Saturday, February 18, 2017

Some Thoughts on the ‘Lost Generation’

Recently, I had a long email conversation with a reader about 10 years younger than myself. He’s firmly a member of the millennial generation, whereas I’m right on the dividing line between millennials and Generation X.

This reader’s argument centered around the idea that the deck is stacked against millennials far more than other post-World War II generations. His primary reasons are threefold.

First, the real wages of someone with just a high school diploma have dropped in the last 40 years. He pointed to this data showing that the inflation-adjusted wages of a person with a high school diploma have dropped by about 30% since 1970. It’s worth noting that the median wages of a person with a bachelor’s degree have dropped by about 15% over the same period, and the wages of someone at the 25th percentile of those with a bachelor’s degree almost perfectly match the experience of someone with just a high school diploma over that time.

Second, the cost of a bachelor’s degree is rising while wages are falling. According to this data, the cost of a bachelor’s degree is going up by about 6.2% a year, which means that this year a four-year bachelor’s degree at a public institution will run you about $80,000, compared to about $5,000 in 1970.

Let’s combine those two points for a moment. We’re going to convert everything here into 2013 dollars, removing inflation from the equation. A person in 1970 could expect to make about $37,000 a year (in 2013 dollars) from just a high school education, costing basically nothing, or $53,000 a year from a bachelor’s degree, on average. That degree would cost about $30,000 in 2013 dollars. In other words, a bachelor’s degree cost you about half a year’s worth of the average income you’d expect to earn with that degree.

Today, a person would make only about $25,000 from just a high school diploma. If they want to do better than that, they can get a bachelor’s degree, which bumps their income up to about $47,000 on average. That degree will now cost you about $80,000. The cost of that four-year college degree is now almost twice (1.8 times) the average annual salary that person could expect to earn from that degree. Student loans are simply a requirement for most students, and if they wind up with below average earnings, they’re in a real pickle.

Third, housing prices have risen almost as fast as education prices. In 1970, the average American home could be purchased for about $150,000 in today’s dollars. Today, that same average American home costs about $384,000, according to this data and using an inflation calculator to convert everything into today’s dollars.

Again, let’s compare that to a person’s salary, putting everything into today’s dollars. In 1970, a person with a high school diploma would make about $37,000 a year and could buy an average home for $150,000. That’s about four times a person’s annual salary, but it’s doable. A person with an average college degree would make $53,000 a year, which means that the average American home is less than three time a person’s annual salary. A person with an average degree and an average job in 1970 could probably purchase a home straight out of college, as their total student loan debt and housing debt would add up to only 3.5 times their salary.

Today, the picture is way different. A person with a high school diploma makes about $25,000 a year, which means an average american home costing $384,000 a year would cost that person about 15.5 years of annual salary. A person with an average college degree makes $47,000 a year, which is merely 8.2 years of annual salary. A person straight out of college with an average job would have to invest ten years worth of their salary to pay off their student loans and their home, and that’s not even considering interest.

I don’t think anyone would disagree with the fact that the financial hole that people start their adult lives in today is far bigger than the ones that their parents or grandparents did. The cost of a home and the cost of an education have grown at a rate far, far faster than wages, and the result is that people coming out of college are facing a much larger financial challenge than their parents ever did. No matter how hard you spin the numbers, the situation millennials face today is substantially more financially challenging than the one faced by earlier generations.

My millennial-aged reader termed his generation the “Lost Generation” because of it, co-opting the term that once referred to the generation that came of age during World War I.

So, why write to The Simple Dollar about these issues? My reader’s argument is that most traditional personal finance advice simply doesn’t apply to that generation or to the generation likely to come after (read: the generation that includes my own children).

The question then becomes what financial and career advice does apply to millennials and the next generation? What follows comes from someone who would probably be considered the absolute oldest of the millennials or the youngest of the previous generation. I’ve witnessed astronomical education costs and the challenge of paying them off and I’ve witnessed the nature of the huge escalation in housing prices, too. As those gaps continue to grow, here’s the advice I give to all millennials and to my own children, too.

The one skill and attribute that matters more than anything else going forward is that of lifelong learning and self-improvement. If you’re not constantly learning new things, honing skills, and improving yourself, you’re going to be left behind. The world moves too fast today to just sit around on the skills you have on the day you graduate. The specific skills represented by your degree will be outdated in pretty short order.

Learning new things, honing your skills, keeping them up to date, and improving yourself should be daily parts of your life. Let me repeat: Learning new things, honing your skills, keeping them up to date, and improving yourself should be daily parts of your life. They should be completely normal. This is simply the way the world is now. You can no longer expect to be able to walk out of school, walk into a job, and do the same thing for 40 years. The world simply does not work like that any more.

Fifteen years ago, Google barely existed. Facebook didn’t exist. Neither did Twitter. Most people didn’t have cell phones, and those that did almost exclusively had “dumb” phones, meaning they could call and maybe text, and texting wasn’t a common thing. Wikipedia existed in an extremely nascent state. Advances in almost every field over that same timeframe have been similarly incredible, where entire fields have appeared (such as microbiomics), and others have disappeared almost overnight. Fifteen years ago, Iowa was almost entirely powered by coal; now, wind turbines and solar panels are everywhere, meaning that powering a person’s home or a business is completely different. Almost every field has radically changed in just the past decade or two.

If you can’t keep up with that, you’re not going to be a highly valued employee. An employee who can keep up with that? That’s a valuable asset to have. The difference between the two is a capacity for and a passion for lifetime learning, self-education, and self-improvement, along with other traits that support them, like good time management and information management. Those are the traits that matter most going forward.

The person that succeeds today is the person who spends their time making things and improving themselves. Almost every job that just requires you to approve things or pass things around or do a fairly simple repetitive task is on the verge of disappearing because we can automate all of that stuff. That’s part of the reason that wages are so depressed – jobs that do things that could be automated are paying less and less because if workers demand more, a company will just automate the job.

That doesn’t mean there aren’t good jobs out there. It just means you have to be providing things that a computer can’t necessarily do, and that usually means a creative approach to your work. You have to be making things, and you have to be learning things that will help you make better things.

Again, I’m firmly convinced that is a learned skill or set of skills, but it’s one that a person has to work at on their own. You can be shown how to follow steps in a process, but if that’s what your job is, then you’re likely heading for being devalued and eventually being automated out of a job. Instead, what’s valued are people that produce things that don’t follow a strict process, or else are able to constantly refine their own process to improve it. They create things and improve things, and creating things doesn’t just go from step A to step B to step C. It involves applying a person’s knowledge and skills in new ways all the time, and that’s never described by a step-by-step process.

You do not need a college education to succeed in many fields going forward; what matters is what you can create, build, and make. Here’s the reality: College is a fantastic, wonderful experience, but it is not worth it if it puts you in financial handcuffs for the rest of your life. It simply isn’t. If you can go to college on scholarship or for a reduced rate, that’s great. Take advantage of it. If not, never forget that you do not need a college degree to succeed financially or professionally.

More and more, what matters to employers is what you can produce and whether or not you’re constantly learning and building skills. A college degree is just the foot in the door at many jobs; quite often, the skills you demonstrate are just as effective at opening that door.

I speak from experience. I think of the stories of six different people I know very well who are working in fields completely unrelated to their education. I’m one of them. None of those six are using degrees they earned; three of those six don’t have college degrees at all. All of them are making very good money in their fields.

How did they get those jobs? Every single person in that group spent their spare time learning and making things and sharing what they made. Every single person either got a job or started a self-employment path based on that. None of them required a degree of any kind.

Again, let me repeat: I’m not saying that college doesn’t have value. I’m simply saying that it is far from the only ticket to a good job, and I believe that the imperative I mentioned earlier – that the number one ticket to success today is to be passionate about being a lifelong learner and making things – is actually more important than a college degree.

In the end, your resume is what you’ve created, not the positions you’ve filled. It’s not the jobs you’ve had or the degrees you’ve earned. Those might get your foot in the door, but they won’t matter for long.

You have to be able to show that you’re able to adapt, you’re able to think creatively, you’re able to self-manage, and you’re able to bring a project to completion. Those are the things that matter today.

You are essentially self-employed from day one, even if you have a great job. Back in the era where jobs more or less stayed the same for decades, a company that found a reliable employee to fill that slot would reward that employee for steady effort and constant reliability.

Today, no job stays the same for very long. It just doesn’t happen. That means that companies have to choose between continuing to hold onto employees that won’t adapt to changes or staying profitable. They’re choosing to stay profitable.

It seems cruel, but it is also a window to a new world as an employee. If a company is not loyal to you, you don’t have to be loyal to a company. Treat yourself as self-employed from day one. You’re working for this company now because they’re offering the best situation this moment, but just like the world is changing rapidly, so will that “best situation.” As long as you keep learning, keep making stuff, and keep building a portfolio of things you’ve made, you’re going to maximize your personal value. It’ll become easy to move on in your field.

Your goal, at any job, is to create value for your employer, but you should do that with a constant eye toward creating personal value for yourself. Take advantage of every tool they have for you to grow and build skills. Take advantage of every opportunity they have for you to produce and make things that you can show to others as proof of your skills.

Reputation and relationships are more valuable than ever. Getting your name out there, having lots of connections, and making your work known is more valuable than it ever has been. It’s part of that “personal value for yourself” that I mentioned above.

Remember, everyone today should view themselves as effectively self-employed. Your ticket to your next route of employment will come through your relationships and your reputation and the things you’ve created. Build those relationships. Build that reputation. It’s on you. No one else will build it for you.

Let’s move on to some more strictly financial tips.

There is almost no imperative to have children or buy a house in your twenties. Both of those things are bone-crushingly expensive, and your twenties are not a time to add bone-crushing expense to your life.

Live as cheap as possible. Remember that you honestly won’t spend a whole lot of time at home, so have a tiny apartment in a convenient place. Spend your time out and about, meeting people and building relationships and learning new things.

Communities are growing in strength today because of the clear need for them today; rely on them and use them. The amazing part of all of these changes is that they’re actually giving birth to a lot of communities, both online and off. People are realizing the value of constant learning and self-improvement and the need for communities and professional and social relationships. That’s why there’s an explosive growth right now of communities oriented around those things.

Take a look at Meetup and see what’s going on in your area. If you live anywhere near a metro area, you’ll find more groups and mini-communities growing than you could possibly imagine. It’s like drinking from a fire hose. Many of those communities are centered around the very things I’ve been talking about – personal growth, lifetime learning, professional relationship building centered around general areas of interest, and communities.

Dive in. Let those things become your social network. Find like-minded people who are really passionate about the things you’re passionate about and marinate yourself in those communities. You’ll be surrounded by interesting, excited, passionate people who are already doing the things described here and it will be exhilarating.

I know – I’ve been a part of a lot of such groups in my area. Groups tied to my profession. Groups tied to my various areas of personal interest. They all provided lots of professional connections, quite a few social connections, and a lot of friends. They provided an environment that practically demanded lifetime learning. They helped me find people that cared about the same things I did, and that passion fed off of each other.

You can find similar groups online, but there’s something truly special about face-to-face meetups. Take advantage of them.

Borrow, borrow, borrow. If you want to read a book, borrow it from the library. If you want to go into the city, borrow a train ride there by buying a metro ticket. If you want to see a movie, rent it for a buck or two. Borrow anything and everything you can and keep your possessions to a minimum.

Why? For starters, owning is more expensive than borrowing. It costs far more to own a car and use it for everything than it does to buy a mass transit pass and use it for everything. It costs far more to buy a book than to borrow one from the library. It costs far more to buy a Bluray than it does to rent one or borrow one from the library.

Secondly, the more possessions you own, the more living space you have to have, which is more expensive. You need storage space for all of that stuff, and eventually that means bigger living quarters are needed. A bigger apartment or a house is expensive.

Finally, the more possessions you own, the harder it becomes to move on, and moving on is likely going to be a big part of your life if you’re striving for big professional goals. You want to be able to move as quickly and easily as possible.

Remember, stuff isn’t the spice of life. Experiences are. Focus on collecting experiences, not things. Not only is it cheaper, it makes your life more flexible and still keeps it fulfilling.

The message is simple: many of the professional and financial rules of previous generations don’t really apply any more. A steady job where you do the same thing every day doesn’t have the same value it once had, and it’ll never have that value again. A changing world requires you to change approaches, and the biggest change can be summed up in one word. Flexibility. Be flexible in your life. Be flexible in your mind.

Millennials have more tools available to them than any generation before them, but it requires new techniques to use all of those tools. Flexibility is the key. That’s the biggest lesson I’m imparting to my own children as they grow up. Be flexible. Know how to teach yourself. Don’t expect others to teach you. Yeah, it’s going to be hard, especially at first. Find your interests and find communities that will help the interests thrive. Keep learning. Make things. Value experiences over stuff. You’ll do fine.

Good luck.

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Friday, February 17, 2017

How to Avoid Beating Yourself Up Over Little Mistakes

I have this little voice in my head that likes to slam me for the missteps I make.

If I eat too much at supper, that voice will say, “Are you completely lacking in self control or what? You didn’t need to eat like that! How disgusting!”

If I spend money on something without thinking it through, that voice will say, “Are you even remotely thinking of your family’s future? Why did you throw your money away like that, you fool?!”

If I forget to pay a bill, that voice will shout out, “How can you be so disorganized and lazy? Can’t you see that paying attention for just a measly minute could have saved you and your family a bunch of money!?”

My voice might be a little bit on the cruel side, but I think that some version of that voice exists inside all of us. It chides us for our missteps.

In small doses, that little voice can be a powerful moral compass. It can be a very strong guide that tells us which decisions are right and which decisions are wrong.

But when you’re trying to improve yourself and adopt stronger standards for yourself, that voice can turn on you hard. It goes from being a great moral compass to being a giant guilt-tripping machine of pure negativity that makes you feel like a loser.

The problem, of course, is that when you begin to feel negative about yourself, it becomes really easy to retreat from your positive standards and initiatives. You fold in on yourself, returning to old habits and old practices that seem safe and reliable and your progress in improving yourself grinds to a halt and even regresses.

This type of cycle is a danger with any kind of self-improvement, whether it’s financial or health-related or mindset-related or exercise-related or anything else. You set strong standards for yourself, which is good, but then your negative internal voice is unleashed and it criticizes you hard for simple mis-steps, which eventually leads you to abandon your progress and retreat to safer rules and standards, which puts you right back where you started.

After all, no one wants to feel bad about themselves. No one wants an internal voice that’s a constant critic.

Further compounding the problem is that there are often contradictory internal rules that we have that guide us in different directions over the same decision.

Let’s say I’m standing in one of my favorite stores – if you want a specific visual, let’s say the Quill and Nib in Des Moines, Iowa. I’m holding some item that I want in my hand; let’s say a big fat Rhodia notebook. It’s something I know I will use in the near future, but not something I strictly need. I could buy a cheaper notebook, absolutely.

So, I have the voice inside of me telling me to buy it and listing the reasons why I should – the great paper, the long-term reliability of the notebook – and then that same voice is telling me reasons not to buy it – the cost, mostly. I have different internal “rules” pushing me in different directions, and I honestly can’t please them both at once.

Either way seems like a mis-step, and it can feel really frustrating and really disheartening. When you’re working hard to improve yourself and your situation, you often wind up in those no-win situations and if you have a strong internal voice that you use to guide yourself, that voice turns on you, no matter what.

That can be devastating to one’s self esteem. It can also cause you to walk away from self-improvement plans entirely.

Here’s the thing, though. You really, really want to be able to trust that inner voice. The benefits of a strong inner voice that guides you well through difficult choices is tremendous. The trick is figuring out how to make that voice quiet down sometimes and how to handle real dilemmas.

This is how I’ve come to handle it.

First of all, I try to be aware of situations that are going to put my own internal rules into conflict. This often happens for me when I’m considering buying a product that I don’t strictly need but that I know I’m going to use, or when I’m considering meal options that will please both me and my family, or when I’m choosing between multiple social options, among many others.

Those types of situations call my internal “rules” into conflict with each other, and when that happens, that voice pipes up. I’m glad I have that voice to tell me when I’m about to make a bad choice, but when I’m in a conflicted choice, that voice is going to pop up no matter what I choose.

Simply by recognizing that I’m going to have to softly violate one of my internal rules because there’s no other real option, I can cause that voice to quiet down. If I know I’m going to a store to buy a specific item and I know the choice might be tough, I think about that a little bit first so that I’m not going to beat myself up over that choice.

Second, I mentally walk through such scenarios, both before and after. This is a constant trick that I use for making better choices in life: I visualize them in advance. This is one of the most common things I do when I’m driving somewhere or waiting at a doctor’s office or waiting for my kids to finish soccer practice.

It’s simple. I just think about situations that I’ve been in recently or situations that I know are coming up where the choice is going to be tough and there’s going to be a conflict in terms of those rules I use to operate my day to day life. I try to figure out the “best” thing to do and why exactly I’m making that choice.

I find that thinking through such scenarios usually sets this kind of “mental precedent” where, if I follow through with that, my internal criticism stays nice and quiet because I’ve clearly already figured out the best choice, even if it goes against one of my internal rules.

Third, I try to prioritize which rules are more important and which rules are less important. For example, if I have money left in my “free spending” budget, then I’m going to prioritize buying the best “bang for the buck” hobby item rather than the cheapest one, but if I’ve spent most or all of my hobby money, then my “be frugal and don’t spend” rule will kick in. Or if I’m eating by myself or just with my family at a normal meal, healthy eating rules are dominant, but I put them aside for the occasional “special occasion” meal with others.

These “rules exceptions” are things I consciously think about when I have the chance. I find that consciously thinking about such things “trains” that voice to abide by more sensible rules and exceptions that handle the realities of my life better so that it’s not shouting at me for “breaking” rules all the time. In other words, it begins to learn that there are sometimes clear exceptions to the rules and that’s okay. Thus, the number of situations where I’m in a genuine conflict gets smaller and smaller over time, and thus my internal voice is less and less aggressive.

I find that this is the best of the strategies for handling unexpected situations where conflicts arise, because having good sound internal rules for handling almost everything on instinct makes decisions easy and keeps that internal critic at bay.

But what do I do if I’m still besieged by that internal critic? I keep a gratitude journal and a “good moves” journal. Each day, I spend a little bit of time reflecting on what I’m grateful for in my life and the best moves I made that day. I think about the multitude of good choices I’ve made and then, on top of that, the gratitude I have for all of the good things that my consistent good choices have built for me.

I have a great relationship with my wife and a great relationship with my kids. I have a job that I love. I have a lot of friends whose companionship I value. I have a steadily rising profile in my community, which means that there are more and more people I know when I walk around my town and can greet and talk to. I have an unquenchable curiosity about the world and I know how to constantly feed it and grow as a person.

All of those things are things I’m very grateful for, but I also recognize that they’re built on the back of a lot of good choices over the years. Yes, I mess up some choices, but I make a lot of great choices, too. Reflecting on the things I’ve done right today shows me some of those immediate good choices, and reflecting on the things I’m grateful for shows me some of the long-term benefits of a long history of good choices.

That process usually quiets that voice of internal criticism pretty directly. Yes, I’ve made missteps, but I’ve made a lot of good steps, too, and those reflections are the evidence of those good choices.

Together, these tools keep me from beating myself up excessively over missteps and little mistakes. Yes, I make mistakes, and yes, I criticize myself over them, but these strategies keep that criticism from boiling over into self-loathing and regression into bad habits.

Instead, these tools keep that internal voice where it should be: as a great guide to good behaviors that reflect my values and lead to the long term goals I have in life. It’s a voice that preaches frugality and lifelong learning and personal growth and good personal choices without beating me up when I’m not perfect. Instead, it guides me to where I should be on that journey.

Work with your internal critic. Don’t let it be cruel to you. Instead, train it to be a useful guide. It will help you make great spending decisions, great personal decisions, great time use decisions, and so much more.

Good luck!

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Thursday, February 16, 2017

31 Days to Financial Independence (Day 27): Handling a Crisis

“31 Days to Financial Independence” is an ongoing series that appears every Thursday on The Simple Dollar. You might want to start this series from the beginning!

Last time, we examined insurance options along with some strategies for maximizing the value one gets out of their insurance. Now, we’re moving on to a handful of special topics to close out the series, starting with a deep look at emergencies.

Life isn’t always perfect. Unfortunate things happen. A car breaks down before work. A family member falls ill or passes away. You get an unexpected pink slip. Your small business or side gig loses its best client. Your home is flooded or burns down. Those things are part of life sometimes.

The question really isn’t whether crises will happen, but when. Eventually, a loved one will die. Eventually, a client will disappear. Eventually, your car will break down. Eventually, an appliance will fail. It will happen.

There are really two things worth considering when it comes to crises like these.

First, since you know it’s coming, what have you done to prepare for it? What do you have in place so that such emergencies aren’t as devastating? Almost every crisis has something that can be done in advance to reduce the impact when it happens.

Second, when it does happen, what’s your plan? What exactly will you do when that crisis occurs? This step is really about visioning and perhaps adjusting your preparation steps.

It’s well worth your time – and well worth your money – to focus on those questions when it comes to some of the most likely emergencies that you’ll face in life.

Exercise #27 – Preparing for and Responding to Common Crises

Today’s exercise is all about taking those steps with the most common crises. So, one at a time, we’re going to walk through some of the big crises people will face in life and what they can do to set things up so that those crises have the smallest possible personal, professional, and especially financial impact.

Before we get started, though, there’s one overriding tip that will help with almost every single crisis you’re going to face in your adult life: have a healthy emergency fund. If I can recommend one single strategy that will help with all kinds of crises, it’s that one. Simply keep a healthy amount of cash in a savings account so that you can access it and use it when an emergency comes. My recommended strategy is to simply automate a small transfer from your checking account each week into an emergency fund and never turn it off, so that when an emergency happens, you know there’s money waiting for you to help you handle it.

Job Loss

You go into work. Your boss asks to meet with you and informs you that you’re fired. It’s out of the blue. You clean out your desk and your mind races, wondering what’s next. Your biggest income stream is gone. What do you do?

Here are a few steps you can take right now to brace yourself against an unexpected job loss.

First, keep your resume polished at all times. That doesn’t just mean keeping it updated. It means choosing work tasks with an eye toward what would build a killer resume. You’re going to want something that will sell you very well to future employers.

Second, build a strong professional network. Get involved with professional groups, both in your local area, across the country, and online. Build some strong professional relationships within those groups. The more people you have a strong relationship with, the easier it will be to send out feelers and quickly find a new job in your field.

Third, maintain as many positive relationships in your own workplace as possible. Avoid negative talk, especially trashing people behind their back. Avoid conflicts with other coworkers. Be helpful. Don’t “rat people out.” Try to stay on everyone’s good side, and build some very strong relationships with reliable people in your workplace. Yes, there will be some bad apples, but that’s true everywhere.

Finally, cultivate a side gig. Having a side business, whatever it might be, provides another income stream for you. If you lose your main job, then you have something else that’s bringing in at least a little money.

What do you do when a job loss actually happens?

First, apply for any unemployment benefits you may be eligible for. Many jobs offer some sort of unemployment or severance package. Do what you need to do to get your hands on that money.

Second, be incredibly active in terms of getting a new job. Start shopping that resume as soon as possible. Treat finding a new job as if it were your old job. Tap your professional network and see what you can find. Look especially closely at any jobs your professional network comes up with.

Third, tighten up your spending until you’ve landed on your feet. This is the time to go ultra-frugal for a while. The tighter you lock down your spending, the longer you can last without major disaster happening.

Extended Personal Illness

What if you get sick? It’s easy for us to fall back on the comfortable idea of perpetual health, but the truth is that people fall ill all the time. Accidents beset us. Illnesses beset us. Things can happen where we can no longer rely on our health. What do you do if your health fails you?

Here are three preparatory steps you can take.

First, talk to your human resources officer about what to do if you have an extended illness. What benefits are offered by the company? What do you sign up for? What kinds of things are in place if, say, an employee gets cancer? Is that information in your employee contract?

Second, keep an active eye on your health. Go to your doctor for regular checkups. If you notice something that’s awry, ask your doctor. You’re far better off learning about a medical problem when it’s a minor issue before it ever develops into a full-blown crisis. Also, make sure you’re eating a healthy diet and taking care of yourself.

Finally, know the ins and outs of your health insurance plan. Know what your deductible is, what it covers in terms of major illnesses, what happens if your employer tries to terminate you when you’re sick, and what your rights are. You can get answers to most of these questions by simply contacting your health insurance provider.

What do you do if you discover you’re sick?

First and foremost, get a second and third opinion. Make sure that there is a consensus on your diagnosis and get that consensus quickly. Doctors often encourage this, because they don’t want to be wrong about a bad diagnosis, either.

Second, learn about life steps you can take to manage symptoms. Follow your doctor’s advice, but go beyond it. Look at tools like improved dietary choices, appropriate exercise, sleeping techniques, and so on that can help you get through the illness.

Also, talk to your employer immediately. Discuss your illness, but also discuss what you’re doing to manage it and recover from it. This is very important if the illness is going to potentially cause you to take an extended leave in the future. Your company is more likely to stick with you if you do what you can to keep them informed and take steps to minimize their negative financial impact.

Death of Friend or Family

Loved ones pass away. It happens. Sometimes it’s expected; at other times, it’s very sudden. When it happens, it often hits you like a wrecking ball. It also can leave you in a situation where emergency travel is warranted.

How can you prepare for this?

First of all, communicate regularly with older and ailing relatives and friends. Don’t give into the belief that they’ll always be there. Call your mom or your dad or your grandma or your aunt and make it a regular thing. Write them letters. Send them texts. Listen to their stories. Visit them. Help them with chores. Stop by their retirement homes. Keep them as an active part of your life, even when it’s inconvenient.

Second, keep a list of people you would need to contact at work and in your life in the case of a sudden emergency. If your parent died right now, who would you need to call at work? What about child care? What about schools? Keep those numbers on your phone. You might even want to make a checklist of people to call. When such an event happens, you’re going to be upset, so do it now when you’re cool and calm. If you have a spouse, share that list with your spouse so that they can make the calls if needed.

Finally, if you’re an executor on someone’s will, get up to date on what their wishes are. Just have a conversation with them every once in a while so that you’re sure what their wishes are and are prepared to handle what might happen. Ask them if there are any family conflicts that may have to be navigated. Be informed, and take notes on this so you can refer to them later.

When the time comes, it’s probably going to be upsetting and chaotic. Here are three things to keep in mind in such an event.

Make the calls. Don’t just run out the door in an emotional wave. Stop, refer to your list of calls you need to make, and get them out of the way immediately. Don’t make a bad situation worse. Most employers and service providers are very sympathetic if an employee’s parent or grandparent dies, but you still have a responsibility to take care of arrangements as soon as you can.

Call a trusted friend for help. If you’re distraught, lean on a friend right now. Any friend worth anything at all will step up and help you with things like handling travel arrangements, driving you to the airport, and giving you a shoulder to cry on if you need it. This is what friends are for, so rely on them now. There will come a day when you can pay your friend back for this.

Allow yourself to grieve. I am the type of person who bottles these kinds of emotions up until after the event has passed. I become the person who handles things, who is the shoulder for people to cry on at funerals, who speaks at such events. I save my grieving for later. The thing is, I don’t have to be that person. Everyone grieves in their own way, and if your way is to cry profusely or go on a long solo walk or whatever it may be, allow yourself to grieve. If you can, do it communally, so a friend or a family member can help you a little through this process.

Business Failure

Sometimes, businesses fail. It happens. A key client pulls their business (for good or bad reasons). Something happens that destroys your reputation. The market changes and you’re suddenly not making money any more.

Whatever the reason, there are some steps you can take to prepare yourself to survive this kind of failure.

First, and most important, diversify your income streams. If you have a successful business, use some of that money to set up other income streams so that if the main business fails, everything doesn’t fall apart for you. Consider investing that money into other businesses or other investments.

Second, keep your personal skill set sharp. The more skills you have that remain sharp, the more likely it is that you’ll be able to transition quickly to some other line of work. You may even find yourself transitioning into building up a former side business into something bigger. Don’t coast. Don’t let your skills atrophy.

Finally, make sure that there is a clear legal wall between yourself and your company. Make sure that if your business fails, it does not impact your personal finances. There are many ways to do this depending on the exact nature of your business, but make sure that there is a firewall in place.

When your business does fail or is heading in that direction, be prepared to move on.

Cut your losses. It can be hard to emotionally divest yourself from your business, especially if you built it up yourself. Don’t fall into that trap. Trust the numbers and if those numbers point to failure, don’t believe that some miracle will save you. Take action as soon as the picture is clear to minimize the financial damage and perhaps salvage some value.

Don’t make a hasty decision, but don’t drift, either. Spend this time looking at your options, brainstorming about what’s next for you, and keeping your skill set sharp. You may decide that a completely new direction is right for you or you may go along a parallel path to your old one. Give it time, but take the decision seriously and give it focus.

Extract value from your mistakes. Don’t beat yourself up over your missteps, but think about what went wrong and what you can learn from that going forward. What could you do in the future to make sure that history doesn’t repeat itself? There’s real value in that kind of thinking.

Car Failure

You go out to your car before work and it won’t start. It’s not something simple, either. It’s going to be an expensive repair and, even worse, you’ve got to get to work. Now what?

If that sounds like a horrible scenario to you … and it should … here are a few steps you can take to minimize the impact before it ever happens.

First, have an alternative plan to get to work. It might be a bicycle or mass transit. It might be another vehicle, either one you own or one that you can very reliably borrow. It might be Uber. It might be your own two feet. It might be a ride from a friend. Whatever it is, think about that alternative transportation now, rather than when you’re in a panic, so you’ll simply know what to do if things go wrong.

Second, have a trusted mechanic. It’s a good idea to find a mechanic in your area that you trust and that’s reliable. That mechanic will give you a good estimate on what’s wrong with your car and what it’ll cost to fix it, and may be able to provide you with a loaner. Find that mechanic now. Touch base with your social network if you don’t have a good mechanic and then start getting regular maintenance done with that mechanic.

Finally, start a car replacement fund. Even if a car replacement seems years away, start it now. If you put $100 aside each month starting right now, in five years you’ll have more than $6,000. That will allow you to write a check for a decent late model used car (along with your trade-in). $200 a month will get you a very nice vehicle. $300 a month allows you to buy an amazing late model used vehicle. Start this savings plan now, not later, and make it automatic.

When your car does fail, here are a couple steps to follow.

Don’t drop everything to worry about your car. Get to work as normally as you can, then make calls about repairs when it’s more convenient. Your car breaking down is a weak excuse at work; that’s why it’s so often used in scenes in television and film to show an employee that’s heading for thin ice. Your car is not your employer’s problem and you’re gobbling up goodwill by using it as an excuse.

Call around to trusted mechanics for estimates to look at the car. Obviously, with a car that doesn’t start, you can’t just drive it to different mechanics for estimates. If you have a trusted mechanic, you can probably just let that mechanic look at it; otherwise, shop around a little bit.

Home Damage or Destruction

A final disaster that often happens is home damage, whether due to a flood or a fire or an earthquake or a robbery. It’s devastating when it happens, but it can be a lot less devastating with some prep work and with a sound plan for when it happens.

Here are three steps you can take now to minimize the impact.

First, know your homeowners insurance and get sensible optional coverage. Find out what exactly your plan covers and what documentation you need. You should also assess whether you’re in an area where additional coverage for specific disasters is warranted, like tornado insurance or earthquake insurance.

Second, keep all needed documentation about your policy on your phone and/or your safe deposit box. In the event of a home disaster, you’ll want that information somewhere outside of your home. The traditional answer is to keep it in a bank safe, but having such info on your phone is also a good idea. At the very least, keep your policy number and your insurance company’s phone number on your phone.

Finally, have a plan for where you would live in the short term in a disaster. Is there someplace you could reliably stay in an emergency? I have a couple of nearby friends who would happily let us stay with them for a few days in an emergency, and they know they could stay with us, too.

What do you do if disaster strikes?

Call your insurance company as soon as everyone’s safe. You have that policy number and phone number on your phone, right? Call the insurance company and get the process started as soon as possible. (You should probably contact your employer, too.)

Take pictures. As soon as you can safely do so, start documenting the damage. Take pictures of everything. While an insurance agent will also look at things, you’re going to want as much documentation as possible for yourself.

Secure what remains. Make sure that what remains of your property is secure and document this as well. Obviously, if there’s nothing left, then this is minor, but in the case of flood damage, proving that you took basic steps to secure your property against further damage will help your insurance case.

Next time, we’ll take a look at a major problem that’s rarely addressed in personal finance writing, the “long valley” problem.

The post 31 Days to Financial Independence (Day 27): Handling a Crisis appeared first on The Simple Dollar.

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Three Tax Traps for Freelancers (and Three Perks, Too)

There are many benefits to freelancing, but it’s sometimes hard to remember that when tax time rolls around. That’s because, unlike regular employees who pay taxes through deductions from their paychecks, freelancers are responsible for setting aside their own state, local, and federal taxes. They also have to pay self-employment tax to contribute to Social Security and Medicare.

This can add up to a nasty surprise at tax time. But it doesn’t have to. With a little planning, you can stay on top of things and avoid getting a big bill. Your accountant or tax professional is the person to see about creating a concrete plan, but being aware of some of the pitfalls can help you prepare and know what to expect.

Plus, as we’ll see in a minute, it’s not all bad news – freelancers can get some unique tax advantages as well. Planning ahead can help you keep more of your money, as well as make sure you’re paid up in timely fashion.

Three Tax Traps for Freelancers

Tax Trap #1: Not Paying Enough Estimated Taxes

The IRS wants self-employed individuals to pay estimated taxes on a quarterly basis. As an accountant once explained it to me, “Think of your total tax bill for the year as a bucket. By the end of the year, the IRS wants to see that bucket full to the top.”

Paying on a quarterly basis helps you fill up the bucket. Of course, if you don’t pour enough into the bucket each quarter, you’ll come up short, and be subject to penalties. (Which is where the metaphor kind of falls apart.)

The IRS provides instructions for figuring out estimated tax for quarterly payments. Just keep in mind that your income is likely to fluctuate over the course of the year. If you get a big client or raise your rates, you’ll want to up your payments accordingly.

Tax Trap #2: Fudging the Home Office Deduction

There are all sorts of myths about what qualifies as a home office. One friend will tell you that it absolutely has to have a door; another will swear that you can write off your dining room because you use the table as an occasional workspace. Both of those friends are wrong.

The IRS is pretty clear on what counts as a home office for tax purposes. For freelancers, the important tests are:

Regular and Exclusive Use: This means that the workspace is used regularly for business, and exclusively for that business. Most tax professionals will remind you not to use your home office for anything other than work. That means no storing skis in there, no using your home office as a study for kids doing homework, and no tucking a desk into the corner of the living room and claiming the whole space for work.

Principal Place of Your Business: Generally, you’ll have to show that you use your home office as your principal place of business. You might also qualify if you do business outside the home, but use part of your home regularly and exclusively for business.

More details on the home office deduction can be found here.

Tax Trap #3: Skipping Deductions, Just to Be Safe

For every freelancer who tries to write off their personal electronics as business deductions, there’s another who overpays their taxes because they don’t want to risk taking perfectly valid write-offs. This feels virtuous, but in fact, you’re just leaving money on the table. Freelancer’s Union has a list of freelancer tax deductions, including office supplies and web hosting fees, that are worth checking out.

Don’t take deductions you aren’t entitled to, but don’t be afraid to claim legitimate deductions. Even if you’re a creative type, by choosing the freelance life, you’ve decided to become a businessperson as well. Don’t cheat yourself.

Three Tax Perks for Freelancers

Now, the bright side: Here are some tax benefits available to freelancers:

Tax Perk #1: Some Existing Bills May Be Deductible

If your home office (the one you use exclusively for work, and for no other reason) is located in your house, you’ll probably be able to write off a percentage of your utilities. Depending on what you do for work, you might be able to do the same with your cellphone, cable, internet, or other services.

Again, your tax professional will be able to tell you what’s fair game. But if you’ve left the rat race to work for yourself at something you love, you’ll likely discover that some of your expenses (or at least a percentage of them) are now totally valid deductions.

Tax Perk #2: Professional Development

To keep on top of your game professionally, you have to keep learning. The IRS knows this, which is why educational expenses are generally deductible.

Again, be reasonable: If you’re a graphic designer, those salsa dancing lessons aren’t exactly related to your area of expertise. But classes that develop your skills and boost your earnings probably are.

Tax Perk #3: Deductible Fun

Fifty percent of the cost of business meals are tax-deductible, according to IRS rules, which means that if you take a client out to dinner, you can write off half the check. Just make sure you keep good records. The IRS specifies that you must record the date, place, and business relationship related to the expense.

Obligatory Legal Disclaimer: While every effort has been made to provide accurate information, we’re not accountants or tax preparers. Discuss all tax planning with a professional. 

Related Articles:

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Wednesday, February 15, 2017

Five Strategies for Avoiding (or Talking Yourself Out of) Hasty Purchases

The biggest personal finance mistake I make on any sort of a regular basis is to visit a store of any kind where I know I’m going to be personally tempted, and to do so with money in my pocket. A board game store, a bookstore, a stationery/pen/ink store, a brewing supply store – I should never, ever, ever walk into places like that with money in my pocket that I know I’ve budgeted for free spending. It’s a huge mistake.

Why is it a huge mistake? I know that in such places, I am extremely susceptible to hasty purchases. I’ll see a board game or a bottle of ink or a notebook or something else that really scratches my fancy. Even worse, I’ll see one that’s on sale, or I’ll see something rare that’s hard to find but isn’t selling at a premium price.

In those situations, I usually feel like I have to make my decision in a hurry. I’m usually not in such stores for a long period of time and I rarely have opportunity to return in a reasonable timeframe, so I have to make the decision quickly: Buy it now or walk away?

It’s in that position that I often make my worst financial mistakes. I give into that temptation and buy something that I really don’t need and honestly don’t even want that much; it just happens to be sitting right in front of me.

That’s not to say I don’t believe in being spontaneous. I absolutely do think that spontaneity is a wonderful thing. However, buying an ill-considered book in a bookstore isn’t spontaneous; it’s a waste of money. Buying yet another bottle of ink or yet another boardgame I won’t play as often as I need to in order to merit the cost? Sure, it might be a bit of fun, but it’s not worth the price of entry.

I recognize those facts later, but in the moment of temptation, sometimes those facts go out the door. Here’s what I do to cut the feet out from under hasty purchases.

I spend my free time and hobby time away from stores, online as well as brick and mortar. If I want to spend time on my hobby, I don’t go to a store. Instead, I go to the kitchen table or out to the garage. I grab a book off of my shelf and open the pages. I pull out gear I already have and do something with it.

When it comes right down to it, the joy in a hobby doesn’t come from throwing money after stuff (unless you’re an obsessive collector, which we’ll get to in a bit). It comes from doing things. It comes from making cool sketchnotes. It comes from reading a great book. It comes from hiking a new trail. It comes from making a killer homebrew. It comes from building something or making something or learning something.

It doesn’t come from acquiring something.

That’s because the magic in a hobby is in you, not in the stuff. It’s the use of your mind and body to do something interesting and engaging and, ideally, results in making something or achieving something.

The beauty of a passion for books isn’t in buying books by the armload, it’s in reading them. The beauty of a passion for board games isn’t buying more games, it’s playing them and mastering them. The beauty of a passion for ink and paper isn’t in accumulating more and more, it’s in doing something interesting with them.

Spend your hobby time and your free time in the places where you do stuff, not where you buy stuff. Stores are places where you buy stuff. Go there when you need something new for your hobby and can walk in there with a very specific purpose in mind. Otherwise, stay out of the stores and stay in your actual active hobby places.

When I do go to hobby stores, I go in there with a specific purpose. The above strategy doesn’t mean that I never go to a hobby store. I often do go to hobby stores. I just try not to go through that front door unless I’ve already made up my mind what I’m going to buy. The same exact thing is true for online stores.

I don’t go to websites like Coolstuff or Pen Chalet without a specific item in mind that I want and I’m intending to actually purchase. The same exact thing is true with brick and mortar stores – I don’t go there unless I’m intending to make a purchase. I don’t click my way to online stores, nor do I walk into brick and mortar stores without a specific purchase in mind.

“But what about sales!?” What about them? Here’s the truth about a sale: if you didn’t want something before you went to that sale, then it’s not worth spending your hard-earned money on it, no matter how inexpensive that item is. An item that’s not on your radar is never worth seeking out solely to spend money on it.

I try to collect achievements and things I’ve made rather than things I’ve bought. I’ve learned that it’s a lot of fun to “collect” achievements and to make things than it is to accumulate things I’ve purchased. This moves me from a collecting mindset into one where I merely buy supplies for making new things.

For example, I love writing down notes on things I’m learning and thinking about. I’ve learned that I’m far more proud of a notebook filled with thoughts and ideas than I am of a pile of empty notebooks without anything in them, no matter how pretty they are. I like writing with fountain pens and I’m far more proud of an empty ink cartridge or ink bottle than of a full one.

I love reading books. I’m far more proud of the list of books I’ve read than I am of the pile of unread books on my shelves.

I love hiking. I’m far more proud of the list of trails I’ve walked along and the pictures I’ve taken than I am of the latest hiking gear I’ve acquired.

I love homebrewing. I’m far more proud of the list of beers I’ve made and shared with friends and family than I am of all of the equipment that I have.

I love playing board games. I’m far more proud of my list of plays than the collection of games that I have, and I’m particularly proud of the games I’ve played more than 100 times.

Center your pride and activity in your hobbies and interests around making and achieving and doing things. If you’re going to accumulate something, make it a list of things you’ve completed.

I channel my physical collecting into free or very low-cost avenues. Like most people, I have some desire to collect and acquire physical items. If I do my best to turn off that attribute with regards to buying things, that doesn’t mean I don’t have to turn it off in other regards. I look for other things to collect.

I collect pictures of myself at the far point of trails. I collect journals and notebooks full of my own writing. I collect single bottles of my homebrew, the last bottle of each batch. I collect rocks from my travels. I collect leaf rubbings from unusual trees. I collect labels of interesting beers (I actually keep a notebook of these with notes about how I liked the beer).

Those things tend to absorb a lot of the brunt of my “acquisition disorder.” Those things are either free or are extremely low cost ot acquire, so it’s not a bad thing if I acquire a lot of them.

I simply do not buy non-essential items without following the “10-second rule” and the “30-day rule.” If I’m considering buying an item that isn’t an absolute necessity or isn’t one that I’ve completely decided on in the past, I use two rules before I buy.

First, I apply the “10-second rule.” I spend 10 seconds with the item in my hand asking myself if I really need this or want this. Quite often, I find reasons to not buy the item and I put it back.

Second, I apply the “30-day rule.” If the item costs more than a few bucks, I agree to wait 30 days before buying it. I write down the item in my pocket notebook or take a picture of it and then I go on a 30-day break before buying the item. During those 30 days, the desire for almost anything I might want to buy fades away. If 30 days pass and I still really want the item, then I switch into a “buyer mode” and start looking for a good price on the item, which leads to situations where I walk into a hobby store with a specific purchase in mind.

Using these strategies together minimizes a lot of my hasty purchases. These strategies allow me to buy things that I actually want, but keeps me from making a lot of hasty choices that I’ll regret later.

Good luck!

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Five Ways to Give Yourself a Raise

If you got a huge raise at the end of the year, consider yourself lucky. A deluge of data both new and old show that annual raises have mostly fallen flat, barely keeping up with inflation in some cases.

The Society for Human Resources Management reports it plainly. Their stats show that, in 2016, most U.S. firms handed out raises equal to 3% of their employees’ salaries. For 2017, companies are planning to do much of the same. Considering the fact that the Consumer Price Index (CPI) (which serves as a measure of inflation) rose 2.1% in 2016, a 3% raise isn’t going to give a very big boost to your buying power.

So, what’s a girl or guy to do? Work hard and hope for a promotion? Yes, but in jobs with little upward mobility, moving up the ranks is a long shot at best. At worst, it’s hopeless.

Here’s what I think: Instead of waiting for your boss to give you a raise, you should take one for yourself.

No, I’m not talking about raiding the work cash register or altering your paycheck; I’m talking about figuring out a way to boost your bottom line by either a) spending less, b) earning more, or c) both.

Don’t Wait Around for a Raise

Sometimes you have to take what you want, and that’s true when it comes to securing the paycheck you deserve. If you’re tired of waiting around for more pay, it might be time to take the bull by the horns. Here are five ways to give yourself a raise without asking for permission or begging your boss.

#1: Hustle on the side.

While nobody loves the idea of doing more work on the side, finding a way to earn money in your spare time is probably the best way to give yourself a raise. If you have any type of skill or talent at all, it’s usually possible to find somebody who will pay you.

Don’t think you have any talents? Think again. If you can babysit, mow lawns, or pick up someone’s dry cleaning, it’s possible to earn extra money with a little effort and time. A few initial ideas:

  • Set up a profile on Care.com: With Care.com, you can find babysitting and housesitting jobs.
  • Walk or watch dogs with Rover.com: If you’re an animal lover with a safe place for pets to stay, it’s easy to make money watching and walking other people’s dogs while they go on vacation or travel for work.
  • Sign up for TaskRabbit: On TaskRabbit, you can connect with people willing to pay you to run errands or perform basic household tasks.
  • Drive for Uber. If you have a smartphone, a reliable vehicle, and a clean driving record, you can earn extra cash driving people around.

Obviously, there are plenty of other ways to make money during your hours away from work. The best “side hustle” for you really depends on your level of skill, how much time you can commit, and what you hope to gain.

If you’re smart in a specific academic subject, you can start tutoring kids on nights and weekends. If you have a green thumb and a knack for lawn care, pass out and hang up flyers and post free ads online until you find someone willing to pay you to lay mulch, mow their lawn, or pull weeds. The sky is the limit on how much you can earn if you’re willing to hustle on the side.

#2: Get a part-time job.

Not everyone wants the hassle or stress that comes with hustling on the side. Instead, they’re better off pursuing traditional part-time employment – the kind with stable wages and predictable hours.

A part-time job may not be your idea of fun, but it can help you earn extra cash that could change your life. Whether you’re simply tired of subsisting on your 9-5 income or you want extra money to pay down debt or save for a specific goal, a part-time job might be the temporary solution you’ve been looking for.

Part-time jobs come in all forms, but some of the easiest to get are in retail and service industries. If you want to benefit even more from your extra work, you could look for a part-time gig in a store where you spend a lot. By working at a grocery store, for example, you could earn extra money and get a 10% discount on your food bill.

#3: Spend less.

You don’t need to earn more money to give yourself a de facto raise. By spending less, you can keep more of your hard-earned dollars in your pocket. That may not sound as sexy as scoring an extra paycheck, but the impact on your wallet works the same.

There are a ton of ways to spend less and keep more of your money. The best one for you depends on what you’re willing to give up. Since food and entertainment spending are some of the biggest discretionary components of anyone’s budget, those two categories are a good place to start. By not dining out as often and choosing to have fun on the cheap, you may be able to cut your spending substantially. But you won’t know unless you try.

The best way to spend less is, unfortunately, the most painful way. To figure out a way to cut your spending, you must know where you’re at. This usually involves tracking your spending for a while, and could require using a budget – especially at first.

Once you find your biggest spending weaknesses and money leaks, you can decide what and how much to give up. Then keep those savings for yourself.

#4: Pay off debt (and quit paying interest!)

Debt is by far the biggest enemy of our paychecks. When you owe money to someone else, you must fork over a monthly payment plus interest every month. Those payments eat away at our incomes and demolish our buying power, not to mention the fact they make it harder to save.

Can you give yourself a raise by paying off debt? Absolutely. Will it happen overnight? Unfortunately, no, unless you’ve got a chunk of savings you’re willing to throw toward a particular debt. This wealth-building strategy does take time, but the payoff will be worth it.

Let’s say you’ve been carrying a credit card balance of about $5,000 at a 20% APR, paying off only about as much as you charge each month. You may not be getting any deeper in debt, but that balance is costing you $83 each month, every month, in interest.

Depending on how aggressively you pay it down, it might take a few months or a few years; but as soon as you pay it off, you’ll have $83 more to spend each month – equivalent to a $1,000 raise in take-home pay. The same idea applies to personal loans, student loans, and your car payments, too.

#5: Save money on your regular bills.

Another way to give yourself a raise is to cut down waste on your regular, essential monthly bills. This can include anything from your house payment to your utility bills, cable bill, or the bill for your phone.

We’ve written about the art of negotiating your bills before. Basically, you should take every monthly bill you have and see if there’s a way you could pay less. Call your cable television provider, for example, and ask them if there’s any way to reduce your bill. You can even threaten to cancel or leave if you want. That may or may not sway them to offer a better rate, but it’s worth a try!

Call your homeowners and car insurance provider to see if they have any discounts you can apply for. Sometimes, they’ll cut your rates if you’re willing to pay your annual bill at once instead of monthly, or if you’re willing to raise your deductible.

Some of your bigger bills can be negotiated down if you’re willing to do some work. If you’re paying a high interest rate on your mortgage, you may be able to refinance to a lower rate and potentially lower both your monthly payment and total interest due. If you’re sick of paying high interest rates on credit card bills, you could transfer your balances to a 0% card, save money, and pay down debt faster.

When it comes to regular, ongoing expenses, any bit you can shave off becomes a permanent raise you can reap the rewards of month after month.

The Bottom Line

Getting a 3% raise at work is great, but what if you want more? I say, figure out a way to cut your spending or increase your income. Heck, why not try both?

If you’re frustrated with your financial situation, something has to give. In lieu of a raise, spending less or earning more might be the solution you need. It may not be the easiest raise you’ll ever get, but it might be the most satisfying. Because, when you put in the effort to fix your finances, you get all the rewards.

Now, that’s something your employer can never take away from you.

Holly Johnson is an award-winning personal finance writer and the author of Zero Down Your Debt. Johnson shares her obsession with frugality, budgeting, and travel at ClubThrifty.com.

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Have you ever “given yourself a raise” before? Did you do it through earning more or spending less?

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Tuesday, February 14, 2017

How to Become ‘The Millionaire Next Door’

The Millionaire Next DoorOne of the most influential books I’ve ever read in terms of shaping my thoughts on personal finance and helping me figure out what to do. This is one of a few books I read at my financial low point, along with Your Money or Your Life and The Total Money Makeover, that really helped me figure out a new direction with my money and my overall life.

So, what exactly is The Millionaire Next Door about? I like the summary I wrote in my detailed overview of the book from a few years back:

The Millionaire Next Door is a book written by Thomas Stanley and William Danko in which the authors did an extensive study of true millionaires in the United States – people with a verifiable net worth of $1 million or more – and used the results of that study to draw some general conclusions on what it truly takes to build financial success.

And what were those general conclusions? Here’s how I summarize them:

First, people who accumulate wealth are usually quite frugal and rarely flaunt their wealth; people who flaunt their wealth rarely have much in the bank. For the most part, people with actual money in the bank are frugal people; people who aren’t frugal are usually scraping bottom.

Second, one of the best ways to accumulate significant wealth is through self-employment and entrepreneurship. In many ways, The Millionaire Next Door was a big initiator of my career shift into self-employment. It really made me think seriously about how I could start working for myself and enjoy a lot of personal flexibility along the way.

Finally, financial success comes not just from money management, but from how you live your life as a whole. Your relationship with your wife and children is vital. Your relationship with friends and coworkers is also vital. Your ability to set personal goals is also vital. The car you drive, the neighborhood you live in … the list goes on and on. All of these things (and many other elements of life) are intimately connected to your ability to accumulate wealth.

Those are really valuable conclusions that line up well with my own experiences over the last decade, in which I’ve changed careers and completely rebooted many aspects of my life.

The question, though, isn’t whether those conclusions happen to line up with someone’s life, but how exactly can you put those ideas into action in your life.

In other words, what action steps can you start taking today to become a “millionaire next door”?

The rest of this article focuses on specific actions you can take on today and new habits you can start working on right now in order to get your life in line to become a prodigious accumulator of wealth as laid out in that book.

Be Frugal

Let’s be clear here: frugal does not mean being an ultra-cheapskate. Instead, the word points you to three distinct behaviors.

First, don’t spend your money on things that don’t provide lasting value to you. If something doesn’t provide lasting value to you, don’t spend more than the minimum on it. For example, most meals are completely ordinary and forgettable, so spend the minimum on those meals. Splurge on occasional meals that are meant to be memorable ones. In other words, eat very simple home-prepared meals most of the time and when you do choose to go out for a special occasion, go out somewhere genuinely nice and memorable.

Second, when you decide to buy something, focus on reliability and ease of use. If you’re buying something you’re going to frequently use, spend the time to do homework on that item and find the version of it that’s going to last for a very long time and not need regular replacement. Find the version that meets your needs – extra bells and whistles rarely meet your needs, so disregard them (I actually view lots of extra features as a drawback as they usually mean extra points of failure that I don’t need).

Finally, don’t spend money just because you have it. These strategies don’t go flying out the window just because there happens to be cash in your checking account. Put that money aside for retirement or for other big life goals or for big expenses you know are coming down the road, like a car replacement. This goes back to not spending your money on things that don’t provide lasting value.

Don’t Flaunt Your Wealth

This is actually just a simple way of stating a number of different principles.

For starters, stop worrying about what other people think. The honest truth is that other people don’t think about you nearly as much as you think that they do; this is called the “spotlight effect.” Often, when you are considered, it’s your character or personal habits or skills that are thought about, not the stuff that you own or the way you present yourself. Present yourself in a simple, clean way. Don’t buy anything to impress others.

Similarly, people who flaunt wealth often become a target. Expensive cars often get targeted by thieves. People wearing expensive clothes or jewelry get targeted by robberies. Scammers will target you, too. The people you want to impress with flaunting wealth often don’t notice; the people who you don’t want to attract end up noticing you.

Finally, money spent on flaunting wealth or trying to impress others rarely means anything for you. In the end, it’s you that’s alone in bed at night (or next to your partner). It’s you that’s the only person in your own heart and your own mind. Stuff spent impressing others doesn’t do anything at all to help the quality of your day to day life or the security and happiness and depth of your own thoughts and internal life. In other words, flaunting your wealth brings virtually no lasting joy and generally only brings problems.

Look for Routes to Self-Employment and Entrepreneurship

Most people who end up becoming wealthy pillars of the community often find that route through entrepreneurship and self-employment. They don’t burn the best years of their life making money for others. They seek out ways to make that profit for themselves. Here are three strategies to follow that path.

First, be a lifelong learner. You should make time each and every day to learn something new and truly challenge your mind. It doesn’t necessarily have to be pointing toward your next career step, as part of the advantage of lifelong learning is ensuring that your ability to learn remains razor sharp and that you’re adding to your overall body of knowledge and skills. This should be daily practice.

Second, start some side gigs and see what takes root.. Start a side business that seems interesting, whatever that might be. Everyone’s interests are different. Just make sure that you can identify a path to profitability, and don’t worry about investing a lot of hours in it initially. The best side gigs, in my experience, involve investing a lot of up-front time with little return, but little up-front cost, too. Look for things where you enjoy that up-front time.

Finally, get your financial foundation as strong as possible so you can make the leap sooner rather than later. Make good basic financial moves. Spend less than you earn. Pay down your debts. Save for retirement. Use that surplus you have from living frugally to build a strong financial platform that gives you the freedom to make bold choices with your side gigs and independent professional life.

Build Strong Family Relationships

Many “millionaires next door” rely on strong family bonds to help them in challenging times and to provide constant support and nurturing. Here are some strategies for building that in your own life.

Put aside regular focused time for your family with minimal distractions. If you’re married and especially if you have children, block off uninterruptible times on your calendar to spend with those core people. Turn off distractions (like your cell phone) and focus on those people in the moment. If you’re single, call some of the relatives that you care about and focus on that conversation. Pay lots of visits, too.

Listen to them and participate in what they care about. If you’re not sure what to do, ask questions and listen to the answers. See what you can learn about the person you’re talking with. Don’t just think of the next thing to say about yourself. Even better, if you get a chance, participate in something they care about. Play your son’s favorite computer game, even if he thrashes you at it. Ask your daughter for a tae kwon do lesson. Go to bingo night with your grandma.

Take responsibility when you make a mistake. You’re not perfect. You’re going to mess up. Maybe you’re angry at some time when you shouldn’t be. Don’t blame others. Admit when you messed up and admit it to the people who you hurt with your mistakes. Point to your own failings and don’t throw blame at others. Blaming others is the easy, lazy route. Then, strive to take action to fix that part of you that caused the mistake.

Build Strong Professional Relationships

Much as with families, a strong career is built on the back of good relationships. Strong professional connections can help you even when you switch to self-employment and can help you move back to your older career if new initiatives don’t work out.

Cultivate real connections and give help when you can multiply value. Take the opportunity to meet lots of people in your field, but make those connections real. Don’t just collect business cards. Follow up. Write down social media and other methods of contact along with a good reason to follow up. Then, pay attention to what they’re saying. Touch base regularly. When you see an opportunity to help, do so, especially when it’s as easy as connecting two people together or helping to connect someone to a resource they need. When you help other people increase their value, you become more valuable.

Take responsibility when you make a mistake. Much as with family situations, take responsibility when you mess up. Don’t blame others when you make a mistake. Don’t look for excuses. Step up, admit that you screwed up, and point solely at yourself. Beyond that, come up with a plan to improve yourself so that you don’t repeat the mistake.

Give lots of credit to everyone else for successes. On the other hand, when you’re successful, spread the credit around. When you give a presentation, take plenty of time to give credit to everyone who helped you and helped the project. When talking to supervisors, give positive credit to everyone who is a positive help in the workplace. Giving credit where it’s due never hurts you; it only helps you as it shows that you’re a team-oriented leader.

Build Strong Community Standing and Social Relationships

Another part of becoming “the millionaire next door” comes from building strong community ties and social relationships to boot. Again, these are relationships that support you when you’re down and boost you and bring comfort when times are good.

Take active steps to be involved in community groups. Don’t just sit at home thinking about how you’d like to be more involved. Turn off the television and get more involved. Look for civic groups to join; you can find many of them via your city’s website. Look for other community groups to be involved in via Meetup. Check out the offerings at the local library, too. Get involved in local politics if that’s your jam; check out town meetings and school board meetings and city council meetings. Get involved in a religious organization, too. Get yourself out there.

Step up to leadership roles. When there’s an opportunity to participate in a group that resonates with you, do it. When there’s an opportunity to lead, swallow your fears and do that, too. There is no better opportunity to build tons of great community relationships than when you step up to leadership in a community group.

Give without expectation of receiving. Civic organizations are the best place in the world to give of yourself without expectation of receiving, because you rarely get direct rewards for doing so. There are many rewards, of course, but they’re all indirect and they build slowly over time. So, when you dive in, expect to give without receiving anything in return and do it with your whole heart. Good things will return to you, often in ways you don’t expect.

Identify and Set Goals for Yourself

Another aspect of becoming the “millionaire next door” is in setting and achieving personal and professional goals of all kinds. It’s all about thinking of the future, deciding what you want, concocting a plan to get there, and then putting that plan into action.

Paint a picture of the life you (realistically) want for yourself in a year, five years, and ten years. What do you want for your life a year from now? Five years from now? Paint detailed pictures of those scenarios in your mind. Keep it realistic, but optimistic, especially in terms of achieving things that you control. Don’t rely on what others control.

Pull tangible goals out of those pictures. Figure out what you want most from those pictures, then identify specific clear goals that will bring you from where you are now to where you want to be. For example, if you picture yourself thinner, you may want to define a weight loss goal. If you picture yourself with a happier career, you may want to plot a goal of a different career or self-employment.

Identify and execute daily steps to achieve those goals. You should have a few big goals in mind. Now, what are you going to do today to make those goals happen? Ask yourself that question seriously each morning. Perhaps your weight loss goal is achieved by choosing a reasonable calorie target and counting calories. Maybe you are striving to change careers, so each day might involve self-directed learning and writing business plans.

Make Smart Choices for Your Biggest Purchases

A final but extremely important point that the book makes about the patterns of “millionaires next door” is that they’re careful and smart about their biggest purchases. This goes beyond just doing one’s homework about a purchase and also looks at the broader impact in one’s life. Here are three strategies to maximize that value.

Choose a modest place to live that’s close to a low-cost grocer. Don’t live in an overly large home, as they tend to have high utilities, high maintenance costs, high property taxes, and often involve expensive association fees. Instead, choose a modest home and instead consider location. Is it near a place where you can get inexpensive groceries? Can you easily access mass transit? Both will save you even more money by cutting down on grocery and transportation costs, and both will save you a lot of time as well.

Focus on buying late model used reliable cars and drive them until serious problems arise. The best “bang for the buck” when it comes to a car is to buy a late model used car (meaning one from a model year between two and five years earlier than the current year) from a reliable manufacturer (Honda and Toyota are two prime examples) and then driving it until it begins to show real problems, then replacing it. This strategy also centers around following the maintenance schedule to the letter to maximize the lifespan of the car. These steps will reduce the initial car acquisition cost and spread out the time between car purchases, enabling you to get the most value for your auto dollar.

Encourage getting a modest education and focus on maximizing value from it. The most cost effective way to invest in yourself and in your children is to get a reasonably priced education and then use that educational opportunity to squeeze out as much value as possible. Don’t shoot for a $50,000 a year college; instead, go to a much more modest school and use every second there as an opportunity to build lifelong relationships and jam in as many experiences and as much knowledge as possible.

Final Thoughts

If you use these principles and strategies as the bedrock of your life, then you’re going a long way toward building yourself into the exact kind of person described in The Millionaire Next Door.

These strategies aren’t a ticket to wealth. Instead, what they do is build your life into a large reservoir into which many great things can flow and be saved. Relationships. Opportunities. Professional income. Ideas. Investment returns.

Build that reservoir. Keep with it and make it strong. Give it time to fill. That’s the recipe for success.

The post How to Become ‘The Millionaire Next Door’ appeared first on The Simple Dollar.

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How Late Can I Make a Payment Before It Shows Up on My Credit Report?

One of the more commonly misunderstood and misreported aspects of credit reporting is exactly when a late payment will show up on your credit report. And, taking it one step further, when a late payment will potentially harm your credit scores.

Safe to say, it’s complicated — because of the voluntary nature of the credit reporting environment.

First, there is nothing in the Fair Credit Reporting Act that requires any lender or credit card issuer to report anything about your accounts to any of the credit bureaus. They instead report information to the credit bureaus voluntarily. That’s why you’ll see examples from time to time when your accounts either don’t appear on one of your credit reports or don’t appear on all three of your credit reports.

When it comes to late payments, however, there is a little more structure. If a lender chooses to report your late payments to the credit bureaus, they cannot do so until you are a full 30 days past the due date. In fact, there is no systemic method to report an account as being one to 29 days past due.

Because the entire reporting system is voluntary, there are many scenarios where lenders choose to not report late payments until you’re several months past due. I often see credit reports that show a long chronology of on-time payments, and then all of a sudden a record of being 90 days late, or more.

This is often misinterpreted as incorrect credit reporting — because you can’t be on time one month and then be 60, 90, 120, or more days past due the next month. But what you have there is an example of a lender cutting the borrower some slack and choosing not to report the ascending level of late payments until it hits a level where the account is several months delinquent.

What About My Credit Score?

You may have read or heard people make claims like, “one late payment cannot harm your credit scores,” or “you have to be two payments late before your scores take a hit.” Both statements are factually inaccurate.

One late payment can absolutely harm your credit scores, and considerably — if the lender chooses to report the late payment. What is true, however, is that a late payment won’t show up until you’re 30 days late or more.

When it comes to late payments, the format used by the credit reporting agencies looks like this:

  • 30-59 days late
  • 60-89 days late
  • 90-119 days late
  • 120-149 days late
  • 150-179 days late
  • 180+ days late

What’s missing from those reporting options? What’s missing is anything that allows for the reporting of a late payment that’s between one and 29 days past due. It simply doesn’t exist. And that’s the real reason being a couple of weeks late won’t harm your credit scores — because it cannot show up on your credit reports.

Keep in mind, however, that the 30-day grace period you enjoy as it pertains to credit reporting only applies to credit reports. If you’re one day late, then your lender considers you late, period. And when you’re late, you normally have to pay a late fee and, when it comes to credit cards, interest on the unpaid balance.

Of course you won’t have to worry about late fees, additional interest charges, or the intricacies of credit reporting practices if you simply get in the habit of making all of your payments on time, every time.

Related Articles: 

John Ulzheimer is an expert on credit reporting, credit scoring, and identity theft. He has written four books on the topic and has been interviewed and quoted thousands of times over the past 10 years. With time spent at Equifax and FICO, Ulzheimer is the only credit expert who actually comes from the credit industry. He has been an expert witness in over 230 credit related lawsuits and has been qualified to testify in both federal and state courts on the topic of consumer credit.

The post How Late Can I Make a Payment Before It Shows Up on My Credit Report? appeared first on The Simple Dollar.

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