How to Forget the Joneses and Embrace Frugality Instead

Embrace Frugality

Have you been quick to dismiss frugality? If you’ve found yourself trying to keep up with the Joneses, it’s easy to think frugality restricts us. We’re conditioned to spend our money on the newest things to hit the market in order to appear “cool.”

(Apple Watch, we’re looking at you.)

We don’t think twice about how it affects our financial future because we’re so focused on the present.

Unfortunately, that often ends in a story of debt, living paycheck to paycheck, or not having enough saved up for retirement. That’s where forgetting about keeping up with the Joneses and embracing frugality instead comes into play.

Put the Focus Back on You

Chances are, your friends are so absorbed in their own lives, they’re not taking the time out of their day to think about how your bank account is doing. They’re not checking in with you to see if you’re maxing out your 401(k). After all, do you?

You’ve probably heard it before, but no one will care about your money — meaning, money in the bank, in your retirement accounts, and what you have invested for your future — as much as you do. In most cases, trying to keep up with your family, friends, and colleagues isn’t going to lead you in the right direction when it comes to being financially responsible.

The first step in fighting the need to keep up with anyone else’s spending is to simply put the focus back on you and your financial situation. Stop caring about what others are doing, and create a list of priorities and goals for yourself.

Your Financial Future Does Matter, Even Now

It’s easy to live in the moment and give into impulse purchases, or to think, “oh well, I get paid next week.” But that’s the wrong way of thinking about things.

You need to start considering how your larger purchases fit into your financial plan. (And if you don’t have a financial plan, now is the time to make one!) This is where that list of priorities and goals factors in. Will buying a $3,000 TV cost you down the road? Does that eventually translate into working for an extra year and delaying retirement?

Start thinking about how your purchases affect your finances, both in the present and the future.

Frugality Probably Doesn’t Mean What You Think It Does

Frugality is a mindset, and it simply means being financially responsible. It’s not about cutting back all the time, or going crazy clipping coupons (unless, of course, that makes you truly happy and fulfilled). It’s about focusing on what’s important to you and spending intentionally on those things. In that way, frugality allows you to live the life you want to live.

Notice there’s nothing in there that says to deprive yourself. Being a tightwad isn’t the same thing as being miserly. You can absolutely spend your money, but the key is doing it in a way that makes you happy.

Think about where the majority of your money goes. Do you spend on things that make you happy? Or are you spending on things because that’s what’s “socially acceptable?”

For example, do you have a cable subscription so you can keep up with the shows everyone in the office loves to talk about, but don’t actually enjoy watching them? Do you get your hair and nails done every other week to look a certain way, even though you’re perfectly happy doing without? Did you lease a $300 per month vehicle because that’s what everyone in your family does?

Start thinking for yourself and stop following the herd.

Are You Being Wasteful?

Sadly, sometimes keeping up with the Joneses results in a lot of waste. Look around your house. Are there any items you bought just because everyone else did that are now collecting dust?

The fact is, fads change, and they change quite often. Buying into them only creates waste, especially when you’re buying things for extrinsic reasons. If things don’t actually matter to you, or they aren’t valuable in your eyes, then don’t buy them.

Purchasing new things constantly pulls you into a cycle of waste (and sometimes, debt). There will never not be a time where nothing new is being promoted in the media. You need to pull yourself away from the allure and go back to that list of priorities and goals.

Ask yourself if the item you’re considering buying will actually be useful to you. If you don’t think you’ll use it more than once, or will lose interest after a month, hold off on the purchase. There’s no point in bringing more stuff into your house that will just become clutter in a matter of months. That’s the definition of throwing money down the drain.

Embrace Frugality

It’s time to embrace frugality and forget about keeping up with the Joneses — or anyone else, for that matter. It’s time to make a choice: a secure financial future, or a future where your financial freedom is uncertain?

There are far too many individuals stuck in the second situation, being forced to work a few extra years (or never being able to retire), simply because they weren’t financially responsible years ago. Don’t let that be you.

It comes down to this: embracing frugality and intentional and meaningful spending will give you wealth, and keeping up with the Joneses won’t. It’s an easy choice, but a difficult battle. One worth fighting to win.

Why (and How) You Need to Plan for the Cost of College

College

The Money-Guy show is back this week and Brian and Bo are talking about the importance of figuring out how to pay for college.

In light of a recent New York Times Op-Ed piece written by Lee Siegel, Why I Defaulted On My Student Loans, Brian and Bo wanted to offer more helpful and proactive advice to parents and students out there contemplating the cost of college.

Fidelity published a great article around the same time, titled How Much College Can You Afford? The Money-Guys take a look at both sides of the coin in this episode and suggest how you can plan for the cost of college (so that you don’t need to worry about defaulting on loans).

How Planning Ahead Can Prevent Dire Situations

After reviewing Lee Siegel’s story, Brian and Bo discuss how proper planning, including calculating how much student loan debt you could reasonably afford to take on, can help avoid those kinds of financial situations.

Another article, Student Loans and Defaults: The Facts, was published after Siegel’s piece ran and took a deeper look at the details. This piece reveals that Siegel graduated from Columbia University with a bachelor’s degree and two master’s degrees. Obviously, that must have cost a pretty penny! Considering Siegel wanted to be a writer, were three degrees even necessary?

The typical writer’s salary isn’t going to cut it when paying back loans for three degrees from an Ivy League school. Siegel attempted to blame the broken student loan system for his predicament, but there’s an element of personal responsibility to consider here, too.

Don’t let this happen to you or your kids. There’s no reason to consider defaulting on your student loans and ruining your credit score because you didn’t plan ahead properly.

How to Plan Ahead for College Expenses

How can you plan ahead for college, especially if you’re a parent whose kids aren’t sure what they want to do or where they want to go? Fidelity’s article has some great insights.

First, you need to consider salary projections. If your child knows what they want to major in, they can use this handy calculator from finaid.org to figure out how much debt they can truly afford. The average starting salary for a particular field is taken into consideration, and this provides you with a reasonable estimate of how much student loan debt your child will be able to handle based on that salary. Student loan debt shouldn’t exceed more than 10% – 15% of your income.

Second, create a realistic budget. Figure all the possible costs associated with college — not just tuition. Include post-graduate education if it’s required for the field your child wants to study.

Third, encourage your child to help pay for their education. According to Fidelity’s article, more and more parents are choosing this route as they plan for college alongside their retirement. (After all, there are no loans for retirement!) Students can work part-time during college, live at home and commute, go to a public university (instead of a private college), or set aside savings.

There’s no excuse for not planning ahead. You don’t have to end up in a situation where you think your only option is to default on your loans. Defaulting has serious consequences that Siegel downplayed in his article.

When you sign your promissory note, you’re making a promise to repay your loans. Be responsible about your choices and fulfill that promise.

How to Build and Manage an Emergency Fund

Cash

Imagine this: you’re driving your only vehicle to get to work, and suddenly one of your tires blows out. While inconvenient, you know you can replace one tire. You take your car to the shop, only to learn you need to replace all the tires. (Oh, and you should probably get your brakes done, too.)

Do you have enough cash set aside for small emergencies like this? Or would you put the cost of repairs on your credit card and struggle to pay off the balance before the end of the month?

This particular example may not resonate with you — but the details aren’t as important as the fact that you need to be covered for unexpected expenses like this. You need to know how to build and manage an emergency fund.

What an Emergency Fund Is — and Isn’t

An emergency fund (or emergency savings, or your rainy day fund) consists of cash you put aside you have to cover unplanned expenses and financial emergencies. You can use it to cover something like a flooded basement or to sustain you through a period of unemployment.

Emergency funds are not backup savings to be spent whenever you’ve exhausted your regular budget.

Setting up an emergency fund is imperative, because it’s designed to keep you functioning when an actual emergency strikes. No one wants to deal with that flooded basement, but it’s even more stressful if you’re worried about how you’re going to pay to clean up the mess.

An emergency fund is peace of mind so that you know you can cover the bills, go to work, and take care of your financial obligations without borrowing money or putting expenses on a line of credit.

How Much to Keep in Your Emergency Fund

Don’t let the idea of an emergency fund make you feel overwhelmed. Everyone needs one and anyone can start taking action (even just baby steps) to build a cash cushion.

When creating an emergency fund from scratch, consider how much money you would need if you lost your income temporarily. Your goal should be to save at least one month’s worth of your net pay (which would cover expenses for a month or possibly more if you’re living within or below your means).

If this seems like an impossible sum, remember you can save money in chunks. Start with a small amount and consistently add to your savings each week. Even $10 every Friday adds up over time — and it’s better to have something rather than nothing.

Once you’ve hit your goal of saving up one month’s worth of net pay, set a new goal. Increase your savings goal to 3 to 6 months’ worth of net pay. This will ensure you’re covered if you do happen to run into a major financial emergency, like an unexpected job loss.

Where to Keep Your Emergency Fund

Once you’ve saved up your cash, you need to know where to put it. While you don’t want to use the fund anytime soon, it is important to make sure you have quick access to your money if you need.

When thinking about where to keep your savings, keep in mind three key factors:

  • Liquidity
  • Accessability
  • Low risk

The best places to keep your savings include cash, savings accounts, money market accounts, and high yield savings accounts. All four of these options are liquid, accessible, and low risk. If you have any specific questions, your financial professional can help direct you to the best location for your savings.

It’s not fun to think about what can go wrong, but it’s financially wise to plan for the worst (while expecting the best). Although you may not know exactly what an emergency in your future might look like, you can prepare right now by building an emergency fund. Doing so will help you make financial disasters and unexpected circumstances a little less stressful if they do crop up.

12 Mistakes to Avoid Making With Your IRA

Mistakes to Avoid with IRA

Individual Retirement Accounts (IRAs) are critical in securing financial independence in retirement. Because of this, Brian and Bo took the opportunity to discuss what mistakes they see clients make — and how you can avoid them. This episode was inspired by an article published by Morningstar back in February called 20 IRA Mistakes to Avoid.

These mistakes are also applicable to other retirement plans as well! If you’re contributing to a 401(k) or 403(b), you’ll want to listen in and understand the 12 mistakes the Money Guys say you must avoid making.

Here’s a quick rundown of the errors Brian and Bo cover in this podcast:

Procrastinating on Making Contributions

The Morningstar article cites the fact that if you’re investing later rather than sooner, you could be losing out on growth thanks to compound interest.

Many people also think they can take their time if they’re getting an extension on their taxes. That doesn’t apply to traditional and Roth IRAs — those contributions need to be in by April 15th.

Not Understanding Tax Bracket Implications

Do you understand the retirement account options you have and the impact each can have on your taxable income? Brian and Bo explain when you should invest in a Roth IRA over a traditional IRA, and which retirement vehicles you should prioritize.

Not Understanding Roth Conversions

If you’re looking to retire early, you’ll be able to plan your tax strategy in advance. Once you retire, you don’t have any earned income, and converting to a Roth IRA might prove to be a good decision as there are no required minimum distributions.

Being Retirement Rich and Liquidity Poor

Having a 7-figure portfolio and nothing in reserves won’t do you any good in the present should something go wrong. Plus, if you retire early and can’t start withdrawing until you’re 59 ½ years old, you’ll need money to tide you over.

Ignoring Spousal Contributions

If you or your spouse work while the other doesn’t, you can still take advantage of spousal contributions. The non-working spouse can use the other spouse’s earned income to make contributions for themselves.

Buying an Annuity

Purchasing an annuity within a retirement plan is usually a bad idea as you’re doubling up on tax shelters. Make sure buying an annuity actually makes sense for your situation.

Treating Your IRA as a Piggy Bank

Say you do leave your job – that technically means you have a distributable event. That doesn’t mean you should make the most of it and buy a new pool or TV. Ignore the temptation to withdraw funds and roll your money over.

Not Updating Beneficiary Designations

Have you divorced or remarried? Then you should update your beneficiary designations – you wouldn’t want your ex-spouse inheriting your money, would you?

Want to grab more tips and understand the mistakes you need to avoid with your IRA? Be sure to tune in to this episode of The Money Guy Show for advice on how to better manage your IRA!