Gary Bourgeault has owned and managed several businesses and has been a financial adviser. In his spare time, he loves writing about music.
The Changing Culture of Personal Finance and Goals
Having been a financial adviser at one time, I've seen a lot of what went for financial wisdom at the personal level change dramatically over the years, even though what made sense in the fairly recent past, makes little sense today for a growing number of people.
In this article, I'm going to, in a number of cases, challenge what passes for financial wisdom and career planning expectations, and look at alternatives that can not only save people a lot of debt and money but over time, far exceed the economic output a traditional career path many people have chosen in the past.
Living Debt Free
In this first section, I want to cover something that applies to all people, and that is to live debt-free, or with as little debt as possible. There is nothing that provides you with more liberty, and it gives you many options while protecting you from unpredictable events that can bring your financial house to come crashing down on you.
For me, I've lived debt-free for well over two decades, with the exception of a small store card used for the purpose of maintaining a high credit rating. You may ask why I want to maintain a high credit rating if I have no plans to take out a loan of any type.
The answer is there are times when applying for certain types of buying options you can work out a deal because you have credit, even if you don't plan on using it.
For example, I work on my computer for a living, and since computers aren't inexpensive, I used my credit rating to secure a credit line at a retail store in case my computer crashed and I needed one immediately.
I qualified for more than enough credit to buy a new computer, and in fact, it crashed totally more than once, and I had to get a new computer. The good news is I chose a store with a payment plan that included not having to pay interest if I paid for the cost of the computer before a period of six months was over.
In every case, I've quickly paid off the loan and didn't have to pay interest. While technically it was debt, it was debt without interest. You can't get any cheaper than that.
The other thing I had going for me in this and other instances, is I had saved up enough money to pay it off at once if I chose to, so if there was any need to do so, I could pay it off anytime I wanted. That helped improve my credit and make it cheaper to secure a loan if there was the type of major emergency that rose that required more than I could pay off at once.
What's great about this is a person or couple can do this at any stage of their lives, and can engage in all sorts of creative things to keep expenses low without significantly interfering with your lifestyle.
Some people I know that live in larger urban areas decide to forego buying a vehicle and instead use transportation services to travel when they need to. They also use bicycles when they go to work, in order to get exercise while saving money.
The point with all of this is to set up a financial foundation that can weather just about any hit life may give us, and survive without complete financial devastation.
Living debt-free or with low debt is by far the best way to do it. You can still do many of the things you wish without being so frugal you're not enjoying life at all.
The key is to live under your means and invest the rest. We'll get to that a little later.
A lot of the survivalist and prepper types focus on surviving in a world that may fall apart, and yet in many ways, ignore the one area that is most likely to have a negative impact on the most people, which is being financially healthy under most, if not all, situations.
Spend Less and Invest the Rest
Having little or no debt doesn't help much if you don't engage in two other financial activities. The first thing you want to do is to spend less and invest the rest. You want to start socking away some money into investments in order to build your wealth over time and to ultimately, draw an income from it, replacing that which you were making from your job or business.
The best strategy to use is called dollar-cost averaging. That's where you decide to take a specific amount of money on a weekly or monthly basis and put it into a specific investment vehicle. What this does is remove the volatility and emotion out of your decision-making process, and over time, it'll build a surprising amount of wealth for you. Our only job, once the decision is made, is to be disciplined in our investing. The other is to never tap into the money if circumstances arise where you think you have to.
As to where you should invest, I would highly recommend an index fund. That places your money in a group of stocks that perform fairly well over time. The S&P 500 is one of the ones there, although if you're younger and want to grow your money faster you could choose the NASDAQ. That's more volatile, and if you're prone to fear and worry, it's best to go with the S&P.
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Last on the foundational level, is to start putting aside whatever money you can on a consistent basis for the purpose of building enough capital or cash in order to protect yourself if you lose your job or something major happens to your car or something else that requires a significant amount of money. Anywhere from 3 to 6 months replacement income is what you should shoot for.
There's nothing more financially empowering than having little or no debt, putting away money for emergencies (not vacations - that's something different), and investing in a safe index fund that grows nicely over a long period of time.
Buying a House Versus Renting
If you're an American, one of the major things we are taught in our lives is that we can live the American dream. For the most part, that means buying and living in our own home.
I've acquired and lived in several homes during my lifetime, and for the last 22 years, I've chosen to rent instead of buy. The major advantage of renting is you position yourself to not be hit by any significant surprises from things that break down that you have to pay a lot to fix or replace. Some of that can be covered by home insurance or insurance that covers high-end appliances, but there are many things that can go wrong you won't think of, and unless you're very skilled in repairs of various types, you will end up having to pay a lot from time to time.
I've seen people have to pay thousands for tree removal after a storm because a huge tree was uprooted and leaning against another one. I've seen major thunderstorms either damage the electrical in the house or flood the basement or cellar, requiring things like new hot water heaters to be bought because they were destroyed from water that rose as high as four feet in the basement.
Also, if any of those small things that break down in a house happen, such as plumbing, all you have to do is call the landlord to get it fixed at their expense. Of course you have to communicate with the landlords and get in writing what is required of you if things go wrong. For the most part where I have lived as a renter, if something goes wrong, my landlord has to pay for it. Only if I forget to do things like remove the hose from the outside spigot, which can result in the water pipes breaking, am I liable for any damages.
The reason this is important is that we can accurately project our monthly costs, and can make decisions based upon the predictable bills we have to pay.
One last thing to consider with a home is many people are told it is an investment. But the truth is it's your home. When people started to treat their homes like a piggy bank with a home equity line of credit (HELOC) back before the Great Recession hit, many of them were underwater, meaning they owed more on the home than it was worth, and would have to pay part of the price if they wanted to sell it. This was because they took out loans based upon the equity they had in the home. With easy credit and terms, many people decided to use their homes as a means of raising capital to spend, rather than the home it was meant to be.
A home really isn't an investment if we're living in it. It's an investment if we rent it out and generate income and build up equity in it over time.
That's important to understand because Realtor will sometimes use that argument to push someone over the edge in whether or not to buy a home, and once they get into it, they find out it's a bigger money pit than they understood it to be.
Renting is a superior way to manage finances to me. But if you're determined to buy a home, buy one that is a step or two below the top end of your budget. That gives you room for unforeseen repairs and to continue investing for your future. Spending everything on your home creates a lot of stress for anyone, and in the end, it is discovered that is the only asset you own because of the inability to do much else but pay the mortgage and needed repairs.
Interestingly, even professionals that make a lot of money live from paycheck to paycheck because almost all their available capital is tied up in their expensive homes.
The College Trap
College is one of those topics where people usually have a very strong opinion about. Some think it's imperative for long-term success, some think it's an expensive waste of time.
There are four key things to consider when thinking of going to college.
1. Would it be better to get a job and start investing at a much younger age?
2. Would starting a business be more profitable in the long run?
3. Would it be better to go to a community college and learn a trade or practical knowledge that will serve a market for a long time into the future?
4. Would it be an option to do some online education that caters to specific skills that can be leveraged in a variety of ways?
There is probably one major question to ask when deciding on college: Once you get a job, will the major you're taking let you get a job that will be able to pay off your loans easily?
I've talked and interacted with many young people on this, and even if they have their heads together on this, once they get to college many times they're talked into taking the most worthless classes and changing their major to something that has no real-world applications. Most of you know what they are, so I'm not going to open up that can of worms and get distracted and off-topic.
College and the accompanying loan debt can work if you're majoring in something that will be around forever. One such thing I've talked to young people about is training to be a pharmacist. A number of other medical degrees would also do very well. I use that as an example because as long as there are sick people there will be a job for pharmacists available. Even robotics or artificial intelligence (AI) aren't going to eat into that field in the near future.
I've heard many people say that those that go to college financially outperform those that don't go to college. There is some truth to that, but when taking everything into consideration, including the long time it takes to pay down loans, the benefit, in many cases, takes a significant period of time to unfold. In the meantime, those choosing other careers are making money and putting it away long before many people even exit college.
Again, the key to college is the type of degree that is chosen and the financial rewards that accompany it. Obviously, for those at lower income levels, this isn't as vital or relevant because they usually get a free ride to college.
One of the businesses I've run in the past was directly related to helping those without college degrees be financially successful in life. It's surprising how many of them have improved their situation, and in fact outperformed their college counterparts, primarily by building successful businesses of different types. This is something you don't learn in college, including business degrees.
Another inexpensive education avenue is to use online educational outlets to learn specific skills that can be applied to life right now. That could improve your ability to retain a job if the economy goes south, and also, if you're running a business, provide you or your employees with new skills that apply to an always-changing market.
Why I'm strong on this is I've heard many young people come out of college with weak or worthless degrees, lament the fact they owe from $30,000 and up with no prospects of getting a job that can pay their debt obligations down. And as most of you know, in the U.S. you aren't allowed to discharge college debt via bankruptcy. For now, you're stuck with it, and even if the law changes, there's no guarantee your loan will be allowed to be discharged in bankruptcy.
For those living outside the U.S., be sure to understand what your obligations are concerning student loans or other forms of financing before making a decision. This includes older students as well—in the U.S. and abroad.
Term Life Insurace: Managing Unforeseen Risk
In order to mitigate the risk associated with an untimely death, we need to do one thing, and that is to have our lives insured. This is one area to be careful with because those selling insurance will always try to sell you up and get the insurance you don't need.
To combat that simply know that you only have to buy term life insurance, which pays out at the time of your death. This is especially important if you're a couple that has children.
Even with term life insurance, you have to think things through clearly, as many times you'll be told you may need life insurance on your children. While it's obvious there is a small number of people where that would be important because their children may have died in an accident, it's a very small percentage, and you have to be careful you're not manipulated because of your emotional attachment and love for them.
What I mean is you could be brought to a place of feeling guilty if you don't do it, when in reality the chances of our children being killed in an accident is very remote. And in those cases, it's related to paying for the funeral. Because of the sensitivity of this, it has to be your decision of course. The key is to think it through logically and rationally before you go to an insurance agent to discuss your needs and wants.
For the most part, term life insurance is for couples. We want to be sure our spouse or partner is taken care of if we meet an untimely death by disease or accident. There is no larger risk than that, so be sure to have that as one of your top priorities when drawing up a financial plan together.
Early Social Security Versus Waiting
I've studied a lot about social security in the U.S., and my conclusion on taking it earlier or later, when taking into account various experts and their input, is it really doesn't matter one way or the other, unless you want a higher monthly payment.
Using $1,000 a month as a baseline, if you start taking social security at 62, you'll receive $12,000 a year. Over a four-year period that comes to $48,000. As of this writing, each year you wait you would get an extra 6.25 percent, up to age 66. You get 25 percent less a month if you start drawing at the age of 62.
When you put this together, you're not losing much if anything. After all, how long will it take to recover the $48,000 you already received after four years? See what I mean? If you're getting paid an extra $250 a month when you hit 66-years-old, you would get an extra $3,000 a year. That means you would have to live 16 more years after 66 before you start to getting a better overall return on your social security payment during your lifetime.
If you plan on having more than that available from your investments throughout your life, then it probably isn't that important to draw earlier. But taking into account 82 is above the average lifespan of men and women, it's tossing the dice to think you're going to live long enough to get more of your benefit than if you took it at 62.
The major thing to consider is whether you want to wait in order to get a higher monthly payment, or you want to enjoy some downtime before your start getting closer to 70.
If you follow the ideas I've shared here, you'll find yourself being set free on a steady basis, and when you're financially healthy, it's surprising how much better and safer you feel about yourself and life.
Even your relationship with your spouse of partner will be better, as money problems have been proven to be the top reason for couples splitting or divorcing. Get finances right, and in most cases, the rest will hold together.
Concerning the hardest parts of college decisions and buying a house, there isn't one right answer, but you really do need to seriously think about the pros and cons of both, and not just make a decision because it's the American dream, or if you're not an American, something you've wanted to do for a long time. Remember if you live in the U.S., if you have college debt, it's almost impossible to get rid of it without paying it down for many years.
Also keep in mind if you're a couple and both have a lot of college debt, you're starting off life under stress and pressure. If you're already there, just start paying down the debt you can. If you haven't made these decisions yet, be sure to include it in your decision-making process so you aren't surprised once you leave college and feel the weight of thousands of dollars on your back.
The bottom line is frugality usually isn't for the purpose of being frugal or stringent, but for developing the discipline of not living beyond our means. Under that scenario, we can learn to be content and creative while participating in and engaging life, building up our wealth over the long term.
This article is accurate and true to the best of the author’s knowledge. Content is for informational or entertainment purposes only and does not substitute for personal counsel or professional advice in business, financial, legal, or technical matters.
Umesh Chandra Bhatt from Kharghar, Navi Mumbai, India on January 16, 2020:
Financial security is one of the crucial things in our life and if we follow certain tips given in this nice article we can achieve what many people only dream in their lives. Thanks for the nice guidance.