If you are new to the world of personal finance, welcome! If you have been around for a while, you’ll know that there are numerous spectacular blogs, highly talented authors, and overall some very smart people writing about personal finance. I have learned a great deal from many of these folks.
However, if you noodle around most of these sites, you’ll see that most have a very distinctive style they follow. Frugality, real estate investing, small business owner, etc. I had a hard time relating, as it seems these folks had found a niche, and I just felt, well, more average than them. I didn’t own a business, yet; I didn’t invest in real estate, I didn’t even consider myself particularly frugal. So how would I describe myself and my approach towards personal finance? Let’s see, there are three main components to personal finance that most people can relate to (Income is also super important and my top area of focus, but it doesn’t typically stand out at first. More on income later):
Most personal finance sites strongly preach frugality. While I can’t entirely disagree, the word frugal has never sat just right with me (and it definitely does not resonate with Mrs. RME). Mrs. RME and I have always been money conscious, and have always worked to cut waste from our life. I mean, what could be worse that wasting money? How many hours did I sit at work to earn that money?
Although Mrs. RME and I are indeed plenty frugal, we prefer the term conscious spenders. We have things we like to spend on, and if it gives us great joy and pleasure, we don’t hesitate for a second. So, what do we like to spend on, and what do we prefer to be more conscious of?
• Cars – I drive an early 2000’s model sedan with nearly 200k miles; Mrs. RME drives a Prius V, which is awesome for roads trips. I could upgrade my car, but why? It runs great and has been payed off for a decade!
• House – We just can’t stand the thought of spending a ton of money on housing. I only sleep in one room.
• Junk Food – Just doesn’t do much for us.
• Eating Out – We like cooking way too much, and our food is usually better (why can’t people understand how to sear a piece of meat!!)
• House stuff – All we need is a few high-quality things, and we are good to go
• Clothes – Same as above, a few high-quality items go a LONG way
• Utilities – We don’t go overboard, but we sure don’t waste resources! Doors stay open when it is nice, and we don’t mind bundling up a bit when chilly. But we don’t walk around in parkas either…
• Upgrading Anything – If we have something that is working well and gets the job done, why upgrade (TV, phone, appliances, carpet, car, etc.)?
Where We Spend
• Travel – Without a doubt, we spend most all our discretionary dollars on travel. What is better than exploring the amazing world we live in? Oh, and the food!
• Food – Considering how much time we spend eating, we want to enjoy it as much as possible. We buy high quality ingredients and love to cook at home.
• Nights Out – We very infrequently go for a night on the town (couple of times a year?) or have parties at our place, but when we do we don’t hesitate to live it up. Like travel above, few things compete with making memories with great friends.
We spend on experiences, without hesitation, because it gives us great joy and lasting memories.
When it comes to material things, we spend enough to be comfortable, but nothing more as we have reached a point of diminishing returns.
Mrs. RME and I also agree on pretty much everything we decide to spend on. Neither of us have an allowance, but both of us feel very comfortable spending money on whatever we so please. If she comes home with something, I know good and well that it is both something she really wanted, and that she looked around to ensure she got the best deal. Likewise, when I went out and bought a computer to write this blog, she knows it was something I really wanted!
Average household spending in America is $63,784 (Data) and I’d say we are right around that mark on any given year. We just happen to spend most of that amount on travel and experiences instead of housing, cars, and purchasing stuff. We consider ourselves pretty average when it comes to spending, and the data tends to agree.
Step 1 – Become very self-aware of your spending. What do you like to spend more on? What do you naturally spend less on? More on this later, but for now, just think about how this plays out in your life.
This one is pretty simple for us. We save a lot. End of story. After we pay our bills and travel to our hearts content, any and all money remaining is saved. If we have an extra couple thousand dollars at the end of the year, we don’t go buy a new TV or upgrade a car, we stash it away and let it grow. We typically save around 50-60% of our take home income each year.
Most other personal finance sites preach saving as much as possible, and we agree.
Now the dilemma, the less you spend, the more you save. Simple. We could definitely save more, but would have to sacrifice things we enjoy. For us, we rather work an extra 12-18 months and travel for a decade while we work towards early retirement. For some people, it might be a no brainer, hit early retirement at all cost and save every penny now! That’s 100% acceptable, if you are deriving as much joy from life as possible. For us, we rather travel now and enjoy our youth and health while we still have it!
Average household savings rate is around 6% (Data)! Wow! That is just incredibly low. We are fortunate enough to have an income that allows us to do a bit more, but even if we earned less, we would have to cut our spending to keep our savings rate high. Savings rate is the accelerator that allows you to reach your financial goals. If you want to reach your goals faster, just crank up your savings rate! What works best for us is saving around 50%-60% of our income. In this respect, we are NOT very similar to the average American. Although, the average American doesn’t retire before 40.
Step 2 – Calculate your savings rate. Don’t go overboard, but just get a general feel. Take your weekly take home pay and multiple by 26 to get your annual take home pay. Add in any lump sums for bonuses, then divide by your spending from above. This will be very rough and give you a good place to start. If you are at or above 50% savings rate, you are on track. If you fall below, we have some work to do. More on this later…
I’ll be honest, this part did not come natural for me.
Being a conscious spender and a strong saver was just part of who I was and how I was raised. Getting educated and comfortable with investing is an entirely different story.
Now that I have saved 50-60% of my take home income, where do I put it? If I was my parents, I would stuff it under my mattress and watch it pile up. Poor sleep would be a problem as the mattress grows lumpy.
Thankfully, I gave investing a shot. Specifically, in the stock market. I’ll go into investing in great detail on posts ahead, but for now know that I have been investing in stocks for a decade. At first, I lost badly. I wasn’t investing at all, I was just speculating. I did some reading, picked up a few “can’t miss” tips from co-workers, followed CNBC etc.
I bought individual stocks. Some did ok. Some did poor. Some quite literally went bankrupt!
Ok, I needed a bit more education. I stumbled upon the concept of index investing. Through companies like Vanguard, you can invest in entire markets through buying just one fund. This one fund will ensure you get the same return as the total market. You’ll miss out on those big winners, but you don’t have the same downside risk. By going this route, you are committing to the long haul, and leaning on market history and the fact that the market has had positive years 71% of the time (Data), and you will likely see similar results. You will still see the ups and downs, but you can sleep well at night knowing you will win in the long haul. This is my approach to investing.
Nearly all of our discretionary investment dollars are put towards index funds.
According to a Gallup poll (Data) 89% of Americans with an average household income greater than $100,000 invest in the stock market. We must be average, as we invest in stocks as well. It is a SPECTACULAR wealth building tool, as long as you invest, and don’t speculate.
Step 3 – Contemplate your current investment strategy. Do you invest at all, or is it all in cash? Do you invest in stocks, or are you just gambling and speculating with each pick you make? Get comfortable with who you are and your current approach, then we can talk about modifying your investment strategy.
We spend as much as the average American, but stay away from material goods. We save as much as possible, and invest what we save in stock market index funds.
Before you start thinking about how you can change, take note of all three things mentioned above. A key to personal finance and mastering money is to know yourself, and acknowledge your current state, then you can start planning your path to financial freedom. How could you plan your path if you don’t even know where you are right now?
Your Next Steps
1. Evaluate your spending habits. What do you like to spend extra on, what can you do without?
2. Evaluate your savings habits. What is your current savings rate? How much do you save each month?
3. Evaluate your investment mindset. Do you invest at all? Are you ok with the risk of investing in stocks?
Be sure to write a few of these things down, as they will help ground you in the reality of today. Based on your findings, we can start planning your path ahead.
Key note: If you have a significant other, be sure to share some of these findings now, and even calculate the numbers together. If you want to make changes in the future, it is best if you are both on the same page from day 1!