Before addressing specialized areas, I’d like to offer my thoughts on basic financial advice for do-it-yourselfers:
- Spend less than you earn
- Be an owner, not a loaner
- Commit to your service
- Locate yourself
- Adopt pay-as-you-go
- Protect against major threats
- Focus on relationships
1. Spend less than you earn. You want your life to point up rather than down, and that starts with making sure your outgo is less than your income. The best way to do that consistently is to make saving automatic, so that a small part of your income never hits your checking account in the first place. Obviously, joining a company-sponsored retirement plan works (or your own IRA if the company doesn’t offer a plan), but you should also save outside of such plans. I suggest setting up a monthly transfer to a mutual fund or brokerage account. (I happen to use TD Ameritrade for myself and clients, but there are plenty of excellent choices.) How much? Start as small as necessary to actually do it: 1% in the company 401(k) plan and $100 per month to a taxable account are enough to mean you are heading toward wealth rather than poverty. Ideally? On my curve you get an A+ if you’re saving 10% of gross pay into a tax-sheltered account and 10% of net pay into a taxable one. But if you find that daunting, start with the absolute smallest amount that your sheltered and taxable accounts permit for periodic investment. Don’t make the perfect the enemy of the good.
2. Be an owner not a loaner. This line comes from the late John Templeton, one of the greatest investors of all time. In the long run the functioning of our world economy depends on businesses providing useful goods and services, and the biggest rewards usually go to the owners of those businesses, not to their creditors. Sure, there are exceptions, but businesses borrow money when it is cheaper than the return they expect to earn on that money. Be the patient owner who is willing to guarantee the wages of the employees and repayment of lenders, standing last in line to collect any residual. The system will only function if those who accept that uncertainty ultimately reap the largest rewards. There will be good years and bad years for equities but, as Nick Murray likes to say, “the ride is the reason for the return.”
3. Commit to your service. Whatever you consider your career, pursue excellence. It will probably be financially rewarding, but whether or not your present or future income depends on the quality of your work, a sense that you are making the lives of others better will give you more selfish happiness than anything you can buy for yourself, and that will help control your spending. As you become happier, you will feel less inclined to engage in “retail therapy” to spend yourself happier. If you do work that isn’t fulfilling, try to figure out if you’re missing the point of it. If you’re not, figure out something else to do. Never stay in a job you hate, but realize that loving what you do is most often a result of a sense of purpose, mastery, and autonomy, and that these things usually come in that order. Even when you work for someone else, autonomy, in the form of less supervision and more flexibility in choosing your activities and approach, normally takes place as your mastery increases. And if your current employer doesn’t give you that, mastery gives you more options to find one who does or, in some cases, to work independently. If you feel your job serves a useful purpose, you can work hard enough to master it, which will earn you autonomy in performing it, and you WILL fall in love with the work you do. So in place of “do what you love” I suggest “do what gives you a sense of purpose.”
4. Locate yourself. Most people I know, including the person writing this post, despise budgeting and watching every penny. May I suggest a shortcut? The majority of what you spend will be based on one thing: where you live. Fortunately, I’ve had few clients get in trouble financially, but those who did almost all fell into one category: they lived in a place beyond their means. It is always hard to argue with someone who falls in love with a place or who insists that the small size of his home is intolerable or that he needs to move to a better neighborhood for the kids. But you’re not my client so I needn’t show you any sympathy: STOP YOUR WHINING! You have a great time on vacation in hotel rooms much smaller than where you live because you’re looking forward to what you’re going to do that day rather than where you’re sleeping. And every time you move, you lose contact with neighbors who, over long periods of time, can become the best part of your life. As for neighborhood, studies suggest people really do suffer from the Jones effect, and having wealthier neighbors generally makes you feel worse rather than better. My default suggestion is to stay where you are unless you have a damn good reason to move; make it work; and build a sense of community that makes your home feel better and better over the years. And if you aren’t willing to live in a place within your means? Fine, but in that case I expect you to BUDGET AND WATCH EVERY PENNY. So there.
5. Adopt pay-as-you-go. Unsecured debt is slavery. Only borrow money when you’re buying an asset worth more than the loan balance, such as a home or a car, so that the debt would disappear if you sold it. Otherwise, you’ve handed a piece of your future to someone else. Naturally, I’m opposed to credit-card debt, but I also despise something which has been regularly called “good debt”: student loans. The cost of college is out of control; its value is extremely dubious in many cases; some students use graduate school as an excuse to delay growing up and getting a real job; and starting postgraduate life with a decade or two of debt payments can restrict career options in a way that is extremely injurious to a person’s entire life. I’ll discuss student loans in some detail during the discussion of college that will be coming up in my next few posts. Let me add, however, that if you’re already in debt, I’m not asking you to pay everything off ASAP because that advice is likely to cause you to give up ever paying off the debt. Just stop borrowing more; cut up all but one of your credit cards (don’t close the accounts; just get rid of the other cards); and allow those balances to be gradually repaid, even if it means minimum payments for years. If you get ambitious or wealthier and can make additional payments to clear the debt further, great, but speaking as a former credit-card debtor with a balance of nearly one year of income at one point, I can tell you the most important step is to stop relying on credit. And if you repay too quickly, you’ll find yourself short at some point and feel it is okay to charge a bit more on those other cards to “correct your overpayment.” It is far better to ensure step (1), which guarantees you have some assets in a taxable account from which you can draw for the emergencies that always seem to happen with regularity to people who don’t have savings.
6. Protect against major threats. There are certain events which are large enough to exceed reasonable savings for decades and which can destroy lives. Death, disability, major property damage, liability for auto accidents and other negligence, and catastrophic health-care expenses should all be considered, and reasonable protection should be obtained.
7. Focus on relationships. Money matters up to the point when it allows you to have adequate shelter, utilities, food, and transportation. Beyond that, the contribution to happiness of more wealth pales in comparison to your relationships with lovers, blood relations, friends, and colleagues. I remember when my mother’s sons and their wives were planning a surprise birthday party for her, and a bunch of details started agitating a few of us. At some point, one of us stepped in and said, “Look, she isn’t going to remember the food, the presents, or the speeches in the years to come: only the people who were there.” And we all relaxed. The more you focus on spending time with people you like or love, the less you’ll find you need to spend on stuff or even experiences. Sure, spend it if you have it: once you’re saving as I suggested in step (1), you’re SUPPOSED to spend the rest of the money. But writing this post on what would have been our 31st wedding anniversary, I can tell you that what I miss most in my life right now is snuggling in front of the TV with Diane watching a murder mystery and trying to solve it before she did. The tears streaming down my cheeks right now are for a priceless memory that cost virtually nothing.
Over the next several weeks I’ll expand on this framework. I encourage you to send questions to Ask Less to help direct my posts toward subjects you’ll find useful. In the meantime, get a start on step (7) and go hug someone who makes your life better by being in it.