Can’t get ahead financially? Then you’ve come to the right place. Someday Is Not a Plan explains how money works in plain English. There are no charts, no formulas, and there’s no confusing finance-speak. There’s just Larry, a twenty-something wage slave, talking with his retired uncle Roger.
Preview the first four chapters here.
Read the reviews at Amazon.
Get the eBook for free (yes, free!) at Smashwords.
If Someday Is Not a Plan isn’t your thing, then check out my free eBook Money Is Not Rocket Science
which offers seven rules for financial success everyone should know. Real world examples show how the dollars work out over a lifetime. Download a (free!) copy for your favorite eReader from Barnes & Noble, or Smashwords. Or continue reading below. (This version uses 2013 dollar figures but the general principles still apply, regardless what year it is.)
Money is Not Rocket Science
Common Sense Rules for Financial Success
Many years ago one could get by without it. Raise a few chickens. Grow some vegetables. Trade with your neighbor for things you didn’t produce yourself. But that doesn’t work in the modern world. Have you tried paying rent with chickens lately?
We still trade, just differently. Trading time for money – that’s work. Trading money for goods or services – that’s spending. This sounds simple enough but there is a problem. Money isn’t just the thing in the middle of all trades. It is a system unto itself. You need to understand that system in order to succeed in today’s world.
Back on the farm, failing to stockpile hay in the summer meant the cows would die in the winter. That’s a cause and effect relationship even the farmer’s children could explain. But can you predict how money decisions in your twenties will play out in your eighties?
Almost everything we do from providing for our families to preparing for retirement is a financial transaction of some sort. We engage in thousands of financial transactions per year, big and small. If those transactions are made on autopilot, guided only by the urgings of advertising and the “advice” of financial services companies, then that’s who will benefit. Not you.
There is no way to sugar coat this fact. Uneducated participants in the modern economy lose.
The good news is that understanding money is not rocket science. You don’t have to be a math genius. Financial competence only requires an open mind and intellectual honesty.
This book presents seven rules for financial success. Though simple in concept, they can be hard to put into practice because it’s human nature to resist change. My hope is that this book will not only inform, but also inspire. You deserve the best. Read on to learn how to get it.
Take the Long View
What would you do with a million dollars?
It’s not an idle question because the average American household earns that much or more in a lifetime. If you assume 40 years in the work force, then $12.50/hr, or $25,000/year, results in one million dollars of lifetime earnings.
The sums are even more dramatic for higher wages. According to the Bureau of Labor Statistics, crane operators can earn two million dollars over their lifetime, occupational therapists three million, and software developers four million.
So the question isn’t whether you’re going to earn a million dollars. It’s what are you going to do with it?
Despite earning millions in their lifetime, close to half of all Americans die with less than $10,000 left over. Where is the money going? To find out, let’s look at an average family during their peak earning, spending, and (hopefully) savings years from age 25 to 65. Assume this family consists of two adults, a son, and a daughter. Here’s where the lifetime earnings might go.
$224,690 for food. This is based on the USDA thrifty food plan and assumes kids feed themselves after the age of 18.
$121,212 for cars. This represents a new car every ten years at an average cost of $30,303 per car.
$250,000 for housing. This is based on the average home mortgage of $240,000 with a $10,000 down payment.
$171,816 for college. This is the cost of two kids attending an in-state school.
$94,560 for retirement savings. This represents an investment of $197 per month growing at 5% annually resulting in $300,626 at retirement.
$600,000 for interest payments. This is interest paid on mortgage, credit card, automobile, college, home equity, and other debt.
$258,049 for taxes. This is based on an average tax rate of 15%.
The items above total $1,720,327 and could be satisfied by an average income of $43,000. But these are only the basic costs. Consider that we left out vacations, insurance, second car, home improvement, summer camp, orthodontia, hobbies, cell phone plan, dinners out, clothing, utilities – well, you get the idea.
Many of us are so overwhelmed by the finances of the moment that we don’t see the big picture. Nor do we appreciate the huge sums of money involved over a lifetime. Financial success is less a matter of how much you make than it is how well you manage what you’ve got.
Think lifetime. What are you going to do with your million?
I want it and I want it now!
Who doesn’t feel that way from time to time? But as you will see, giving in to those feelings results in less goodies over the long haul. How that happens is quite simple.
Buying on credit means you are borrowing money. Borrowed money has to be paid back with interest. The interest payments raise the true cost of what you bought. If you only have a certain amount of money to spend in your lifetime, then overpaying for each item because of added interest means you get less items.
If you want more, pay less. One of the best ways to do that is by avoiding interest. And that means you need to delay gratification. That is easier said than done, but here are some ideas.
One strategy is to change your internal dialogue from “I want it now” to “I want more stuff.” Some might argue this is a materialistic form of behavior modification, but it’s what most people want. And if it gets you off the debt treadmill, who cares?
Flipping a switch on your spending behavior and internal dialogue isn’t easy. So let’s look at some numbers to help with motivation. You may be surprised at just how expensive things get once interest is accounted for.
The average balance per household in America with credit card debt is $10,637. The average interest rate on that debt is 19%. If you never charge anything again and make only minimum payments, it will take 29 years and 2 months to pay it off. But here’s the real eye opener. In that time you’ll pay $16,246 in interest.
In other words, you’ll have paid back two and a half times whatever it is that you let ride on your credit card. Did I mention yet that overpaying means you end up with less goodies in the long run?
Maybe your card was advertised with a much lower interest rate. Cards often start with a low rate which jumps later on. If you carry a balance, miss a payment, or prove yourself unworthy in some other way like with a bad credit rating, you might pay 30% or more on your balances.
That’s right, you may pay more interest, much much more, than your pal down the street. The American constitution may say that all men (and women) are created equal. But the bank only cares whether you’re a good credit risk. And in that regard, all Americans are decidedly unequal.
People with poor money habits are penalized with higher interest rates.
Of course there’s an easy way to avoid paying all that interest. Either pay the monthly balance in full or don’t use credit cards at all except for in the direst emergencies. And a sale on wide screen TVs is not an emergency!
The following may be overly dramatic, but it is true.
Debt is your enemy. It forces you to overpay. It is a ball and chain which inexorably steals money from you day after day, year after year.
Break those chains. Delay gratification. Eliminate debt. Get more for your money.
Some are obvious, some aren’t. For example, you probably know not to take a nap on the railroad tracks. And that chain saw jugglers typically have short careers.
But everything isn’t that straightforward. We humans are surprisingly irrational in how we assess risk. This is partially because the reptilian part of our brains respond to risk long before the thinking part gets a chance to consider it thoughtfully.
Financial risks can be especially difficult to recognize and are often made worse by our own behavior. For example, what do most people do with their first steady paycheck? That’s right, they start spending it on better housing, vehicles, clothes, electronics, you name it.
This may be the great American way, but is it smart? The first few months on a job are typically probationary and if times get tough, it’s often last hired first fired. This is not the time to pile on debt or increase fixed costs with higher rent, car payments, or other outlays.
Financial planners recommend you keep an emergency fund of three to six month’s expenses on hand. It’s exactly when you don’t have a job that you want to make sure you can keep your car, don’t have to move, and can feed yourself. Your chances of a finding a new job are much improved if you can arrive on time, rested, and able to focus.
Building up an emergency fund is also easiest immediately after a jump in salary. You were subsisting on less income before, right? Just spend the way you used to, put all the extra cash into savings, and don’t touch it. Within a few months you’ll have built up an emergency fund that can handle job loss, an emergency car repair, or some other unexpected calamity. This isn’t the first choice of many, but it should be.
Another example of a commonly misunderstood financial risk is the home mortgage. We tend to think of home ownership as all goodness and fulfilling the American dream. But financially, mortgages are risky because they are a form of leverage.
Say you buy a $100,000 house with $10,000 down and take out a mortgage for the remaining $90,000. A year goes by and house prices go up 10% so that your house is now worth $110,000. You sell at $110,000, pay the bank their $90,000, and pocket $20,000 having conveniently doubled your $10,000 investment. (We ignored the first year’s mortgage payments to keep things simple.)
This is leverage because while the house appreciated 10%, your $10,000 cash outlay appreciated 100%. But it can work the other way too.
Say that a year goes by and home prices go down 10% so that your house is now worth $90,000. For whatever reason you’re forced to sell at that price and use the $90,000 sale proceeds to pay off the bank. You’re left with nothing. So while the house depreciated 10%, your $10,000 cash outlay depreciated 100%. Oops!
That’s not to say you shouldn’t buy a house. But go into it with your eyes open and a full understanding of the financial risks involved.
Don’t be in a rush to follow common wisdom because often, there isn’t any. For example, many people get wrapped up in complicated life insurance strategies when they should be thinking about disability. During your working years you’re much more likely to be disabled than to die. So why doesn’t everyone have long term disability insurance?
The bottom line is that risk assessment is a tricky business. Between misunderstanding the probabilities and optimistically underestimating the consequences, it’s all too easy to add risk rather than reduce it.
The risk is in not understanding risk.
Put Your Money to Work
It’s my favorite four letter word. Who doesn’t like something for nothing? Combine “free” with “money” and you’ve got a real winner.
Free money? It’s everywhere and ready to be harvested by those with self discipline and patience.
Are you rolling your eyes at such a preposterous claim? Maybe you’ve already forgotten how credit card companies double their money by letting you carry a balance for a few years. Well here’s a little secret about money. It doesn’t care whether a corporate titan or little old you earns the interest.
When put to work wisely, money spawns additional free money. Why can’t it be yours?
The challenge is to transform yourself from borrower to lender. Borrowers pay interest. Lenders earn it. We saw earlier that borrowers end up with less stuff. And now you know that lenders get free money. Less stuff or more money. Which is it going to be?
Maybe some numbers will help convince you to come over to the free money side of the fence. Say you put aside $10 every month during your working years from age 25 to 65 and it earned 5% interest. On retirement day you would have more than $15,000. That would throw one heck of a party!
What if you could squirrel away $10 every week? Now you’re at more than $66,000 on retirement day. That would fund a party AND a trip around the world.
Let’s get really crazy and imagine you put aside $10 every working day of your life. Now the total comes to more than $330,000. But here’s the really amazing part. Of that total, $226,000 represents earned interest, not money you put in yourself. Welcome to one quarter of a million dollars of free money!
There’s got to be a catch, you say. There isn’t, aside from the fact that you have to actually set the money aside regularly. This “miracle” is nothing more than compound interest which is where free money earned the first year earns additional free money of its own in subsequent years.
If there is a catch, it’s that interest rates aren’t always 5%. Some years they are more, some years they are less. And putting your money into a savings account isn’t the only way to put it to work.
There are fundamentally two ways to put money to work. One is to lend it out and earn interest on it. You might be surprised at how many people want to borrow your money. Banks, municipalities, the federal government, and corporations are all active borrowers and therefore payers of interest. The interest they pay varies as do their guarantees against loss, so do your homework.
The other way to put money to work is to buy something that generates income, appreciates in value, or does both. Classic investments one buys include stocks, mutual funds, real estate, and businesses. But beware. Whereas many lending opportunities come with guarantees that you’ll at least get your initial amount back, this is rarely the case with investments you buy.
The warning bears repeating. You can lose everything with investments you buy or with loans that aren’t insured. Don’t do anything until you’ve read and understood investment classics like those featured by Forbes Magazine. Stash your cash in a federally insured, interest paying savings account while you educate yourself. And even then, proceed cautiously. Ignorance is the investor’s Achilles heel.
Are you thinking it might be easier and safer to save money under your mattress instead? Then you’re forgetting about inflation. For example, something you bought for $1.00 ten years ago costs $1.29 today. Conversely, the dollar you put under your mattress 10 years ago buys only 3/4 as much stuff today. You have to invest to some degree just to maintain your money’s buying power.
There may be no such thing as a free lunch, but there is free money. Put your money to work and get your share of it. And start early.
Make Taxes Your Friend
Now there’s a hot button issue if ever there was one. No one likes how things are and everyone has an opinion. My advice is that you get over it. If you don’t like the tax system, then get yourself elected to Congress and change it. In the mean time, take advantage of existing tax benefits any way you can. Legally, of course.
That’s right, our tax system has benefits which can put more money in your pocket. Consider the following logic. Tax laws are enacted by Congress. Almost 50% of Congress members are millionaires as compared to 1% of Americans in general. What kinds of tax laws do you think they will enact?
The pessimist believes a self-serving Congress favors tax laws which protect and increase their own wealth. The optimist believes an altruistic Congress favors tax laws which enables common citizens to increase their wealth.
Either way, the result is tax laws which can be used to increase wealth!
The benefits may be buried in fine print and bureaucrat-speak. They may change over time. They may require planning, changes in how you do things, and extra paperwork. But the benefits exist. The only question is which ones are you going to use?
One of the most popular benefits is the tax advantaged retirement savings plan. The most common of these is the IRA – the Individual Retirement Account. Put your money in the bank and you pay taxes on each year’s interest. Put your money in an IRA and the money grows tax free.
The tax benefits make a big difference over time. For example, let’s say you set aside $1,000 per year from age 35 to 65, it earned 5% on average, and your marginal tax bracket was 25%. (That’s the tax you pay on the last dollar you earn.)
In a taxed savings account, you’d end up with $53,799. In a tax advantaged IRA, you’d end up with $66,439. That’s 23% more money just because you stuck it in the right place from day one. You can see how the numbers might work out for you using this online calculator.
And by the way, depending on which kind of IRA you have, annual contributions may be tax deductible themselves. Similar tax advantaged plans exist to save for college and to manage health care expenses.
Things get even better if you’re putting your money to work and have started investing. Wages are taxed progressively meaning the more you make, the higher a tax rate you pay. But investments held for more than a year are taxed completely differently, and historically, much less.
The obvious conclusion is that you can radically reduce your tax burden by replacing ordinary income with investment income. Over a lifetime of paying taxes, the difference can be significant. Just ask some of our senators!
This only touches the tip of the tax benefit iceberg. And I’ll concede that learning about taxes can be difficult and mind numbing. But the fact remains that you can save big the more you know about taxes. So if at all possible, make taxes your friend!
Look for Alternatives
They’re good to have when you’re in a pinch. The funny thing is, we often don’t seek them out or evaluate them seriously. Instead, we expend more effort figuring out how to pay for something rather than whether that something is the right thing in the first place.
Easy credit closes your mind by making it so convenient to buy. Offers like “No money down”, “Low monthly payments”, “Transfer your balance at 0% interest”, and similar are hard to resist. But remember, those offers are created by marketing experts trained to make you feel superficially good while separating you from as much money as possible. The good deal is theirs, not yours.
A good defense against this is to never make a big purchase without evaluating several alternatives. Evaluating an alternative doesn’t mean comparing the luxury item you’ve been lusting for against the next more expensive one! Rather, it means looking at the dollars involved in buying something different altogether or buying it differently.
Here’s an example based on buying a car. Let’s say you’re going to buy a new car for $30,000 putting down $4,000 (maybe the value of your trade-in) and financing the remaining $26,000 over 64 months. Assuming a middle of the road credit rating, this represents $32,025 in total payments at $500 per month.
The car salesman assures you this is a great deal and you’ve convinced yourself you can handle the $500 payments. You really want to do the deal and can’t wait to impress friends with your new car. But despite the salesman’s warning that this deal won’t be available tomorrow (a lie!) you decide to sleep on it.
That night you consider option two which is to buy a $20,000 car instead. With everything else the same, you’d be financing $16,000 at $308 per month. Is the nicer car worth the pain of larger payments?
Comparing the options you note that the $192 less per month in option two represents more than $12,000 saved over the 64 months of the loan. That’s not pocket change.
Here’s a third option which takes into account that you really don’t want to give up on the nicer car. Realizing you were willing to commit to $500 a month in payments, you wonder what would happen if you stuck it out with the old car one more year while putting aside $500 each month towards the new one?
Let’s assume your trade-in will only be worth $3,500 one year later but the $500 saved per month adds $6,000 to the down payment. The total cost of the car is still $30,000, but you’re only financing $20,500 at $395 per month in payments. One year’s delay has bought $105 less pain per month.
What if you’re one of those people who can come up with alternatives but aren’t comfortable working the numbers? While it does get easier with practice, it isn’t as complicated as you may think. Free on-line calculators are available for just about any kind of financial analysis. Nolo has a good selection for figuring out car loan payments, whether to rent or buy, how long your retirement savings will last, and if loan consolidation makes sense, just to name a few.
Plug in the numbers you know and the calculator does the rest. All you need is pencil and paper to record the different outcomes so you can see all options at a glance.
What to buy and how to buy it isn’t the only time to evaluate alternatives. It is equally important for major decisions of all kinds. For example, common wisdom says a college degree leads to higher lifetime earnings. But not always. Studies show that more than one quarter of those with Associate’s degrees earn more than the median Bachelor degree-holders.
This is not a recommendation against traditional four year college. Rather, it’s an invitation to consider reasonable alternatives. Compare, say, an Associate’s degree-holder with good money habits in a growth industry against a Bachelor’s degree-holder with bad money habits in a stagnant industry. Who is better off in the long run?
There’s more than one way to do just about anything. Look for alternatives to make sure you’re picking what’s best for you and your future.
Be a Student for Life
But I didn’t know!
Sorry. That excuse won’t work – at least not once you’re an adult. Your life is your responsibility.
When it comes right down to it, there are only two kinds of knowledge. There’s what you know and what you don’t know. Between the sheer volume of knowledge in existence much less the rate at which it is growing, it’s a sure bet that you know only a fraction of what’s out there.
So barring the advent of computer augmented brains, each of us is doomed to being behind the information curve for life.
The good news is that you don’t need to know everything to survive. You just need to know what’s important. And then you need to act on it.
Better yet, in the world of money and finance, much of what you need to know is both common sense and freely available. Public libraries are filled with finance books. Periodicals, whether paper or digital, cover money issues. “Personal finance advice” returns millions of hits in search engines. Do you see why “But I didn’t know!” is a poor excuse?
The information you need is out there and waiting for you. Maybe the enormity of it scares you or you just don’t know where to start. Fair enough. Try thinking about process rather than result and you might be able to begin.
Here are three easy things to do which will massively increase your financial IQ over time.
First, commit to reading one finance article per week. We’re talking ten minutes here. How hard can that be?
Second, commit to reading two finance books per year. Yes, cover to cover! Depending on how thick a book you pick and how fast you read, that’s maybe an investment of one whole day per year. Isn’t your future worth that much of your time?
Lastly, find a money mentor with whom you chat about what you read. Ask them about the things you didn’t understand. Don’t blindly believe what they tell you as they could be in the dark just as much as you. Listen, evaluate, learn, and repeat.
Keep this up for a few years and soon it is you who will be the money mentor. What you’ll discover is that the learning never stops. Or at least it shouldn’t. Because the only way to deal with the information explosion is to be a student for life.
Seven Rules for Financial Success
Here are the seven rules for financial success all in one place for easy review. None are complicated because as you’ve seen, money is not rocket science! But human nature being what it is, they may be difficult to follow. Here’s wishing you luck in achieving your financial goals and every success in life.
1 – Take the Long View
2 – Delay Gratification
3 – Understand Risk
4 – Put Your Money to Work
5 – Make Taxes Your Friend
6 – Look for Alternatives
7 – Be a Student for Life
This publication is intended to provide competent and reliable information regarding the subject matter covered. However, it is offered with the understanding that the author and publisher are not engaged in rendering financial, tax, legal, or other professional advice. Laws and practices often vary from state to state and if legal, financial, or other expert assistance is required, the services of a professional should be sought. The author and publisher specifically disclaim any liability that is incurred from the use or application of the contents of this book.