Asking the right questions

Nick True at Mapped Out Money often has good budgeting and personal finance advice. This episode looks at the questions we ask ourselves regarding money and suggests maybe we’re asking the wrong things.

I find there’s a lot of value in what he says, especially in comparing yourself to others. My wife and I could drive ourselves crazy if we were to compare our grocery budget to others. We’re vegans, which tends to be more expensive for base ingredients, but we don’t eat out very often, mostly because of the expense. On a strict analysis that doesn’t make sense. If we’re really interested in saving money on food, why shell out for vegan food? Or, if we’re so interested in health, why not go even more expensive and buy everything organic? (That’s not why we’re vegan, but that’s another story for another time.) The answer lies with our values. We do value vegan living, and we also value saving money. This is the balance we’re comfortable with.

At the end of the day, if we don’t live in accordance with our values we’re going to be dissatisfied with whatever other choices we make. Granted, values can–and sometimes should–be changed. If your primary value is to live as large as possible regardless of income, then you’re headed for trouble and either need to to not disregard income so much or decide not to live so large. But on the whole, money needs to serve our needs and not the other way around.

Your money or your life? It’s not that simple

About a month ago I began discussing an article from Wikihow.com on “4 Ways to Be Self Reliant,” by Trudi Griffin, LPC, MS. The article is more about relationships than what I would consider self-reliance, but she still makes some valid points. Today I want to look at her second point, managing money independently. She breaks money management down into six areas:

  1. Learn how to manage money
  2. Get out of debt
  3. Pay cash instead of using your credit card
  4. Keep cash on hand at all times
  5. Own a home
  6. Live within your means

To begin with Griffin warns against allowing others to manage your money. I agree with her basic premise, that you can lose your independence if you lost control of your money, but that depends on the nature of your relationship with that person. In most marriages one of the two usually assumes responsibility for managing the money. If you are good at communicating, have compatible financial goals, and trust one another it’s actually easier to have one partner take primary responsibility and keep the other informed. Her second concern is more valid: if the primary money manager is unable to continue in that role it may be very difficult for the other partner to step in. Even if you are not the money manager in your relationship, make sure you know how to access everything and are comfortable managing money yourself.

Griffin also encourages everyone to get out of debt, though what she really focuses on is keeping your debt manageable. According to her, your total long-term debt payments (mortgage, auto and school loans, and credit card debt) shouldn’t exceed 36% of your monthly income. If your debt payments exceed this level you should make every effort to get that debt load paid down as quickly as possible.

As a corollary to that, Griffin also advocates paying cash for everything, and to keep cash on hand (and in savings) at all times. This seems primarily to be to keep your credit card debt low, and I somewhat agree with this. If you have difficulty paying off your credit cards, or can’t resist charging more money on them, then by all means you should avoid using those credit cards. But if you have developed financial discipline and never miss making your payments because you’re able to set money aside to make those payments, there may be a way to make your credit cards work for you.

I recently read I Will Teach You To Be Rich, by Ramit Sethi. The man has some good ideas about acquiring, building, and managing wealth–and some ideas I’m less keen on. But one suggestion he makes is to put your regular expenses, as much as possible, on your credit cards and then set that money aside to pay the bill off quickly. If you get the right credit card you can earn travel miles or cash back rewards that amount to free money. I’m disciplined with managing my budget, and so I decided to try it. I haven’t put as much on my card as I could, but already within the past several months I’ve picked up nearly $250 of cash back rewards. It’s free money. But if you’re not so good at managing your credit card debt and paying off your account monthly, it’s best to follow Griffin’s advice and avoid credit cards altogether.

Griffin’s next suggestion is to own a home. I’m not as sure about this one as I once was. Right now interest rates are low, so you may only pay about 50% more than the cost of your house in repaying the loan. Depending on how long you live there, the value of the home may increase well beyond that. Our first house did just that. But you don’t always control how long you live somewhere these days. We had to move when I lost my job ten years ago, and the timing was terrible–the housing market had collapsed and I owed considerably more on that house than I could sell it for.

There’s also the maintenance costs and hassle of a house to consider. So far since moving into our house nine years ago we’ve replaced the roof, replaced the furnace, air conditioner, and water heater, and bought high-efficiency windows. Granted, that last purchase was voluntary, but that was easily an additional 30-40% the cost of the house we had to find within the first six years of buying it. That, on top of a myriad of other maintenance expenses through the years. If you don’t like or can’t afford doing your own maintenance, or if you can’t be sure how long you’ll be staying where you live, a house may not be the best option. Everyone needs to evaluate their priorities themselves in this area.

Last, but by no means least, we should live within our means. That usually means several things that have to happen. First, you need to know (or learn) exactly how much money you spend each month and where it goes. Second, where at all possible, and perhaps not matter what the sacrifice, you need to adjust your spending to where it is less than what you earn. Third, you need to continually monitor your spending and your justifications for spending and see how you measure up against your budget. You need to be willing and able to adjust your spending to remain below your means–and save the difference religiously.

Frankly, learning how to budget and how to stick to that budget is one of the most important skills one can develop for self-reliance. That’s pretty much the key to achieving financial independence and taking care of “future you.” Or perhaps your spouse and children after you’re gone. Usually in life there are only two choices: either your master your money or your money masters you. Money is seldom a kind master, but it can be a real friend when you learn to master it. Mastering your finances is a key step toward true self-reliance.

Frugality, financial compatibility, and the silver lining of unemployment

One of the smartest financial decisions I ever made was marrying my wife. I’m a reasonably frugal guy, but she is great at it. I think it comes from living in Estonia under the Soviet Union for awhile. They didn’t have much, so everyone got used to getting by on very little. As a result she’s never been one to spend extravagantly.

When we got married I wasn’t making much money. It seemed like a lot at first because it was the first time I’d ever been on salary instead of wages, so thinking “lump-sum” made it sound so much greater than it really was. At any rate, when we got married things were a bit tight. We’d just barely squeaked our way into a home loan to buy my brother’s house, and it seemed like we were one major appliance failure away from financial ruin. Yet because we were frugal we got by, and even absorbed a few lesser financial problems.

In time, however, my income started rising. And that’s where my wife really helped out. My first instinct was to increase our budget to match our increased income. We could afford to live a little better now, I figured. But she was firm, insisting that we instead put that money into savings. I grudgingly went along with it at first, but after awhile I got a bit excited to see how much we were putting away and how we could endure minor setbacks more easily.

That became the pattern for the ten years we’ve been together. My income continued to rise, and as we were having kids, our expenses rose, too. But because of our frugality our expenses did not keep pace with my income. We were spending more money, but we were saving more, too.

Am I ever grateful for that savings now–and that frugality. I lost my job nine months ago, and though unemployment insurance helps, we still rely on our savings quite a bit. Our savings has been holding up amazingly well. That’s partly because we were saving so much, but it’s also because we know how to be frugal. The minute I knew my job was going away we went into “bare minimum” mode and were able to cut our budget by about a third. That really helps the savings go farther.

Eventually I will find work again, and then we’ll see the silver lining. Unemployment has helped us identify and eliminate some of the fat from our budget. When my income goes back up again it will be much easier to simply say “no” to letting our budget increase again rather than having to look for ways to cut back once we’ve gotten used to spending more. We can move forward with a much more efficient budget and with any luck rebuild our savings that much faster.

Of course first I have to find work, so our savings may continue to take a hit for awhile, but it’s comforting to know that I’ve got such a strong partner in my wife. It’s a big relief knowing that she’s working just as hard or harder to keep our expenses down right now. We’re under enough strain right now without having to clash over money as well.

Being married to someone I’m financially compatible with is a true blessing.

Introduction to Simple Self-Reliance

Last year I became a grim statistic; one of the one in ten people who can’t find work. The past nine months have revealed both good and bad. The good is that my family and I have been above average in our self-reliance. We had money put away for emergencies such as this. We were able to cut back on our budget considerably. We are able to make do, do without, or make it ourselves in quite a few areas.

But I’ve also realized that we could do more. I have nothing against my mechanic, but it costs me $30 to have him change my oil–something I’m pretty sure I could do myself with a little study and practice. I’m still having professionals come and fertilize my lawn and spray my trees. I’m still paying $30-40 for tax software, even though I’m pretty sure there are cheaper alternatives.

Or perhaps I’m just not thinking creatively enough. Is there some skill I possess that I could use to barter with someone else who has the skills I lack? Could I have my friend the out-of-work accountant do my taxes in exchange for my setting up a website for his wife’s day care?

The more I think about it the more I realize that there is much more I could do to become even more self-reliant if I put my mind to it. Could the drive for self-reliance become a harmful obsession? Of course it could. But I don’t think I’m there yet. The key, I think, is to determine which areas are the most beneficial and focus on those first, then apply whatever time you have to lesser gains.

For example, is it really worth my time to figure out how to save $20 on an oil change every three months if I could instead figure out how to save $150 on lawn fertilizer each year? Perhaps not. Why waste time trying to save two cents more on a tube of toothpaste that runs out once a month if there are ways to save two cents per roll of toilet paper that I replace every few days? There’s self-reliance, and then there’s psychosis.

So hopefully this blog will prove to be both useful and sensible. I’m not advocating we all move to the back woods and build our own compound with our bare hands and prepare ourselves for doomsday. But if I can figure out how to keep at least a week’s worth of food on hand just in case severe weather causes the store shelves to empty for a few days or a new pandemic forces a quarantine, wouldn’t that be a worthwhile pursuit? I think so.

And that’s why I want to do this blog.