I’m with you. I have no idea what in the hell this blog title actually means. But it’s exactly what I’m talking about. If you don’t push the limits on your budget allocation towards housing, then you will have the freedom to have more interesting life experiences.
Want to experience life? Then you need to get out of your house. Want to get out of your house? Then make sure that your house isn’t holding you as a financial prisoner.
Paging Dr. Hypothetical. Dr Hypothetical, you have a call on line 1:
Let’s say that your household income is $75,000. After taxes, healthcare, and other paycheck deductions, you bring in about $4300 per month. Pete the Planner’s ideal household budget tells you that you can spend up to 25% of your net income on housing. And in this example that would equal a maximum housing expense of $1075. What most of us do (and yes, me included) is try to spend as much on housing as we can up to the point of restless nights. Not only does this manufacture undue stress, but it precludes us from spending money on other things. This is true whether you are buying or renting.
What would happen if you only allocated $750 per month to housing? That’s 17% of your net income. What would be different? A great deal would be different. And this is because many of us spend MORE than 25% on housing. We spend 30-40% of our net income on housing. This is not only dangerous, but restricts you from living life. For example 35% of a $75,000 gross household income is $1,505 per month. This high payment can prevent vacations, prevent savings, and prevent you from living and enjoying life. Compare that to having a housing expense of $750 per month, and you can quickly see life becomes a bit more fun.
Does this work for everyone? Nope. Could it work for you? Possibly. There is no reason to make yourself house poor. It just doesn’t make financial sense. We often justify getting in over our heads by calling a home an investment. Whether it is or not is certainly debatable. You know what else are investments? Investments. But you don’t see anyone busting their ass and stressing out in order to invest.
And don’t forget that pushing the limits on housing will also force you to spend more on utilities, insurance, and furnishings. That house that you are forcing yourself to afford costs a great deal to fill with stuff.
There will be a time in your life when allocating 25% of your income towards housing will make sense. Until then, live. Go do stuff. Get a passport. Get it stamped. Just be smart about it. You could have awesome vacations and experiences 5-10 times per year if you financially allow yourself to do it. There’s nothing wrong with spending money on fun, as long as you do it responsibly.
Congrats! You are on the verge of seeing the year 2012. Wow, the excitement is palpable! Nope, never mind. That was the coffee. I’m not one for hyperbolic statements, but what you do in the next 20 days or so could determine whether or not 2012 is a successful year for you. No pressure.
To look forward, we must first look backward. I believe that Fab Five Freddy said that. Maybe not. Anywho. How did this year go for you? Did you accomplish what you set out to do? Maybe the better question is: did you set out to do anything? If your goal was simply to “still be breathing” come 2012, then you are just days away. Congrats.But if you didn’t set any financial goals/markers for 2011, then you certainly didn’t accomplish these hypothetical goals/markers. A lack of goals will never be the death of you, but it may the reason that you never do GREAT things.
No matter how smart you are, no matter how much stuff you have, and no matter how high your income is, accidents can only get you so far. You MUST be purposeful with your money. Planning and goal-setting are your ticket to the promise land.
2011
Let’s start with 2011. Answer the following questions. Hell, print this guide out, mark it up, and talk about it with your spouse, co-worker, sibling, sensual masseuse, etc. Just don’t forego this opportunity to improve yourself.
What was the biggest waste of your money in 2011? (I swear if you say my book, 60 Days to Change, I’m going to get pissed)
What was the smartest thing that you did with your money in 2011?
In what situation did you show the most financial restraint?
In what area did you show improvement from 2010 (e.g. income, spending, debt reduction, saving, etc)?
In what area did you show regression from 2010 (e.g. income, spending, debt reduction, saving, etc)?
My total amount of assets: $_______________
**This includes your: home value, savings and checking accounts, investments, retirement accounts, other real estate values, etc.
My total amount of debt: $________________
**This includes your: mortgage(s), credit cards, student loans, car loans, personal loans, lines of credit, etc.
Total assets – total debt = $_______________
This number is also called your net worth. Your net worth lets you know whether or not you owe more money than you own, or whether you own more money than you owe. What can be gathered from tracking your net worth? Progress or lack thereof. What are some things that can impact your net worth other than taking on more debt, paying off debt and saving money? Market fluctuations. If your home and/or investments go down in value, then you will see this reflected in the annual measure of your net worth. It sucks when this happens. But it happens. Don’t lose sleep over it. One of your goals for 2012 will be to grow (improve) your net worth. How do you grow your net worth? By living a healthy financial life: saving(investing) money, paying off debt, and refusing to take on new debt.
Side note: I only calculate my net worth once per year. And it’s on December 31st. The rest of the year I focus on healthy behavior. Healthy behavior generally begets a healthy net worth. Focusing on your net worth any more than this is a bad idea. It’s just a simple measure. Don’t obsess over it. Identify it, take corrective action towards your habits, and move on.
Every December 31st I ask myself one very simple question: am I proud of my financial progress in the previous 364 days (365 in leap years)? Over the years I have been able to answer “yes” several times, and I have had to answer “no” a few times. But if I never were to ask myself the question, then I might not have the opportunity to correct poor financial behavior. This is why a retrospective is so important. You MUST learn from your past behavior. In fact, I can’t think of anything stupider than ignoring your past behavior. Treat your financial behavior like a neck tattoo. Acknowledge it. Embrace it. Own it. You did it to yourself. You might as well own it. Just don’t do it again.
2012
I can’t possibly overemphasize the importance of setting goals. A lack of financial progress is generally due to a lack of goals. It’s not any more complicated than that. Here’s how we’re going to do this: I’ll ask a question, you answer it. Repeat. And at the end you will have goals. It’s easier than raising sea monkeys.
Goal #1 The Short Term Goal
What would you like to accomplish (in regards to your financial life) within the first 30 days of 2012 (e.g. save $300, pay off your Best Buy credit card, buy life insurance, start a college saving plan for your spawn, etc)?
Why is that important to you?
What would be the result of accomplishing this goal?
What would be the result of failing to accomplish this goal?
What will it financially take for you to accomplish this goal?
You can have several short-term goals, and you can start one whenever you like. A 30 day duration is perfect. Once you set the goal, track it. If you don’t look at the goal until the 3oth day, then you probably won’t accomplish it. Make it the homescreen on your phone, computer, and iPad. Tape a note to your debit/credit card with your goal written on it. Do whatever it takes to constantly look at and focus on this goal. This isn’t silly. It’s effective. Think of it like the breathing exercises that women use during child birth. From a complete outsider’s perspective, it seems silly. But for those in the know, it’s effective.
Goal #2 The Quarterly Goal
What would you like to accomplish (in regards to your financial life) within the first quarter (90 days) of 2012 (e.g. save $500, pay off your Disney MasterCard, create a will, start an Individual Retirement Account, etc)?
Why is that important to you?
What would be the result of accomplishing this goal?
What would be the result of failing to accomplish this goal?
What will it financially take for you to accomplish this goal?
Like I mentioned, once you accomplish these goals within the given time frame, then you can create new goals. Please believe me when I tell you that this isn’t tedious. I like to set a new Short-Term Goal every month, and a new Quarterly Goal every quarter. It becomes habit. A good habit. You need those.
Net worth goal
What do you think is a reasonable goal for your net worth calculation on December 31, 2012? How much do you think you will be able to move the needle? Whether your big focus this year is saving or paying down debt, your net worth WILL improve (market forces willing). So what’s it gonna be?
My net worth goal for December 31st, 2012: $_______________
Oddly enough, setting your net worth goal is a great deal more fun than setting your short-term and quarterly goals. This is where you can really mess things up. Focusing on your net worth on a regular basis is a really bad idea. And by bad idea I mean like “Netflix splitting into two companies sort of bad idea.” Short term goal setting is the key to success. It will take care of the net worth goal.
Budget goal
At some point in your life, it just makes sense to know how much money you spend on a regular basis. When exactly is this time? Oh, I would say from 16 YEARS OLD on. Still buckin’ the trend, are ya? That’s okay. I believe that the Chinese have decided that 2012 is the Year of the Budget Pie-Chart. You NEED to know what percentage of your income goes to each spending category. You just have to. There’s no ifs ands, or buts. Here’s what I recommend, put your spending into a pie-chart at least 4 times per year. Start with the end of January, and then chart the month of April, August, and November. You are looking for trends and future problem areas. Below, you will find the ideal budget percentages. Here is the blog post on how to use this pie chart.
Drawing a blank?
Don’t have any 2012 financial goals? First of all, I don’t believe you. Everybody has something that they need to strive towards. There’s nothing wrong with needing some samples and examples. Try one some of these. If they fit, you can keep them. If they don’t, just leave them in the dressing room.
1. Save $27.33 per day- The result? You will have saved $10,000 in 2012. Given that 2012 is a leap year, 366 days of $27.33 will get you to the $10,000 mark. For the last 4 years, I have done 28 pushups everyday. That way, I do 10,000 pushups per year. This will come in handy if I ever get into a shoving match.
2. Pay off your car- There is something outright depressing about making monthly payments for something that is constantly decreasing in value. You can address this by paying off your car early. Paying off your car loan based on the original loan terms is for suckers. Speed up the loan. You will save interest, and you will free up cash flow sooner.
3. Increase your charitable giving- Will this increase your net worth in 2012? Probably not. But it WILL increase your net awesomeness. No one likes a self-obsessed a-hole, so don’t be one. Recognize the need of others, and give your time and/or money to help improve their lives.
Here’s the plan
I plan on having a great year. And I’d like you to have the same plan. But you can’t send some sort of weird cosmic “I’d like to have a good year” vibe up into the sky, and think that you’ve done your part. You MUST be intentional. You MUST plan, achieve, and repeat. I will gladly be your guide. Feel free to leave your email address below, and you will be on my monthly newsletter list. I publish my best stuff to this list. Good luck, and let me know if you need any help along the way.
****I strongly encourage you to share this post with your significant other. Complete the guide separately, and then together. Compare answers, and arrive at collective household goals for 2012.
I love getting your email questions. I really do. I received one the other day that may be one of my all time favorites. Check it out.
Pete
Love your blog, there’s a lot of great advice on it. Between you and Dave Ramsey I can almost always find the answer to any question of situation. Thanks for putting so much information out there!
I come from a family that has a horrible relationship with money. On one end of the spectrum family members practically hoard money and can’t have a logical conversation about buying anything that costs more than $10, and on the other end my “most successful” family, makes 7 -figures and still manages to have a negative net worth. So figuring out money has been a challenge for my husband and I and we really don’t have good person to run ideas by… So I thought I’d ask you.
We currently have about 6K in savings that we don’t touch in the event one of us would loose a job. We make a combined 102K a year. We have almost 220K in student loans left to pay off.
My husband just inherited 90K. Some think we should stick it under the mattress, and others think it would make a great down payment on a 500K home. Neither of those a good option, clearly, so here is what we were thinking.
We don’t have any children yet, 20K of the 90K would go towards adoption. With the other We would like to purchase a property for $70K. Our 3 options are a property ready to go, one that would cost $20K and need about $40K in work, and a lot that is $20K with a house plan that we can build for $40K. Although we could start the adoption process now, we were told it is much better if we have a house, rather than saying we would be moving out of our tiny 1 bedroom when we adopted.
Our thought is, if we didn’t have to pay rent/mortgage each month, it would take us a lot less time over all to finally pay off that $220K in student loans. But we are wondering if we are hurting ourselves in the long run by not throwing that $90K at student loans initially.
Any thoughts, just wondering if it sounds like a good idea? I think I’ve thought of everything, but I thought I would run it by a third person for some feedback.
M.A.
Awesome question. You have the chance to make an AMAZING decision right now. I have seen several people inherit much more than $90k, and in most cases the money was either wasted, or it didn’t provide the sort of impact that this $90k will have on you. Here is what you need to consider.
Taxes- Don’t forget about taxes. I don’t know the details of your inheritance, but don’t forget to set some aside for Uncle Sam. That is unless you inherited the money from your deceased Uncle Sam. If that’s the case, then I’m sorry for the Uncle Sam reference. This is spiraling out of control. Just pay your damn taxes.
Emergency reserves- Having only $6k in savings given your $100k income is a bit worrisome. I’m not going to lose sleep over it, but you should. You should have AT LEAST three months expenses set aside. You make at least $6k net per month. That means that if your expenses are anywhere near your income, then you need $18k set away. I think you should at least put $4k of the $90k in savings to get you up to $10k, and then set money aside from your income on a monthly basis.
Student loans- I’m not going to lie. $220k in student loans made me throw up in my mouth a lil bit. That’s a ton! I usually tell people that student loans are like a having another house, but one that you can’t live in. But you are talking about getting a house that is 1/3 the cost of your student loans. Based on my ideal household budget, you can put 25% of your household income towards housing. Since you don’t plan on having a house payment, you can put that hypothetical $1500 per month towards your student loans (that’s in addition to a what you are already paying towards those loans). Let’s assume for a second that you don’t pay anything in interest (which obviously isn’t the case), it’s going to take around 12 years to pay off these student loans with $1500/month payments.
Your house- So you want to be a homeowner? Cool. I’m glad that you are thinking straight in regards to not using the inheritance as a down payment, but instead viewing the inheritance as a full payment. This restraint will serve you well. Just know that you will still need to pay property taxes, insurance, increased utility bills, and maintenance expenses. I’m not trying to piss in your Cheerios, I’m just letting you know that paying cash for your house won’t end the costs associated with homeownership.
Adoption- Congrats! What a great decision. Not to get all sappy here, but adding a family member in the wake of losing a family member is a wonderful thing. However, it’s been my experience (assisting several peeps over the years) that adoption will cost more than $20k. I hope this isn’t the case for you, but I believe it will be. Just know that you may need to set more aside for the adoption than you think.
All in all, M.A., you are in a pretty sweet spot. But the decisions you make now will impact you greatly over the next few decades. I believe that you are thinking straight, and I hope that my “things to consider” helps you even more.
Yesterday we spent quite a bit of time discussing what’s wrong with Thanksgiving/Black Friday. Let’s get past that. Like I mentioned in that post, if you aren’t part of the solution, then you are part of the problem. My rant is over. Let’s get better.
Thanksgiving = family. And if any of your familial relationships are damaged for financial reasons, then this Thursday the healing begins. You are no longer allowed to bury your head in the sand. Especially once you’ve read this post which will pick the scab off the wound…just prior to us starting the healing process. (Okay, that was a little gross. I’m a bit squeamish. I wish I hadn’t written that, but alas I’m too lazy to delete it. I’d rather just explain it away with a digression.)
Family financial wounds are damaging for several reasons. By righting the wrong, you will begin to heal all the different types of damage that the wrong caused. For example, let’s say that you’ve borrow $500 from your favorite Uncle Rick. As you know, Rick has a mustache. Pete the Planner Bonus Fact: 90% of people named Rick have mustaches. This debt has existed for a while. And you haven’t made any real effort to pay him back. What sort of damage has this unaddressed debt caused?
Non-transparent communication- It was your deep connection with Rick that allowed him to really understand your financial conundrum. It’s this same deep connection that has you clammed up as you ignore your debt to him. Things just aren’t the same. You can’t even share your career success stories with him. “If things are so good, why isn’t he/she paying me back,” he might wonder. And if things are so good, why in the hell aren’t you paying him back, I wonder.
Rick lost his pension- But why would you know? It’s something that we doesn’t really share with anyone. While $500 used to not be that big of deal fro Uncle Rick, it is now. He’s secretly getting pissed about it. Oh, and he hates your new car because of this. He doesn’t care that it’s a lease.
Any financial progress that you are seeing is false financial progress- Things are finally starting to turn around for you…or so you think. People conveniently forget to tell me about personal loans that they took from their family and friends. That’s why I always ask about them. Just because there isn’t a loan document, doesn’t mean that the debt doesn’t exist. Not to get all cosmic-Oprah on you here, but I don’t think you can consider yourself financially viable until you fully acknowledge that debt. And I mean really acknowledge it. Like talk about it – acknowledge it. And if your Uncle Rick has conceded in any way, shape, or form by now calling the loan “a gift”, then you REALLY need to get to work. I don’t really care if he has absolved you of your obligation to pay him. In my book, you will always owe him the money. If he has called it a gift a couple of years ago, but now he is hurting financially, then he is unlikely to tell you. Do the right thing.
Crap, now what? The good news is that it isn’t too late. And what’s better is that I’m going to now tell you the EXACT right way to fix it. Stepping up and doing the right thing in this uncomfortable situation will be the first step towards your financial rebirth. Hyperbole? Nope. It’s true. Taking ownership of your decisions is such an important step in your financial development. Good decisions are generally made by confident people. You will generally lack confidence if you are embarrassed by your financial behavior. There isn’t anything much more embarrassing than shafting your Uncle Rick out of the money you owe him. See what I’m sayin’?
Here’s the plan. You are going to bridge the gap. What? You’re concerned that you don’t have enough money to pay Slick Rick back? Don’t worry about that. Follow these steps:
Be subtle- Sorry, but you don’t get to take credit for this. You don’t get to tell anyone other than your significant other or your Uncle Rick what you are doing. This isn’t one of those things that you announce right before the family prayer This is not a broadway production of your one man show “The Guy That Finally Paid His Debt.” Just settle the hell down, and focus on the execution of this thing.
Get a card- Delivering a soliloquy that will change your financial life can be a little nerve wracking. Therefore, avoid the possibility of doing this wrong. Write it down. Is this the Nancy-ass way out of it? Nope. This is way too important for you to risk saying the wrong thing. You are going to write a simple note.
Write a check for a nominal amount- This is an act of goodwill. This isn’t repaying the national debt. Write a check to Rick for $25-$50. Slip the check into the card. You are going to write this same check every single month until you pay back Rick. I don’t know why people feel like they can only repay family debts with one giant check, but that is a ridiculous notion. You don’t pay your bank back for your mortgage loan in one big chunk do you? Of course not.
Write the following message- Uncle Rick, Enclosed you will find a check for $__. It is my first payment towards the $____ I owe you. My financial struggles should not extend to those that I love. Thank you so much for believing in my ability to repay my debts. Your confidence in me means the world to me. I won’t let you down. Happy Thanksgiving.
If you choose to go through this process on Thursday, then you need to let me know. I will send you a free book. I’m very proud of you in advance. Several of my clients have done this, and it was the beginning of their financial brilliance. Congrats on your willingness to take control of your financial life once again.
This was the topic of last weeks Pete the Planner show on 93 WIBC. Listen to the podcast here. We discussed: for-profit vs not-for-profit, education inflation, innovative money saving tips for college, and student loans.
With special guests:
Alex Taborrok, from George Mason University to discuss why college has been oversold
Thanksgiving is far and away my favorite day of the year. I love food. I love family. I love football. And I love reflection. What I don’t love is what Thanksgiving has become. It has become the “official start of the holiday shopping season.”
I love that Thanksgiving exists to remind us that we should be thankful for the things that we have, but I feel sick that we spend the other 364 days lamenting the things that we don’t have. And in recent years we have kicked this off with the most horrific display of American greed that exists in modern society today: Black Friday. I know that “black” is meant to describe retailers moving “into the black” (becoming profitable), but I think it signifies the beginning of the blackening of our hearts until the next Thanksgiving. The formerly most grounded day in America is now followed by the shallowest display of mindless spending, greed, and excess that is Black Friday. Retailers want us to do stupid irrational things, and we gladly do them. We camp out to buy consumer electronics that we don’t need. We trample our fellow humans in order to get the latest Crap My Pants Elmo or whatever the PR machine spins. Black Friday shopping has even under-classed itself. Instead of fighting each other for gifts for each other, we are now fighting each other for gifts for ourselves. The crowds are thick with self-givers and farcical units which perpetuate the thoughtless gift-fest that is American Christmas. The beast is hungry. We feed the beast. The beast eats us.
Thanksgiving was the day that we used to stop, find and then give thanks. But the crazier that consumerism gets, the harder it is to find true gratitude and humility. Thanksgiving has become Waldo. We can hardly locate sincere thanks when our actions are those of the unappreciative. If you were truly thankful for your income, would you treat it like you do? If you were truly thankful for your job, would you try harder than you do? If you were truly thankful for the freedom that we enjoy in American, would you still help destroy the fabric of this country via cancerous consumerism? If you aren’t part of the solution, then you are part of the problem. The corporate greed that deadens our holiday celebrations was seeded by our thoughtlessness. We have married ourselves to this by our yearnings for more, our discontentment in what we have, and our refusal to buck popular culture in order to change popular culture.
The prophetic words of Langston Hughes have never rang more true. He writes in 1935′s Let America be America Again:
I am the poor white, fooled and pushed apart,
I am the Negro bearing slavery’s scars.
I am the red man driven from the land,
I am the immigrant clutching the hope I seek–
And finding only the same old stupid plan
Of dog eat dog, of mighty crush the weak.
I am the young man, full of strength and hope,
Tangled in that ancient endless chain
Of profit, power, gain, of grab the land!
Of grab the gold! Of grab the ways of satisfying need!
Of work the men! Of take the pay!
Of owning everything for one’s own greed!
Recently, a friend of mine in Georgia lost everything. Everything. He lost his wife. He lost his business. He lost his wealth. He lost his status and credibility. If he gives thanks this Thursday, then I know it will be sincere. For when you have nothing, then you can see what you really have. The noise will be turned down. He can’t be thankful for his money. He doesn’t have any. He can’t be thankful for his wife. He doesn’t have one. He can’t be thankful for his business. He doesn’t have one. He can’t be thankful for his status and credibility. He has none. What will he see this Thursday? Will he see what he has lost, or will he see what he has? If he had ever been truly thankful for all that he had, then would he still be in this position today? These questions keep me up at night.
I wish the best for you. I just hope that we both are on the same page on what “best” means. I hope that the aspects of your life that you can make simple, are simple. The rest is complex. I know this. Just don’t make the rest of your life harder than it needs to be. To me, this means being thankful everyday for the life that you have…and not missing out on it by focusing on the things that you don’t have. Happy Thanksgiving.
