experience using the Share-Save-Spend method with his children’s allowance

The method goes like this:

50% Spend – The perfect place to learn about buyer’s remorse, just like I did with my $200 keyboard. Also, as Brenner points out: [A] lovely side effect of the Spend, Save and Share strategy is that it minimizes begging and whining. The answer is always, “Yes, you can have that. Use your allowance.”

25% Save – This is a great way to see how patience and discipline can pay off. I remember how overjoyed my brother was when he saved enough money to buy his Nintendo 64. He loved that game much more than anything else that was bought for him because saving for it allowed him to exercise his autonomy.

25% Share – By giving to others a child can know that there is enough for everyone. It also develops a sense of community. We all share this planet, we can also share our resources responsibly.

The beauty of teaching kids about money is that you’ll probably get to learn a ton about yourself and connect deeply with him or her. Like with many of life’s big questions, it is in the questioning that we learn. I mentor a little girl and when we first began to go on outings she seemed uncomfortable with having me pay for everything. At the time she was only 10 years old and already knew that money is limited.

We talked about it and I clearly told her our expenses were in my budget, as long as they were reasonable. We decided we could have big expensive outings every six months. Our first expensive outing was getting her doll’s hair done at the American Girl store. Our other outings would be more affordable things like flying a kite at the park or going for a hike. After this discussion she was more relaxed.

This was as much of a growth experience for her as it was for me. She asked me a lot of big questions, for example, “What is a reasonable expense? How do you budget? Why do you budget? Do you make more money than other people?” Yikes! I shared enough with her to answer without boring her with adult details like the stress I felt before creating a budget or the structural inequalities that have increased income gaps since the 70s.

The way we use time and money speaks loudly about our values. By spending time talking about money with a child you are letting him or her know that they are valuable and capable. What if you are terrified of having to look at any of this? Thankfully you do not have to figure it all out today. The first thing is to be aware of how you use money and start to consider talking with the kids you know about what money is for.

For a very lively look at this topic I recommend you check out Brunch & Budget’s podcast over at Bondfire Radio. Pamela Capalad is a pro at talking with kids about money. You’ll definitely benefit from her suggestions, especially since according to her website “Parents are more afraid to talk to their kids about money than they are to talk to them about sex or drugs.”

What money conversations have you had with kids? Do you remember having them with adults when you were a kid? Would you ever consider tracking your money as a family and discussing it openly?

The Benefits of Partnering with a Financial Planner

It can be very difficult to share financial details with someone else because they are so private. This means that many people would never consider seeing a financial planner, even if they found their finances overwhelming. However, partnering with someone else can make looking at your finances more enjoyable and you are sure to make progress towards your goal of financial flourishing. Check out my first ever video, and please let me know what you think!

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?

Buying a New Car

I just bought a car and I am very happy with my decision. Here are the steps I took:

  1. Get upset because I needed to replace my old car.
  2. Get overwhelmed thinking about what car I could buy
  3. Follow Fool Proof Guide to buying a car
    • Determine budget
    • Research Car
    • Find best price
  4. Purchase Car
  5. Update insurance and budget

The most difficult part for me was feeling overwhelmed with having to make such a big decision. The thought of stepping into a car lot left me feeling incompetent. I put off replacing my car as long as I could. A few months ago I learned I could not register my 2007, 177K+ mile car in California because the catalytic converter was broken.

I had known it was functioning at less than 100% for a while, but I figured it could still hold out for a bit longer. Then I learned the car couldn’t pass a smog test with a check engine light on. My mechanic was nice enough to turn off the light, but by the time the car was ready to get a smog check the light was already on again. It was decided: I needed to replace my car.

I live in Los Angeles where it often feels like we have more cars than people. Our freeways are called “The 405”, “The 174”, and “The 5”. We let each other know where we live by describing the major freeways around us. We have ten car museums in the greater Los Angeles area. As the song says Nobody walks in LA, the Smithsonian has a great article on how things got this way. A lot of the time it feels like what you drive is a statement on what you value.

When it comes to finances my motto is less is more. As I mentioned in a previous post financial well-being is best served by spending thoughtfully. Rather than focusing on what you want in a car, focus on what you want in your life. Buying more car than you can afford is a recipe for stress. Thanks to hedonic adaptation after only three short months the thrill of having a new car will wear out, while the payments will continue. Do yourself a favor and value your sanity by setting a budget before you even start looking at cars.

Which Car?

Growing up my parents always had at least one car payment. My mom loves the feeling of a brand new car and my dad loves status symbols. Like most of society my entire family sees cars as a marker of well-being. My aunt once told me, “I’m buying a Beamer… isn’t that what people do when they’re unhappy?” Her marriage was going through a rough time and it was probably easier to attempt to buy happiness than address the underlying issues. My aunt did buy the Beamer and then got divorced some time later

When I found myself faced with the decision of which car to buy I was at the other extreme. I wanted to buy the least car possible. I have been debt free since paying off my student loans 14 months ago and I love saving 30% of my take home income. It took work for me to recognize a brand new car was the best decision because I had a pre-conceived idea used cars are always a better value. Regardless of whether you want a bare bones car or a luxurious automotive experience set aside your emotions so that you can set your budget.

How much can you spend?

The Fool Proof Guide to Car Buying lines out a clear path to setting a car budget. He even has a great calculator that will let you know your total spend given your interest rate and ability to make payments. You’ll also need to determine your down-payment. If you plan to trade in your old car it’s recommended you visit several dealerships to get a fair price. You can also visit NADA guide to see what you should expect for it.

On a side note, the clearer your existing budget is the easier it is to figure out how to make changes to it. When you know how much your current lifestyle costs, you know what changes you’ll need to make to accommodate a car payment. Or you may already have a car payment and this new car will only be an adjustment to it. Another thing to consider are changes in your gas usage and insurance. Many people I know decide to lease rather than buy because it lowers the monthly car payments. Take a look at Chapter 7 in the Fool Proof Guide for details on leasing.

Which Car? Take two…

After setting my price range I went back to my car research. I began by looking through Consumer Reports (for free) through my local library. The car issue comes out in April and it will give you recommendations based on your budget. I also referred to NADA guides to see how much I could expect to pay for my preferred car. Lastly, I talked about the pros and cons of each car with my mechanic and with friends who owned the cars I was considering.

The April issue of Consumer Reports is packed with information. In fact, this part of the car buying process took the longest. As you can probably guess I wanted to buy the cheapest care on the market: a Mitsubishi Mirage. A look through the car’s review let me know that would be a mistake. The car had a poor quality rating and was uncomfortable to drive.

Although not everyone may love researching as much as I do, we all want to feel confident in our decisions. If looking through consumer reports on cars feels overwhelming you can ask a friend for help. I took a couple of weeks to look through potentials before I narrowed my list to 3 choices. Another option is to stick to the recommended cars in your category. Below is screenshot of the top hatchbacks in 2016.

Best New Hatchbacks in 2016
Best New Hatchbacks in 2016

If you’re considering buying a used model the same auto report has a section highlighting the best used cars. It is also important to have the car inspected by a trusted mechanic. My mechanic let me know that for $75 and a couple of hours he could make sure I was paying a fair price for whatever car I looked at. Below is a screenshot of the recommended used cars for 2016:

Sample Best Used Cars report
Sample Best Used Cars report

After this prep work you will know what cars you are interested in and the price you are willing to pay. This leads us into actually meeting the cars in person.

The Dealership

On the way to my first dealership I felt as nervous as if I were on my way to an interview or a visit with a dreaded family member. Before I got out of my car I had to look into the mirror and give myself a pep talk. Thankfully the salesman I was guided to was kind and polite. He let me know he did not have the car I was looking for. In fact, he said there were very few used models available and that I would be better off buying a new one from him now… The next dealership I went to also had a nice salesperson who showed me around, but did not have the car I was looking for. Even though I did not find the car I left the second dealership with a sigh of relief. It turns out car salespeople are just regular folk, even if a tad pushier than most.

I continued to visit car dealerships and took a test drive in two models. It felt great to drive a new car, even if only for a moment. Call me a California hippie, but the final decision on which model to buy came down to gas efficiency. I chose the car with better miles per gallon to diminish my carbon footprint. You get to decide what is important to you and select a car based on that, regardless of what other people say. At the end of the day, it’s your car and you get to pay the bill. Just make sure that the bill is aligned with your best interest, not that of the dealership’s.

And the winner is…

I decided to buy a new Honda Fit because the cost difference between a new and used one was only $2,000 for around 25,000 miles. The car is an economy car so it has very little depreciation. Getting a new car meant I would get a better interest rate and a warranty. I also took a look at the total cost of owning the car including maintenance on NADA guide. The cost was lower for a new car because of lower maintenance fees. Once that was all decided I used TrueCar to find the best dealership prices. At the end of the day it was my mom who saved the day by searching Edmunds.

The final stage of the car buying process is negotiating cost. I suggest you do this remotely. At one dealership I did meet the stereotypical greasy used car salesman who swaggered over to my mom and I with a predatory grin. The guy gave me the creeps. If you get this guy walk away. There’s a saying that goes, “When you fight with a pig you both get dirty and the pig enjoys it.” Let someone else fight that pig and stick to dealing with people.

In California a car cost has the following components:

  • Car Price
  • License Fees – about 10%
  • DMV Fees – $200-400
  • CA Documentation fee – $80
  • Tire tax – $8.75

The dealership will probably tack on other costs. My dealership charged me $399 for “Secure Edge”. This feature has a code on my door in case the car was stolen. I attempted to have it removed, however it was non-negotiable. Despite this added fee the total cost was the best we could find.

The dealer was able to give me the total cost over the phone and stated he could match my credit union’s interest rate. He also let me know what the trade-in value would be for my old car. This way I was able to determine how much I would need to finance. A friend of mine reached out to several dealerships through their internet sales manager. She let the dealers know exactly what she was looking for and had them underbid each other completely over email. By the time she walked into the dealership all of the pricing had been settled.

To finance outside of the dealership you will need a purchase order or an option contract. Once the price is set the dealer can fax you a purchase order for the car with the cost detailed out. You can then find out your bank’s interest rate. A second way is to request the dealership finance you with an option contract. That would give you a week to find out whether you could get a better interest elsewhere. Then you would return to the dealership with a check from your bank paying off the balance.

If possible give your down payment on a credit card with cash back or mileage rewards. The amount you can pay on a card will depend on the dealership and the cost of your car. Otherwise dealerships will generally prefer cashier’s checks over personal checks.

The final visit to the dealership was easier than I expected. I had thought there might be haggling over my interest rate or the trade-in value of my car, but there was none. After signing documents for half an hour I owned a new car with a manageable monthly payment.

What’s next?

Now that I have a new car I get to shop for car insurance. I also get to learn how much the amount I spend on gas will change. The morning after getting the new car I lowered the amount I save for retirement to accommodate my car payment. Once again, I’m in debt. I am also a lot more confident in my ability to make major financial decisions.

One last thing, Robert Cialdini, author of “The Psychology of Influence and Persuasion” points out that once we buy something we believe it was the best decision. This is because people want to be consistent with their actions. Regardless of what car you do end up buying you will end up feeling that it was the best decision for you. If you take the steps outlined in the “Fool Proof Guide to Car Buying” you will know that you paid the right price for it.

What was it like when you bought your first car? Do you share my dread of car dealerships?

Giving Back – Being Charitable is one of the Best Uses of Money

Personal finances encompass your entire relationship with money, that includes giving to charity. We all routinely receive requests to be charitable. Most of us probably contribute to causes we believe in, even if it’s only sporadically. According to Charity Navigator in 2014 total giving was $300 billion, or about 2% of US GDP. This is the equivalent of the GDP of all of South Africa in 2009. That’s impressive. We give so much each year that we could fund an entire country with a population of 49 million people. You can find a detailed report of what charities we give to here.

Why do we give?

Simply put, we give because it feels good to spend money on other people. Eric Baker’s article What’s one way where money definitely brings happiness? shares the psychological benefits of giving. The article describes a survey conducted by the Harvard Business Review on people’s happiness after receiving a profit sharing bonus from their company. They found that those who spent the bonus on charities or gifts for others showed increased happiness for longer than those who only spent it on themselves or bills.

Giving to others not only makes us happier, but it has a host of other benefits:

  • Charity as a way of leaving a legacy
  • Charity as a way of building community
  • Charity as a way of providing social welfare
  • Charity as a way of creating meaning in your life
  • Charity as a way of creating change in the world and shaping society
  • Charity as a way of showing gratitude and cultivating a feeling of abundance

I did not begin to give until I developed a budget with my mentor and she suggested I consider giving back a set percentage. Her reasoning is that over time my financial situation will improve and I will be able to give more. I started by giving 0.5% to the church I attended at the time. Just as my mentor predicted, that percentage has increased as I have paid off debt and my income has grown. I now contribute to that same church even though I no longer attend, as well as NPR, and a local volunteer organization.

I followed my mentor’s suggestion because I trusted her judgment and wanted to emulate her. Growing up my family did not contribute to charities, so this was not something I had ever thought about before. I found that giving when I felt like I had nothing to give really did create a sense of abundance in me. Even though at first I was only giving a tiny amount, I felt all of the psychological benefits.

I recently received a contribution request from a program I was a part of in college. I’ve given to them before, but this time they were asking for a larger amount and for multi-year commitments. Their request made me take a second look at my giving. I was happy to find that there is space in my budget to give more. Anyone who has ever realized that they could support something that gave to them knows how satisfying giving can be. This college program taught me how to work in corporate America and gave me the confidence to do so.

Although my family did not give routinely to charities, they did model other types of charity. I remember one instance when a man came to my grandmother’s house in Mexicali, Mexico and she had a set of clothes set aside for him. After his short visit Grandma told me he had recently been deported from the US with only the clothes on his back. He was now trying to decide whether to sneak back into the US or return home to his family in southern Mexico. Either way, his options were grim. He could risk his life to find work or he could go home and struggle to makes ends meet with his family.

In one short generation so much changed in my family. I grew up seeing poverty, but I never experienced it myself, although both my parents did. It is a miracle that my father experienced hunger as a child and that I am now at the other extreme where I can actually give back. No wonder I feel startled to realize that I now give back in a structured way with recurrent payments. Had it not been for my mentor’s encouragement, I may never have begun the practice of giving on a routine basis.

In addition to giving money we can also give time. Volunteering is a great way to build relationships and create more purpose within one’s life. In a way, giving time can be more costly than giving money. Money is a replenishable resource; you can make more of it. But time is finite. When you dedicate time to something that time can never be replaced. As a kid I was a very active volunteer because I love talking with people and being of service. Now that my life has gotten busier I’ve moved away from giving time to giving money.

An additional benefit of giving is the resulting sense of community. When we give to a cause we believe in we feel connected to it and are more likely to encourage others to check it out. This also gives us a sense of a bigger purpose in life.

When you are just getting started figuring out your personal finances, giving may seem like a distant concern. For a while you may not be able to give money or time, but you can always donate old items to charities, or at the very least you can plan to give one day. Simply imagining what you would like to contribute to will give you a greater sense of direction.

Take a look at your giving habits and determine how much you already give. You may be surprised at the amount. If you like, you can begin to grow that number or you can plan to one day grow the number. Before you do decide to give make sure that you have a livable budget. If your budget does not give you enough space to live comfortably it will be difficult to give on an ongoing basis.

Also, remember to give because you want to and can do so. Some of us may be tempted to give in order to show others that we are doing well or because we feel we should. I suggest you be very clear on your motives for giving; otherwise down the road you may even resent the organizations that you give to. Just like with everything else, moderation is key.

Do you remember the first time you realized you had enough for yourself and to give away? What was that 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?