An old friend of the family sent me DM asking for broad financial advice based on a few Facebook posts, and so I thought I’d ramble a longer version of what I sent him here, in descending priority order.

At the top is stuff I think is pretty cut and dried and obvious (but hard to do.) As you get towards the middle, you are reaching things that work for me, but that might not work well for people not in my circumstances. At the very bottom are some things that work for me, but probably only work for me, because I’m just a weirdo. Finally, a few notes on where I’m coming from with my perspective.

First a disclaimer, I’m basically assuming you are middle class here. I don’t know first hand what problems are faced by the top 1%. I do know first hand what problems are faced by the bottom 20%, but I don’t really have anything to say about that life. Maybe you can salvage some of it, but probably not.

This whole thing assumes you have an income somewhere between $25k (approx 20th percentile) and $400k (approx the 99th percentile). Higher or lower than that, and I either don’t really know your world, or don’t feel comfortable commenting on it.

Obvious and for everyone

  1. Cancel your credit cards

    This one’s obvious. 15,20,25% interest is not a good deal, and all those points and rewards are just bait. You are not superhuman, you are the same as everyone else, and the same tricks work on you. They work on me, too. So, just cancel them.

    Want to keep one, because the rewards are just so great? Fine, keep one, but call them and tell them “Reduce my credit limit to XXX”, where XXX is an amount you could pay off with the disposable income of one paycheck. For me, that’s around $500. So I have 1 credit card with a $500 credit limit, so that I can get the Amazon rewards. They gave me a $10k limit, and after running up that balance twice in my lifetime, I called them and said “No, $500.” Every now and then they send me a happy, congratulations letters increasing it to $5k, and I call them and say “No, $500.”

    BTW: My wife and I make pretty good money. If your answer for a total credit card credit limit is more than $1k, you had better be a brain surgeon married to a lawyer.

  2. Save a set amount of each check in a savings account

    Pick a number, setup your bank to auto deduct it. In a few months, go increase that number by 5%. Do that until forever or you die. When Murphy comes to visit, pull the money out. Congratulations, you just reduced your financial stress by 95%.

  3. Roth is better than a normal 401k

    If your work offers a Roth option, use Roth. Roth is better unless you are very close to retirement. There is no tax situation where “grow tax free” works worse than “no taxes now.” Also, if you need to withdraw early, the penalities on a Roth are lower.

    If your work doesn’t offer a Roth, do what you can to meet the match, and put everything else in a Roth through another bank.

    Whatever you are saving for retirement, same as 2, go in every few months and increase it slightly until you are at 15%.

Your Mileage May Vary

  1. Use an Escrow Account

    I have two checking accounts (plus my savings) and a spreadsheet. One account is called “Pocket Money” and the other is called “Escrow.”

    On the spreadsheet I have added together every foreseen expense for the next year, such as:

    • Mortgage
    • Christmas and birthday presents
    • Car insurance
    • Annual train pass
    • Car registration
    • The total I paid for all my utilities all year last year
    • Phone bill
    • Prescription drug costs

    I take that number, divide by my number of paychecks each year, and setup an auto transfer rule at my bank that moves that amount into Escrow every paycheck.

    That leaves pocket money as, well, pocket money. I already saved (see 2), I set aside money for every bill I know about (that’s 4), so whatever is left is for whatever feels good at the moment. Pocket money is for:

    • Food
    • Entertainment
    • Clothes
    • Gasoline
    • Whatever else we feel like spending money on

    In other words, every budget I ever had broke down because it was hard to predict things like clothes or food or entertainment. So I take everything predictable, make sure I have that coverered, and play the rest by ear. I’ve used this one for 5 years now and it works.

    But take note, this doesn’t work if you kept those credit cards!

  2. Minimize your payments and Never pay the minimum

    I make more money than anyone else I know except my doctor cousin and a few higher ups at work. I also live in the cheapest house of anyone I know and I drive a used paid for car. I could almost afford to pay my set minimum bills on minimum wage.

    Taking on a big mortgage, or a big car payment, or a 12 month good-as-cash financing deal is prespending all your money before you have it. Every payment is a straight-jacket you put on your future self, and here’s the thing:

    There are two future yous. One is having good luck, the other is having bad luck. The one with good luck doesn’t need your help, and the one having bad luck does not appreciate being put in a straight jacket by younger, rosey, optimistic you.

    Because I have a cheap house, because I drive a used car, I pay extra on my mortgage every month. I save almost half my monthly income every month (either in retirement or in savings accounts.) I eat out a lot (probably more than I should, but that’s true of most of us I think.) I’m not worried about what happens if I lose my job because of the coronavirus.

    Here’s the lesson: having disposable income, having a funded savings account, having a growing net worth, is way less stressful and way more fun than having those extra 600 square feet in your house, or having upper middle class neighbors, or having a late model car.

    You might be thinking “But you said it yourself, you make good money, but you aren’t scared. You aren’t scared because you make good money.” You have a point, but at the same time, I said at the top of this, I don’t really have advice for people living on $15k or $20k. And if you make more than that $20k, there are people poorer than you. You could be one of those people. If you were one of those people, you would have to get by on their income.

    You are not special. You could become one of those people making $15k tomorrow. If you did, your tomorrow self will be grateful if you lived a little more like that person today, and gave him a little money in a savings account to ease the transition.

    I don’t know what that looks like for you. For us, it looks like living a $50k/year lifestyle while making $160k/year. For you, it might be living a $40k/year lifestyle on a $50k/year income. Or just a living a $29k/year lifestyle on a $30k/year income.

    Here’s the thing I learned being outside of America for 6 years. America is an awesome place, but we have one very bad trait: we are really, really, really good at making everybody feel like the bare minimum to which everyone is entitled is about 10% more than they can afford. And then giving them financing at interest to fill the gap. And that is a recipe for misery. It’s true with a $30k income, with a $75k income, with a $100k income, with a $150k income. I’m sure there is a magic line where you say “My greed is sated. I have enough!” But I haven’t reached it yet. I had a nagging voice in my ear at $18k saying “You deserve better”, I had it at 30k, I had it at 60k. I have it at $160k.

    That voice is a liar!

    You are better off with no TV, sitting in your house reading a book with $1,000 in a savings account, than having a TV and being wretched because you don’t know how to pay the next electric bill. By better off, I mean happier, right then, in that moment. This is not a discipline, hard-ass, pull yourselves up by your bootstraps and bear the pain thing. This is a “For God’s sake, try just being happy for once! You might like it!”

    Bored beats scared for your family every day of the week, and bored doesn’t charge interest.

Probably Just Because I’m a Nerd

  1. Track your net worth…and a few other things

    Okay, this is probably just because sitting down with my spreadsheet once a month is fun for me, but it helps me alot. I keep a suite of about half a dozen “financial health” metrics, and I don’t think I’m doing well unless all of them are better than the previous month. They are:

    • Net worth
    • Net worth ignoring house appreciation
    • Downside net worth
    • Liquid Assets
    • Highly Liquid Assets
    • Debt to Assets Ratio

The first two are obvious.

“Downside networth” is “all your debts stay the same, but all investments (including your home) lose 50% of their value.” This is the “net worth bullshit detector.” If net worth goes up, but this goes down, that means “You got excited about unrealized gains in a risky asset and took out debt because you thought you actually had more money.” If this number is negative (mine was when I first started calculating it) then the only difference between you and a person in bankruptcy court is one very unlucky day. Now, just because this number goes down doesn’t automatically mean you did something wrong, it means you did something risky. Like buy a house. Barring a major life event like that, this should go up every month. It should not go negative! If a 2008 style downturn would thrust you into bankrupcy court if you buy that house, then you can’t afford that house.

“Liquid assets”: That’s all your cash, CDs, checking account, savings account, escrow account, precious metals, stocks and bonds (including in retirement). If this is less than your annual pay, and you are over 30, go to DEFCON 1. By 65, you want this to be 25x your annual pay, but if it’s ever less than your annual salary, you are in emergency mode. You are one bad day away from a crisis. This is the number that re-assures you “if money can solve it, I can solve it.”

“Highly Liquid assets”: The same, except excluding retirement accounts. If this is less than 1 month’s pay, DEFCON 1, lock-down, you are in emergency terroritory. You want it to be 3-6 months ideally, but less than 1 month means you are, at best, a bad day away from raiding your retirement savings, and at worst a bad day away from a crisis.

“Debt to Assets Ratio”: All debts divided by all assets. If its over 0.4, prioritize paying down debts. If it’s under 0.4, you can relax on debts (if you want) and prioritize saving.

These numbers are all in tension with each other. Specifically, “downside networth” and “debt to assets ratio” are kill joys designed to stop you from making the mistake of thinking that unrealized stock market, housing, and bond gains excuse running up debts. Most profitable assets can lose half their value in a day. Getting debts to go down (without paying them) is painful and involves submitting your financial life to the scrutiny of a judge for years. Net worth pretends that a dollar of unrealized 401k gains and a dollar on a credit card cancel each other out. Downside networth corrects for that illusion.

Where Did All This Come From

Some of it is Dave Ramsey, but most of it is living in China. I lived in China 4 years, and I discovered a paradox: I was wealthy! I felt wealthy! I ate out all the time, I stayed in expensive hotels!

Also, I made $400 a month! I didn’t have a car, I rode a bicycle. I had air conditioning in only one room, no TV, a horrible computer, no video game console, no cell phone, and finding clothes that fit was a chore beyond belief. If I wanted hot water for my shower, I had to turn the water heater on an hour in advance, and turn it off against afterwards. By every objective measure I was poorer, but my subjective experience was, I was wealthy.

There were no advertisements (that I could understand or which were aimed at me). I was an outsider living among outsiders, so there was no “Jones” to keep up with. There was a rat race, but I wasn’t in it. I was looking on, bemused, and occasionally apologizing for my hideuous Mandarin skills.

There was no possibility of getting a credit card, of taking out a car loan, of a “12 month no interest payment plan” on a bicycle. I could buy furniture, but what was the point, I would move in a few years anyway. So I kept the uncomfortable stuff in the furnished apartment and just dealth with it.

I moved to China, took an objective pay cut from my minimum wage job, moved down ten rungs in lifestyle, and within 3 months felt the richest I had ever felt in my life. The solution to the paradox was two-fold. The feeling of being “wealthy” is really only two things:

1) Comparing yourself to others and finding you are ahead

2) Not spending future me’s money

And then a third:

3) If you can knock out 2, then you will cease to be impressed by all the stressed, miserable, “my life is a trap I can’t escape” people driving leased cars and living in $250k houses.

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15 April 2020