Yes, Money Can Buy Happiness

Yes, Money Can Buy Happiness

“Money is of no value; it cannot spend itself. All depends on the skill of the spender.”

Ralph Waldo Emerson

 

“Whoever said money can’t buy happiness simply  didn’t know where to go shopping.”

Gertrude Stein

 

Money Can Buy Happiness

Wealth can buy happiness, according to supporting evidence. However, it is up to you as well.

That is good news! I grew up with the notion that an excess of money may lead to feeling miserable. However, wealth alone is not a guarantee of a happy life. It can help you with your goals, make relationships more accessible, and allow you to be satisfied. Money can buy happiness when you can gain financial security for peace of mind. That is the icing on the cake.

Money Can Buy Happiness In Several Ways:

 

#1 Earning $75,000 A Year May Make You Happy

A classic study by Princeton University researchers Angus Deaton and Daniel Kahneman found a $75,000 salary to be an optimum level for two types of happiness: day-to-day emotional mood and more profound life satisfaction.

Their work studied 450,000 Americans polled over two years by Gallup and Healthways. The study asked respondents about their satisfaction, income, and adversities like lower income, divorce, and health issues. The more that income fell below the $75,000 benchmark, the unhappier people felt. However, those who made more than that amount did not report a more significant amount of happiness.

Another study at Purdue University and the University of Virginia found $95,000 to be an excellent salary for life evaluation or satisfaction and $60,000-$75,000 associated with emotional well-being.

Lifestyle Inflation

Researcher Andrew Jebb found that earnings above the ideal threshold coincided with a lower level of happiness. This result suggests the more you make, the more you tend to spend, leading to lifestyle inflation.

Jebb pointed to a degree of happiness through the fulfillment of both basic needs and increasing material needs. Evaluations tend to be more influenced by people comparing themselves to other people. There is an old adage, “Keeping Up With The Jones” used for increased spending.

More recently, Matthew A. Killingsworth’s 2021 study disputed the relevance of making more than the threshold of  $75,000 income did not lead to greater happiness. Killingsworth’s research suggested that “higher incomes are associated with both feeling better day-to-day and being more satisfied with life overall.”

I can assure you that earning $75,000 or $100,000 in NYC and living on your own would make your heart sing. For that matter, when someone earns half a million but has $550,000 in hard-to-reduce costs, they are not going to be a happy camper. That person may have a spending problem in need of fixing.

#2 You May Not Be Spending Your Money The Right Way

 

Consumers can realize more happiness if they spend their money according to core principles recommended by psychologists Elizabeth Dunn, Daniel Gilbert, and Timothy D. Wilson work in the Journal of Consumer Psychology.

Dunn and her colleagues have been proponents of the relationship between money and happiness. Following these tenets may add more satisfaction for consumers:

Buy More Experiences

For some of us, spending money on a new dress, a purse, gadgets, or other material goods makes us feel good. The question is, what produces longer-lasting benefits: material possessions or experiential purchases?

An experience can be a walk on the beach, an exotic or family vacation. True, not all experiences are good. The benefit of a great experience may allow for revisiting those happy memory years. When my children were younger, we often picked pumpkins at a farm, had apple cider, and visited the animals that roamed around. We all remember the fun we had. I’m sure we bought our kids souvenir t-shirts, lanterns, and hats, but they never used the purchases.

Giving to Others

Ever feel a high from helping someone in need? I have, and I am sure I am not alone.

The smallest gesture can mean so much to another that we are sometimes embarrassed that we didn’t act sooner. Making donations to your favorite charities feels good. Slipping a small bill to someone on the street provides us with an even greater satisfaction because it is an intimate form of giving.

This example is “prosocial spending.”  There is a positive impact on our social relationships when we practice this type of giving. Give a book to a friend you enjoyed or a tasty treat can improve your bond with that person.

Treat Yourself To Small Pleasures As Antidote To Hedonic Buys

When we make small purchases, we are treating ourselves with relatively inexpensive pleasures. Happiness is closely associated with the frequency of these treats. As financial resources are relatively finite, we are better off making smaller purchases.

Dunn and her colleagues point to the lesser likelihood of adapting to this more secondary and more limited spending. On the other hand, we adapt more quickly to the more expensive purchases if habitual. These are “hedonic buys,”  consumed for luxury purposes.

Let’s say you buy high-end specialty coffee drinks like cardamom lattes at $9 a pop daily from Starbucks ‘ Reserve Roastery. Over a short period, you may get accustomed to this rather expensive habit, and it is no longer unique.

When we buy showy sportscars or a bigger house, it may be consistent with our spending habits. We may not even enjoy these consistent expensive purchases as much because we are so used to these luxury goods. As mentioned earlier, this is classic lifestyle inflation, with more spending “required” to feed your happiness.

Extended Warranties Are “Overpriced” Insurance

Extended warranties can be a waste of money for consumers. From appliances to electronics, extended warranties may cost up to 50% of the product cost. On the other hand, retailers enjoy higher margins for this kind of insurance. I try to avoid those heavy-handed sales pitches we receive at the counter by saying I am in a hurry.

Extended warranties are often unnecessary. Consumer Reports recommends that you research the manufacturer’s initial warranty, which usually covers the product for at least 90 days. For most products, that is enough.

Pay Now, Consume Later

In our credit card-oriented society, we are conditioned to spending consumption and pay our bills later. We get immediate gratification from our purchase which doesn’t last as long as our card balances. Delaying gratification may sometimes allow us to feel the pleasure longer.

When booking a vacation, pay for it in advance rather than purchase it on your credit card. Your enjoyment may last longer.

Think About What You’re Not Thinking About: Remember The Details

We often focus on the best qualities of a purchase. By doing that, we minimize or ignore other features that may be critical. I know I have experienced this in some of our most significant purchases, only to regret it later.

Let’s say you want to buy a vacation home. You may be drawn to a cottage for its location and its charm, ignoring some of its downsides. Having a limited budget for your second home, you need to understand potential costs. Buying this cottage may require a lot of updating inside and outside of the building. Had you considered those costs, it may have helped you to negotiate the price down.

Related Post: How To Overcome Biases In Financial Situations

Beware Of Comparison Shopping

We are told to comparison shop to spend more consciously, but there may be a downside. Searching for a particular product available through different brands, we may use several websites like BizRate and Shopping.com. The sites may help us compare them. Retailers know comparison shoppers are ideal audiences for promotions because they have high intent to purchase.

The authors say these sites may offer comparisons based on available options rather than the attributes buyers seek. They may be purposely distracting you from what you are explicitly buying.. Don’t let them throw you off your game!

Follow The Herd Instead Of Your Head

You should read available reviews and pick movies, reading, and restaurants based on better customer ratings. By paying close attention to the happiness of others, you may better glean what you prefer. Be aware of what makes you happy.

I have found some reviews can be helpful through artificial intelligence, though, at times, they are faulty. Netflix recommends the next film we should watch. However, after I watched a murder mystery, Netflix suggested I watch Chitty Chitty Bang Bang. Hmmm.

#3  Buy What Fits Your Personality And You Will Be Happy

Spending increased our happiness when the purchases were for goods and services that match our personalities.

This ambitious 2016 study by Cambridge University psychologist Sandra Matz and others reviewed thousands of bank transaction records of customer purchases across categories. They studied Big Five personality traits: Openness to Experience, Conscientiousness, Extraversion, Agreeableness, and Neuroticism.

The study proved that money could buy happiness if spent according to the proper psychological fit. Our personalities influence our spending for experiential purchases, material goods, or to buy for others.

Our psychological fit matters. We look for similar traits when we choose our friends or colleagues, so we match up with each other. It also plays into how we each spend money individually according to our psychological makeup.

#4 Trade-Offs Between Time And Money

The relationship between time and money is well known. An old proverb, “time is money,” equates the two variables. However, we put different values on time and money. Time is a limited resource, but we don’t treat it as such and waste time often. Whether it refers to 24 hours per day or a lifetime, time is finite, and money may regenerate.

Saving money versus saving time was the theme of the Harvard Business School 2017 study by Ashley V. Whillans. Rising incomes around the globe have often come with stresses of time. 

Buying Some Time

This study set out to examine how to reduce stressful feelings of time scarcity. The growth of the sharing economy has made time-saving services for household chores increasingly available. Participants allocated discretionary income at $80-$99 per month to buy time-saving benefits such as meal delivery, house cleaning, and lawn services.

Their study found that people realized greater life satisfaction when linked to spending money for these time-savers by reducing stress.

Marital Bliss

In a 2018 Harvard Business School study led by Whillans, over 4,000 cohabitating adults (i.e., committed adults) extended the above research. Disagreements about household chores are a primary source of relationship conflict. 30% of the respondents cited disagreements over household chores as the number one reason for divorce.

They found that time-saving purchases promoted relationship satisfaction based on bought “marital bliss.”

There is a Chinese proverb:

“If you want happiness for an hour, take a nap. If you want happiness for a day, go fishing. If you want happiness for a year, inherit a fortune. If you want happiness for a lifetime, help someone else.”

#5  Money Can Buy Happiness. Find Financial Security:

  • Spend less than you earn.
  • Don’t spend to impress others.
  • Create an emergency fund for times of unforeseen circumstances.
  • Minimize debt by paying your credit card balances in full.
  • Reduce spending when you cannot pay balances fully.
  • Automate bill payments to timely pay your bills and regularly contribute to your retirement plan.
  • Save diligently and deploy into retirement and investment accounts.
  • Invest early with diversification to minimizes risk, using long-term strategies.
  • Money isn’t everything.

 

Final Thoughts

Various studies consider the relationship between money and happiness on our well-being. Indeed, if you can meet your basic needs and find financial stability, you should be happier than someone who cannot. The world has many unhappy millionaires and billionaires because money cannot solve problems like disappointments, health challenges, or broken relationships. Money can buy happiness!

My grandmother always said, “Poor or rich, money is good to have.” Managing your money well can’t hurt.

Related Posts:

Why You Need An Emergency Fund (And How To Invest It)

10 Ways To Better Manage Your Spending

 

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What makes you happy? How does money affect your satisfaction levels? Do you use time-saving services to smooth stress levels?

 

 

 

 

 

 

 

 

 

 

 

 

 

A Guide To Owning or Renting Your Home

A Guide To Owning or Renting Your Home

Owning versus renting your home is a longstanding and often passionate debate. The reasons for owning or renting differ according to financial calculations and your personal preferences.

Factors To Consider

If you seek to own a home, do you prefer stability, building equity, control over home and its responsibilities, and tax benefits? Will you enjoy a sense of pride in ownership? On the other hand, does flexibility and freedom appeal to you, not having to deal with the home’s repair and maintenance, freeing you to use savings to make investments, and not have to worry about declining home values?

I understand the allure of owning your home as I have had with our primary home. We continue to hold a second home which we may one day make our primary spot. I grew up in the Bronx in an apartment building for affordable housing. As a result, my family paid a relatively low stabilized rent. Owning our home as inspired by the American Dream was out of my family’s budget.

My husband, Craig, is a real estate attorney dealing with residential and commercial transactions. When I went to law school, I was fascinated by the real estate field and became an investor in commercial properties for a time.

Before we review the advantages and disadvantages of owning and renting your home, let’s address critical factors to consider in making this critical decision.

Housing Market Trends

When it is the right time for you to buy or rent, it may be worthwhile to be aware of the overall housing market, that is, home prices, interest rates, and mortgage rates in particular. US homeownership had grown from 45.6% in 1920 to 66.2% in 2000. Homeownership rates peaked in 2004 at 69.2% (in both April and October of that year), then retreating to 65.8% in 2020.

Generational Gap In Buying Homes

According to a 2019 Zillow report, the average age of the typical first-time homebuyer in the US is 34 years old. Since the Great Recession, millennials were initially slow to purchase their home as they grapple with high student debt and slower wage growth. However, millennials’ average mortgage debt in 3Q 2020 is $237,349, just below $247,567 held by Gen X according to Experian data.

A major consideration in timing a purchase is the level of mortgage rates. Generally, mortgage rates rise during periods of strong economic growth and decline during weak or recessionary periods. Mortgage rates have been historically low, with current rates for 30 years, the fixed rate at 3.564%, and 15 years the fixed rate at 2.615%.

By pursuing a home purchase, make sure your finances are in order. That means being debt-free and establishing or expanding your emergency fund. When we review the financial costs, you’ll better understand the need to have a solid financial condition.

Substantial Financial Differences Between Homebuying And Renting

Financial costs differ between purchasing a home and renting. Homebuyers’ substantial costs can be divided into one-time payments upfront and at the closing. Purchasers face required one-time upfront and closing costs in addition to the ongoing or recurring expenses.

The process of buying a home through closing may be overwhelming, but each step is well defined.

Upfront And Closing Costs

Homebuyers are usually surprised by the number of required payments to those professionals (home inspector, bank attorney, title closer, appraiser, broker, attorney) who are assisting in their purchase. There are also other costs associated with securing the mortgage and protecting the lenders, as they will effectively own 80% of your home. You will pay mortgage application fees, points, and origination.

Upfront Costs

 

Earnest Money

Earnest money can range from 1%-3% up to 10% of the home price, depending on the locale. This money is a consideration for the mutual acceptance of a deal with the seller. As a credit, this amount reduces the purchase price at the closing. If you default before the closing, the earnest money can be the measure of liquidated damages to the seller.

Home Inspection

A qualified inspector will need to inspect the home for damages.  An inspection can help you decide on a house to buy, but before you put money down. The fee amounts vary based on the type of home, square footage, and locale. It is an essential cost as you may find structural damage or disclose other issues can reduce the price you are willing to pay.

Appraisal fees

These fees are for an independent certified appraiser’s report. The report is essential to protect the bank’s  collateral exposure. They are paid directly to the bank after inspection but before the closing and in conjunction with the mortgage loan agreement.

Escrow Accounts

The escrow account is for the bank’s benefit and the attorney’s.

The attorney escrow account holds your down payment for the house. The bank’s escrow covers prepayments for property taxes on the homeowner’s behalf for up to six months. Additionally, the buyer will be paying a full year’s homeowners insurance premiums upfront and one-twelfth of the premium into escrow. Some borrowers,  if applicable, pay private mortgage insurance (PMI) premiums. PMI is required if the buyer is making a down payment of less than 20% of the home price preferred by the lender.

Closing Costs

The final part of your purchase involves several closing costs associated with formalizing the mortgage processing and concluding the transaction between buyer and seller. They include charges for the loan application, processing, and underwriting. The latter may amount to about 1% of the loan. So if you are borrowing $300,000, you will pay $3,000.

You will be paying for a title search and other title-related costs to ensure you are purchasing a home with “good title” free of fraud and any liens for unpaid taxes, etc. The title company collects a premium and receives recording fees.

You will also be paying an attorney for closing your deal and representing you as the buyer in most states. The attorney’s fee ranges from $750-$3,000 depending on the deal’s complexity and your locale.

Recurring or Ongoing Costs

Your ongoing monthly costs of buying a home are your mortgage payments, utilities, garbage, property taxes, and homeowner insurance. These are predictable or fixed costs.

If you are buying a house (rather than an apartment), maintenance, repair, painting, and appliances may vary depending on the house’s condition and age. The costs are often difficult to estimate and may depend on your DIY abilities. You will also have other expenses for lawn care and snow removal, which differ based on your geographic location.

Costs of Renting Your Home

Upfront costs are far less. Landlords usually require 1-2 months for a security deposit at the time of the lease signing. Some landlords will increase additional security or fees for any pets you have for potential damage to their property.

The landlord may require an application fee for administrative costs and a possible broker fee unless the landlord pays this. There may be a move-in fee depending on the type of home you are renting.

Recurring Rental Costs

Tenants are responsible for monthly rent, all utilities, and renters insurance. While the homeowner has homeowners insurance, that doesn’t cover your personal property, including your furniture, clothing, electronics, computers, jewelry, and anything of value to you or liability insurance. The landlord will require you to purchase renters insurance.

Landlords are required to provide you with at least 30-day notice in most states with an increase in the rent unless stated as part of a multi-year lease.

What Is Your Financial Situation?

Before going house-hunting, if you plan to make a purchase, it is a good idea to check your credit report for any errors or issues. You need to be aware of any errors that you should correct. You should know your credit score and what amount of mortgage you can afford. There are steps you can take to raise your credit score.

By the way, your credit report matters to your landlord also. A poor credit report could be a thumbs down on your ability to rent. If your credit score is fair, it may mean providing your landlord with more security. However, a poor credit score has far more of a negative impact on your ability to borrow.

MyFICO’s loan calculator is handy for estimating your APR, monthly loan payment, and total interest paid. For example, using a $300,000 loan your payments for 30 years and 15-year mortgages as of April 9, 2021, based upon your FICO score will be:

30 Year Mortgage

Credit Score                APR             Monthly Payment        Total Interest Paid

760-850                      2.764%                  $1,227                    $141,702

700-759                      2.986%                  $1,263                    $154,517

680-699                      3.163%                  $1,291                    $164,881

660-679                      3.377%                  $1,327                    $177,583

640-659                      3.807%                  $1,399                    $203,664

620-639                      4.353%                  $1,494                    $237,826

 

15 Year Mortgage

Credit Score                APR             Monthly Payment        Total Interest Paid

760-850                      2.107%                  $1,945                    $50,162

700-759                      2.329%                  $1,976                    $55,736

680-699                      2.506%                  $2,001                    $60,219

660-679                      2.72%                   $2,093                    $65,685

640-659                      3.15%                   $2,093                    $76,822

620-639                      3.696%                 $2,174                    $91,255

 

A Few Observations

Irrespective of your FICO Score, the lower the credit score, the higher your APR, monthly mortgage payment, and total interest paid.

Financial Implications For 30 Year versus 15 Year Mortgage

When comparing the different loan maturities on a $300,000 loan:

  • The APR will be higher for the 30-year mortgage than 15 years, all else being the same.
  • The monthly mortgage payments will be significantly higher for the 15-year mortgage, given the shorter period. If you can afford to pay the higher monthly amount, you are better off with the 15-year mortgage because you pay less in total interest.
  •  Assuming you have a 720 credit score, the total home price, including total interest paid and down payment will be lower with a 15-year mortgage loan.
  • The 30-year mortgage is much higher because you are paying interest on your loan longer, so the total home price or principal is $375,000 plus $154,517 equals $529,517.
  • If you opt for a 15 year mortgage, your total home price or principal  is $375,000 ($300,000 loan + $75,000 down payment of 20%) + $55,776 in total interest equals $430,776 for principal and interest.

Advantages Of Buying Your Home

 

1. Building Equity

Paying your mortgage over time will result in building some equity in your home. You should be aware that your initial payments are predominantly for interest on your loan, especially if you have a 30-year mortgage and equity builds relatively slowly.

On the other hand, you will undoubtedly be owning your home much more quickly with a 15-year mortgage. A mortgage amortization calculator helps compare the principal and interest portions for the 15 and 30-year mortgages. Assume your loan begins in April 2021.

The comparison reveals that more than half of your first monthly payment goes to the principal than interest with the 15-year mortgage. However, only about a third of your payment goes to the principal with 30 years. The amount between principal and interest reaches parity until the year 2032, and equity rises slowly after that until the year 2050, when you satisfy the 30-year loan.

2. Your Home As An Appreciable Asset

Depending on your time frame, US new home median prices reflect appreciable growth. Median new home prices have risen from $17,200 in 1963 to $212,300 in 2011 according to the US Census of Housing. That is a 5.38% compounded annual growth rate. However, adjusted for inflation, the growth rate is 1.8%. On the other hand, inflation-adjusted monthly rent grew from $568 in 1960 to $934 in 2010, according to Apartment List Rentonomics. This 68% hike in rent is well ahead of the 18% rise in household income during the same period.

Your investment in your primary home essentially keeps pace with inflation rather than generating strong investment returns. When calculating returns you need to factor in the interest costs to the total price. That said, you are living in your home and hopefully enjoying a high quality of living which can be priceless for many.

There have broader differences in select markets across the US that exhibit stronger appreciation due to higher population growth, demand, and other factors.

Housing Bubble

The US housing bubble was particularly troubling for homeowners in the mid-2000s. Housing prices peaked in early 2006, then leveled off until record drops of 18% as reported by the S& P Case-Shiller index in October 2008.

While this drop was exceptional, it still provides a warning sign for those interested in purchasing their homes as loss in home values is real. However, some markets have recovered from the Great Recession and recent housing price trends seem more favorable.

3. HELOC As A Source of Funding

Once you have built some amount of equity and have paid your mortgage on time, you may be able to set up a home equity line of credit or HELOC. You can often get a loan more quickly and at lower rates because you are using your home equity as collateral. Part of these funds could go to building a new kitchen or expanding the house.

The HELOC, if not maxed out, can positively help your credit score. This is because the HELOC has increased the available amount of credit, lowering your utilization rate and improving your financial situation. Credit utilization accounts for 30% of your credit score. HELOC increases debt, so make sure you pay this loan on time and in full. To avoid a hit to your credit score, don’t close the HELOC unless you are too tempted to use the money or about to close on the house, as it will then lower the available credit.

4. Possibility of Rental Income

When you live in your primary residence, you don’t often think about renting out your property. However, your family may relocate for your firm for a couple of years, or your kids are moving out, and you want to travel more. You may decide to rent out your home or list it with Airbnb.

5. Stability In Owning Your Home

It is wonderful to raise your kids in one home, become part of the neighborhood and community. There is a certain calm feeling of not searching for a place to live and pack and unpack boxes. (Having just moved to a new home, I can share that I will be thrilled when our family settles in our home and the last box is gone.)

6. Tax Benefits After The Tax Law Changes

The 2017 tax law did impact some of the tax deductions enjoyed by homeowners. If you itemize your deductions on a joint filing, you still claim mortgage interest payments up to a $750,000 face value loan. Qualified loans include your mortgage, home equity loans, and HELOCs. This tax change is a reduction from $1,000,000 before the recent tax law. You can no longer deduct interest associated with home equity debt unless buying or improving your home.

Deductions for state and local taxes (known as the SALT deduction) and property taxes are capped at $10,000. This amount may be appropriate in Ohio but not in high-tax states like New York or California. This is a reduction from unrestricted amounts previously deducted. You can still deduct the proportionate interest associated with your apartment building’s mortgage if it is a co-operative.

Homestead Exemption

Certain states, like Florida, offer exemptions if you meet specific requirements. This exemption may protect a surviving spouse when the homestead spouse dies. A homestead exemption is a law that protects the value of a home from property taxes and creditors. Depending on the state, a property tax can get an exemption in the range of $25,000-$75,000 of a home’s assessed value from property taxes.

7. You Have Freedom To Do What You Want

Are you creative? Your home can be a good option for you. There may be some conformity required, but your wallet limits design and remodeling. You can do gardening and grow vegetables. Owning your pets is more manageable in your home. Your children can listen to loud music with fewer rules of noise after hours. Peace of mind can be precious for you and your family.

8. Sense of Pride In Ownership

For those who have rented for a long time. owning your home feels like an accomplishment. The land is a natural resource, and there is a good feeling of knowing you own the land where you walk and live.

Ask any refugee that has had their home taken away from them what a house meant to them. My mom was a refugee when she came to the US, having lost her family. Her home was taken away illegally and violently. While owning a home eluded her, she always considered owning a home away to wealth.

Disadvantages of Owning A Home

 

1. High Costs To Own

We addressed the one-time and recurring costs a homeowner has to realize, but it bears repeating. In particular, there are unforeseen events that require homeowners to do planning ahead of the purchase. Having an ample emergency fund is essential for all, but homeowners need to expand that fund to avoid borrowing unnecessarily.

Consider the age of the home and its condition when factoring in maintenance and repairs. Are you handy? We are not, and so we rely on a plethora of plumbers, electricians, and those who can help us around the house with shower breaking and leaky pipes. I keep wanting to spend time watching YouTube to pick up some tips but I am always afraid of starting a fire.

Our teens are handier but not always available given their schoolwork, friends, sports, video games, and sleeping late.

It may be worthwhile to watch the 1986 movie The Money Pit with Tom Hanks and Shelley Long. It left an indelible memory of what not to do with your house.

2. Lack of Flexibility

If you are adventurous, you may feel stuck in the same house and environment, especially as your friends may pick up and leave to try life in another place or country. You may want to sell your home and retire to another locale, but the local economy is weak.

We had next-door neighbors who experienced that predicament. They lived in Connecticut and had bought a house in Florida. The market had been terrible for the better part of a decade. They had to stay put in the colder climate they planned to avoid in their later years. They finally sold last year.

3. Your Home Has An Opportunity Cost

A home is usually the most significant asset you own. The mortgage, maintenance, repairs, and property taxes require a lot of capital that may be better invest in a diverse investment portfolio. Many people believe that when they sell their house, they will use the money for retirement. That is true, but there is no guarantee that you will be able to sell your property quickly or not be facing declining values.

Too much concentration on one asset is hazardous. You need to have investments in other assets but saving to invest in other vehicles is difficult when so much capital is in real estate.

One way to avoid this difficulty is don’t buy a house too big for you. The amount of space homeowners have been buying has dramatically increased since 1973. Specifically, median size homes have recently expanded to 2,467 square feet, up to 1,000 square feet. During that time, the average living space per person in the household has nearly doubled to 971 from 505. Do we need all that space and then have to furnish it too?

Advantages of Renting

 

1. Rental Costs Are Less

The lease agreement with the landlord provides your financial responsibilities, which are essentially predictable: monthly rent payments, utilities, lawn care, garbage disposal, and snow removal if applicable. There is a minimum of upfront fees. Finding an apartment may be harder in specific markets and more expensive based on demand.

2. Benefits of Ownership Without The Property Taxes

You may be fortunate to get the best of what property taxes pay for without having to pay these costs when you rent. Families are always willing to pay more money for a house to be located in a nice place with a great school district. Higher home prices and property taxes may put buying a home out of your range.

Our Recent Move To A Rental House

By renting, you can access the town’s beauty, infrastructures like transportation, town pool, and schools. These attributes are a big reason why we moved to a small town (from a big city)  to a house rental (from an owned apartment) and switched our kids from a private school to one of the best public schools in the state, if not the country.

Our son joined the football team, and our daughter is considering other sports not readily available at her previous school. It was a difficult decision, especially for me, having grown up in the city. Although it is early, it feels promising.

Renting may also help you get familiar with the area before purchasing and allow you to get your financials in order.

3. Free Of Maintenance And Repairs

Your landlord has primary responsibility for the care of the property. It is up to you to inform your landlord of the need for maintenance and care. For those not handy or not wanting to spend the money to fix things, renting can be ideal.  Usually, the landlord wants to use their folks (e.g., painters, electricians) for respective issues in the home.

4. Flexibility To Leave

At the end of the lease, you can leave the premises. Many people decide to move around and explore different areas or look for other jobs. You aren’t tied down, and as long as you make payments through the end of the lease, you are good to go. It is challenging to leave your own home as quickly as a tenant can.

Disadvantages of Renting

 

1. Higher Rent Or Sells Property

Your landlord can raise your rent with proper notice or sell the property. Renting has increased faster than household income has since 1960. Apartment List Rentonomics points out that inflation-adjusted rent rose 64% from $568 per month in 1960 to $934 in 2010, while household income grew only 18%.

Many homeowners turn to rent if they are unable to sell their property due to a poor market. Once the market turns, they may ultimately sell the home you are renting.

Markets vary, but in specific markets, there are fewer homes to rent.

2. No Equity Buildup or Tax Benefits

It is common for people to say that renting is throwing money away. Of course, this is not true as you are paying for the living space for some time. You have the freedom to find the best affordable apartment you can to live in an area you prefer.

You are not getting equity or tax benefits from your rent, but you are getting several advantages. You can divert your savings into other assets.

3. A Bad Landlord

It would be a drag if you rent an apartment from a bad landlord, but the good news it is not permanent. Before you rent, check out Yelp to see if there any red flags to know about your landlord. People are always willing to share their bad stories.

I recall some horrifying stories that painted their landlord as a reincarnation of Jack Torrance, played by Jack Nicholson in The Shining. Torrance was the caretaker at an isolated hotel.

If you are having trouble with your landlord, who is not providing services promised in the lease, there are legal actions to take.

4. No Upside From A Strong Housing Market

As a renter, you do not get the benefit of improving house values. It may feel bad when your friends are experiencing some growth in their home value, while you may be getting a notice from your landlord that they are getting ready to sell or raise the rent.

 

Final Thoughts

Hopefully, this guide provided you with good information to decide between buying or renting your home. Frankly, you can look at the calculations related to mortgage costs, building equity, home prices, square footage, but in the end, the choice is a personal one for you and your family.

If there is one point I would like to make, consider how your preferences line up with your long-term financial goals. Make sure that if you find your dream house, it is doesn’t break the bank. You don’t want to be too overladen with debt.  Remain disciplined in your spending and make saving a priority.

 

Thank you for reading! If you rent or own your home, would you kindly share your experiences with us? We always like to hear how you decided which shed light on a home decision.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

How To Become A Millionaire -16 Dos And Don’ts

How To Become A Millionaire -16 Dos And Don’ts

It’s no longer “Who Wants to Be a Millionaire” but how to become a millionaire. You don’t have to be a contestant on a game show, win the lottery, or receive a windfall from a relative. Just follow the 16 Do’s and Don’t in this article, and you’ll be on the road to becoming a millionaire.

Four Money Mindsets Used by Millionaires

While it might be easy to think that millionaires are just lucky, they think about how their money can work for them, not just how they can work for money.

1. Use Time to Your Advantage

Most people look for concrete paths to becoming a millionaire. But the essential ingredient to becoming a millionaire is intangible. It’s time. The majority of millionaires utilize the compounding nature of time, where growth builds on itself over time.

My favorite imagery to describe compounding is to imagine the growth of a tree. In the first five years of a tree’s life, it will only grow a few feet. Its shrubbery is the size of a basketball. It’s a small, weak plant. In the next five years, will the tree double in size? No! It’s more likely to quadruple (or more) in size. It’s growing in all three dimensions—height, depth, width. It’s not a simple doubling.

We’ve all seen the social media megastar who goes from broke to millionaire in less than ten years. But they are exceptions, not the rule. Most millionaires grow their wealth at a slow pace. Over time, they utilize an explosion of compound growth—like a tree—to become a millionaire.

2. Create Financial Goals

Millionaires develop written financial plans that serve as roadmaps to reach their destination. These plans allow them to make financial decisions based on their goals. A good financial plan means that to reach millionaire status isn’t an if; it’s a when. They know where they are going to get there because their personal finance is all planned out.

If you’re unsure how to create a financial plan, then a certified financial planner (CFP) might be an excellent place to start. They might suggest you start investing or open a Roth IRA retirement account or first fill up your emergency fund. A financial advisor is there to share millionaire wisdom with you.

Becoming a millionaire goes hand-in-hand with retirement planning and retirement savings. For some, reaching the millionaire club will enable their financial freedom or the ability never to work again. Saving money allows a high net worth, and financial independence is the reward.

Big financial success requires big financial goals. A written financial plan sets those goals.

3. Millionaires Increase Earnings

There are a few ways to go about increasing your earnings on your path to becoming a millionaire.

The fact is that most millionaires have a full-time job. And they might work it for a full 40 years. If routine work is how you make money, you could ask for a raise. Easier said than done, sure. But there are sure-fire ways to speak with your management about increasing your base salary. The best part? An increased salary affects your income every year from now until retirement. You aren’t just doing it for your current self, but for your future self too.

You could switch jobs. Self-made millionaire Steve Adcock attributes changing jobs (and getting raises each time) to be one of the critical factors in becoming a millionaire. Steve also focuses on the need to work hard and start investing as early as you can. Or you could find sources of passive income or secure a second job. Surprisingly there are easy ways to generate passive income, tons of side hustles to start, real estate ventures, and other easy ways to earn money and build wealth.

Increased earnings can be invested and grow into future millionaire wealth. A simple rule of thumb is that a dollar invested today will grow into $10 in 30 years. Using this fact, one can quickly see how a few thousand dollars in extra earnings can make significant headway on your path to future millionaire status. The bottom line: increasing your earnings is how to become a millionaire. There’s no “best way” to do this, but it’s critically important to reach your millionaire financial goals.

4. Millionaires Also Decrease Their Spending

Many financial writers point out that the stereotypical “millionaire lifestyle” is antithetical to becoming a millionaire. Why? We think of millionaires as having a big house, a fancy car, the nicest clothes. But if you spend all your money, then you aren’t a millionaire anymore. The truth is that most millionaires find ways to decrease their spending. They don’t buy dumb crap.

This behavior—spend less, save more—is how to become a millionaire. It’s counterintuitive to our traditional thoughts. The people who don’t look like millionaires are the ones who frequently are millionaires. It’s the adage of the “millionaire next door.” The authors of “The Millionaire Next Door,” a worthwhile read, have a target net worth ratio with age added as a factor.

They might drive used or old cars. They wear non-designer clothes. They enjoy low-cost or free activities. They don’t dine out too much. They vacation economically. These are all ways that millionaires decrease their spending without feeling deprived.

There are plenty of counter-examples. We all see millionaires on T.V. who genuinely live the millionaire lifestyle. But for the average reader, the simple path to wealth involves decreasing your spending, not increasing it.

Five Ways to Invest Like a Millionaire

Did you know that millionaires put 44% of their investable assets in stocks? And that 2/3 of millionaires lean on experts by consulting with advisors? Let’s take a look at the most common path to Millionaire Road.

1. Millionaires Do Simple Stock Investing

The stock market is one of the most common methods for people to become millionaires. One investing strategy is simple to describe. Invest a regular percentage of every paycheck into a low-cost index fund. Rinse and repeat for ~35 years. Boom—that’s how to become a millionaire. But let’s take some time to break down those terms and that math.

First, what’s a low-cost index fund? Many people mistakenly believe that successful stock investing involves picking individual winners and losers. But that’s not true, and an index fund helps explain why. An index fund owns every stock in a given stock index. It doesn’t pick winners and losers but buys entire swaths of the market instead.

You’ve heard of some indexes—like the S&P 500 or the Dow Jones. An S&P 500 index fund chooses to own every stock in the S&P 500, regardless of its recent success or failure. Other indexes and index funds are less well-known. For example, some indexes track the energy industry, the automotive industry, or precious metals.

History shows that index fund investing is very successful. One of the key reasons is that index funds charge meager fees. Since there is less expertise required—no “skilled” picking of winners and losers—there is no need to charge high fees.

2. Millionaire Investors Leverage Time

Next, let’s discuss the long-term aspect of stock investing. Many people see the most expensive stocks—like Tesla—and think it’s typical for stocks to grow by 10x in five years. “If only,” they ponder, “I can discover the next Tesla.” Index investing circumvents that wishful thinking. Since brokerages design index funds to be average (they own everything), index funds return average profits.

Over the history of the stock market, that return has been about 10% per year. Once inflation is accounted for, the stock market has a “real return” of about 7% per year. 7% is not a lot until it starts compounding. One year of 7% turns $1000 into $1070. But what do 30 years of compounding do? The average person might think 7% times 30 years equals 210%…turning those $1000 into $1000+$2100 = $3100.

But the truth is that stock market returns compound over time, just like our tree from before! A 7% return compounded over 30 years equates to (1.07)^30 = 761%. Your $1000 investment turns into $8610. But $8610 doesn’t make you a millionaire.

3. Regular Investment, Regular Frequency Is the Path To Millionaire Status

That’s why many experts suggest the average person invest using a regular frequency and a uniform amount. That’s how you reach $1 million net worth. For example, Americans could choose to utilize their 401(k) account. They’d be investing a consistent fraction of their paycheck (uniform amount) each time they are paid (regular frequency). Some people call this “dollar-cost averaging,” although the exact definition of dollar-cost averaging is up for debate.

Let’s look at an example of dollar-cost averaging using a 401(k). Mikey invests $400 out of each of his paychecks. He does this from age 22 until he retires at age 60. Some quick math tells us that Mikey’s contribution is $400 per check * 26 checks per year * 38 years = $395,200. The technical term for this contribution is principal.

But once we account for investing growth (again, using the 7% per year historical average), Mikey ends up with a whopping $2.07 million. Remember, our 7% is the “real return,” meaning that Mikey has $2 million in today’s dollars. He hits 1 million dollars at age 51. That’s the power of consistent stock market investing over decades. In this case, 30 years of simple investing is how to become a millionaire.

4. Millionaires Invest in What They Know

Cryptocurrency has undoubtedly created many millionaires (and even some billionaires). Whereas stocks return an average of 10% per year, Bitcoin has grown by 196% per year since its invention in 2008. Crazy! But your correspondents here suggest the following when it comes to cryptocurrency: invest in what you know.

If you understand how Bitcoin works and feel confident in its long-term growth, then you likely have the constitution to withstand any ups and downs it sees in the future. But if you invest in crypto ignorantly, simply hoping to make a quick buck, then you might be in it for the wrong reasons. If prices dive quickly—which we know can occur—it will scare you into selling after a significant loss.

Investing in stocks—which represent ownership in the companies comprising our economy—is much more tangible for the average investor than the boom in digital currencies.

5. Millionaires Invest in Themselves

While a smaller percentage, another path for millionaires is to “invest in themselves” via starting a business. Most business owners will tell you how this is a high-stress, high-risk, high-reward path.

First, there is stress. Business owners typically work long hours. They often take a little-to-no salary during the early years of the business. Instead, they opt to invest any earning to allow the company to grow. They are responsible to their employees (and those their employees care for) and responsibly for their customers to provide the best service possible. These responsibilities contribute to high stress.

And then there is the risk. Businesses frequently use debt (or borrowed money) to get started. This debt creates financial risk associated with the business failing. Some businesses utilize outside investment capital. In this case, the outside investors trade a share of the risk for a company’s percentage. This trade decreases the business owner’s risk but increases their stress (they now must answer to their investors) and reduces the owner’s reward (they share it with the investors).

After the risk and the stress comes the reward! Perhaps the most satisfying aspect of capitalism is that those who invest their capital (money and time) can later reap huge rewards. Business owners certainly fall into this category. Let’s go over a few quick examples of those rewards.

Bill Gates founded Microsoft with, essentially, zero start-up dollars. The company is worth $1.7 trillion today (though Gates is no longer close to being a majority or plurality shareholder). Elon Musk contributed $6.5 million to Tesla in 2004—yes, he was already a millionaire. But Musk earned his millions from cash-strapped start-ups, most notably PayPal. Jeff Bezos founded Amazon using “a few hundred thousand dollars” as a loan from his parents. The company is now worth $1.5 trillion.

Yes, this data set was cherry-picked in the “worst” way. These are possibly the three most successful entrepreneurs in the past 50 years. But it serves to drive the point home. A business can filter risk and stress to create an asymmetric reward.

Four Personality Traits of a Millionaire

Millionaires and other successful people tend to share similar personality traits. You might already have some guesses as to what those are. Authors Chris Hogan and Tom Corley identified the following characteristics the millionaires share.

1. Millionaires Seek Feedback and Have Mentors

Millionaires don’t exist in a silo. They often seek out external feedback to improve. In particular, millionaires frequently utilize experienced mentorship to help them stay on the path to wealth. Sure, some people strike gold by doing things their own way. But those people are exceptions to the rule.

2. Millionaires Persevere

The road of life is never smooth, whether you’re a millionaire or not. But one character trait that sets successful people apart is their ability to persevere through thick and thin. This perseverance might mean overcoming hardships. It might equate to ignoring critics. They keep pushing on, no matter the obstacle. It’s not guaranteed to make you millions. Plenty of hard-working people don’t end up as millionaires. But it’s even rarer for a lazy quitter to end up a millionaire.

3. Millionaires Are Consistent

Millionaires know that the tortoise beats the hare. Its slow and steady strategy wins the race. In other words, consistency wins in the long run. Consistency can take many forms. It can show up as hard work. It manifests as daily responsibility and intentional thinking. When these behaviors are practice day after week after month after year—consistently—then good results are sure to follow.

4. Millionaires Are Conscientious

Millionaires tend to be responsible and thorough. They follow through. They complete their duties to the best of their abilities. In other words, they are conscientious. Their inner conscience guides them.

Three Things Millionaires Don’t Do

On your journey to becoming a millionaire, it’s important to avoid some behaviors, or you’ll sink your efforts. You’ll be trying to fill your bank account with a leaky bucket. Let’s now discuss the actions that millionaires don’t do.

1.Don’t Accrue Dumb Debt

Debt is a double-edged sword. You can spend more money than you have and achieve wild growth. Or you can stumble into a pit of misery, stuck in debt for decades. Student loans, for example, are one of the most common debt vehicles today. Many current and future millionaires have suffered student debt. Why? Because education kickstarted their growth as nothing else could.

While some student loan debt is dumb, most people find their student loans manageable and worthwhile. Trading education for some debt was a good deal. But credit card debt is rarely worth it. It’s dumb debt. Purchasing consumer products using credit card debt is not a millionaire behavior.

2. Don’t Make Rushed Decisions

Remember when we said that “time is on your side.” That idea applies to more than just long-term investments. Millionaires realize that big decisions require significant time commitments. And how to become a millionaire is a big question to answer! It’s not something to rush.

Millionaires rely on well-researched decisions, rarely succumbing to hasty, irrational choices. What’s one example of a foolish choice? Millionaires don’t follow the crowd. According to author Tom Corely, the millionaires he has interviewed tend to separate themselves from “the crowd.” They don’t make decisions based on popular choices. Why? Because the popular opinion is often wrong!

3. Don’t Be Stagnant

Millionaires seek growth in both their personal and financial lives. They aren’t stagnant. Millionaires are constantly seeking to learn new skills and expand their knowledge set. They don’t settle for the status quo. And in their finances, millionaires understand the balance between risk and reward. They don’t use a savings account other than for their emergency funds.

In general, the most impactful rewards come from the highest risks. But there’s a “risk-adjusted” way to measure those rewards. Millionaires often strike a healthy balance between risk and rewards.

Final Thoughts

Even if (somehow) this advice doesn’t land you in the millionaire club, think of where you’ll end up. You’ll be a reasonably wealthy, high-earning, low-spending, self-invested, self-improving, perseverent, consistent, and conscientious person who avoids debt, doesn’t rush decisions, and never settles.

Not bad, right?

This article originally appeared on Your Money Geek and has been republished with permission.

Being Frugal When Saving Time And Money

Being Frugal When Saving Time And Money

“Price is what you pay; value is what you get.”

Warren Buffett

I bristled when they called me a cheapskate when I was a young kid. It cast a dark shadow over me. We lived in a modest neighborhood in the Bronx, so it wasn’t like some of us were from the upper class. Still, our lifestyle was far more humble than others. I was laughed at for getting an ice cream without sprinkles or wearing ratty clothes. My parents were more frugal for a good reason. They struggled with their small business and needed to save money for our basic needs. For many people, frugality is a necessity. For others, it may be a choice.

Cheap Vs. Frugal

Nowadays, calling someone frugal is more of a virtue, like giving a badge of honor to that person. Being frugal or cheap is sometimes used interchangeably, but the terms have different meanings. According to Merriam-Webster, frugal is characterized by or reflecting economy in the use of resources. On the other hand, cheap has a range of definitions. Cheap has two or more meanings: charging or obtainable at a low price and inferior quality or worth.

While both terms are about saving money, being cheap is usually motivated by price and paying less. On the other hand, being frugal considers price along with quality and value in evaluating the purchase. There is a gray area but considering if a person is cheap or frugal, you’ll know the difference by their actions or words. Cheap people are penny-pinchers who will mostly pick the lowest price option even if the quality is suspect, regift presents, and are poor tippers. Many will engage in D-I-Y projects like plumbing and electrician work just for the sake of not spending the money.

When Frugality Can Go Too Far

Being overly cheap or extreme frugality without reason and lack of generosity is a symptom of obsessive-compulsive personality disorder (OCPD) by the International OCD Foundation. The American Psychiatric Association has pointed to this symptom as when “a person adopts a miserly spending style toward both self and others.” Growing up, my Uncle Harry lived with us for many years. He was a Holocaust survivor of the death camp Auschwitz. As a teen, he suffered from the camp’s traumatic effects. He lost his family, except for my mom, and married late in life. Unfortunately, he divorced soon after.

It was extreme frugality that killed his marriage. His wife, Doris would come home with a dozen eggs or too many groceries and he would have a breakdown over the potential for wasted food. His psychiatrist noted his anxiety about saving money or extreme frugality was a tragic symptom of his experience.

In contrast to being cheap, frugality is a strategy that saves money and considers the whole picture: quality, durability, value, and price of what you are buying. Those who are frugal are savvy about saving money for themselves and others. They will consider other variables like whether that purchase is good for the environment and other causes.

The Frugal Warren Buffett

Warren Buffett is as legendary for his frugality as he is for his investing acumen. He lives in the same Omaha home since 1958. Buffett frequents McDonald’s and his company’s cafeteria. He is a value-seeker when investing or in his lifestyle. Yet, for all of his frugalness, Warren Buffett has generously donated $37 billion since 2006.  One of my favorite Buffett quotes: “It’s far better to buy a wonderful company at a fair price than a fair company at a wonderful price.”

6 Benefits To Being Frugal  

 

1. Having A Purposeful Mindset

Adopting a frugal mindset means being more thoughtful about your purchase decisions. It is not about having it all but about choosing your purchases carefully for you and your family.  Having a frugal attitude favors good money habits like saving money and better financial management overall. It is not about choosing the lowest price option basing your decision on price alone. Other factors are part of the value proposition.

Frugality is a lifestyle that people adopt for the simple pleasures of life. It is not new. Plato and Henry David Thoreau in Walden advocated modest or minimalist living. It contrasts with societal desires for materialistic possessions which often leads to overspending just to keep up with your peers. Being thrifty has its merits and can lead to sound well-being.

Related Post: 10 Ways To Better Manage Your Spending

2. Motivate Yourself By Knowing Your Goals

It is easier to save or manage money when you have a plan for your future. Determine your short and long-term goals. Those who plan to retire early,  work hard to set aside money for savings, retirement, and investments. Their plan will motivate them to be financially independent and retire early (FIRE). It is not for everyone, but it does give you a chance to develop good money habits for future financial flexibility. By adopting frugal ways to save more, spend less now so you can retire early in life. Spending within your means allows you to choose what you want to do later on at a still young age.

I left my job on Wall Street in 2001, before the FIRE movement became popular in the 2010s. My choice was to go to law school and practice for a few years, have kids, and teach at a college. For me, it has worked out fortunately though it was a big adjustment that could have been smoother. To be honest, I didn’t have a well-developed plan though I did want to return to school because I enjoyed learning new things. Goal setting is essential even if you finetune through the years.

The Frugal Millionaire

In The Millionaire Next Door, a favorite read of mine, millionaires were profiled in two groups. The Under Accumulators of Wealth (UAWs) were the more typical white-collar professional millionaire, devoting more of their high income to luxury goods to maintain their status. As a result, they had lower net wealth compared to their income by neglecting savings and investments.

The Prodigious Accumulator of Wealth (PAWs) were more frugal millionaires. They avoided a showy lifestyle, bought used cars, often living in blue-collar areas. Goal-oriented, they made intelligent buying decisions, using savings to invest more of their money in securities or in businesses for good returns. PAWs spent less on luxury, accumulating higher net wealth relative to income from less.

3. Prioritize Spending To Improve Your Financial Health

Although you don’t want to penny-pinch, prioritize your spending. Frugal spenders tend not to be compulsive shoppers, accumulating lots of material possessions to regret. That doesn’t mean you can’t travel, buy good things, or enjoy your life. Quite the contrary. It is about spending thoughtfully and moderately and not on a whim. Know the difference between your wants and needs or living essentials. Your needs–food, rent, clothes, medical, education– should be a priority. Yes, you can have that latte if it gives you a particular pleasure.

Being frugal means spending below your means so that you can save money to improve your financial health. Those who are frugal tend to:

  • Save money rather than spend;
  • Avoid debt rather than purchase on credit;
  • Pay their credit card balances in full;
  • Have an ample emergency fund invested in a money market deposit account;
  • Contribute at least the minimum amount into your employer-sponsored 401K plan to earn their match; and,
  • Set aside money to build up an investment account.

Related Post: 10 Commandments of Saving Money

4. Price Vs. Value

Buying solely on a price basis without regard to quality is a hallmark of cheapskates. Those who are frugal make economic rather than impulsive decisions. Price is important, but there are other factors to consider. When making purchases, economic people will evaluate the quality, usefulness, reliability, durability, style, convenience, experience, and trustworthiness of the company or the brand. In other words, they will look at the whole picture.

Of course, the price versus value equation depends on the product itself. Frugal shoppers are not going to evaluate many factors for convenience products bought frequently. Price plays a bigger role when buying toothpaste or laundry detergent. For these products and many others, you can save money by buying generic brands at a discount to name brands. The price will be lower for generic brands, as much 35% reductions compared to name brands but the quality is often the same.

Don’t Shop On Price Alone

On the other hand, shopping for appliances, furniture, clothing, and other items less frequently bought quality and other considerations matter. Buying furniture chiefly because it is inexpensive is a recipe for disaster. That is being penny-wise pound foolish. Robert Burton is credited with that British saying in 1621 and is in The Anatomy of Melancholy. I am not sure Burton had our cheap bookcases in mind. However, that is what Craig and I remember saying after we bought cheap bookcases at a “bargain price.” We regretted that purchase made in our early years together almost immediately. The bookcase crashed in the middle of the night. Cheaply made, it didn’t hold up our books for too long.

5. Frugalness Is Good For The Environment

Practicing frugality has become part of the minimalism cult and more acceptable in recent years.  Mindless consumption is being frugal and less wasteful, which is good for the environment. Even if you are not saving money, reusing bags at the grocery store, or not taxing our utilities makes economic and environmental sense. Turn over your lights when leaving your room or home. Wash your clothes on the cold setting and lower or raise your thermostat. You may have personal savings, but you are also helping a cause.

6. Be Frugal About Wasting Time

Time is money. Both are valuable resources, but time is more precious because it is finite. We cannot replenish time. Saving money is necessary, but not when it causes you to waste time. Time is an element that many of us use poorly. Examples of how we splurge on time when trying to save money are:

  • Driving around to get the best gas price;
  • DIY projects when you aren’t handy or don’t even like doing them; and,
  • Grocery shopping at different places to get the best price at each store

Being frugal with our time means being more focused on how we are spending it. To save money, I sometimes over-research things for the best product. Make a “to-do” list to organize your time more meaningfully. Don’t go shopping without a list.

When your time is short, consider spending money on time-saving services. Studies say it can promote happiness when time constraints are stressing you out. On the other hand, Some people work more efficiently under a tight timeframe. I find that I often accomplish more with time constraints which help me to be more focused. Balance your needs of saving money and saving time according to your abilities and preferences.

Related Post: The Relationship Between Time, Money, And Productivity

Final Thoughts

No one wants to be a cheapskate. On the other hand, being frugal is often a virtue that may lead to a happier lifestyle. Just be sure you are not becoming obsessive like my Uncle Harry. Saving time and money are valuable goals that can help to eliminate stress while strengthening your financial health. Maintain a balance to live a life you enjoy. You don’t need to stop pleasures just for the sake of being frugal. Instead, prioritize what is essential for you.

Thank you for reading! If you find value in this post, please visit us more often or consider subscribing to The Cents of Money and get our weekly newsletter and other freebies.

 

 

 

 

 

 

 

Getting Stimulus Money? Spend This Money Wisely

Getting Stimulus Money? Spend This Money Wisely

The third and possibly final stimulus check from the federal government is on its way. Most people will get their stimulus money via direct deposit to tens of millions of bank accounts. If you and your family qualify for the most extensive distribution, you likely have some immediate or future needs. Whatever you decide to do, strategize to spend this money wisely.

Stimulus Checks And Extended Unemployment Benefits

Did you get your stimulus check yet? The maximum tax-free amount is $1,400 per individual ($2,800 per married couple if jointly filing), and $1,400 per dependent, including those ages 17 and up. The federal government extended unemployment benefits with a $300 additional supplement to state benefits through September 6, 2021.

Typically, unemployment benefits are fully taxable. However, the IRS gave a tax break by allowing taxpayers to exclude up to $10,200 ($20,400 for married couples filing jointly) benefits on their 2020 taxes for those who made less than $150,000 in adjusted gross income (AGI). As stimulus checks were going out to households, the IRS announced tax returns are now due on May 17 this year instead of April 15.

How To Use Your Money Depends On Your Needs

Every household varies as to their need for this money. For instance, lower-income families are more likely to devote much of their spending to living necessities.

In a June 2020  US Census study,  adults in households with income between $75,000 and $99,999 were more likely to use their stimulus money to pay off debt or add to savings compared to households overall. In contrast, 87.6% of adults earning $25,000 or below planned to use their stimulus payments to meet their expenses.

The stimulus money is part of more considerable fiscal support targeted to boost consumer and business spending. As the economy grows, more people will work.

The Fed has accommodated our weak economy with low-interest rates and continued liquidity. These efforts will stimulate our economy and help our financial markets, but they may cause higher inflation. Fears of higher inflation have added volatility in the stock market.

Some believe higher economic growth and inflation may be transient, causing some stock market opportunities ahead. Chair Powell seems to be staying on course of a stimulative monetary policy and will tolerate higher inflation over the 2% target. 

Is This A Financial Windfall?

Merriam Webster  defines windfall as “an unexpected, unearned, or sudden gain or advantage.” A windfall can range from being a sum of $1,000 to something far more significant. This money may result from an inheritance, legal settlement win, salary bonus, or a winning lottery ticket.

A small windfall, newfound money, or stimulus money can serve a similar function by bringing you a step closer to your financial goals. That is a win for you whether you direct the money to help you with your day-to-day expenses or cushion your retirement nest egg.

Strategize What You Need Now And For Your Future

Strategize before spending your additional money by paying what is most urgently needed now.  The funds should improve your financial situation. Most people receiving checks have had a difficult time making ends meet. They may have lost their jobs, had their hours cut, or their job remains in jeopardy.

You may need to shore up your finances now. Are there holes in your budget that need mending that you can take care of first?   Pay your bills, reduce your debt to manageable levels, eliminating high-interest credit card debt. Should you have money left over, save for emergencies.

On the other hand, if you have little to no debt, devote your extra money to where you can catch up on retirement savings and investing.  Allocate where you can boost your financial future–replenish your emergency fund, retirement, investing– by adding to where the money can potentially grow.

Our Recommendations For Spending The Money Wisely  

 

1. Prioritize Your Everyday Bills

If you have outstanding household bills for your rent, mortgage, or utilities that need attention, consider negotiating with your providers. Ask if lower rates are possible or stretch out due dates. You want to avoid being late paying bills and affecting your credit score. It never hurts to try to do that at a time when people are most understanding.

Staying current on your bills can relieve the angst. And you don’t want to pile on late charges and add to your debt load.

2. Paying Off Your High-Cost Debt First

When you carry a lot of debt–credit cards, car, mortgage, student loans, or personal loans–can be overwhelming. Your stimulus money may not stretch that far. Interest rates are low for mortgages, car, and student loans, so your best bet is to reduce your credit card balances. Card issuers typically charge 15%-16% interest rates, and the compounding effect makes that balance grow faster.

It may be tempting to spread the cash proceeds around to all of your loans but target the most detrimental cost first.

3. Neglecting Any Car Repairs?

During COVID, you may be using your car less. If you are not following through with tune-ups, you can damage your vehicle in the long run. Do you have any car repairs you postponed but now can bring into the shop? Your repair guy will likely welcome you back.

4. Replenish Your Emergency Funds Or Start One

Many people have withdrawn money during the past year. They may have had to close businesses, leave jobs to take care of their family, or lost their jobs. It is time to reassess your emergency savings. Refill this fund so you can cover six months of your basic living needs should something unforeseen happen. A job loss, pet surgery, an unexpected illness, or car accident can mean higher costs beyond your budget.

Replenishing these savings can give you peace of mind. Those unexpected events do happen, as many of us learned the hard way last year.

Make sure to keep this money in liquid assets such as a higher-yielding savings account that is readily accessible. These days there is very little income to earn from low yields. But, economists are expecting higher interest rates as the economy strengthens. Therefore, use short-term securities like CDs so you can roll this money into higher yields when they are available.  

5. Add To Your Retirement Savings

Whenever you have extra money from a bonus, overtime, or raise, consider adding some of this money to your retirement savings. Notably, a 401K employer-sponsored plan or an IRA and Roth IRA makes sense. If you don’t have a retirement account, this is a good time to do so. 

Technically, your tax-free stimulus payment is unearned income. As such, it may be tricky to deposit money into your Roth IRA directly. Therefore, you may want to substitute earned money from other accounts, replacing those dollars with your stimulus money.

It is worth the effort to do so. Putting some money into a Roth IRA makes it a triple tax-free win. You aren’t paying taxes upfront. The contributed amount grows tax-free, and when you withdraw money after your turn 59.5 years.

Be Aware of Contribution Limits

You can have both a 401K and an IRA, but there are IRS contribution and income limits you need to be aware of so you can get the full deduction. Be mindful of those income limits for traditional IRA and Roth IRA for 2020 and 2021. They vary according to whether you are the single or head of the household, married, filing jointly, a retirement plan at work covers one or both spouses.

Contribute generously up to the maximum amount allowed:

The 2020 and 2021 limits are $19,500 for 401K and most 400 plans, and with a catch-up limit, $26,000 for employees aged 50 or over.

Total contributions for 2020 and 2021 are limited for all traditional IRAs and Roth IRAs to $6,000 or $7,000 if you’re age 50 or older.

6. 529 Savings For College

These accounts have federal tax benefits, like retirement accounts. Open a 529 savings account to set aside some money for your children’s college fund. Earnings on investments grow on a tax-deferred basis and tax-free when you withdraw money for educational costs. Generally, there are no contribution limits except for the $15,000 cap to qualify for the annual gift tax exclusion.

Each state has its own plan, and you don’t need to reside in the state to use their program. You may think that they are young and it is too early to think about their future, let alone college, if they are still at the crawling stage. The truth is that time goes by quickly, and before you know it, they are in high school. Don’t let this valuable time slip away without putting money into this fund. It will help your children to avoid borrowing heavily for college tuition.

7. Allocate Your  Savings To Investing

In a perfect world, all of your extra money should go toward investing. If you have a strong financial foundation with manageable debt, you should invest the money. Add to your investments or opening up an investment account for you or your kids.

Any savings you have from stimulus checks to a significant financial windfall should go to your investment accounts. That is if you have taken care of other needs. Invest early and have a plan in mind which considers your risk tolerance, timeframe, and diversification. 

When you are beginning to invest, you may not know where to start. Buying individual stocks can be very rewarding but can be risky. Consider low-cost index mutual funds or exchange-traded funds (ETFs) if you are uneasy purchasing individual stocks. Buying a pool of stocks is a popular way to own securities with diversification, avoiding concentration risk.

Professional portfolio managers actively manage mutual funds. They are constantly evaluating and choosing securities for the fund’s specific investment approach. Mutual funds are available for stocks, bonds, precious metals, other securities, varying risks,  and varying geographic markets. 

Active managers earn annual fees or expense ratios of your investment and are responsible for the fund’s performance. If you invest $1,000 in a mutual fund with a 1% expense ratio, you pay $10 per year towards the fund’s expenses.

Active Versus Passive Investing

Investors who buy actively managed funds pay higher expense ratios than passively managed index mutual funds that track a market-weighted portfolio. The latter index fund replicates the S&P 500 index via computers for a fraction of the fees, averaging 0.20%-0.50% expense ratios, below the typical 1%-2.5% costs of active managers.

You can buy a low-cost index mutual fund or an ETF consisting of a basket of securities, such as money markets, stocks, or bonds depending on your risk appetite. ETFs are similar to mutual funds but tend to be cheaper and more liquid. If both are available, I usually buy the ETF version. There are many funds with terrific choices, such as Vanguard, who pioneered indexed funds.

8. Give To Others

It is always a good time to give charitable donations to others. We always target giving 10% of our income to charitable contributions, but we have done more to offset the time we couldn’t do so. Everyone has their reasons for giving what they can and may stem from religious or ethical sources.

The minimum of one-tenth of one’s income belongs to God per measure handed down from the Patriarchs. As Jacob himself said to God, “Of all that You give, I will set aside a tenth to You” (Genesis 28:22). Giving 10% of your net income every year is a desirable goal—those who can do that.

Giving, like expressing gratitude, is among the most worthwhile healthy emotions to feel. Being grateful can even help us with our finances.

As part of 2021 $1.9 trillion American Rescue Plan, Biden extended the favorable tax deduction treatment in 2021 that was available last year. Taxpayers who take the standard deduction rather than itemize their tax deductions may set aside $300 (or $600 if you are married and filing jointly). The IRS suspended the typical limit of 60% of adjusted gross income for the amount of the charitable deduction made in a year.

The IRS has temporarily suspended limits on charitable contributions for those who itemize deductions on Schedule A. Check with your accountant whenever it relates to your taxes. 

 

Final Thoughts

Use your stimulus payment or windfall by spending the money wisely to improve your financial situation. It’s a personal decision based on your needs now or in your financial future. Strategize before spending this additional money so you can get the most of it. Hopefully, you are turning the corner to better times.

 

 

 

 

 

 

 

 

 

Ten Commandments of Personal Finance

Ten Commandments of Personal Finance

We revisit ancient views of money on ten central tenets of personal finance from timeworn texts and stories. Surveying these words adds a different perspective on finances whether you are celebrating the upcoming holidays or not. There is a common thread across varying beliefs on handling money, saving, overspending, debt accumulation, and investing.

Ten Commandments of Personal Finance:

 

1. Financial Planning

A financial plan is essential to achieve your short-term and long-term goals. According to Proverbs 21:15, “The plans of the diligent lead to profit as surely haste leads to poverty.”

Understanding your priorities is an essential first step. With hard work, you can accomplish what you want so long as you know your preferences. Our goals are not always clear to us, especially when we are young. “Complete your outdoor work in order and prepare your field; after that, you may build your house.” (Proverbs 24:12).

Making a plan doesn’t happen overnight. Set reasonable priorities incrementally as you engage in deep thought and conversations with your partner. It is often hard to address many features of a sound financial plan on your own. Reduce some of the risks upfront, whether you are investing in stocks or starting a business.

 One of my favorite books, Richest Man In Babylon by George S. Clason provides some guidance. “Gold slippeth away from the man who invest it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.” Avoid recklessness when investing.

Consult A Fiduciary

Consider a financial advisor who as a fiduciary must act in your best interests rather than his or her own. Such an adviser can provide a framework to help you with your goals for retirement saving, investing and estate planning. “For by wise guidance you can wage your war. And in the abundance of counselors there is victory.” (Proverbs 24:6).

2. Saving More, Spending Less

Saving money is an essential financial habit. According to a CareerBuilder report, 78% of American workers were living paycheck-to-paycheck. The report found almost 1 out of 10 workers making $100,000 were having trouble making ends meet. When facing a weak economy, rising job losses cause financial stresses. For those reasons, having an emergency fund is necessary to pay for at least six months of basic living expenses. Having readily accessible funds in liquid funds such as money market securities helps you avoid increasing debt.

Joseph’s Emergency Funds

Emergency funds as a prudent strategy appear in Genesis 41:34-36.

In this passage, Joseph interprets Pharaoh’s dream about seven fat cows grazing by a river swallowed up by seven skinny cows. Joseph views the seven fat cows as seven prosperous years for Egypt, followed by seven famine years. As a result of planning for this disaster, Joseph advises Pharaoh to store grain during the good years for use in more challenging years. Save when you have more for those times you have less due to job loss, illness, or crisis.

Adopting a habit of saving more provides you with more flexibility to allocate into investment and retirement savings. Begin by setting aside small amounts of savings of $1,000 but don’t stop there. Tough times prove that amount is inadequate. Don’t think of these savings as wasteful assets. Instead, it is a means to avoid higher debt levels. As Proverbs 13:11 tells us, “Dishonest money dwindles away, but whoever gathers money little by little make it grow.”

3. Track Your Spending By Budgeting

Spending more than your means is a sour recipe that leads to borrowing more. It is far more profitable to save money and allocate to investments that yield 5% returns or more than having to borrow at mid-teen rates with credit cards to pay for your overspending habits. “Whoever works his land will have plenty of bread, but he who follows worthless pursuits will have plenty of poverty.” (Proverbs 28:19).

Track your spending carefully by budgeting according to your priorities. Bava Metzia 42a instructs us, “A person should always divide his money into three: one-third in the ground (for the future), one-third (invested) in business, and one-third in possession.”

That may be an old way of splitting your funds. There are several ways to budget, such as tracking your expenses, creating a monthly budget, or using the 50/30/20 rule. The latter budget is Elizabeth Warren’s rule of thumb using 50% of aftertax or net income for your needs, 30% of net income for your wants, leaving 20% for saving money and paying the debt. Budget in any reasonable way you can control your spending. Consider these budgeting methods.

Avoid Lifestyle Inflation

Overspending leads to materialism and lifestyle inflation that is hard to maintain. Mishlei Proverbs 13:7 tells us, “There is one who feigns riches but has nothing; one who feigns poverty but has great wealth.”  According to Psalms 128:2, “You shall eat the fruit of your effort–you shall be happy, and it shall be well with you.” This proverb reminds me of another favorite book, “The Millionaire Next Door: The Surprising Secrets of America’s Wealthy by Thomas J. Stanley and William D. Danko.

Stanley and Danko profiled and compared millionaires in two categories: those under accumulators of wealth (UAW) and the prodigious accumulator of wealth (PAW). The UAWs had a low net wealth compared to their high income because of spending to maintain their status. On the other hand, PAWs managed their wealth better, often living in blue-collar neighborhoods and buying used cars. It is an eye-opening account about the good and bad money habits of the wealthy.

4. Manage Your Debt Wisely

The successful millionaires practice budgeting and bargaining. They avoid debt accumulation to lower their risks.  According to Proverbs 22:7, “The rich rule the poor and the borrower is slave to the lender.” Manage your debt wisely. Pay your bills on time and in full. Don’t carry high credit card balances. You need to pay your card balances in full, not merely the minimum, or your debt will be accumulating quickly because of compounding growth.

Managing your debt and developing good credit habits are essential in your financial life. Learn how to avoid common credit mistakes in a recent post here.

Related Post: How To Pay Down Debt For Better Financial Health

5. Retirement Savings

Start saving for retirement in your 20s through your employer’s sponsored 401K plans. Deposits in small amounts in retirement accounts regularly benefit from tax advantages and compound growth over a long horizon. Automate your tax-deferred contributions to come out of your paychecks, and employers often match a portion of your contributions. The match contribution is like extra money you can earn from your employer. Separately, you can establish an IRA (Roth IRA) for further retirement savings. Target your contributions to amounts capped by the IRS for maximum growth for retirement.

One of my favorite quotes in The Richest Man is this: “It behooves a man to make preparation for a suitable income in the days to come when he is no longer young, and to make preparations for his family should he no longer be with them to comfort and support them.” Providing insurance should be arranged for your family to cover potential risks. “We cannot afford to be without adequate protection.”

6. Diversify Investments

Allocate some of your savings into investments. Whether you have a financial adviser to guide you, manage your assets, and diversify to reduce your risks. Don’t put all your eggs in a basket unless you are using Easter eggs for a holiday hunt. Ecclesiastes 11:2 says, “Put your investments in several places-because you never know what kind of bad luck you are going to have in this world.”

The financial markets go through turbulent times. Reducing risk by diversifying your assets into stocks, bonds, real estate (including home ownership), and money market securities is the best way to weather those stormy times. Diversify within each class of investments to avoid the pitfalls. That means having some stocks with growth portfolios and those with healthy dividend yields.

Bull Market To Bear Market In Record Time And Then…

Since the beginning of the pandemic, the stock market has been volatile. We saw severe moves,  going from a bull market to a short bear market. There has been fiscal support, sending out the third stimulus checks and extending federal unemployment. 

The Fed has stimulated the economy with lower interest rates and substantial liquidity. Fears of high inflation are now on the table concerning investors. Stock investing is always challenging to predict. It is even more challenging to time the market.

Stay the course rather than jumping in and out of the market. For long-term stockholders, staying the course rather than panic selling seems to be a better path. A more robust economy will likely fuel corporate earnings growth.

7. Don’t Obsess About Money

Maintain balance in your life without a focus on just wealth accumulation. According to Proverbs 21:20, “Precious treasure and oil are in a wise man’s dwellings, but a foolish man devours it.”  While no one seeks to become poor, there are dangers of solely wanting to be rich. “Keep your lives free from the love of money and be content with what you have.” Hebrews 13:5

Rev. Martin Luther King Jr. worried about the obsession with money in his famous speech called False God of Money. He said, “We attribute to the almighty dollar an omnipotence equal to that of the eternal God of the universe. We are always on the verge of rewriting the Scriptures to read, ‘Seek ye first money and its power and all these things will be added unto you,’ or ‘Money is my light and salvation, what shall I fear.”

King himself lived frugally, leaving little money for his family. However, he saw other goals like working hard, investing in education, and having faith as critical.

8. Add Knowledge And Skills 

Become a lifelong learner adding knowledge and skills. “Wisdom is a shelter as money is shelter but the advantage of knowledge is this: wisdom preserves those who have it.” (Ecclesiastes 7:12). By investing in yourself, whether learning a skill, a language or knowledge, you grow in confidence and are valuable to others. “Lazy hands make for poverty, but diligent hands bring wealth.” Proverbs 10:4

Work hard and persevere in your job, your career, and your profession. As a result of the coronavirus and social distancing, we see many people who do not have the luxury of working from home. I speak of doctors, healthcare workers, grocery store clerks, bus drivers, and untold heroes working hard to save lives or are engaged in essential jobs.

“The Street Sweeper”

Dr. King valued those who worked hard. Another favorite King quote, “If a man is called a street sweeper, he should sweep streets even as a Michaelangelo painted, or Beethoven composed music or Shakespeare wrote poetry. He should sweep streets sp well that all the hosts of heaven and earth will pause to say, ‘Here lived a great street sweeper who did his job well.”

9. Be Ethical

We have a responsibility to be ethical to others. That means not to scam, steal, or be dishonest. Respect others’ property. Wastefulness is shameful according to the Torah and should destroy any useful objects according to Deuteronomy 20-19. Destruction is only forbidden when it is without purpose. For example, only trees that you know do not yield food may be destroyed.   We should not borrow anything without permission. According to Leviticus 5:23, “He must return the stolen article, the withheld funds, the article is left for safekeeping, the found article.”

10. Be Charitable

According to Jewish law, it is forbidden to impoverish one’s wealth by the distribution of all of one’s wealth to charity. However, one can leave one-third of his estate to charity in his or her will. A minimum of one-tenth of one’s income belongs to God per measure handed down from the Patriarchs as Jacob himself said to God, “Of all that You give, I will set aside a tenth to You” (Genesis 28:22). Give 10% of your net income per year as a desirable goal. Those who can, should.

According to HW Charles in The Money Code: Become A Millionaire With The Ancient Code, “Those who love people acquire wealth so they can give generously, after all, money feeds, shelters and clothes people.” We should strive to be as generous as possible to those in need.

Final Thoughts

Ten commandments of personal finance come from timeless scriptures. Sometimes ancient words remind us that money management was always a challenge. That said, you can learn money lessons wherever you look. Choose financial success by your actions in dealing with money. Determine your priorities and set out to accomplish them. The building doesn’t happen overnight. Many have lost jobs and the means to pay bills. It will take time to get back to normal. In the meantime, stay healthy.

Thank you for reading our piece. Please visit The Cents of Money for more articles and consider subscribing to get regular updates.

 

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