Disclaimer: In this post I use two links to YNAB (they have * by them) that are specific referral links, so if you buy YNAB through one of those links, you get $6, and I do too. Likewise, if you sign up for Betterment through the link I use below, I get $10 and you get $25. If you don’t want me to get extra money but want the services, simply Google either site. Moving on.
Lifehacker posted a story recently that got me thinking about finances. Actually, I’ve been reading lots of articles on personal finance, using your personal skills to make some money on the side of a normal 9-5 job, paying down debt, increasing wealth, how our society defines wealth, etc.
Let me start with the ol’ “debt snowball” that Dave Ramsey fanatics love to talk about. This is the Lifehacker story I referred to before: they’ve posted a link to an Excel spreadsheet that calculates how much money one would save (or pay in interest) and how long it will take to pay off debt that’s input into the spreadsheet. Pretty slick. Having just bought a house, I played around a little bit with it, inputting house loan and car loan info. It can show you how payments play out if you use the debt snowball method (paying off lowest debt balances first) or highest interest method (paying off debt with the highest interest rates). It’s not the perfect spreadsheet; there is a bit of a learning curve but there are a lot of comments on the spreadsheet itself that help clear everything up. I haven’t seen anything else that allows you to make these sorts of calculations so quickly, so it’s pretty handy.
And it’s downright shocking to see how much one ends up paying in interest alone, even at decently low interest rates. Personal finance company YNAB* (more on them in a second) has an extremely thought-provoking blog, and as you’d expect, they write a lot about being in debt and how to get out of debt. One of their recent blogs on debt centered around this idea that we really need to learn to hate our debt. Not in a self-shaming way, but in a way that motivates us to change our lifestyles so as to break free of the current American mindset that debt is just a part of life and something with which we all must deal. Wrong. Debt should not be a given in your life, but rather it should be a given that our lifestyles reflect that debt is bad and we need to be free of it. Ramsey’s debt snowball method is a great way to pull that off.
But what happens after you’ve broken the chain of debt? How do you handle your finances then? Are we stuck with the cash-in-envelopes method that Ramsey preaches? Another Lifehacker article recently discussed the advantages of a zero-sum budget; basically, a budget where you allocate every single dollar you own to a specific category, like mortgage/rent, gas, entertainment, clothes, groceries, etc. To be honest, I didn’t give this the most thorough read because I already live by a zero-sum budget, and I cannot stress how much it has reshaped my entire financial world for the better. I use a software called You Need A Budget* (YNAB for short…I honestly just can’t get over how horribly named this amazing product is). At it’s core, the financial strategy of YNAB is zero-sum; give every dollar a job. Assign all the money you have to specific categories with none left over. The idea being that with a paycheck-to-paycheck lifestyle, you’re paying your bills as your paychecks come in, and the “fun” spending money (or basically everything not bill-related) just stays in a checking account that you use as needed. When you give every dollar a job (e.g. put every dollar towards specific categories), you have a much clearer, holistic view of your financial state. You see exactly what you’re spending your money on, where you can cut back, and where you can afford to splurge. No dollar goes unchecked.
Needless to say, since this isn’t the first time I’ve written about YNAB, I’m a gigantic supporter of their mission and their product, and I can’t speak highly enough about their financial method. The other three rules are very simple and allow for so much budgeting flexibility that I hesitate to call them “rules.” Suffice it all to say, if you haven’t checked out YNAB, and you feel like you could use even the slightest bit of help in the budgeting department, please please please check them out! Such a fantastic program.
Heading even further into the financial rabbit hole, last spring I took an email course on personal investing offered by YNAB (for free. Again, check out this amazing product…). Very simply, they broke down the basics of investing: why invest, differences between different investment vehicles like stocks and bonds, how to get started, etc. In the how to get started section, they discussed a few options, and one was an online financial services program called Betterment*. When I checked out the site, I was immediately hooked. It cleared away all the mystique surrounding investing and made the entire process so incredibly easy. And I believe in their investment strategy: namely, trying to “win” the market is foolishness, and the most tried-and-true way to make money through investing is a set-it-and-forget-it mentality. None of this trying to read the market or invest in the hot new stock tip. Just diversify, don’t freak out when the market drops, and be patient. This is not a get-rich-quick scheme, but rather a build-wealth-slowly method.
What else is great about Betterment? Two things: first, you don’t have to be a millionaire to begin investing with them, and they aren’t going to charge you millionaire prices. They are by far the cheapest personal investing option I’ve found, which I was happy about. So if you don’t have an extra 10 grand sitting around waiting to be invested. And second, they also have an incredible advice platform to springboard your start into personal investing. It is such an awesome user-interface and it very clearly outlines how changing certain factors (like fund allocation, amount you invest, length of investment, etc.) changes the probability of you reaching an investing goal. My words do it no justice. Please take my word for it: it is an absolutely awesome system and I highly recommend you check them out.
What I really want to discuss is this concept of wealth, as discussed in a recent post on the Betterment blog. The blog was entitled “Why You Should Live Paycheck To Paycheck.” Fightin’ words! This seems directly contradictory to everything about YNAB’s budgeting method, and on a larger scale, contradictory to what our society deems acceptably wealthy. Basically, it talks about wealth being a concept that we directly (and subconsciously) connect with comparison. As a culture, we define wealth based on what our neighbor has. Or our parents, or in-laws, or friends, or insert whoever you want. I don’t feel wealthy unless I’ve got as much as my friend.
This is an overwhelmingly flawed and backwards perspective, but it permeates our society. It’s a disease. The problem with wealth comparison is that you can’t ever win. You will always, 100% of the time, find someone who has more than you. Your friend will always have a newer model cell phone than you. Their car will be newer. And so on, forever. Now let’s go back to the living paycheck to paycheck idea. Is living paycheck to paycheck such a bad thing? The example given in the blog is a couple that both net high salaries but don’t feel wealthy cause they don’t have excess cash to spend on whatever they want. However, the details of their situation reveal that allocation is the key to this whole thing. The couple is debt free, they put money towards their main expenses, they store money away towards savings (emergency fund, retirement, down payment for a house), and the excess money is what they’re living on “paycheck to paycheck.” Yet they are plagued by this backwards point of view that if they don’t have extra money to splurge whenever they want, they aren’t wealthy.
In reality, they are much better off than the majority of Americans. They just need to readjust their perspective a little bit. Not having excess money to spend on a big new TV or a killer Hawaiian vacation doesn’t mean you aren’t wealthy, especially if you’re allocating your funds towards financial stability, both in the present and in the long-term. What I want to strive for is a concept of wealth that isn’t based around how many things I have or if my things are better than your things, but whether or not the things I do have can create a home and a lifestyle that is conducive to my values. Is my financial lifestyle consistent with my values? Often for me, the answer is no, and that’s a sobering realization to have. But it is this realization has motivated me to get away from the myth I’ve accepted that says wealth translates to a number and to work even harder on planning for stability in the future while maintaining contentedness in the present.