9 Ways To Avoid Lifestyle Inflation With A Savings Plan

9 Ways To Avoid Lifestyle Inflation With A Savings Plan

Lifestyle inflation happens when our income rises, we increase our spending.

Like a balloon that gets larger, we tend to spend our expanding pocketful of extra dollars.

When we get our first job after college, we begin to earn money, get raises, bonuses, or change jobs for more pay. We conjure up what we had considered buying before this newfound financial freedom and spend it too quickly. Instead, we should be using this money wisely.

To avoid lifestyle inflation or lifestyle creep, we need to make a reasonable budget when we start our first job and throughout our career.

9 Ways to Use Our Savings

  • An emergency fund.
  • Set up a budget.
  • Spending limits.
  • Pay down debt.
  • Pay down student loan repayment.
  •  Retirement savings.
  • We leverage the power of compound interest.
  • Diversify your investments.

College Students Are Probably Better Budgeters

When we go to college, we become frugal out of necessity.

College needs for money for the academic year are housing, meal plans, public transportation or car costs, including insurance, gas, repairs, parking permit, textbooks/supplies; cellphone/cable/streaming; clothing, food outside of meal plan, entertainment, clubs/ activities; clothing, computer, travel, laundry, and personal items.

Parents may share or pick up school-related costs such as housing, meal plans, car insurance, clothing, textbooks, travel, and computer. Students may also have their mobile phones and streaming through shared family accounts. Parents may provide their kids a monthly allowance or an emergency fund for miscellaneous expenses.

Students will most likely pay for lifestyle needs like meals and alcohol off campus, gas or public transportation, extra clothes, entertainment, gifts, personal items, and belong to clubs.

Working Through College Helps

The average full-time college student makes $195 per week and may stay on for winter break or summer. Many college students may work 30 hours per week or more at various jobs on and off-campus.

The majority of college students make between $7,500 to $42,000 per year while in school, according to Bizfluent. The wide gap is likely due to hourly differences for full-time and part-time students who may work full-time jobs.

According to a Digest of Education Statistics (NCES), working students comprise 43% of those going full-time and 81% of part-timers in 2018.

What College Students Think About Money

LendEdu survey illustrates attitudes held by college students about personal finance topics.

Current financial situation:

  • 49% of students were in fine shape versus 51% barely making ends meet.
  • 42% were saving money monthly, 58% were not.
  • 71% were saving some part of their income, while 29% were saving zero.

Budgeting/Emergency Fund

  • 59% were very knowledgeable or moderately knowledgeable about budgeting.
  • 57% were budgeting either using an app or doing it by hand.
  • 43% were not tracking their monthly spending.
  • 19% had an emergency fund, while 81% did not.
  • Their most significant monthly expense, the most prominent categories were: food (38%), rent (29%), alcohol/drugs (25%), and clothing (8%).

Knowledgeable about Personal Finance

  • 51% were very knowledgeable or moderately knowledgeable about the need for saving for retirement.
  • 34%  took a personal finance course in college, 21% hadn’t but planned to, and the rest have no interest in taking such a class.

Personal Finance Goals: 29% want to pay off student debt, 19% start saving for retirement, 23% plan to build good credit, and 20% want to save for a vacation or a unique vacation.

This survey indicates that college students need to learn how to manage their money as they start their careers. After college, they are prone to lifestyle inflation, spending more of their income than they should. Instead, they should seek financial security and freedom long term. 

First Job Post College Leads to Lifestyle Inflation

A college student with fewer funds is more budget-oriented. They may have accumulated some cash while in school or parental contribution, but they use it sparingly.

Once getting their first job, a $50,000 plus annual income feels pretty sturdy in former students’ hands and quickly disappears. Their college life of squeezing dollars seems to dissipate soon. If they are living at home, they may feel even more prosperous.

The latest average salaries for your first job after college will probably be in the $50,000 per year range according to Indeed. Salaries will be higher for majors like aerospace, software, or mechanical engineers.

Your gross monthly income is $4,167. However, you will be paying your bills with your monthly take-home pay, net of taxes, of about $3,173. Budgeting is easier when you are younger and have fewer bills to pay. Start early and get into the groove of budgeting by finding a free mobile app (e.g., Mint, Personal Capital).

 Related: A Guide For College Grads On Your Company Benefits

Start A Budget As Soon As Possible

The monthly income may seem like a lot of money to someone just out of college. However, it needs to support many fixed monthly bills, including rent, utilities, student loan debt, public transportation or car payments, gas, and health insurance payments.

You should start a budget, using your current income, and add your fixed monthly payments such as rent, utilities, and groceries. Remember to pay yourself an amount that reflects savings to target money for your retirement, an emergency fund, and investment accounts.

There are variable expenses, mainly for discretionary spending. These costs include food (groceries at home and eating out), clothing, entertainment, personal care, and services. Track your spending on your mobile app or via credit card bills. 

With that in mind, we can calculate average monthly expenditures for major categories by age group drawn from the Bureau of Labor Statistics (BLS) Consumer Expenditures Survey of 2017. This survey tracks the average American as well as provides respective demographics.

Post-College Demographics Consumer Unit

After a few years in the workforce, the post-college graduate falls comfortably in the “25-34 years” group, with the age of the reference person being 29.8 years old. As such, there are 2.8 people in this consumer unit, including a child under 18 years old.

This household has 1.5 earners with 1.7 vehicles. Of this group, 75% went to college.

The 25-34 year reference person earns $61,145 aftertax annually or takes home about $5,095 per month.

Average total expenditures are about $4,610, falling into the following:

Housing is the most significant expenditure category at $1,660 per month

When you are just out of college and working at your first job, you will likely be renting an apartment with two or three other people. However, as you move through your 20s, you will want your place for privacy and, potentially, a family.

Where you live will have implications on not just your housing costs but your overall living costs. Living in an urban market like New York or San Francisco is much more expensive than living in Boise, Idaho, regardless of whether you buy or rent.

Roughly 59% of this age group are renting, while 41% are homeowners. Of this age group, 33% have mortgages.

Housing accounts for 36% of total expenditures. However, housing costs vary whether you own your home, pay a mortgage, or are a renter.

This broad category includes utilities, mortgages, maintenance, insurance, repairs, telecom, mobile, household supplies, furnishings, furniture, flooring, appliances, and household equipment.

On its own, utilities ( including gas, electric, water, telecom, and mobile services) are 8% of your total housing costs. Your utilities may part of your rent. Many homes have cut the cord and use mobile which may not work in some rural areas.

Be Cautious About Housing and Related Expenditures 

You should keep your housing costs to 25%-30% of your total spending budget. Lifestyle inflation is going to play a significant role in your housing costs getting out of control. If you want the most prominent house in the high consumption neighborhood to “keep up with the Jones,” your costs could quickly spiral out of control.

The house is often the least of the problem. Add in the decorator and furnishings, the luxury cars, the private schools, cruises, and the country clubs, and other items adding to your conspicuous spending tally.  Suddenly your six or seven-figure income is drained from spending and higher debt.

Food: $616 per month

What we spend on our food is dependent on the type of household we have. Our reference household of three, including a young child under 18, eats home 54% of the time and 46% away from home. Food accounts for 13% of total expenditures.

As we all know, and I can attest in our household, eating out is far more expensive, especially when you add beverages.

It is good to do comparison grocery shopping, use coupons wisely, eat out more prudently to save more. Food should account for 10%-15% of your budget, especially if your household has four people.

Transportation: $760 per month

This category amounts to about 16% of total spending. It matters if you live and work in an urban market with access to an excellent public transportation system or need a car(s).

While NYC is super expensive, monthly MetroCards are among its few bargains at $127 for a 30-day unlimited pass if you depend on the train. On the other hand, buying a new or used car, net of trade-in,  car insurance, finance charges, gas/oil, and repairs can be costly. You can eliminate about $58 per month if you are handy with cars.

You should aim to keep transportation below 10%-15% of your spending.

Gas, fuels, and oil cost $168 per month in 2017, lower than previous years, and can significantly swing. Shopping around for a used car that you buy outright and comparing vehicle insurance costs can reduce your monthly burden.

Cars are often a big part of our conspicuous consumption. For some, it is a functional device to transport us from place to place. For others, the “dream” car has to go with the “dream” house. Resist spending that may go with your success and higher income.

Budgeting Is For Everyone, Even Millionaires

In one of my favorite books, “The Millionaire Next Door,” authors Stanley and Danko portray the differences between the self-made millionaire and the typical wealth inheritor.

The one who became rich by working hard often bargain shops for low-key used cars, saves and invests wisely. On the other hand, the classic wealthy person who has accumulated wealth through legacy tends to be a big spender for the sake of image. The last exhibit similar traits to those in the early stages of lifestyle inflation, ramping about debt quickly.

Healthcare: $264 per month

This category is 5% of our total spending and is associated mainly with health insurance.  If you are fortunate, your employer substantially pays for the plan. Medical services, medical supplies, and drugs account for the rest. As your family grows and especially ages, healthcare costs rise for the household.

You should target these costs to stay at the 5%-10% level.

Apparel: $170 per month

Apparel is just under 4% of total spending and certainly is a variable annual cost. You could always use a rule of thumb of 2%-4% of your total expenditures for budget purposes.

More likely, families will spend seasonally or back-to-school and special events. For young families with young children, clothes could amount to more significant expenditures because of outgrowing (sizing out) or fashion-conscious teens. Shopping wisely really matters, whether in the mall or online, to keep spending down.

Entertainment: $220 per month

We entertain differently depending on our age, household, hobbies, video, sports, music, and pets. These variable costs are something we can exercise some control over. It may be more challenging when we have children, however.

Here, entertainment is a tad under 5% but may increase if you count eating out as part of the entertainment.

Personal Insurance and pensions: $549 per month

Your social security payments are your contributions deducted from your paycheck and in this category. Also, there are life insurance, railroad retirement, government pensions, private pensions, and retirement programs for the self-employed. This category accounts for 12% of your monthly expenditures.

Education: $102 per month

Education is part of “Other Expenditures” but deserves its mention. It includes tuition, fees, and supplies for all levels of private and public schools, including colleges.

The relatively low amount may not fully reflect the burdensome student debt. Typically, students pay their loans over a ten-year or longer time frame. Some students may accelerate their payments to get rid of their debt. Others pay just the monthly minimum, which could be as low as $50 per month. Others make late payments.

Other expenditures: $269 per month

These are miscellaneous items, primarily personal care products, magazines, credit card memberships, legal fees, tobacco, donations,  and alimony. This category amounts to 5.7% of total spending.

Those that can give to their favorite charities should donate higher amounts. We have used a rule of thumb of 10% of spending though recognizing that is not possible for every year and everyone.

 Related: 10 Ways To Better Manage Spending

Related: Saving For Retirement in your 20s

What Does Your Budget Look Like?

Monthly income of 5,095 less total expenditures of $4,610 for the average 25-34 year household leaves $485 or almost 10% of net income.

Boost your “monthly savings” of $485 or $5,820 a bit, especially if you can keep your housing costs to 30% of total expenditures or less. Certainly, if you are renting or buying a modest home and getting an affordable mortgage, your savings will have room to grow.

Monthly Savings Should Be at least 10% Of Your Earnings

To combat the likelihood of increased spending as your income grows, you need to have a financial plan in place: 

#1 Pay Yourself First

Allocate at least 10% of your earnings to go savings and allocate to paying off debt, emergencies, retirement accounts, and investments.

#2 Establish An Emergency Fund

Establish an emergency fund for at least six months of necessary expenses such as rent, student loan payments, transportation, utilities, phone, food (even pizza). You may be living on your own or with roommates, and they’ll be expecting your monthly contribution.

#3 Set Up A Budget

Put a budget plan in place once you know your take-home pay, you should think about your fixed and variable expenses. Keep your housing costs from expanding as you grow your family. Consider a used car and paying cash. It is not unusual to quickly ramp up spending for entertainment, eating out, clothing for work, and play as your earnings grow.

#4 Spending Limits

Spend within your means by tracking and limiting purchases. The problem is that the new freedom you have to enjoy more things with your latest paycheck, the more likely you will spend more than you should. You want to live well within your means so you can grow savings. Bargain hunt and consider ways to avoid impulsive shopping.

#5 Pay Off Debt

If you are living home initially after college, that is a great time to put some savings away to pay off debt. Reduce your high-cost debt by paying your bills in full. Credit card balances grow fast on high interest rates. Instead, pay your credit card balances in full. If you can’t, stop spending with your cards.

#6 Student Loan Repayment

Have a plan for your student loan repayment. This has to be an essential part of your priorities. The Consumer Expenditures Survey may be underestimating education costs or in other categories. Your household may have higher student loan repayments closer to the national average of $304-393 per month.  Pay your fully monthly bill, not just the minimum for student loans.

#7 Consider Increasing Your Loan Payments

When you have extra savings or your income rises, pay down your student loans. You may decide to pay more than your current student loan bill if you get a bonus or substantial raise. If you can handle paying back your federal and private (if any) student loans sooner, that may be good. Look to pay the higher cost of debt first, usually the private loans.

If you buy your home or condominium, consider a shorter term for your mortgage, say 15 years versus a 30-year mortgage. The latter is a higher total cost because of the higher over interest costs.

#8 Retirement Savings

 Jumpstart saving for your retirement when you start your job by contributing to your 401K plan, especially if your company has a matching contribution. There are tax-deferred savings benefits. You need to save up to the amount that will trigger your companies’ matching contribution. At the same time, allocate some savings for an IRA/Roth IRA.

#9 Leverage The Magic of Compounding Interest

Get familiar with the benefits of compounding to grow your money faster. Regular contributions in your 20s amount to substantial savings for your retirement decades later through compounding interest. A monthly amount of $800 for 30 years at an 8% rate produces savings of $1,203,223.29. Not too shabby! The earlier you invest, the better your retirement grows.

#10 Diversification Is An Essential Investing Strategy

When investing money,  you should diversify your investments among different financial instruments and asset classes, such as real estate. That strategy will help you reduce your risks. 

By diversifying, you can reduce risk by buying different kinds of stocks in various industries, even in foreign markets (the US versus emerging markets). You can never eliminate risk or loss, but you never want to put all your eggs in one basket.

11. Taking Advantage of Retirement Savings: 401K and Roth IRA

In 2021, the maximum contribution you can make to your 401K is $19,500, likely a steep amount to make if this is your first job. Make some arrangements for some percentage of your paycheck to be withdrawn for your 401K. It is a good habit and essential to start as early as possible, given the benefits of earning on a compounded basis.

You should also open up a  Roth IRA account to begin saving outside of work. In 2021,  the maximum amount allowed was $6,000 ($7,000 if you’re 50 or older). Maybe you received some graduation presents from your family, which would be perfect seed money to put into these accounts.

At an early age, post-college, you can learn how to reduce spending, save more to pay down debt, create an emergency fund and invest in your future. What has worked for you when you are budgeting? What ideas have you tried that worked for your household? We would like to hear from you!

 Final Thoughts

Avoid lifestyle inflation by carefully budgeting your spending so it doesn’t get out of control. Spend within your means and allocate your savings with care. Sure, you deserve treats in life but you want to make sure your costs don’t spiral out of control so you are constantly borrowing. Financial security and freedom are desirable goals so that you can achieve financial success and enjoyment in life.

 Thank you for reading! If you found some value in this article, please visit The Cents of Money for more articles of interest. Consider subscribing and getting our weekly newsletter for free!

 

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Personal Finance Lessons From The Richest Man In Babylon

Personal Finance Lessons From The Richest Man In Babylon

A Timeless Classic On The Basics of Money

Personal finance lessons are all around us in our everyday lives. Every day we handle money without thinking about the consequences of making poor decisions. However, we may not grasp our own financial mistakes. We can learn better financial habits from The Richest Man in Babylon by George S. Clason, among my all-time favorites. This book can help anyone avoid financial blunders, create wealth and build a financially secure future. I recommend this easy-to-absorb book to my business students and my children.

Richest Man lays out the central tenets of good money management through ancient Babylonian parables told by charming characters, notably Arkad, the richest man in Babylon himself. Millions of readers have read it. Clason gave it out initially as separate pamphlets to banks and insurance companies for their customers. Then it was published in 1926 before the Great Depression and has remained an inspirational classic.

The author uses endearing parables as personal finance lessons to build wealth. The book structures key money themes within “The Seven Cures” and  “Five Laws of Gold.” Among the oldest civilizations, Babylonians were resourceful, wise, enterprising with a judicial nature. They were clever financiers and traders who invented money as a means of exchange.

Women Did Not Make Money Decisions In Babylon

All of the major characters are men. That is appropriate as women didn’t manage money then. Women could not apply for credit cards in their name until the Equal Credit Opportunity Act in 1974!  Clason wrote when women had finally etched out a win with women finally getting the right to vote in 1920. Fortunately, we are now seeing women gain financial independence.

The Babylonians, enlightened about money and other things, but gender equality was not on their list. That said, don’t let the gender bias hold you back from this good read. Just recast it into contemporary times when women are often better with money!

10 Money Lessons From “Ancient Times” For Today:

 

1. Pay Yourself First By Saving 10% of Your Annual Earnings

 

Start thy purse by fattening

“ Pay yourself first

“Pay yourself first” may have been Clason’s term. It means you should put away 10% of every paycheck into savings.  Allocate your savings to an emergency fund amounting to at least six months of coverage for basic essential expenses.  Unforeseen events are unpredictable and undesirable so plan ahead.

Once establishing this fund, use some of your savings stashes to invest your money in retirement and taxable investment accounts. Putting away some money may be difficult at first, depending on your spending habits.

2. Spend Within Your Means

 

Control thy expenditures.”

To set aside money for saving and investing, you may need to cut some costs. To control your expenses, assess your budget for your basic living needs. These are predictable monthly fixed costs such as mortgage payments or rent, property taxes, utilities, car loans, typical grocery bills, credit card payments, and other monthly expenses. Remember, these costs are for our needs rather than for our wants and desires.

As our income grows, we often increase our so-called “essential costs,” leading to lifestyle inflation. While we are allowed the occasional latte and extravagant dinners, we need to keep our spending in check. You shouldn’t deprive yourself of everything. However, fulfilling every desire is no longer a special treat.

Don’t fall into the trap of spending your raise soon after you have received it. It is tempting to buy something special upon getting a raise and bonus after a year of working hard. However, remember that your pay hike is pretax and shrinks on an after-tax basis. If you need some things, make a list of what you believe is essential if you had some extra cash.

Be reasonable about satisfying your every want. For example, that 10% raise on your $80,000 salary may not significantly help you to buy that luxury car (or chariot in ancient times), you have been eyeing. A rise in earnings may not fully accommodate every gratification we seek.

3. Make Your Investments Work For You Long Term To Accumulate Wealth

 

“Make thy gold multiply.”

Saving and investing your money as early as possible enables you to benefit from compound interest through the years. Compounding is a magical way of earning interest on the principal invested and the cumulative effect of earning interest on that interest. Compounding works to your advantage when it is your invested money.

On the other hand, compounding works against you when you borrow long-term like for your home.

Arkad explained how this magic works: “As they labored for, so their children also labored and their children’s children until great was the income from their combined efforts.

4. Pitfalls of Investment Is Overconfidence

 

Guard thy treasures from loss.”

Investments are often fraught with dangers, especially for beginners. Not every investment bears fruit. Learn about the risks of investing, whether in the stock market or investing in a new business. Consult those with training and more experience in that field. Arkad tells of his folly when he entrusted a bricklayer to buy jewels for him and returned with glass.

While you can’t prevent every loss or mistake, there are ways to minimize your risks. When investing, you should diversify your portfolio and implement asset allocation depending on your age and life cycle. As your wealth increases, consult a financial adviser who may enhance your abilities to address and confront many financial, tax, and legal issues.

5. Owning Your Primary Home Is A Good Investment

 

Make of thy dwelling a profitable investment.

Buying your own home versus renting is a widespread debate. Clason via Arkad advocates in favor of owning your home. From the 1920s and well past the post-World War II period, buying your home was an essential part of the American Dream.

Is it still part of the American Dream today?  US homeownership rose from 45.6% in 1920 to 66.2% in 2000. Ownership of your home has since retreated to 64.1% in June 2019 despite low mortgage rates. North Dakota is the state with the highest ownership ever recorded at 80% and was in 1900!

Higher Homeownership Rates For Millennials

With reduced mortgage rates, homeownership rates have improved recently. Millennials made up a higher (47.9%) proportion of US homeownership in 2020, up from 40% three years ago. These levels are far above where Millennials were during the Great Recession when they were crippled with student debt and had difficult work prospects.

There are many benefits to owning your home rather than paying rent in particular parts of the country. Don’t think of renting as throwing away money. It is more of a personal choice for many people. You should weigh the costs of owning your home (downpayment, monthly loan, insurance, taxes, and maintenance), against rising rents, lack of control over your home, and renter’s insurance.

 

Housing Appreciation Rates

When renting, consider the benefit of having savings for investments or retirement rather than its use as a down payment. Investing this money could be a significant plus. In the best years for the housing market (1976-2005), real price appreciation averaged 2.2% annually. This modest appreciation would compare to the long-term stock appreciation of 8% annually if you were to put your savings into the stock market.

Of course, there are many reasons to buy a primary home, such as gardening, more space, and decorating rather than as a good investment.   However, investment returns may be a significant factor if you are on the fence between buying or renting your home.

 

6. Retirement Savings And Insurance

 

“..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 be no longer with them to comfort and support them.

Although the American Express Company started offering private pensions in 1875, it wasn’t until the 1920s  that many American industries offered private pensions.. State governments established pensions for employees in 1911, followed by federal pension plans. Social Security income did not yet exist at the time Clason’s book was published.

Today, fewer people (4%) can count on the traditionally defined benefit pension plans if they work in the private sector. Participation through pensions is down significantly from 60% in the 1980s. The responsibility of saving for retirement falls on us. About half of Americans 55 or older have not put away any retirement savings. Roughly 22% have less than $5,000 in savings earmarked for retirement.

Don’t make this mistake. Saving for retirement is investing with deferred tax benefits. The earlier you save, the more you will benefit from compound growth. If offered, make sure to participate in your employer’s 401K plan, especially if they offer a matching contribution. Don’t throw away free money from your company. 

The IRS sets caps on the maximum annual amount you may contribute to your 401K plan. Your contribution is on a pretax basis. You defer your taxes until you withdraw money. You will be able to direct these funds into an investment vehicle of your choice.

How 401K Matching Works

Many companies offer their employees access to 401K plans. Most employers provide a contribution match (partial or dollar-for-dollar) based on the employee’s contribution.

A typical example is a partial match provided by employers. The match means they will contribute 50% of what you put in, up to 6% of your salary. Some companies will give the more desirable dollar-for-dollar matches where your employers will put in what you do.

An Example

Let’s say you make $80,000 per year, and you contribute $4,800 annually based on a 6% cap in your plan. If your employer provides dollar-for-dollar matching, they would be contributing or compensating you with another $4,800. Consider this as a gift from your company. Why wouldn’t you make your contribution to earn your company’s match?

Check your plan at work as to what your employer offers. You want to get the maximum amount from your company to meet the cap of 6% or whatever the percentage is that they will contribute up to.   That is free money for those employees that participate.

Roth IRAs

Separately, you should also fund a tax-advantaged Roth IRA on your own. You can direct your money into several different mutual funds. This Contribution is made with your after-tax income up to the maximum amount.  Roth IRAs work differently than traditional IRAs as you are contributing after-tax dollars. The benefit of the Roth IRA is that you have already paid the taxes. You will not be paying taxes when withdrawing and can do so without penalties.

As Arkad insists, you need to provide a suitable income an older age to continue enjoying your life.

“…no man can afford not to insure a treasure for his old age and the protection of his family, no matter how prosperous his business and his investments may be.”

Insurance Is Needed Protect Your Family, Income And Your Assets

 

We cannot afford to be without adequate protection.

Insurance planning is one way to protect your family in the event of your passing. Your company benefit package may provide life insurance. However, it is usually a smaller amount than you need. You should make sure to have enough coverage for essential living payments and future costs like college tuition.

Besides life insurance, there are other insurance types you need to protect your assets, income, and family. There are 8 types of insurance to consider: car, home, renters, health, disability, long term care and an umbrella policy.

7. Invest In Yourself

 

“Increase thy ability to earn”

After you earn your college degree, real learning has just begun. You should leverage any skill-building or training opportunities to increase your earnings if offered at your workplace.

I remember being at an employee orientation with others shortly after I graduated college. The head of human resources at the investment bank provided us with a list of investment workshops (in different kinds of financial securities) she recommended we take over the next 6-12 months.

Being a bit of a learning nerd, I was excited by the opportunity to educate myself about unfamiliar areas. Someone behind me kept groaning as they described the workshops, and finally saying: “I didn’t take this job to go back to school!” Needless to say, the groaner didn’t stay long and not by his choice.

Use Every Opportunity To Gain More Skills

There are rewards for Increased skills at your job. “The more wisdom we know, the more we may earn.” Grow your skills in your 20s and beyond to make yourself a more valuable employee, or better job. You may want to start your own company. Learning should be a life long goal.

8. Invest In What You Know Or Seek Smart Advice

 

“Gold slippeth away from the man who invests it in businesses or purposes with which he is not familiar or which are not approved by those skilled in its keep.”

Arkad tells a Babylonian tradition that sons of wealthy parents must earn the right to inherit the estate of the parents. Arkad gave his son two things his parents denied him. First, he gave his son a bag of gold and a clay tablet carved with the five laws of gold. He told his son to come back in 10 years and give his father an account of how he did. If worthy, he would inherit the estate.

Ten years later, his son came back to tell his father he handled the gold poorly and lost it all. He had gotten involved with horse racing and wagering with deceitful men. His son admitted he knew nothing of horses, a business he was unfamiliar with. These men defrauded him.

The son sought employment but had no practical training. He then turned to the clay tablets, which contained financial wisdom and provided him a road to wealth.

Lost The Gold, Gained The Wisdom

Essentially, his son followed Arkad’s wisdom which provided greater value than that of the bag of gold.  As a result, he multiplied his earnings by putting 10% of his earnings into savings, spending less than he earned.

He also learned how to make savvy investments from  knowledgeable financial advisors, avoiding the scams he had experienced before.

Arkad was impressed with the multiple of bags of gold returned to him, and he provided his son with the inheritance upon Arkad’s passing.

9. A Lesson In Borrowing and Lending From The Gold Lender

Mathon, the gold lender, is approached by Rodan, the spearmaker, who earned a fortune of fifty gold pieces. Rodan’s sister wants him to lend his money to her husband because he cannot seem to make enough earnings on his own. Mathon provides counsel to Rodan based on his largely successful lending experience.

Can the loan be well made if the borrower cannot pay?

Mathon shares the ways he makes loans if the borrower can demonstrate:

  • possessions like property or jewels with greater value than the loan that can be collateral;
  • they are a wise trader or purpose of money is wise;
  • the capacity to earn enough to pay back the debt, and
  • there is a guarantor to pay back the loan if the borrower is unable.

Mathon will not make a loan to a borrower who is:

  • indiscreet with investments;
  • will take shortcuts to make money; or
  • poor (or lazy) workers.

In the end, Rodan made his decision not to lend money to his sister’s husband. He believes his brother-in-law to be not only envious but also lazy. Rodan knows from experience that his sister’s husband is a spendthrift and will use the money on unnecessary things and will not repay him.

Ill fortune pursues every man who thinks more of borrowing than of repaying.”

 

10. Budget Rule:  10/70/20

The clay tablets of Babylon provided a budgeting plan of 10/70/20 with earnings allocated as follows:

  • 10% goes for savings for future investments.
  • 70%  should go for necessary expenses, notably to provide for home, clothes, and food.
  •  20% will be for paying off debt.

The above percentages provided by Clason differ from Elizabeth Warren’s popular budget rule of 50/20/30 or spending 50% for your needs, 30% for your wants, and 20% allocated to savings.

While the Babylonian budget rule may seem to be antiquated, budgeting any kind that works for you is the best way to control your spending. Overspending leads to having to borrow and carrying too much debt. Whatever plan can you choose and stick to is good so long as you spend within your means and don’t overburden yourself with debt too challenging to pay off.

Final Thoughts

Arkad, as the richest man in Babylon, passes on his financial knowledge to generations of readers, which wisdom remains excellent advice to those wanting to create and grow wealth to this day. His stories and that of others in the book are classic, easy to grasp, and implement. The rules may differ but remain entirely relevant today. Whatever way it is easiest to learn personal finance, take those first steps through tales of old or contemporary means.

If you like classics like The Richest Man in Babylon, check out the personal finance lessons from these classic gems.

Have you a favorite personal finance book or story you would like to share? There are many good ways to learn better financial habits. What works for you can work for others. We would appreciate any thoughts you want to share!

 

 

 

 

 

 

 

 

 

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

Money 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

 

Thank you for reading! Consider subscribing to our blog and get our free newsletter weekly.

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.

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

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.