What’s a Financially Literate Aunt/Sister/Mom/Daughter/Friend to Do?

Occasionally, a family member or friend asks me about money.

Thinking back on these conversations, I’m struck by a common trend.  After just a few minutes into me chattering on about investing, taxes, or debt, I realize they’re not hearing me.  Exasperated, and in all earnestness, they ask this simple question:

“Why, for God’s sake, was I not taught this in school?!?!”

Why, indeed.

They continue, still incredulous. “I took trigonometry but have no idea how much to save for retirement.” Or “I got an A in algebra but don’t know what to invest in.”  Or, “I have no idea where my money goes; no one ever taught me how to manage it!”

Facepalm.

Aggh! Every adult citizen of the modern world should posses at least a rudimentary understanding of how money works. Our economy is chaotic, frenetic, dog-eat-dog. We’re all players in this game, whether we like it or not. We should at least know the ‘getting started’ rules.

Have you ever played poker with someone who didn’t know the rules?  I hope you took their money, because they had no business ante-ing up.  Yet I know people in their forties who don’t understand the basics of playing our modern economy: how insurance works, how to minimize tax liabilities, how to manage spending, how to invest, etc. They’re playing the game and they don’t know the rules! You know where their money is? That’s right, neither do they.

The core principles of money handling should be taught – for goodness sakes – to EVERYONE!  Alas, they’re not, and so, there I often find myself, three minutes into a conversation about financial management, when I too wonder, why aren’t we taught this stuff in school?

I’m not sure what combination of wicked forces converged to convince education policy makers to strike personal economics from the curriculum. Maybe they got distracted by the ‘we need STEM‘ mania.  Or perhaps they figured, ‘this is the information age, kids can find this information on their own!’

Unfortunately, it’s really the TMI (Too Much Information) age, and it can be difficult to tease useful information out from the wrong-headed, misleading bunk.  I’m talking about those online articles authored by

  • people with vested interests selling financial products
  • callow financial journalists at Yahoo! Finance weaving narratives that leave one feeling like a victim who may as well give up now because the economy is working against us all
  • IRA & 401k companies that estimate $8M is needed to retire
  • hacks who write ‘top 5 financial mistakes’ click-bait on revenue sharing sites
  • well-intentioned journalists who muddle the message by leading with oodles of disclaimers – you know, about not being able to predict the future and that everyone’s situation differs – that the reader grows beleaguered and ceases reading before getting to the advice!

It’s all so overwhelming, it’s easy for my friends and relatives to give up and go right back to where they were: rudderless, discouraged and frightened in their financial journey. Or, they hire investment advisors who overwhelm them with information, or worse, sell them products they don’t need.

So what’s a financially literate aunt/mom/sister/daughter/friend to do?

I’ve tried giving unsolicited advice. That’s more annoying than effective. I’m done with that.

So, I’m gonna sum up – in just 15 short bullet points – the financial ‘getting started’ rules-of-the-game that we all should have been taught in school.

What you’re about to read is one-size-fits all.  These rules apply to everyone. K?

Ready? Lets begin:

1. The object of the game is Financial Independence, ‘FI’ for short. No, you don’t get to choose a different goal. FI is your friggin’ goal. Accept it. Your objective is to accumulate a nest egg large enough to fund your life. That’s FI.

If you prefer, you can call it ‘FU’ Money.  Here’s Lucy Liu’s take on FU money, …and John Goodman’s thoughts on FU money.

How do you know when you’ve won?  There are two simple ways.

When your investments >= 25x your annual expenses. In other words, if you need $40,000 a year to live (shelter, food, insurance, hockey tickets, etc.), then having $1,000,000 in investments should grow/make enough money to fund that life. ($1M = 25x$40k).

Alternative check: cFIREsim reports that you have a greater than 95% chance of successfully living off your assets for the rest of your life. Simple right?  That’s when you’re FI.  That’s when you’ve won.

K, now it’s settled. Your goal is to become FI / acquire FU Money. Moving on…

2. Memorize these numbers:

  • 75% = 7 years
  • 50% = 17 years
  • 25% = 32 years
  • 10% = 51 years

Here’s what these numbers mean: if you save 75% of your after-tax income, you will be FI in 7 years. If you save 10% of your after-tax income, you’ll be FI in 51 years.

How long do you want to give yourself to get to FI? 17 years? 25 years?

If you answered ’51 years’, ask yourself the question again.  Loop on this question until your answer is less than that. Want to read more about how and why this works? See The Shockingly Simple Math Post on the Mr. Money Mustache Blog. 

3. Track what you earn and track what you spend. There are oodles of powerful tools that can make this easy: mint.com, YNAB (You Need a Budget), Personal Capital. Loop on this step until you’ve fully set that shit up. Download the tracker app on your smartphone (yes – I KNOW you have one), and enter every expense – every latte, fuel fill-up, Ginormo Big Gulp, restaurant bill.

4. Calculate your savings rate.    Your savings rate = (Income – expenses)/(income).

Include in ‘income’ any money your employer directly deposits into your retirement fund – matches and withholdings alike. Omit from income all taxes.*

Include in ‘expenses’ all those stupid Coach bags, costly greens fees, and Lexus lease payments.

What’s your savings %?  At your current savings rate, how long to FI? See The Shockingly Simple Math Post on MMM for a more granular chart. Are you happy with that projection?  If so, skip to #6. Else, keep tracking expenses and continue to #5;

5. Stop buying shit you don’t need. Here are my top five biggest bang-for-your-buck spending cuts: kill cable, get cheaper cell plan (move to Ting or Republic Wireless), stop eating out (pack your damned lunch), sell all cars until you own <= 1, stop buying that daily bottled water / sugar-drink / prepared coffee nonsense.

6. Get free expert advice! While you’re cutting expenses, go get yourself some customized advice; register on forum.mrmoneymustache.com, lurk for a bit, then post a user case and get feedback. Some of us forum posters can be brutal, but that’s what you need if you’re having trouble getting to the savings rate you desire.

Some people on the MMM forum are saving more than 80% of their income.  Crazy, right? Hardly.  Those people are winning the game.

7. Never borrow money to buy a depreciating asset. No you don’t need a $20,000 car. Unless you’re FI, you have no business buying one. Similarly, unless you can put 20% down on a house, keep renting.

8. Educate yourself on investing. Read the Bogleheads.org wiki. Long story short: buy index funds. If you’re young, 100% stock or 90% stock/10% bond.  If you’re older, 80/20. If you’re old / super conservative, do 50/50. Every 6 months, ‘rebalance’ (sell & buy) to get back to your 90/10 or 80/20 or 50/50 ratios. Do it bitch.

Also, never pay more than .3% management fee on a fund. Buy funds like VTI (Total US Stock Market), VXUS (Total World Market – US), VT (Total World Stock Market, and BND (US Bond Market).  If you’ve got >$10k to invest in any one fund, get Vanguard ‘Admiral Shares’.  The management fee is as low as .05%. That’s crazy low!

9. That retirement account at work? Max that shit out.

10. Maxed the work retirement account out? Open an IRA** and max that shit out.

11. Maxed the IRAs out? Open an after tax investment account and buy more index funds like VTI, VXUS.  Try to make the after-tax account all stock – shift any bond funds to tax-advantaged retirement accounts for tax reasons.  (Bond funds pay interest which is taxed at ordinary income rates.  If you are in the 33% bracket – you’re paying more than twice the tax on bond fund dividend vs qualified dividends from equity funds.)

Oh, and mentally prepare yourself to lose half of your investment every 8-12 years.  It happens.  Can’t stomach it? Then increase your bond allocation and dollar cost average (that’s what I do – cuz I’m a total wimp).

12. Life Insurance – a simple term policy is all you need.  If you have no dependents, skip life insurance.  If you have dependents, buy only enough term insurance to pay off the house + a few years living expenses for the surviving family. If you have children, add $80k per kid to fund 4 years at a state college. After you get all of your other shit in order, then MAYBE consider LTC (Long Term Care) insurance. But that’s for later. Whatever you do, don’t let anyone talk you into Whole Life or Universal Life Policies. Unless you’re already FI and looking for tax loopholes, they’re BULLSHIT.

13. Insurance in general (e.g. car & health) – get plans with high deductibles! Self-insure the small ticket items.  Insurance is to protect you in the event of catastrophic events.  Insurance is not for financing a $40 course of antibiotics.
(note: if you have some ongoing medical conditions that require special insurance, obviously you may have reasons for doing something different).

14. Change your thinking – it’s all a game. Yes it’s that easy – think of your financial life as just a game. You know the objective, now its time to come up with strategies and tactics to reach it.  Be creative.  How can you have fun today without spending a dime?  Or, adopt this mantra: ‘if I throw money at a problem, I’ve lost.’  Or, put a post-it on your credit card that reads, ‘do you really need to buy stupid shit right now numb-nuts?’

15. Brag. How badass can you get? Brag about your improvements on a frugality or investing forum like Mr. Money Mustache or Bogleheads. Get advice from others who have walked the path. Still stuck in old thinking?  Educate yourself about hedonic adaptation and then decide if you still want to buy that $2,000 Apple Watch because ‘you deserve it’.  (Hint -until you are FI, you don’t).

That’s it.  Do these 15 things and get on with your life.  Soon, you may discover the word ‘money’ magically disappears from your ‘big problem’ mental ledger.  Isn’t that what you want after all? To not have to worry about money? I’ll bet it is – no matter who is to blame – the DoE or you.  Not thinking about money is exactly what got you right here today.  You are in the game no matter what, so maybe it’s time to put your head into it.

Further reading:
Bogleheads.org wiki
http://www.irs.gov (Honestly, this site is THE place to get tax info.  Don’t trust random online articles for tax advice).
Your Money or Your Life (audible audiobook) The audio book beats the print edition IMO, but if you prefer…  YMOYL (paperback)  
The Shockingly Simple Math Behind Early Retirement
Find out if you’ve won the FI game on cFIREsim.

*Incidentally, try to set your W-2 withholding to a level that’s very close to what you’ll actually owe.  Don’t ‘save’ by manufacturing a giant tax refund. Rather, save, by fricking just saving.

**Check the Retirement Account Page on irs.gov to find IRAs you are eligible for. In general, contributions to a traditional IRA are deductible if your AGI is south of $100k, and Roth is open to everyone, unless you already have 401ks in which case eligibility ceases with AGI north of 180K (assuming married filing joint). PM me in the forum.mrmoneymustache.com and we’ll dial this in for you.

Thanks a lot, Amazon Prime Pantry!

In order to confidently live off of savings, we’ve committed ourselves to frugality. It’s kind of like a spending diet; quick fixes or fasts don’t work. What’s effective is making lifestyle changes and sticking to them. Of course, after months of ‘being good,’ we sometimes digress slightly. Splurges may happen for the most admirable of reasons, for example, a birthday. None-the-less, as with a diet, a little fissure in discipline is when all hell can break loose.

Recently, the in-laws visited. We indulged in some expensive meals out*. I treated to a cooking class at the local tropical spice garden. We ran air conditioning in the main house. While we normally don’t engage in these activities, they were all perfectly reasonable while we had guests.  After all, a commitment to frugality should not make one cheap.

But as it is with a diet, deviations from discipline can feel like small cheats and trigger the ‘oh what the hell’ effect. Soon, both feet are off the wagon as one gorges on a foolish spending spree. For me personally, even as I realize I’m being manipulated by master marketers, I spend my money anyway! My frugality muscles go flaccid and the old ‘consumer-suckah‘ me is back, right where I left off. It’s like people I know with drug addictions. Once they slip up, it’s a quick descent to whatever rock-bottom they previously climbed out of.

After our visitors departed, I thought about our daughters in the US. I decided to send them an early Easter basket (to the devout Christian) or Zombie Day baskets (to the atheists). Instead of chocolates, though, it’d be basics – dental floss, pasta, olive oil.

These things might not sound exciting, but all three girls are at various stages of starting their adult lives. I suspect they might be scrimping on personal care items and pantry necessities. I worry they may not be flossing their teeth or replacing their toothbrushes! It’s important to take care of your teeth. I wish I’d taken better care of mine when I was their ages.

In the end I placed three $100 orders with Amazon Prime Pantry. One order to each daughter. $300 total, even though I intended to send maybe $30 worth of floss and pasta to each daughter.

Amazon Prime Pantry is based upon a brilliant business model**. Items are shipped for a flat rate of $5.99 in a big box. While selecting items, Amazon reports *in real time* the % volume of the package that has been filled. They don’t offer various box sizes. Just one size. So, when you go to place your order and see the box is only 28.7% filled, it’s pretty hard to press the order button. The urge to fill the box to capacity is strong. So, you go back in and add more rotini, some shampoo and bulky items such as clorox wipes, paper towels and toilet paper.

Take that Amazon biz-natches; Oh yeah, I got to 99.2%! ‘Order’.

Back up. I spent 3x what I’d intended. Even as I chose between Charmin and Angel Soft, I understood that filling the box was exactly what Amazon wanted me to do. I knew I wasn’t gaming the system. The Amazon marketers astutely studied their behavioral economics. They designed a cattle shoot that nudged me right into the killing chamber. And I happily mosied in, fully aware, even as I pulled the trigger on my Chase credit card that discharges with a 1% cash kickback. Three times over, I watched as $100 bullets exploded into an arc eastward, toward Amazon.com HQ in Seattle Washington, USA.

Thanks a lot Amazon Prime Pantry! Actually, yes, thanks. I’m glad I did this one last splurge while off the frugality wagon. Our daughters are definitely worth the extra money. That said, we are now climbing … back … on.

*Full disclosure – the in laws treated to most of these expensive meals out, but it still had an ‘off the wagon’ feel to it.

**Amazon Prime Pantry is based on a brilliant, but not perfect business model. It lacks one fundamental feature: the ability to include a note with the package. To each daughter, I wanted to explain,

“Happy Early Zombie Day / Easter _daughter’s name_,

This package is to help you take care of yourself!  The intended message is ‘floss your teeth!’ Although, it’s understandable, that if you miss this note, you’ll read, ‘wipe your butt.’ While both activities are worthwhile, what we really want to say is this: Since we no longer take care of you directly, we hope you take care of yourself with all of the love that we have for you! Happy Easter/Zombie Day.”