The Only 2 Ways to Beat Inflation

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Run for your lives.

Run for your lives.

There’s a saying that goes, “If you’re not going forward, you’re going backwards.”  If you take it literally,it makes no sense at all.  I mean if you’re not going forward, you’re just staying still in one spot right?  So chill out what’s the problem!?  The problem is, that while you may be relaxing in your little spot, the REST OF THE WORLD is going forward.  Meaning that if you stay in your little spot, you are moving backwards relative to everyone else.

So now that this little lesson in perspective is over, how does this apply to your financial life?  It’s because inflation will make your money worth less (and eventually worthless) year after year if you don’t do something about it.  For some reason I think of inflation as a big, horrible beast.  This beast that just devours everything in its path with no regard for the carnage it leaves in its wake.  I would like to eventually convince you all to think of it in this way too, because if you’re not paying attention to it, inflation will eat you alive.

(Very) Short history lesson

In order to learn how to beat inflation, we have to know a little bit about it.  It’s a very deep topic with many economic theories pertaining to it, but in general, inflation is an increase in the price of goods and services over a period of time.  This is usually because of the diluting effect of pumping extra money into the economy.  More money available means that you need more money to purchase the same product over time.  This means your purchasing power decreases over time.

The long term average inflation rate in the US from 1913-2013 is 3.22%.  Let’s round it to 3% and assume this is the rate of inflation for every year for the rest of time so I can do math in my head.  That means if an apple cost $1, next year it will cost $1.03.  And it will keep going up 3% every year from there.  This also means that if you make $10,000 in one year, you will have to make $10,300 the next year just to maintain your standard of living.  This is why if you’re not moving forward, you’re actually moving backwards.

So how do we combat this beast that will destroy our finances?  There are only two ways available:  Make more money, or spend less money.

Making more money

This seems like an obvious bit of advice but there are many ways to diversify this.  Here are some down and dirty ways to beat the inflation monster by making more money:

Work more.  A no-brainer here.  If you’re able to work some extra days or take on some extra clients without degrading your quality of life TOO much, you can beat inflation this way.  Just working an extra day per month should be able to accomplish this.  Now of course you can’t continue to work an extra day year after year because you’ll run out of days and your spouse and kids will hate you.  So you need to find some other ways to increase your income.

Work FOR more.  Increasing the rate you get paid, by either asking for a raise or increasing your business rates is probably the best way to beat inflation when it comes to making more money.  This is because any increase on top of that will get you even more ahead of inflation!  For example, if you’re able to increase your salary by 5% each year, not only will you beat inflation every year, but each 5% increase will be compounded on top of the previous one.  So if you were able to get a 5% increase for your $10K salary, you will now make $10,500.  Another 5% increase will net you even more because it will be based on the $10,500 figure.  So your next 5% increase will get you to $11,025.  Eventually, you will leave inflation in the dust.

Getting a 5% raise every year is pretty difficult, but you should always be trying to get the highest raise you can whenever the opportunity presents itself.

Increase your investments.  Inflation needs to be battled not just year to year, but decade to decade.  Things will cost a lot more in 20 years than they do now, so you have to plan for that as well.  You can do this by increasing your contributions to your investment accounts.  If you invest wisely in the stock market with index funds you should be looking at a conservative 5-6% return on investment every year.  This will easily beat inflation, so increasing your investment contributions will increase your net worth and help ensure that you will have enough money down the road.

Spending less money

Being able to keep more of your hard earned money is another way to fight back inflation.  Using those savings to increase your investment contributions can provide a nice double whammy as well.

Frugality.  Saving money is awesome.  There are no two ways about it.  It is said that a dollar saved is a dollar earned, but remember that we get taxed TWICE when we buy stuff (first income tax and then sales tax), so saving a dollar will actually save you a little more than a dollar.  It’s important to take a detailed and thorough look at your expenses every so often and see where you can shave off some money.  Reconsider your “necessities”, because a lot of them are just wants.

It’s also important to note that if you can cut your expenses down comfortably by 10% and can keep them around the same level for most of your life, those savings will help you for a lifetime.  By being able to live on less, you are giving inflation a sucker punch that it will not recover from.

Pay less taxes.  Uncle Sam wants his fair share for every dollar we earn.  And for good reason.  There is a country to run and it takes money to run a country.  The country being run WELL is a whole other issue, but the country still needs taxes to function.  But just like we do with our real uncles, we can play some games here.  Uncle Sam has allowed us to hide some of our money from him.  This is what a 401k account essentially is.  We get to set aside some money pre-tax and invest it in what we like (or what our company chooses for us).  We will have to pay taxes on this money eventually, but the hope is that in the meantime we reduce our taxable income early on and that money grows a lot before we have to eventually give our share in taxes.

You can also pay less taxes by making sure you take all of the deductions you are eligible for.  You can read up on these on your own or get your taxes done by a reputable professional.  Most online tax programs like TurboTax will do their best to make sure you get what you’re eligible for also.

There are still some steps to take even if you are wildly successful in saving money and making money.  If you make more money and end up spending it, you have done nothing to beat inflation.  If you save some money but just let it sit there in your checking account, it’s serving as a nice buffer but it can be doing so much more.  The key to bring it all together is to put your savings and extra income to good use by increasing your contributions to your emergency fund, decrease debt and increase investments.  Inflation will never know what hit it.

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Filed Under: Investing, Student Loans

Football and Your Finances

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catching football

Well it was inevitable.  Given my love for football and personal finance, I have written up some similarities I’ve noticed between the two.  I’m surprised it took so long actually.  I always thought that sports really transcend what you’re actually seeing on the field and that there are some life lessons to be had if you really look into them (Check out what running and soccer can teach you about your finances).  Football especially has these characteristics as each game is a blend of athleticism, history, philosophy and art.  Non sports fans probably think I’m crazy, but it’s there trust me.  You just don’t see it.

There are lots of lessons to be learned financially if we give a critical eye to football.  Football is a pretty unique sport in that it is only really played in North America and has a rabid following at the high school, college and professional levels.  It can also help you get your finances into shape if you really pay attention to the game.  I specifically enjoy watching the NFL and, videotaped displays of domestic violence notwithstanding, it has been a fun week of football as usual.  It would have been better if the Giants could actually win a season opening game, but there are still many games to be played.  Without further ado, here is what football can teach you about your finances:

Think Long Term

If there is one thing that nearly all the Super Bowl champions have in common, it’s that they took a look at the big picture to get where they are.  Football is the ultimate team sport, and it takes a combination of shrewd moves on the part of management and hard work and dedication on the part of the players to make a championship team.  This means you have to hire the right personnel, draft the right players and make sure they stay motivated.  This takes years of implementing a plan and executing it to its perfection.  Football is one sport where you can’t just sign a star player or two and expect to have success.  Teams have tried this in the past and fell flat on their faces (ahem Washington Redskins).

Thinking long term is important for your finances as well.  It is actually essential for your finances.  Your short term savings, retirement planning, college investments and income potential all need to be in order to have success.  This takes time and can not be fixed overnight.  While there can be emergencies that crop up such as emergency medical bills and job loss, those are usually temporary and if you have your long term financial picture in mind, you should have enough savings to weather the storm.  One great way to measure your financial success is to track your net worth.  If your net worth is going up over time, you’re generally doing well.  If not, changes need to be made.

Diversify!

Football has has 3 main phases:  offense, defense and special teams.  To define them simply, offense is in charge of scoring points, defense is in charge of stopping the opponent from scoring points and special teams scores some points but mainly tries to put the offense and defense in a good position.  Most teams that have continued success do well in all 3 phases.  There are some teams that have won the championship by having one overly dominant aspect, but that usually doesn’t last.  NFL coaches and players are too smart and work too hard to be fooled by the same thing every time.  In order to be successful in football, you need to keep the other team on their toes all the time by having a good offense and defense.  Being well balanced also allows you to overcome injuries.  If a team only relies on offense and has a poor defense, an injury to their star quarterback will all but spell their doom.

Diversification is needed for success in personal finance as well.  Diversification is usually talked about in the sphere of investing because putting all your eggs in one investment basket can be a very risky venture.  This is most definitely an important point to remember, but diversification can also apply to your personal finances as a whole.  I like to think of your income as your offense, expenses as your defense and investments as special teams.  Most people get the majority of their income from their day job, which is great if you have a great paying and stable job that will be around forever.  But if you are at a risk for job loss, which everyone is to some degree, it’s important to have other diverse streams of income.  This can be in the form of a side business.  While it may not net you as much as your day job, it is still something to expand upon in case you do suffer a job loss.  Keeping expenses low is also important because if you spend as much as you earn, you’re not going anywhere.  So just like football, income, expenses and investments must all be in good shape.

Plan for the worst

One thing that is unfortunately ever present in the game of football is injuries.  Football is a brutal game, with huge athletic men running into each other at full speed.  No amount of pads or protection can fully protect the players from damage.  Injuries will happen and need to be factored into the long term plan for any team.  This means that you need great reserve players who know their assigned role and will be able to fulfill it.  These reserves need to be found ahead of time because teams will be hard pressed to find a quality emergency player just sitting around and waiting.

This couldn’t be more true in the world of personal finance.  Finances can be brutal at times as well, and bills can come fast and hit hard.  This highlights the importance of having short term money in reserve.  Call it an emergency fund, tranquility fund or whatever you want, the name doesn’t matter.  What matters is that you need a stash of money that you can access in a pinch, because emergencies happen to everyone at some point.  You just have to be ready for them.  It can be the difference between paying an unexpected medical bill and not losing a beat to having to get into credit card debt and set yourself back for years.

I firmly believe that there are life lessons to be found in almost anything, but especially so in football.  If you’re not a football fan now after reading this, then I can’t help you anymore.  And if you want a team to start rooting for, pick the New York Giants.

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Filed Under: Investing

Roth IRA: A Love Story

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This is a story of love found, lost and found once again.  The characters are The Broke Professional (yours truly), and the most seductive of retirement saving vehicles, the Roth IRA.  It’s a story full of sleepless nights, laughter, heartbreak and utter contentment, and not necessarily in that order.  Allow me to take you on a journey that will hopefully end in a joyous and carefree retirement.

There are a number of different types of retirement savings vehicles.  While retirement seems a long way away for many people, and may never come for others, what makes these accounts so attractive is the tax savings that they can bring, specifically not taxing the growth of your accounts right away.  No other accounts do this (besides the amazing HSA).    There are essentially three points at which your contributions can be taxed:  first is when you put your money in, second is when your money grows within the account and third is when you pull money out of the account.  Let’s take the bastion of employer retirement accounts, the 401k.  Contributions to a 401k are made with pretax dollars and growth in the account isn’t taxed either.  You’re taxed when you pull money out of the account later in life.  While being taxed is a bummer, at least with this account your contributions and growth are not taxed.

A Traditional IRA works in essentially the same way as a 401k when it comes to taxes.  You are taxed on withdrawal of funds but not on contributions (given you meet the income requirements) or growth of your investments.  Traditional IRA’s allow more freedom in choosing investments, however, as 401k’s usually have funds that have been preselected by your employer.  I personally contribute regularly to my 401k (my employer offers free money) and don’t contribute to a traditional IRA because I exceed the income limits to take a tax deduction (guess that’s a good and bad thing depending on how you look at it).

This leaves us with the true object of my affection, the Roth IRA.  Just like everyone wants to know the key data before you make a decision on a potential life partner, let me quickly go through the relevant nitty gritty of the Roth IRA account:

Vital information

-The Roth IRA was established by the Tax Payer Relief Act of 1997 and is named after its main legislative sponsor, Senator William Roth from Delaware (God bless him).

-As stated before, contributions to a Roth IRA are not tax deductible

-Growth in the account and withdrawals are not taxed if you meet eligibility requirements, mainly having the account for at least 5 years AND being 59.5 years old.

–Direct contributions (not earnings) can be withdrawn anytime without penalty.  This a one of the main features that helped me fall back in love with the Roth.

-For a couple who is married and files a joint tax return, they are eligible to contribute the full maximum amount of $5,500 (for 2014) if they make less than $181,000.  This makes the Roth highly accessible to middle/upper middle class families.

-There is also a higher “catch up” contribution limit of $6,500 for those 50 and older (man I can’t wait to turn 50).

Without further ado, here is a dramatic re-telling of my journey back into the arms of the Roth IRA.

The Story

For whatever reason, the Roth IRA seems to bring out a lot of emotion in the world of personal finance.  Most finance writers agree that 401k’s which provide a match to your contributions and have decent investment options are a good thing.  No one will really argue against Flexible Spending Accounts and HSA’s for healthcare.  The Roth IRA, however, is truly a love it or hate it affair.  Sam at Financial Samurai has a number of posts stating his reasons against the Roth IRA.  They are all very convincing, especially this one (It currently has 363 comments!).  Jeff Rose, another prominent personal finance blogger as well as a Certified Financial Planner, is on the other side of the spectrum.  He absolutely LOVES the Roth IRA, and even started a Roth IRA Movement to get the word around to everybody that would listen.  So right there you have two respected writers who have made a career out of finance and have such differing views on the Roth IRA.  

So now comes my story.  I opened my first Roth IRA in July 2010.  It was a year after I graduated optometry school so I figured I should do something with all that cash sitting in my checking account.  I was contributing to my 401k to get the employer match and I exceeded the income requirements to get a tax deduction with a Traditional IRA, so I decided to do some research on what else I could do with my money.  A number of sites I visited recommended The Bogleheads’ Guide to Investing as an essential read for investing newbies.  I picked it up and couldn’t put it down.  It really resonated with me.  That book provided me with the foundation for my investment knowledge, and I still refer to it from time to time.  John Bogle is the founder of Vanguard, so I naturally decided to open up my first Roth IRA with them. 

They truly do have the lowest fees and expense ratios out there, which doesn’t make a HUGE difference in your investment results early on but can really diminish your returns when you have a sizable amount of money in your portfolio.  Vanguard also makes investing pretty easy and transparent, which is important to newbie investors.  I already had a full time job, so I didn’t want to have to spend too much of my free time worrying about investments.  Since I knew this was money I wasn’t going to need for a very long time, I decided to fully invest in Vanguard’s Total Stock Market Fund (which I’m still with by the way) to get the most growth potential with very very low fees.  I dumped what extra money I had into my shiny new Roth IRA and set up regular monthly contributions.

This initial fling went on for about 2 years, which is when I realized I really really hate student loans.  I was faithfully paying the minimum on all my loans but it seemed like the balances weren’t moving.  Some of them were actually going higher!  I appreciate my education and everything, but I don’t like the idea of a big bank siphoning a chunk of my income month after month.  I did some reading on debt repayment strategies and found that the Avalanche method was the best way to get rid of student loans.  I started working a few extra days a month, stopped my Roth IRA contributions and put whatever extra I could towards my highest rate student loan.  I got rid of the first one in a few months and started attacking the second one.  It was great seeing those balances actually start going south for a change.

While I was attacking student loans with all of my might, my Roth IRA was gathering dust.  I even withdrew some of my contributions to pay off a student loan that was almost finished and was bothering me.  I abandoned her.  For two whole years.  I did check in on the account from time to time (which was actually growing well since the stock market was going wild), but never really thought to start contributing again.  But then I realized I was making a mistake.  It wasn’t because the stock market was going up.  I know enough not to focus on a few years of growth for money that I will not need for a few decades.  I forgot how awesome compound interest was.  By reinvesting dividends and letting the account grow tax free for decades, I realized I could probably do a lot better than the interest rate I was getting by paying off my student loans early.  I also get a tax deduction every year on interest paid on my student loans, so I can still take advantage of that while it’s still around.

Another realization I came too was that in my fervor to pay off student loans early, I saw that I did not have a whole lot of liquid cash available.  I’m still contributing regularly to my 401k so I had a decent amount in there, but I can’t touch that until I’m 60.  Most of my free cash was going to pay off student loans, which is great but I’m not going to see that increased cash flow for a few years down the road.  While it is not advisable to touch the money in a Roth IRA, the fact that you can withdraw contributions penalty free at any time provides a lot of piece in mind.  I do have a regular emergency fund in an online savings account, but in case I may need some more for whatever reason, it’s nice to know the Roth is there.

So as of a few months ago, I decided to start contributing to my Roth IRA again, and it feels great.  The good part is that I can still attack my student loans because I decided to trim some expenses and use those savings to contribute to the Roth.  I’m not contributing up to the max yet, but my goal is to be able to contribute enough in 2015 (and beyond) to be able to max out my Roth IRA.  This combination of increasing my investment contributions, attacking my higher interest student loan debts and trimming my expenses will be the best actions I can take to speed up my journey to financial independence.  Any extra money I will see in the form of bonuses, credit card rewards etc will go straight to eliminating student loans or increasing investment.

So there you have it.  The tale of my relationship with the Roth IRA is now out in the open for everyone to gawk at.  It felt good to get that off my chest as it gives me motivation to keep my financial situation on the right path and hopefully provide some guidance to anyone who will listen.

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Filed Under: Investing, Self Building

Navigating Life After Graduation

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Times they definitely are a changing.  And it couldn’t be more true for those that are graduating with a professional degree.  Be it a new graduate in medicine, law, engineering, dentistry or optometry (my profession of choice), there is a whole different world to face after the years of living in the university bubble.  And it can sometimes be a new and cruel world.  Now I’m not trying to garner sympathy for these new graduates.  After all they usually end up in pretty high paying jobs with plenty of room for advancement.  But there is also a unique set of challenges that face newly minted professionals that they should be aware of.

Lifestyle inflation.  This is arguably the BIGGEST reason for new professional graduates getting into financial trouble.  To become an optometrist, for example, you have to complete your prerequisite classes in college and get a Bachelor’s degree along the way.  This usually takes about 4 years.  After the grueling process of applying to schools and flying out for interviews, when you finally get into optometry school, 4 years of even more intense studying and clinical work await you.  After completing these 4 years (and passing the nerve wracking board exams), you are finally free to find a job or open a practice and finally start making some money.

After years of schooling and (hopefully) living like a poor student, it’s only natural for one to get in the I “deserve” this mindset right out of school.  As in, I “deserve” a new BMW because of all the work I put in (along with the $700 monthly lease payment).  And I “deserve” a sweet new fancy townhouse since I’ve been living like a pauper the past few years (and the $2500 monthly payment plus maintenance that goes along with it).  The examples are endless.  With inflation eroding buying power over the years and incomes not rising in the same manner, a dollar doesn’t buy you as much now as it did 10 years ago.  This is an essential point to realize, as simply having a certain title doesn’t enable you to get the goods right out of the gate.

Student loan debt.  The issue of the high cost of tuition and subsequent massive amounts of student loan debt is a hotly debated one.  And for good reason.  Tuition is increasingly rapidly year after year, widely outpacing inflation.  College was once thought to be an essential stepping stone for success.  Sky high tuition prices are making many re-think that.  While student loan debt is a big problem for all students, it is an especially big one for professional school graduates.  For the graduating class of 2012, the average student loan debt was $29,400.  This is not an amount to sneeze at, but I probably incurred that much debt sitting through my first 5 classes in optometry school.

While my final student loan debt (undergrad and optometry school) was around $140K, many of my colleagues were well into $200K.  So my student loan debt was almost 5 times the national average.  That’s a huge discrepancy and a problem that needs to be tackled hard.  Many students, myself included, underestimate the effect of student loan debt while in school.  And who can blame them?  With tests every week and sweat inducing clinical practicals to prepare for, who has the time to prepare for life after graduation?

Student loan payments will make up a substantial chunk of a new grad’s monthly payments.  In a lot of cases it can be the largest payment one has to make per month.  And if the banks have their way, this will continue for decades.  That can end up being tens of thousands of dollars in interest payments.  That’s money that you earn but you will never be able to use because it is lining the coffers of the country’s biggest banks.  As if their coffers need lining.  Students and new grads should be prepared for the hit that student loan debt brings and get ready to hit right back.  This means cutting back on your consumption and throwing whatever extra money you can towards your highest interest loan and then moving to the next one (also called the Avalanche Method).  If you can be diligent in this process, you can reduce the time you pay student loans by years and save thousands and thousands of dollars in interest payments.

Building a good credit score.  Unfortunately, the importance of a good credit score is lost on many.  Most people don’t know the difference between a credit score and a credit report, and why they should even bother checking them.  I’ve noticed that this is especially widespread among new grads, as they’re focusing on finding their place in the world and spending their new found money.  Eventually, most people end up applying for a mortgage or a car loan.  Even if it’s not in the near future, it will most likely happen.  This is the best time to improve your credit score, as it can potentially save you tens of thousands of dollars over your lifetime.

Applying for a mortgage or credit card will initiate a credit inquiry by the lender.  They want to look at your past history to make sure you’ll pay them back.  Instead of hiring a private investigator, your credit score gives them this info in a nutshell.  A low score means you’re not a good borrower.  You get the highest interest rate possible on your loan.  A high score means you are a pretty dependable borrower, so you get the lowest interest rate offered.  On a big purchase like a house, the difference between a low interest rate and a high interest rate can cost you potentially hundreds of thousands of dollars.  That’s a lot of cheddar.  Giving your credit score some attention even for just a few years will get it right where it needs to be.

A professional degree isn’t a ticket to a lifetime of riches like it used to be.  Many new grads are falling into financial trouble by not paying attention to these three big issues.  If you can weather the student loan debt storm and resist lifestyle inflation early on in your career, you will be setting yourself up for a lifetime of success.

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Filed Under: Investing, Self Building, Student Loans

Frugality Can Make you Wealthy

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They should call him "Froog" Mc Duck

They should call him “Froog” Mc Duck

The word “frugal” can elicit different emotions from different types of people.  In the personal finance world, frugality is a virtue that allows you to save money every month and not get caught up in Keeping up with the Joneses.  The frugal practices of Warren Buffet, for example, are well documented and legendary.  For those people who know money, being frugal is a way of life.  But if you tell a guy who knows nothing about money that you try to live a frugal life, one word will come to their mind: cheap.  This is loaded with a ton of connotations and this person will think you are this stingy and mean person who only cares about keeping their money (as if keeping your money was a bad thing?).

Being considered frugal (or cheap) is frowned upon by most people.  But it shouldn’t be.  In fact, if everyone practiced frugality this would would be a much better place with much happier (and wealthier) people.  This post is not going to talk about different ways to live frugally.  You can search my other posts for that (like how to save money on eating out) or the countless other great frugality blogs out there.  I just wanted to touch on the idea that frugality is the ULTIMATE way to become wealthy.  It’s an idea many people propagate but I have not seen it explained better than in this article by the Badass himself, Mr Money Mustache.

While saving ten bucks a month doesn’t seem like a whole lot by itself, the implication is much greater.  If you’re able to kick a habit that costs $10, you have to realize that will be $10 a month you shouldn’t have to spend for the REST OF YOUR LIFE.  This will allow you to reach your savings goals that much quicker and will let you retire that much earlier.  The whole point of personal finance is increasing your assets and decreasing your spending.  Saving $10 a month does both of those things.

It should be obvious that the goal is not to stop at just $10 a month.  Look at ways to save on housing and transportation, usually the biggest money sinks for most people.  Learn to eat more at home and bring awesome lunches to your workplace.  Evaluate your cable and cell phone needs.  Most people can easily find ways to save a few hundred dollars a month by looking at where their money is going.  At the same time, you should try to increase your income and put those savings and increased income to work in the form of investments and/or paying off debt.  This is the sure path to financial success and it all starts with living a frugal lifestyle.

One thing you will most likely get from living a completely frugal life is resistance from others.  People are not used to living frugally.  Most want to spend their hard earned money on things that will only end up bringing temporary happiness.  Many people scoff at the idea of trying to cut down on your morning coffee, for example.  But this little change can free up money which you will have for the rest of your life.  Cutting out things you can live without to create a life that you enjoy is nothing to scoff at.  Let others think what they want while you trim your monthly expenses and reap the enormous benefits.

One final argument for frugality.  Living a frugal life and being able to live on less will teach you skills that will last you for a lifetime.  Almost everyone will go through tough times financially at some point, so it would be ideal to learn to live on less when times are good.  Cutting expenses won’t be such a shock and that will help you dig out of any hole you get in.  Besides, living frugally when times are good will allow you to save more which will hopefully prevent those tough times from affecting you too much!

Taking the time to go through your monthly expenditures and cutting things you don’t need, and banking the savings, can be one of the most powerful things you could ever do for your finances.

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Filed Under: Investing, Money Savers, Self Building

What Soccer (Futbol) Can Teach you About your Finances

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Savings GOOOOOOAAAAAAAALLLLLLLL!!!!!!!!

Savings GOOOOOOAAAAAAAALLLLLLLL!!!!!!!!

Regular readers of my blog know that I’m a big basketball and football fan.  But like the rest of America, I have been stricken with a case of World Cup fever.  I hardly ever watch soccer, but the games in this year’s World Cup have been really exciting, especially in the knock out rounds where there has to be a winner.  And in my never ending quest to equate sports and life, and specifically personal finance (click here to see how baseball is related to your finances), I have thought about some ways that the “beautiful game” is a lot like your financial life.

Make BIG goals

One very unique thing about soccer compared to most other American sports is that scoring doesn’t happen often.  In basketball, most teams will score a basket on 30-40% of possessions.  Scores are routinely in the 100’s.  In American football, touchdowns are scored in pretty much every quarter, with the good teams scoring multiple times.  And in baseball, you do have your 1-0 score once in a while, but most games will have at least a couple of runs by each team.  But in soccer, scoring is much tougher and you will regularly have games ending in a score of 0-0.

To an outsider, this can make it seem that it was a slow game and nothing was really going on.  But the exhausted players and torn up field will show that hard work was definitely being done.  The players and coaches can evaluate the game tape and find out what they did well and what they need to shore up.  And eventually, when a team scores a goal and is able to win a game, that hard work in the scoreless game was definitely worth it.  This should be similar to our approach to our financial goals.  While making lots of little scores is nice, we should try to make big and worthwhile goals and work tirelessly towards them, constantly evaluating what works and what doesn’t.  While it may be frustrating not to reach a goal quickly, the worthwhile goals almost always take some time.  Finally hitting that goal will make that effort all the more sweet.

It takes determination AND skill

A soccer game is 90 plus minutes of constant play.  That’s a long time.  With hardly any breaks in play and few substitutions, all players have to be constantly on alert.  Even a momentary lapse can produce disastrous results.  This is where the determination to stay involved and alert comes in.  Having this constant determination will help you play great defense and maybe even get a shot or two at the goal.  But you also need players who have the skill and creativity to overcome any defense that comes their way.  You need those type of players to have any long term success.  This is particularly seen in the US team as they are described as having a lot of “grit” and determination but hardly ever make it close to the World Cup finals since they lack the talented players that the Brazils and Germanys of the world have in abundance.

This concept applies to our personal finances as well.  While we definitely need consistency and determination to achieve any big financial goal, such as having a comfortable retirement, it also takes skill and creativity find ways to cut your expenses and make more money so you can increase your chances of being successful in the long term.  Things like inflation and changes in your field will be there, so you have to find smart ways to overcome those to stay on track.

Diversify, diversify and diversify

Some people say that the NFL is the ultimate team sport since you need offense, defense and special teams working together.  But there are plenty of examples of teams that do well while having a poor defense or a poor offense.  Heck, the Baltimore Ravens won the Super Bowl in 2000 with an offense that couldn’t score a touchdown for 7 straight games!  I would argue that soccer is even more of a team sport because any deficiency on offense or defense will severely hinder your chance of winning.  Most games are decided by a goal or 2, so if you have a defense that is not playing very well you almost have no chance to win no matter how good your offensive players are.

This couldn’t be more true in our finances as well.  The two sides of the personal finance coin are making money versus spending money.  If you make good money but spend it with reckless abandon, you’re gonna be in bad shape.  If you are also frugal with your money but don’t start making more, you’re not really going to go far.  It takes a combination of a good income and good spending habits, with adequate insurance serving as your goalkeeper, to have a solid and balanced financial team.

I meet a lot of people that hate sports, and even more people that hate sports analogies.  If you’re one of them, you probably didn’t read this far.  And you should get some professional help.  But if you did, I genuinely appreciate that and will ask you to add some analogies of your own in the comments.  Here’s hoping for an exciting finish to the World Cup!

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Do You Really Need to Save for Retirement?

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Certain sayings or ideas get repeated so often throughout time that they become second nature to say or believe.  Our moms always told us not to put our eyes like “that” or they would get stuck (I’m an eye doctor and that is not possible).  They also tell us over and over to eat our vegetables.  That is something we should be doing and something I do a lot of, especially if you count fried potatoes as a vegetable.  At some point things become so repetitive and automatic that we just recite them without even delving into the reasons why.

This could not be more true when it comes to personal finance.  One piece of advice you hear from many people is that you need to buy a house.  It’s just the way things are done and if you’re old enough and have enough money, just get a house.  People who followed this advice during the recent housing crash would beg to differ.  You have to be able to AFFORD the house before you can buy it, even if interest rates are low.  And the interest rate deduction is not as awesome as most make it out to be.  In any case, “you must buy a house” is a piece of advice that gets repeated over and over but should not be followed blindly.

Another idea that you hear get repeated over and over is the importance of saving for retirement.  Talk to any financial planner and visit any financial blog (including this one) and you will inevitably see a post on the best ways to save for retirement.  This gets repeated everywhere so I thought it might be a good thought exercise to think of the reasons why we should save for retirement and if there are any compelling reasons not to.  After doing some hard thinking, casual interviewing and meticulous research (Google), I’ve realized that saving for retirement is something that EVERYONE should be doing and there is no reason not to.  I’ve listed some possible reasons why retirement savings aren’t that important, and then proceeded to explain why those reasons are dead wrong.

1.  I LOVE my job and could not see myself ever leaving:  This is the reason I have come across the most, but it is dumb on so many levels.  Loving your job at age 30 doesn’t mean you will love it at age 60.  Heck, you might not even love it at age 31.  Many things can make you not enjoy your job as much later in life such as changes to your industry, office politics or not feeling fulfilled.  Many people in their 50’s and 60’s now did not stay with their current company or even their current field all their life.  You really have to plan for the fact that you may not like your job so much at some point.  Not saving for retirement because you think you will die on the job you love is one of the most foolish things I have ever heard.

Another reason that depending on your undying love for your current job is stupid: life may have other plans for you.  You might get laid off or see your position disappear.  But more likely, your health could be jeopardized.  According to the Social Security Administration, 25% of 20 year-olds will become disabled at some point in their lives.  That means you probably won’t be making much money during a sizable time period in your life.  Health care issues are by far the number one reason people declare bankruptcy.  Human health is a fragile thing, and you have to almost expect your health to fail at some point.  Knowing all this, not saving for retirement because you think you will always be on the job is one of the most irresponsible things you could do to yourself.

2.  I want to enjoy my money now instead of when I’m 70:  This is one of the reasons I have heard that actually has some merit.  There is some wisdom to the idea that life should be enjoyed in the moment, and I agree with this.  We only get a limited amount of years on this planet, so why spend it worrying about the end of our lives while we can enjoy the present?  We’re young and healthy, so let’s take advantage of it!  This is not a bad motto to live by, but if enjoying life to you means spending all of your money, then you have some bigger issues to worry about.

I agree that we should take advantage of our youth and travel and explore when we can.  But this is just one chapter in our life.  The average US life expectancy as of 2011 is about 78 years.  Most people retire in their early to mid 60’s.  That means you have potentially 20 years to live without the help of a paycheck.  Simply ignoring this chapter of life because you want to have more fun in your 20’s and 30’s is not a smart decision.

The solution?  Put your retirement savings on autopilot and enjoy what you can on the rest.  You can focus on enjoying your young years (which is important) without putting your retirement years in jeopardy.  Besides, there is nothing that says you will not be able to have fun in your 60’s and 70’s.  If you keep relatively good health, you will still be able to travel and work on your hobbies while being able to spend more time with family and friends.  We need to focus on preparing ourselves for each chapter of our life, not just the one we’re currently in.

Be a happy retiree

Be a happy retiree

3.  If I put money away for retirement, then I won’t have enough to cover my expenses:  People who use this as a reason not to save for retirement really have some problems.  If your day to day expenses are so high that you are setting yourself up for failure during retirement, you have to make some changes.  Right now.  If credit card debt is the culprit, which is true for many Americans today, get those paid off in full ASAP so you can start contributing to retirement.  Contributing to a retirement account while paying 20% in interest on credit cards is not a wise move anyway.  You also need to cut expenses and use that money to help pay off the credit cards or start contributing to your retirement account.  If you have a workplace 401k, start there because the hit won’t be as bad since it is taken out before taxes.  If you have some serious issues like healthcare bills, you really need to cut out your unnecessary expenses until everything is in order.  Treat it like an emergency because once you retire and have nothing to live on, that’s exactly what it will be.

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You Are Your Own Worst Enemy

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The human race is a very interesting one.  The past few centuries of our existence have produced massive leaps in the areas of technology and exploration.  Just a few decades ago not many people had computers or cell phones.  Despite all of this progress, there are still dark things that always occur.  Violence, war and intolerance to name a few.  These have all taken on different forms in different eras but that self destructive nature is always there.  We are a true dichotomy and probably always will be.

These self destructive habits can be found in our individual lives and habits as well.  In our never ending quest for comfort, people still smoke and eat poorly despite knowing the harmful effects to our body.  We avoid doing things we know will be beneficial for us, while choosing things that are easier to do but may not be good for us in the long run.  While these individual flaws don’t have a global effect like wars and violence do, they can be minimized in the same way.

Society sets laws to limit our destructive habits.  For whatever reason, many people resort to things like theft and violence to get what they want.  Laws were created to prevent this and while they don’t eliminate it completely, it greatly reduces the amount of crimes that occur.  We all follow some types of law, be they religious or secular.  For the most part, they are there for our own good and for the good of society.  In essence, laws prevent us from making bad choices that we might have made if left to our own devices.

This same idea can be applied in order to improve our financial lives as well.  Most people commit a financial “crime” at some point.  Spending a little more than we would have liked on the coffee run.  Going out for an overpriced dinner while cooking at home would have been much cheaper and just as tasty.  Not contributing to our 401k plan because we need all the money we can get in order to pay the credit card minimums.  We know actions like these are not good for our financial health, but they end up happening anyway to a lot of people.  But just as society can set laws to keep the crime rate down, we can set some laws of our own to keep financial crimes from happening.  The two best laws to help us financially: setting up automatic transfers and creating a spending plan.

Automatic transfers:  The best thing to come from being able to bank online is the ability to easily transfer funds from one account to another.  It’s so easy to do and is the single best way to prevent financial crimes from occurring.  Why?  Because it takes the decision out of your hands.  By having a set amount of money transferred from your checking account before you ever get a chance to spend it, you’re taking away the potential of doing something stupid with that money.  Part of your earnings need to be earmarked for savings and investment.  Instead of stressing about how much you have left over to contribute to your savings, set a comfortable amount to be taken every month so you don’t have to worry about it.

We all need to have something saved for the future and the best thing to do is save early and often.  That means contributing as much as you can to your retirement account as soon as you can.  For those who can participate in a 401k plan through their employer, this is best done with deductions from your paycheck straight into your retirement account.  You won’t even have a chance to miss the money.  This is key since most people don’t like getting less money in each paycheck. If you start early and have it deducted automatically, you have to find way to make do with what you get.  In my own personal situation, the ability to automatically transfer money from my checking account into my savings and 401k has been the best thing I have ever done for my finances.

Spending plan:  The second way to keep yourself from committing a financial crime is to set a spending plan.  This can also be called a budget, but spending plan sounds cooler.  It’s really very simple.  Just take a look at how you spent your money the last 6 months or so.  The longer time period you analyze the more exact you can get, but 6 months will give you a good overview of how you’re spending your money.  Divide it up into categories and look at where you feel you’ve been spending too much.  This is where personal finance gets personal as everyone has different tolerances.  Some people love food and don’t mind spending a lot on eating out.  Others like a strong cell phone plan and will gladly pay for it.

The key is to optimize your spending.  Spend what you like (within reason) on what you value and cut what you don’t.  This takes a few minutes of thought but it will have a profound effect on your finances.  You can then set up estimates on how much you want to spend in each category and try to stay within those values.  The goal is not to hit that exact dollar amount every month, but to recognize where you’re spending your money and shift it to where you want.  Any money you save from those things not so important to you can be sent to your savings and investment accounts.  Knowing really is half the battle.

These are two of the best ways to hack your finances and keep yourself from making a costly mistake.  There are many financial “laws” you can set to protect yourself against yourself, so just experiment around and find what works the best.

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Quick and Easy Ways to Pay Less Taxes

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homer check

Tax season 2014 has come and gone.  The best thing about it being over?  No more seeing those unfortunate Liberty Tax employees dancing on the corner.  Way to make paying taxes even less dignifying.  Since you filed your taxes, are waiting for your refund (here are some things to do with your refund by the way), or have to send a payment in, it may be time to finally relax.

WRONG!  There is never a time to relax when it comes to taxes, because what you do this year will affect you next filing season.  Being mindful early on in the year, however, can make tax time 2015 a lot easier and hopefully more lucrative.  Here are some easy things you can do now in order to reduce your tax bill if you’re employed:

Contribute to (or increase) your 401k:  Can’t think of a quicker and easier way to reduce your taxes than this.  Though it is technically a tax deferral since you will be paying taxes on it when you eventually withdraw between age 59 and a half and 70, the earnings have time to compound.  And if you don’t think your income, and thus your tax liability, will be lower when you’re retired than in your prime working years, you have some priorities that need to be shifted.

Another thing to remember is that money contributed to a 401k is done so before taxes, so a $100 contribution doesn’t take $100 away from your next paycheck.  Having less money is the main reason that people don’t want to increase their 401k contribution, so this fact should be kept in mind.  Besides, just find one monthly expense to cut or reduce and voila!  You have successfully invested in your future and increased your net worth.

Open a Health Savings Account:  Regular readers on this blog know that I’m a big fan of the HSA (here and here).  Irregular readers should know that I’m a big fan of the HSA.  You can set aside pre-tax money for an expense you will need now and in the future: health care.  Everybody has to go to the doctor or dentist at some point, so why not save money on taxes and open an HSA?  The contribution limit for families in 2014 is $6,550.  That’s a lot less money to pay taxes on.  The best part is that when you eventually use your HSA money, you are not taxed on it.  Any earnings are not taxed either.

This is such a great deal but you have to have a high deductible health plan (HDHP) to participate.  Some people, especially those who see doctors a lot, are wary of these because you pretty much pay any emergency visits in full until you meet the deductible amount.  The advantage is that their premiums are much less and the plan still pays for routine annual visits.  If you run the numbers and find that even with the tax savings and lower monthly premiums you would be saving more money by having a traditional health plan, then signing up for a high deductible one wouldn’t be the best idea.  But if you’re not in that minority of the population, fully contributing to your HSA is an amazing way to reduce your taxes.

Open a 529 plan (some states):  If you would like to give your kid a little financial head start for college, you can open a 529 plan.  Each state has their own plan with different administrators, investments, fees etc.  Some states allow you to deduct some or all of your 529 contribution from your state taxes.  Currently, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming don’t offer this because they don’t have any state income tax (this is also a list of good states to retire in).  California, Delaware, Hawaii, Kentucky, Massachusetts, Minnesota, New Hampshire, New Jersey and Tennessee have a state income tax but don’t allow for a 529 tax deduction.  I guess they don’t care about education.

All other states have some type of deduction from state taxes.  It’s also worth pointing out that 401k contributions should have priority over 529’s.  Not only do you get a federal tax break, you also probably get matching funds when contributing early on.  And if you don’t make sure you’re taken care of during retirement, your kids (if they’re good) will have to pick up the slack anyway.

Work less:  Not a popular piece of advice on personal finance blogs, but if you make less money then you pay less in taxes right?  While this is true, it’s probably not recommended in most cases, especially if you need money to pay off debt or save for retirement.  But if you are in that enviable position where you make more than enough money and want to spend some more time with family or just relaxing, work a few less hours per week and you’ll be paying less taxes.  Not a bad trade off.

These are just a few very quick ways to reduce your taxes and help your future self at the same time.  There are many other ways to reduce taxes, which is why there are books and CPA’s available.  The US tax code is complex but it is definitely worth learning since you will most likely be paying taxes until you’re in the grave, and even beyond.

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A Twist on the HSA

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The Health Savings Account is the relatively new kid on the block in the healthcare world (check out my intro post to the HSA here).  The HSA has the distinct advantage of staying with you at the end of every year rather than expiring on December 31 like Flexible Spending Accounts.  Depending on which bank you open your HSA with, that money can be invested or gain a small amount of interest.  If you’re eligible for it, it is a nice account to have because contributions, earnings, and qualified distributions are all tax free.

There is one condition of the HSA that actually gives it a while new dimension.  It can act as an IRA.  My eyes were opened to this idea from a post by the Mad Fientist.  It took me a few days to kind of wrap my head around it but ever since I did, I’m all in.  And it’s all because of one rule regarding HSA’s:  any distributions made from the account after the age of 65 can be used for ANYTHING.  Meaning that after you turn 65, you can use the money for healthcare expenses, paying the mortgage, going on a vacation or just letting it sit in the account and grow.  The one caveat is that if you withdraw HSA money after 65 for anything other than healthcare expenses, you will have to pay taxes on it. This makes it similar to a traditional IRA.

The key to making this happen is that you don’t have to DIRECTLY pay for healthcare expenses because the funds don’t expire.  Let me explain.  With an FSA, the money expires at the end of the year so you better use that money on any and all healthcare expenses.  Or scramble to get glasses in December like I did because I had too much money left over.  You either use the debit card they give you or pay for it yourself and make sure to submit the receipt by the end of the year.  With an HSA, you can just pay for a $100 doctor’s visit out of your own pocket (ideally with a rewards credit card), hang on to the receipt and know that you have two choices.  The first choice is to now move $100 from your HSA to your checking account to cover the $100 charge you made.  This is fine if you know you won’t have enough money in your checking or savings to cover the bill.  This is also similar to what you would do with an FSA.

The second choice, and the better one, is to not touch your HSA money and simply file the receipt away for future use.  This will allow that $100 to grow in the account and still give you the ability to withdraw that $100 at some time in the future if you really need it.  Or, ideally, just let it sit in the account until you’re 65 and withdraw it without penalty or taxes.

There are certainly some things to keep in mind when using the HSA as a modified IRA.  If you have a genuine healthcare emergency that you will definitely not be able to cover out of pocket, use the HSA money.  That’s what it’s there for.  Hopefully the emergency will happen after you have had a few years to build up some money in the account (the 2014 IRS limit for HSA contributions for a family is $6,550).  So saving the max amount even after a few years will give you a nice cushion in case of a high hospital bill.  So if you haven’t opened an HSA or are not contributing the max amount, find a way to do so.

For its intended use, the HSA is a great account as it allows you to set aside money tax free, lets the money grow in the account tax free and lets you withdraw it tax free for qualified healthcare expenses, which we all need to spend money on at some point.  No other account allows you to do this.  But if you can keep your healthcare expenses low and cover them out of pocket, this money can grow and grow until 65 and if you need it before then, it will certainly be there for you.  Just be sure to hang on to your receipts.

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Filed Under: Investing, Money Savers, Self Building
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