What’s a Freedom Account? What’s a Rainy Day Fund? What’s a Sinking Fund?
They’re all the same thing. Mary Hunt coined the phrase Freedom Account, I (probably did definitely didn’t) coin the phrase Rainy Day Fund. I’m not sure who got Sinking Fund. Had I known about Mary Hunt’s Freedom Accounts before making YNAB, I wouldn’t have bothered trying to coin anything.
[Update: Thanks to Adam for taking the time to see if I did coin the term 'Rainy Day Fund'. Apparently it's something state governments have been doing for a while - to buffer against times when revenues are lower.]
The gist of it is that you set aside a fixed amount of money each month to prepare for larger known expected or unexpected expenses of a fixed or variable amount.
For instance, I know the car will eventually need repairs. It’s a known expense. How much will these repairs cost? I have no idea (hopefully very little). Known expense, variable amount.
I know that our life insurance premiums are due annually. It’s a known expense. How much will the premiums cost? We have term insurance, locked in for at least a decade, and it comes to $840 per year. Known expense, fixed amount.
Based on past experience, let’s say we spend $2,000 per year on car repairs. That means I need to be socking away $167 into my Car Repairs account (or YNAB category, but we’ll get there). For the life insurance premium, $70 per month means we’ll be able to pay for that premium easy-breezy. And now we have the Freedom Rainy Sinking Account Fund. All set up and ready to go.
JD over at Get Rich Slowly wrote about a month ago about Freedom Accounts in depth. Apparently Mary Hunt originally advocated setting up a separate checking account and then keeping a lot of separate “accounts” within that checking account for all of your Freedom Accounts. (Also, see MoneySpot’s great article on Freedom Accounts.)
Get Rich Slowly Savvy Readers were quick to comment that companies such as ING let you set up an unlimited number of accounts — all for free — that bear some interest. Transfers to checking can happen quickly and you can set up autofunding with a few clicks. I’m a huge fan of ING for this very reason. You can read what I wrote about ING and be sad that the rate is no longer as high as it once was (but still better than your checking account).
(Thanks to Sean, Leslie, and Inabag for mentioning YNAB in the comments. I owe you three lunch. Also, a bit less thanks to Michael for claiming that the “YNAB Team” made all those comments. Would still buy you lunch so I could figure out why you didn’t like YNAB so much. We’re open to feedback!)
The beauty of the YNAB system is that all of these accounts can be easily managed right in the Budget. If you set up a Car Repairs category, you just “sink” money into it every month and watch the balance rise.
In order to keep the number of physical accounts down at our household, I only use a separate account for our New Car Fund (because of cool features like this) (I wish). All of the other accounts are small enough I don’t bother earning any interest. It’s your personal call though.
At the end of the day, implementation details aren’t the important part. What’s important is that you’re looking ahead and actively planning what your money is going to do and when. You’ll then find that all of those “emergencies” that used to knock you off your financial feet are now not a problem at all.
Jonathan over at MyMoneyBlog had a great article about how the concept of Kaizen ties in to personal finance. According to Wikipedia:
a Japanese philosophy that focuses on continuous improvement throughout all aspects of life.
I couldn’t help but notice something Jonathan mentioned regarding spending habits:
If you want to start a budget, why not track your spending in just one category, like dining out?
Brilliant.
The idea of small, easily-surmountable (perhaps so small they’re barely noticeable) tasks is a recipe for long-term success.
Normally, when someone is truly struggling with the budgeting process (the struggle always happens at the start. I never have people come to me and say, “Hey, I’ve been doing this for a year now and now, all of a sudden, it’s just getting really hard to stick to.”) I recommend that they don’t worry about budgeting but simply write down everything they spend.
Jonathan’s suggestion to start with maybe just writing down your ‘dining out’ spending is phenomenal because it breaks that task down even further.
And honestly, I see a lot of wisdom there. With some expenses, such as the mortgage, property taxes, insurance premiums, they’re not variable and their timing is known. The value of writing down those expenses is, incrementally, so much smaller than recording expenses for discretionary, variable expenses such as entertainment, dining out, hobbies, etc.
So why is this post’s title talking about never getting anything done?
It goes back to the principle of Kaizen, where you work with small tasks, small improvements (continuously) instead of trying to develop a new habit, skill, or process all at once. Each of us has a drive to be better, do better, in some areas of our lives. What keeps us from taking the first steps? The huge task we see looming in front of us. We want to do things right even perfectly and we have a difficult task ahead. This desire for perfection from the start keeps us from taking any action at all.
The result? We don’t get anything done.
When starting your quest to manage your money at a higher level, recognize that you may need to start smaller and make small, continuous improvements to ensure your long-term success. Anything can be done for a few weeks, even a few months. But we’re after the long-term here! We’re undoing years and years of possibly bad money management habits, and that’s no small task.
In this regard, in order to achieve something big, you really need to start thinking small.
How would you like to make your car get 220 miles to the gallon instead of 20? Or would you prefer, instead, to only pay $0.36 per gallon of gas? How about this: If your car gets good enough mileage then you get paid for putting gas in the car instead of paying? All of this is possible through some known, but sometimes unappreciated tax deductions.
For many of my clients, one of their biggest tax deductions is their car mileage. And yet this is also one of the least appreciated tax deductions, in my opinion. If you own a business, drive your own car for your employer, go to the doctor or even take boy scouts on campouts you could save money on your gas bill.
To illustrate the possibilities, let’s imagine a man named Bob. Bob uses his own car to make some deliveries and visit some clients for his employer. For Bob this adds up to about 150 miles per month. Bob is currently paying $4.00 per gallon for gas and gets about 20 mpg in his Camry. Bob and his wife make a decent living and, between Fed & State, they are in a 36% marginal tax bracket.
At tax time Bob brings his records to his accountant:
1,800 miles driven for work
90 gallons of gas attributable to those miles
$4.00 per gallon average cost
Bob’s accountant prepares his taxes and shows Bob the following:
1,800 miles x $0.505 per mile = $909 in deductions x 36% = $327 tax savings
$360 gas expense – $327 tax savings = $33, or $0.36 per gallon
– or –
$33 net gas cost / $4.00 per gallon = 8.25 gallons
1,800 miles / 8.25 gallons = 220 miles per gallon
Needless to say, Bob is pretty happy he kept track of his miles. And get this: if Bob’s car was more fuel efficient and got 23+ mpg (or if gas prices went down to $3.60 per gallon) Bob would actually be getting more back in tax savings than he paid for the gas. He would be getting paid to put gas in his car!
You may drive for work even if you don’t realize it. Many professions require some form of continuing education. If you use your vehicle for such a reason and are not reimbursed this would be qualified mileage. Even if you don’t use a vehicle for any work related reason there are still benefits to be had.
While the benefits are the greatest for business related mileage, there are deductions for other common things. Do you ever drive to the doctor, dentist, hospital, pharmacy, etc.? As long as these trips are for qualified medical reasons they are deductible at a rate of $0.19 per mile. Do you ever do volunteer work? If you drive your car for a qualified charitable organization (Boy Scouts, Church, etc) or to do volunteer work for such an organization, those miles are deductible at a rate of $0.14 per mile. So, to continue the idea of your effective mileage:
Reason for use MPG Adj. CostPersonal (actual cost) 20 $4.00
Business 220 $0.36
Medical 30 $2.63
Volunteer 27 $2.99
It is clear that the tax deduction is still worth taking note of, even if you don’t have business miles.
No catch, but there are a lot of assumptions built into the scenario I have described – and a change in any of them would change the results to some extent. Some major assumptions are that Bob (or you) have enough deductions that you would itemize instead of taking the standard deduction. Also, this assumes that you have met the 2% of AGI limit for employee expenses or 7.5% limit for medical expenses. (However, if you own your own business the mileage deduction comes of 100% as a business expense, regardless of whether you itemize personal deductions).
The assumed tax bracket also affects the results. There are several other things to take into account as well. I recommend that you talk to a tax professional about your specific situation before assuming that these things apply to you.
I also run into two common misunderstandings when discussing this. The first is that commuting miles to and from your home and main place of business are not counted as business miles. These are personal miles in the eyes of the IRS. The second is that if your employer (or the volunteer organization) reimburses you for your mileage you may only deduct the difference between the employer’s reimbursement rate and the standard rate.
In the event that the IRS wants to verify your figures (i.e. audit you) you will need to provide the following:
There are very inexpensive ($2-$5) record books at office stores and online. I would recommend getting one and keeping it in your car to make it easy to keep track of all the mileage that you may be able to write off at the end of the year.
The mileage rates in this article are for 2008 expenses and are adjusted each year. States may also deduct mileage at a different rate than the Federal Government.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
This post was inspired by JD’s Father’s Day Post at Get Rich Slowly.
My mother and father are both currently visiting Jerusalem. They left on Thursday and won’t be back for two weeks. My mom asked each of the (six) kids to write something for our dad that she now has probably given to him. I wrote him a few-sentence letter stating my admiration for some of his (many) great qualities.
Julie and I are staying at their house with the three kids down here in Arizona — waiting to settle on a house we purchased (but having our lease run out at the house were renting about a week too early!). So this is an interesting time to write — being surrounded by a place that holds about 16 years of memories for me.
Staying in line with money topics, I want to share a few things I’ve learned from my dad regarding money. He’ll probably never read this because I don’t believe he knows what a blog is, but this is for him nonetheless.
My dad taught me to take care of the things you have. Cords to appliances are always wrapped nicely, tools are always put away, etc. He always related the story of the man going door-to-door looking for donations. He stopped at a house and, before he rang the doorbell, overheard a man in the back yard scolding his son for leaving some nails out in the grass. “These nails are rusted now and aren’t nearly as useful!” The man at the door thought to himself that this was probably an exercise in futility — to ask a donation of a man that cared about a few nails. He rang the door anyway and the man ended up giving the largest donation the man had ever collected. Lesson: Understand Value.
My dad taught me to work (he may claim he didn’t successfully). When I was twelve I was tasked with mowing our 1/2 acre yard. Our lawnmower wasn’t the kind that pulled itself — it took some heav-ho pushing – especially for a 100 lb. 12-year old kid. Pushing that thing I think I looked more like those guys cruising on their choppers, with their arms up high. The lawnmower was a beast to push. It took me about 3 1/2 hours to do the front and back. I would put it off, which would only make things worse because the grass would be so much longer. The grass catcher would be heavy and I had a hard time dumping the grass into the bins. I had an even harder time dumping the bins full of grass into our mulch pile in the very back of the yard.
As time passed I became taller and stronger. By the time I left home I could finish both yards in an hour, do a better job, and enjoyed the entire process. To this day, I love mowing lawns. Lesson: Learn to Work.
The first personal finance book I read was The Richest Man in Babylon. I devoured it. I don’t remember how old I was — probably pre-teen. When I was 14 my dad gave me a book from a talk-show host that was starting to make his mark, named Dave Ramsey. The book was Financial Peace and I loved it. I credit that book’s principles with keeping me out of debt all these years. I’m thankful to my dad for recognizing good principles and passing them on to me. Lesson: Read.
My Dad’s an attorney (a nice one!). He’s always been able to provide for us. He claims to never really have been “book smart” but somehow he made it through Law School. He claims he’s always had to work harder to be average than the your average-average guy. I don’t buy in to my Dad’s whole, “I’m not too smart” facade he puts on. Where do my dad’s smarts come from? His dedication to his family. As a kid I was blessed by the fact that I never once thought there wasn’t enough money for food, shelter, and clothing (though maybe not the exact clothing I wanted – like Air Jordans…). My Dad worked so we had all the things we needed. He openly states that he’s never really enjoyed being an attorney, but doing that he provided for his family and, in that, found his purpose. Lesson: Provide for Your Family.
My Dad taught me to play chess when I was very little – probably six? I have a hard time remembering. I do remember lying on my stomach staring at the board, and being beat time and time again. Not just beat – slaughtered – in very few moves sometimes. I don’t know what our overall record is, but he’s winning. When I was 14 we were on vacation and I beat him — three times in a row. It rattled him good and I still relish the moment. But for eight or so years, he beat me again and again and again. Lesson: No Freebies.
Thank you Dad!
For our family, discretionary time has proven to be the most temptation-laden for superfluous spending. Perhaps it’s boredom that breeds the itch to eat out, shop, and entertain ourselves in similarly costly ways? Whatever the cause, our frugal fortitude seems to shrivel on the weekends and when find ourselves with excessive free time.
There is undoubtedly a time for splurging, and the fast-approaching days of summer vacation should provide a few opportunities for indulgence, but the three months of freedom that lie ahead can also be perilous times for those of us trying to stick vigilantly to our budgeting/savings goals.
The good news for conservative consumers is that large amounts of surplus cash are not a necessary prerequisite for family fun. There are certain forms of entertainment which, no matter how clever or thrifty you are, will always be pricey — amusement parks, prime time movie tickets, exotic vacations and fine dining come to mind. But for the financially-minded family, summer fun that won’t drain the savings account can be just a few minutes of planning and a homemade costume away.
Here are some budget-friendly ideas for family fun to get you thinking about and planning for affordable summer entertainment:
Choose a foreign holiday to observe (Bastille Day happens to fall during the summer – July 14th,) learn a bit about the historical background of its origins, and celebrate with crepes, French music, and maybe even some Parisian costuming.
Make friends with your local library. Plan themed trips — i.e. select a place, person, natural phenomenon, or historical era, and check out books, music, and movies that will help educate you and your children about the chosen topic. Plan a craft or cooking project that could go along with your theme. For an underwater theme, check out picture books on aquatic life, rent Finding Nemo, check out The Little Mermaid soundtrack and bake and decorate fish-shaped sugar cookies.
Have a mid-week pajama party. Serve breakfast for dinner and invite guests to dine in their favorite pajamas. Continue the festivities with games and movies and finish the evening with a family bed time story.
Shift the focus: instead of worrying about how you’re going to amuse yourselves, spend a day cheering others. Make and deliver cookies and homemade cards. Visit a nursing home or hospital and read or sing to the elderly/infirm. Show up at a needy friend/neighbor’s door with buckets, rags, mops or yard tools and donate an hour or two of family labor.
For younger children, a trip to the local pet store can be as delightful as a trip to the zoo. For parents, it is more convenient and less expensive. Ask the resident reptile expert to tell you about the different species of frogs, lizards and snakes. Admire the colors and textures of the birds and fish. Some pet stores will let you hold the baby bunnies and puppies, ask an employee about store policy. Stop at McDonald’s on the way home for $.88 soft serve cones and you’ve had yourself an afternoon’s worth of fun for less than five dollars.
For a family twist on the traditional movie night, feature old home movies or a digital slideshow as the evening’s entertainment. Provide popcorn and familiar background music (if it’s a digital slideshow), and have fun reminiscing about vacations, sporting events, recitals and holidays past.
Let little ones explore their creative capacities. Visit the dollar store to purchase finger paint, feathers, sequins, and pipe cleaner. Tape a long strip of butcher paper to an exterior wall of your home (or the back fence) and let your children and their friends create a super-sized multi-media masterpiece.
Don’t forget about free public facilities (police/fire stations, and the local animal rescue shelters typically offer complimentary tours,) public pools, parks, sprinklers, picnics, playgroups and other inexpensive recreational venues.
Whether you’re feeling the financial pinch or not, the pressure of costly summer entertainment mounts quickly. With a little creativity and planing, you can create family fun and lasting memories without leaving a financial divot.
Do you and your family have any fun inexpensive summer-fun traditions? If so, share them in the comment thread.
If my mission in life is to get the world on a budget, then I need to convince people that they shouldn’t hate budgeting. In order to do that, I have to figure out why they hate it in the first place. I’ve come to the conclusion that people hate budgeting because it makes them feel lousy without providing anything in return. I’m talking about the old way of budgeting here — not the YNAB Way.
Sometimes, after I’m done working out, I feel “lousy” in that I’m completely exhausted, sweaty, and (if I worked really hard) slightly nauseated. However strange it is, while I’m feeling lousy, I also feel completely satisfied. Why? Because I got something in return (huge, rippling muscles — or something like that).
Budgeting the old way is painful and provides very little value to most people. It’s akin to a punishing run without the “runner’s high” at the end. It’s a strict diet where you still gain weight…
With the old way of budgeting, you decide you’re going to spend $300 on groceries for the month. You’re really ratcheting down. You’re getting serious. You’re going to cinch the belt and get crazy. At the end of the month you realize you’ve spent $380. You forgot that you were having company one weekend. You feel lousy.
With the old way of budgeting, you decide you’re going to just go crazy and not spend a dime on gasoline (yeah, right). You budget $150 and spend $250 because you ended up having to make multiple trips to the airport. You feel dejected.
Your name becomes a byword for “boring” because you set an entertainment budget so unbelievably low that if you don’t return the one DVD rental you allowed yourself, the late fee will cause a stratospheric variance. Well, it turns out you’re a bit more social than you allowed yourself and you also go to the movies with your friends (and it wasn’t even a good movie). You feel defeated.
This is the old way of budgeting. No wonder you (and everyone else) can’t stand it. You get beat up and don’t even win a consolation prize.
Seriously. Where is the value here? The part where you’re feeling dejected? Or how about when you’re going to throw in the towel because you’re completely defeated? Where is the value in this variance check at the end of the month when you see how far off you were from your budget?
There is a small minority of people that get some value from the old way of budgeting. They like seeing how good they are at predicting what they’re going to spend for the month.
Think about this. The only thing you’re really learning when you’re setting a budget and then recording expenses is how good you are at predicting what you’re going to spend. It doesn’t mean you’re necessarily frugal or managing your money. It just means you’re good at predicting what will be spent. Is there inherent value in that? A bit of an ego stroke perhaps…but not much else.
In business, prediction is a great skill. If you can reliably predict cash flows from the next big craze then perhaps you can become a stock analyst and make your millions. But what value is there in predicting that you’re going to spend $300 for groceries and then spending $290?
Not much.
Going forward, you are not a budgeter. You are an air traffic controller. Your job is to make sure planes get to their destination on time. You want to make sure the planes don’t run into each other.
I mentioned this in the webinar a few weeks ago. It’s important that you begin to look at budgeting in a different light. The real value of budgeting comes because you’re proactively deciding where your money should be going at any given moment.
Yes, you’ll sit down and give each of your dollars a job at the beginning of the month (Rule Two). So those planes have taken off, so to speak. But if you find yourself in the middle of the month with two planes heading right at each other, what do you do? Do you sit there and wring your hands because you don’t want to show any variance from how you originally set things up and then how things actually played out?
Where will you derive value in this situation? Will you derive value from having the disaster happen, and then being able to look back and say, “Well, I guess I didn’t predict where my money need to go as well as I should have.”?
Nah.
The value comes from seeing that things have changed and a disaster needs to be averted. You change the planes’ routes and you’re done. Or in other words, you adjust some numbers and you’re done.
Some will say that you’re now being reactive, instead of proactive with your money. I couldn’t disagree more! You proactively planned at the beginning of the month. You did your best. And yes, things would have been great if all the planes had stayed perfectly on course and nothing out of the ordinary ever happened. But something happened. You received new information. With that new information, you changed your mind.
You see, the value is going to come because you set out with a plan, with goals, and anything that happens is either helping the plan, or thwarting it. In this way, when a disaster strikes (and it will) you’ll immediately recognize that Hey, this isn’t part of the plan – what needs to be done?. The difference there is that before you were budgeting (the YNAB Way), you didn’t have a plan at all. The disaster struck, you reacted based on whatever emotions you were feeling at the moment, and moved on (hopefully forward).
What I’m talking about here is having that plan at the beginning of the month and then averting disasters as best you can with that plan in mind.
“…but I love that I can make a budget on the 1st of the month and then on the 15th, move things around so the budget reflects my actual spending. Yes, I realize that defeats the idea of the budget…”
That just defeats the old idea of the budget. The key is that you stay zero-based (so you’re living within your means) and you start the month (or each paycheck, when you’re Pre-Rule One) with a plan.
You are an air traffic controller. You make sure all of your planes have destinations and you do your best to get them there on time. But if a disaster is going to strike, you do something about it. You take in the situation, recognize the routes, schedules, etc. and, with that original plan as your framework, you make the best decision you can to avoid disaster.
That is budgeting. Planning and then reacting to changes according to your plan.
It turns out it also makes for great living.
My father is also a financial advisor. About 12 years ago he had a couple in their early thirties come into his office. They owned a business and were now at the point where they wanted to start saving and planning for their future. They were in the process of finding a financial advisor that they felt good about and had interviewed several before they came to my dad.
They spent a fair amount of time interviewing my father and he, in turn, found out as much as he could about them. At the end of the meeting, as they were about to leave, the wife asked my dad one last question: “Are we crazy?”
My father asked what she meant and she replied with something like the following: We are in our early thirties. We own a successful business and make a great income. We have every indication that that income will only improve. And yet, we don’t have a lot to show for it. Our friends are about the same age and make the same amount of money, or even less. And yet so many of them look like they are doing so much better. They have bigger houses, drive nicer cars, and go on nice vacations. They look at us and wonder why we don’t do the same. But we know that they are going into debt for all of this stuff and we don’t want to. We are debt free and saving, but sometimes it is hard to see all of the stuff that we are missing. My dad smiled and only said, “Ask me that question again in ten years.”
About two years ago this same couple came into our office to review their financial plan and investments. At the end of the meeting my dad reminded her of their conversation the first time that they met and of her question. Then he said, “So, are you crazy?” They smiled big and laughed. They were probably still smiling as they drove off in their Corvette.
You see, they had just reviewed their portfolio of well over $1 million in assets (in their early 40’s), not including the business. They still had no debt and had all of the disposable income that they needed. At the same time, their friends were in about the same circumstances that they had been in 10 years earlier. I guess it all depends on how you define crazy. If “crazy” means seeing the world differently and acting differently than the average person then I would say that they definitely are crazy, by that definition. Oh that the rest of the world were crazy too!
Soon after this meeting the housing crunch was becoming a real issue. This couple’s business is building spec. homes and selling them. When the Real Estate market came to a screeching halt, so did their income from home sales. However, even in their business they had not used debt. So, while their homes sat on the market and didn’t sell, they also had no payments to make on those homes as they would have if they had used debt. In their personal lives they had no debt as well. This meant that their necessary monthly expenses were minimal, and their supply of cash to get them through this hard time was plentiful. All of this while many of their competitors are going out of business or getting night jobs to stay afloat.
So, who is crazy? In this case the definition, in my mind, changes: Almost everyone in the world is crazy except a select few. Getting out of debt is the only sane thing to do!
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
It is unfathomable to me, in the midst of an economy that is wavering, to hear the presidential candidates talking about tax increases! How can anyone who looks at things from a rational, logical perspective think that increasing our taxes is going to help? Of course, I know that they want to give an economic stimulus in the near term, but an increase in taxes will completely destroy any benefit that a stimulus will bring.
Believe it or not, this is what is being offered as one of the “solutions” out there. First, they are talking about eliminating the cap on the Social Security tax. That would mean that every dollar of earned income would be taxed at 15.3%, without limit. Next, they are talking about bringing the top tax rate back to 39.6%. Finally, if you live in a high income tax state like Oregon or California you will pay another 9% (9.3% in CA). So, here goes the math: 15.3 + 39.6 + 9.3 = 64.2% marginal tax! That doesn’t even count the sales taxes, property taxes, etc., etc. Does it sound good to you to go to work and know that out of every new dollar that you earn you will only take home $0.35? Add CA sales tax to that and you are left with $0.32. Add in gas tax, property tax, tolls, license fees, business taxes passed on to consumers, phone and utility taxes . . . this is legalized theft!
Please, don’t ever say that in my presence. There are too many things to say about this to fit in this entry. Let me put it to you this way: How on earth do you think the not-so-rich get their money? See if you can follow this logic:
Tom is a wealthy man who owns a successful business. He wants it to grow. He also needs to support his family. He needs to take home a certain amount of money to do that. Beyond that, the money that he earns will be invested back into the business so that he can make even more money. He knows that as his business grows to certain points he will need to hire more help because he just can’t do it all himself. That is okay with Tom because he plans to make more money by growing the business than it costs him to hire someone (otherwise he wouldn’t do it). Now, with more help Tom is able to make even more money. He takes some of the extra home, but also reinvests the rest of it into the business in order to grow even more. In the process he is providing more jobs.
Next comes along a new President and Congress. They increase Tom’s taxes by 15% (because he’s “rich”). Now Tom has a choice. He can do the same amount of work and watch his income decrease by 15%, or maintain his lifestyle and lay off some of his employees? Remember – Tom’s a selfish rich guy. So, he fires some people.
Who got hurt by the increase in taxes? Who can afford a tax increase, or more importantly, who can’t afford one? Now, a bunch of not-so-rich guys are running around without jobs and without money to spend. This begins to make the economy worse because there is less spending (both from the out-of-work guys and those who are afraid they might be out of work next week). Also, more people apply for government help. Those people are also not paying taxes anymore because they aren’t making money. Now the deficit grows and the government needs to make it up by what? You got it! Tax the rich!
You can replace the rich guy in that story with “Big Oil” or whomever you want. The only people that get really hurt by tax increases are the ones who think they aren’t paying the taxes. And yet they are the ones who get duped into voting for them.
The problem with this whole scenario is that it takes a while to play out. The changes don’t take effect immediately (except on Wall Street). They often take years to fully appreciate. So if today’s Congress and Whitehouse increase taxes it is often the next Congress and Whitehouse that live through the results. The same is true of the opposite. The positive effects of a tax decrees often take effect in subsequent administrations. By then it is too long for the perpetrators, or even the reason for the booming economy or recession to be linked to the results by the common observer. And so we go on in this senseless cycle.
By the way, even with all of the tax cuts of recent years we are only down to paying approximately the historical average tax rates for our country. We had to take significant cuts to get down to the average. If we go up to these higher rates that are being proposed we will be far above our historical average. That cannot help but take a toll. We will never be able to continue as an economic leader in the world with a 64% tax rate. No nation ever has.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
For the first several years of our marriage, my husband nagged, what felt like fortnightly, “we need to sit down and make some financial goals.” His suggestion was met with a habitual eye roll, (because I’m stubborn and snarky,) but also because I’m a financial first-grader in many regards and didn’t fully understand what he meant by “financial goals.” My response was always a reluctant consent for procrastinated compliance, “okay, but let’s not do it tonight, maybe at our next budget pow wow.” I mistakenly equated making financial goals with nailing down some arbitrary retirement figures upon whose altar I’d be sacrificing not-so-necessary, but oh-so-desirable Target purchases for decades to come.
As is so often the case, what we needed, even before financial goals, was better communication. Once I was freed from my errant preconceived notions and realized that my desires for a new camera or two inch blinds for the living room windows could also be included in (and eventually fulfilled by) financial goals, I was cheerfully onboard for setting them and working towards them.
Our goal setting sessions have, as a result of improved communication and understanding, become more successful and enjoyable. And the striving for said goals, even when it requires consumer restraint, has been equally satisfying.
Here’s what’s helped our financial goal-setting:
At the goal-setting table it is mutually understood that there is no such thing as a stupid goal; if it is important to one of us, it’s important enough to at least consider making it a bona fide family goal.
Breaking up our objectives into short, mid, and long term categories has helped us prioritize our desires and devise appropriately aggressive savings strategies to reach our goals in a time frame we’ve mutually agreed on.
I hesitate to even mention this because it seems so obvious as to go without saying, but the only way your voice and your desires will ever be considered in the financial plans is if you actively and assertively participate in the laying of those plans. In abdicating the responsibility of setting financial goals to my husband, I was also abdicating my right to have my desires considered in the financial plan. It wasn’t until I stepped in as an active and opinionated participant in the goal-setting process that I realized how productive and satisfying a process it could be.
Having goals on the list that I feel strongly about has made it easier to resist enticing little non-necessity items that whittle away at the available funds sum. I don’t feel like a retirement martyr when saying no to a cute pair of earrings, because instead of trying to imagine the gratification that tiny sum will bring us in our grizzled seventies, I’m imagining that $7.99 going into the “new blinds fund,” feeling totally triumphant that my current restraint has just brought us closer to less distant future gratification.
Sometimes we have to speak each other’s financial language to help each other understand the importance of certain goals — it helps me contextualize his lofty aspirations for long-term savings when my husband says, “saving aggressively for the future is as important to me as our weekly date night budget is to you.” With just that quick sentence, it’s suddenly very clear to me how non-negotiable the long-term savings is for him, and the overall give and take feels less sacrificial and more altruistic.
With mutually defined financial objectives, we are able to consciously align our spending with what we value because we have determined and discussed those values (read: goals), in a moment much more rational and clear than the one at the check-out stand. Like most of my husband’s suggestions that I’m reluctant to agree to, operating with financial goals in mind has proven to be a tremendously helpful step in the right direction for the monetary arm of our household.
I have a young married couple as clients with whom I love to meet. They are in their late 20’s / early 30’s. Both went to college to become teachers and both taught in local elementary schools. You might guess that they don’t have large sums of money to invest. You might also guess that their disposable income isn’t in plentiful supply. In both cases you would be correct.
Despite a relatively low combined income as two new teachers, this couple went about putting first things first. They made a budget and began learning to stick to it. They started saving for an emergency fund, college for their kids, and retirement. They purchased life and disability insurance. They took care of those things that mattered most to them and they still made it work. Many people on much higher incomes cannot seem to figure out how to do what they were doing.
Over the time that we have met they have made some choices that, at first glance, do not seem helpful to their financial situation. They have had two children. After their first was born they decided that the wife should work two days a week instead of full time. After their second was born they decided to have her stay with the children full time. That was more important to them than their financial goals, as long as they could survive.
As they were making the decision to have the wife stay home full time they came to me for help. They could not see how to make their budget work, but they felt like it was really important that they did. We spent some time together working through it all and even though it was tough, we found a way to make it work. Soon after I even got an email from them saying that their email address would be changing because they had started using a free internet service.
Soon the husband found a job as an assistant principal. Not only would the salary increase but the commute was better. Other things have worked in their favor. They have not needed to take any money out of their emergency fund. It is still an ongoing and recent change in their lives, but I know that it will work out.
I want to go on record with this prediction: If this couple stays on course with the decisions that they are making I will be writing about them again in future years. In 10-15 years they will be in a better position than nearly all of their peers, even if they remain on one income. When we want badly enough for a decision like this to work out, it does. There is magic that enters our lives as we make good decisions and parts of the equation that we never saw begin to appear and have a multiplying effect on financial and family wellbeing.
* This article is commentary on basic principles. In no way should the things said in the article be construed or interpreted to be advice for your specific situation. Before making any financial decision you should consider all factors and consult with a professional.
This is The Wallet. My name is Jesse Mecham, founder of YNAB. Here I focus on the YNAB methodology, software, personal finance, and more.
Take the Tour or download the trial to see what YNAB's all about.
