My recent interview about Enslaved by Consumption can be listened to below. The audio was broadcast on the first segment of KYOS 1480’s Community Conversation show.
Available at Amazon.com in late July 2015…
Enslaved by Consumption – How frivolous consumption fueled by debt is leading to your voluntary enslavement
Whether we are young or old, with debt or without debt, each of us has the power to guide our financial futures toward the goals we seek to achieve. To sail toward and reach our financial goals, we must have discipline.
Today’s personal finance topics are often composed of recipes. Financial advisors are paid to insist you save $X per year and invest in the market in order for you to achieve the life goals you have set before yourself. This advice is well and good, but only scratches the surface of the introspection that needs to be had amongst the majority of society. It is not that we lack the knowledge of what needs to be saved; the problem is we lack the will to save, the will to defer consumption, the will to say no to frivolous debt.
To cure our affliction we must understand the root causes of what is enabling detrimental patterns of behavior to shape and control our lives. To break the chains of enslavement, it is necessary for us to know how we arrived at this point in history, what is causing the problem to perpetuate itself and how we each can take action to reverse its progression. Breaking the chains of frivolous consumption must be done one-by-one, to not only create a better future for ourselves, but a better future for our entire society.
Enslaved by Consumption goes beyond the standard personal finance playbook and explores the underlying streams of thought that are causing us to compromise our future and voluntarily enslave ourselves. Whether you are looking for financial advice or are seeking to understand what is driving our nation of debtors, Enslaved by Consumption will take you on a journey that will lead to a deeper introspection and an understanding of the financial landscape that surrounds us all. It’s time you invest in yourself.
Having healthy personal finances is a pivotal component for every family and society. The small, taken together, ultimately becomes the large. Our collective body ultimately becomes what we call our society. Whether it be for yourself or society, understanding what constitutes healthy personal finances is critical to creating and maintaining an environment in which we can economically thrive.
Three parts are needed to be in good order for a person/family’s personal finances to be considered in good health. The first component, and most important, is ones ’emergency’ savings. The second is the ratio of spending to take home pay per month. The third concerns ongoing savings.
The importance of having some form of emergency savings on hand cannot be stressed enough. The term emergency is a loose term that applies to any savings held that are not designated for some other purpose. To exhibit health in this first area of your personal finances, it is necessary to have a minimum of six months of savings on hand.
Establishing a reserve of six months or more provides protection against a number of potential maladies that can occur. The most frequently cited is job loss. The loss of a job means for most people the loss of their regular occurring income. Since the ability to reduce expenses is not directly tied to whether you receive all, some or no income per month, savings must exist to service the expenses when your regular income is no longer present.
What we have experienced since the Great Recession is the fact that regaining employment is not often a fast transition. It may take months and involve relocation before one gets back to establishing a regular form of employment. Six months should be your minimum emergency savings set-aside.
If you’re earning above $60,000 annually, then a threshold above six months would strongly be suggested. Generally speaking, higher level jobs in organizations are fewer in number than lower level jobs. Therefore, establishing employment again as a higher earner would be more difficult, especially in a time when the economy is experiencing a contraction.
The second pillar is built upon establishing a sustainable ratio of monthly spending to monthly take home pay. The first step is to establish what your monthly expenses are. An average must be identified. With the average, certain non-frequent payments should be incorporated. Examples of ‘non-frequent’ expenses are DMV registration and insurance. These events do not occur monthly, but are regular and need to be identified.
Once you have arrived at a reasonable figure of what your monthly expenses are, then the expense can be compared to monthly take home pay. In doing the comparison, the initial goal is to establish a portion of ‘slack’. The slack that is needed between expenses and pay serves as a buffer. The buffer serves as protection against monthly spending that swings above the determined average. The minimum amount of slack needed in the establishment and maintenance of a health spending to pay ratio is 10%. If you lack control of your spending habits, then the amount of slack would need to be higher; say 20% or 30%.
The way the spending to pay ratio works is simple. In the case that you determine the average amount spent per month is $3,000 and take home pay is $3,500, then your spending to pay ratio would be .86 (divided the two dollar amounts). For every dollar you bring home per month, .86 cents is spent. The amount of slack you have per dollar is .14 cents or 14%. In a situation where ones control on spending is relatively strong, the 14% amount of slack would be a suitable buffer.
The third component is ongoing savings. Ongoing savings can be established in multiple ways. Depending on the avenue chosen, the re-evaluation of the spending to pay ratio might be necessary.
Ongoing savings will constitute something different for everyone. Retirement is often a binding theme, but people save for many other items. Someone might save for a TV, while another might save for a boat and another might save to start their own business. Even amongst the multitude of possibilities, general guidance can be established.
When a pre-defined contribution is being made out of ones paycheck for retirement purposes (401k, 403b or another tax sheltered account), then that money is not part of ones take home pay. In most cases, when payroll is run, the contribution to the tax sheltered account is diverted directly to the account and not included as part of the final paycheck. In such cases, the take home pay amount is not inflated by the inclusion of retirement funds. If this is not the case, then the amount dedicated to retirement pay needs to be deducted from the take home pay amount being used to establish the spending to pay ratio.
Other items that are being saved for (car, boat, house, business, etc.) need to be deducted from the amount of take home pay per month. The savings in such an instance is a savings to serve a future expense. The savings is not to serve as protection against an unknown event, retirement, or what would be considered ‘slack’ in the amount you spent this month versus what you brought home.
An example of the principal above would be a situation where you were saving $300 per month for a new television. If we go back to our example of having $3,000 in expenses per month and $3,500 of take home pay, we would need to deduct the $300 from our $3,500 take home pay. In this instance the $3,500 would fall to $3,200 and our spend to pay ratio would become .94. A ratio of .94 means our ‘slack’ would be .06 or 6%, which puts us below the 10% threshold.
Savings is paramount to establishing and maintaining a healthy personal finance system. Each of the three components outline above is structured via the establishment of savings. This is done to preserve the quality of life we’ve come to know and ensure the financial goals we’ve set forth are realized. Without being aware of our personal finances and establishing controls we are feathers in the wind hoping that fate blows us in the right direction.
For the good of yourself, your family and society, don’t reduce yourself to a feather in the wind.
The US Department of Agriculture (USDA) estimates the cost of raising a child in today’s environment averages around $250,00. Yes, that’s the cost per one child. Depending on the region of the country you live in, the average can range from over $280,000 to under $200,000. If we look at the cost categories where do the expenses exist and where can you find savings?
- Housing – 30%
- Food – 16%
- Transportation – 14%
- Clothing – 6%
- Healthcare – 8%
- Childcare & education – 18%
- Miscellaneous – 8%
The interesting part of the breakdown starts with housing costs. What the USDA is doing in their analysis is attempting to compartmentalize the idea of housing. By compartmentalizing per person, then a dollar value based on average mortgage costs can be associated per child. This is a reasonable way to estimate housing costs, but is it actually applicable to your living situation?
The assumption the USDA is making for housing is that your need for housing expands as you having more kids. This a logical assumption. What might cause you to consider the logic flawed for your situation is the fact that you may not have a mortgage to pay at the time of having a child or the fact that your given housing size would not increase or decrease with or without kids. Therefore, in many situations you could consider the housing cost a sunk cost that would have been incurred at the same level with or without kids.
The housing category does deserve special attention in you personal analysis of the USDA’s estimates. At 30% it comprises nearly 1/3rd of the estimated cost. Based on the $250,000 average, elimination of 30% of the cost means a reduction of $75,000.
The childcare area is another category that could have some significant variances. If you have a relative available to watch your child/children or have one parent able to stay at home, the childcare cost is going to be greatly reduced. In terms of education, private school versus public school for K-12 education will create a huge variance, as well.
It should be noted that the analysis the USDA did excluded college expenses, since the age range is from age 0 – 18 years.
In terms of personal finance, it’s important to understand when very general studies and statistics are provided, you must find where you fit into the mix. Often times news stories are written to capture your attention, which large figures are thrown around, such as $250,000. It’s not until you deconstruct the information that you’re able to see how you might not be “average” or the assumptions made in the model doesn’t fit into how you’ve structured your finances.
If you frequent personal finance sites, you probably have run across an article or two advocating the development of an annual budget to manage your personal finances. After reflecting about the topic and thinking about my own personal finances, I don’t think the focus on a full fledged budgeting process is the best method.
Here’s what I’ve come to believe…Most people will not dedicate the time to developing a budget and sticking with the budget set. Typically, the budgeting process and the up-keep to track actual activity versus the original budget is more than your average person is willing to deal with. So, if budgeting is beyond what most people want to do in terms of personal finances, then what alternative exists that will help promote and maintain fiscal control?
The alternative I’ve used for many years looks at budgeting as a secondary consideration and savings as the primary. Let me explain…When you get paid, you take home say $4,000 per month or $48,000 annually. Based on what you’re bringing home you need to set a savings percentage. If you’re only looking at retirement and have 30+ years ahead of yourself, then a savings rate of 10% is a decent minimum. In dollars that’s $400 per month or $4,800 annually.
Side note: If you save $400 a month and are able to average a rate of return around 7% annually, over a 30 year period, you’d end up with around $500,000 in savings.
What placing savings at the paramount of your personal finance decisions does is it creates a hierarchy in which all other activity must adhere. Everything is seen through your savings lens. If you want a new car you must ask yourself how will it fit within the goal of saving for retirement or some other goal you have. You will still need to “budget” for the expense, but you won’t have to incorporate it into some grand budget.
I understand that the idea posed above might sound a little too simplistic. It’s not. Take a look at your bills over the past month or two. Have you been able to save anything? What costs can you adjust? What costs cant you adjust within the next month or next quarter? The costs you can adjust are variable and they are you biggest asset to crafting a saving percentage into your personal finance regimen.
To help you determine where you are and where you want to be, I have available a Monthly Budget Worksheet. It identifies what your fixed and variable expenses are and shows graphically how the items measure compared to your monthly income. (It’s completely free, you don’t have to sign up for anything)
To conclude, putting your savings goal at the pinnacle of your personal finances (That means the piggy bank eats before any other need…) makes the rest of your personal finance choices take a subservient role. If you’re able to keep your focus on your savings goal and not falter, then the act of creating a full scale annual budget is not something you need.
Earlier this week the sad news broke of actor Robin William’s suicide. Since the announcement of his death, various information has been released to explain what might have caused his depression to spiral out of control. What is very apparent to me when reading these stories is the personal finance subtext that is woven into many of the explanations to his depressed state.
Mr. William’s, at the end of his life, had become wholly enslaved by consumption. So enslaved that he came to the point where the only hope he saw was to exit this life through suicide. This is an extreme example of one losing control of their finances through their own will. As with examples, it’s often the extreme ones that are able to drive the moral home.
It seems impossible that an A-list actor and successful comedian could arrive at the point of bankruptcy by the age of 63. This is what Mr. Williams was facing. Why? It was not for the lack of money earned. He had a very successful acting and comedy career, which put him higher than 98%-99% of the entire population in terms of lifetime earnings. His issue came from his inability to control his spending habits.
As a result of out of control spending, he found himself in a dubious situation. His need for money led him to return to roles that apparently did not help his mental state. It is reported that he was in the process of forcing himself to take the lead role in the sequel of Mrs. Doubtfire. This role is reported to be one that he dreaded having to take because it would have a negative impact on his mental condition. Yet, it would help him stave off bankruptcy.
At the end of Mr. William’s life, he had enslaved himself to his master. His master was consumption and he found that the funds used to fuel consumption did not answer to him; they owned him. This led to the escalation of his depressed state and it arrived at a point of inflection where he could not continue life and chose to end it.
What is living? Is it consuming to the point where debtors bring you to the knees of bankruptcy? Is it having more and more stuff? For Mr. Williams the laughs and jokes were not enough and whatever was missing in his life was ultimately not filled by his consumption. In the end, the consumption didn’t close the chasm, but tore it wide open.
I’m currently working on a soon to be released book titled, Enslaved by Consumption. Look for its release toward the end of 2014.
It’s estimated that over 38 million American households have no liquid cash set aside for an unexpected financial calamity (That means about 1 in 3 fall into this category…38 / 115 million total households = 33%). Of this 38 million, 25 million of them cannot be classified as poor. This is a disparaging thought that 25 million households are choosing to live hand-to-mouth (Hand-to-mouth = Spending all your earnings and not saving.). This choice not only has personal ramifications, but national, as well.
The reason choosing to live hand-to-mouth is such a disparaging thought is the same reason acrobats are heavily discouraged from performing stunts without a safety net. If your stunt goes awry and a net is there, you have an accident. If something goes wrong and you have no net, a tragedy occurs. As we experienced in the last recession, economic calamity can strike fast and hard. If you do not have savings to fall back on, you can find your household in a rather compromised situation. This situation is likely to impact not only your household, but your family and the entire society, if you must turn to some form of government assistance to recover.
When statistics are thrown out alerting the rest of society that a good portion (33%) of households are performing their personal finance routine without a net, not many solutions are provided to cure the problem. One reason stems from the fact that financial choices are not really ‘surface’ decisions. By ‘surface’ I mean that the decisions are not often lightly held beliefs. The way we spend and save our money is often the outworking of a deeply entrenched pattern of behavior that governs our lives.
For example cars, homes, clothing, technology and other tangible goods are purchased not simply for their functional value; they are purchased in part for the status they bring. For example, such purchases go beyond a decision to secure shelter with adequate space in a safe area. These decisions are made to establish a perception in one’s mind and the mind of others. This isn’t to deride such motivations. The issue becomes a problem when the superficiality suffocates practicality. In such cases, the safety net becomes a thing of scorn because it takes away from the splendor of materialism.
The wager made not to save causes society the same problem created when families forgo purchasing health insurance. Without health insurance the cost you might incur from an injury has not been hedged. No ‘net’ via insurance has been purchased to shield society from the burden of your health costs you cannot afford. A parallel situation exists when saving is foregone. Economic calamity strikes and society is left holding the bag. Food, housing and other subsidies are given to assuage the fiscal pain, while the bill is shouldered on the backs of others.
The reality is that we live in a consumer-centric society. Most outlets of influence whether it’s from the government, mainstream news, or entertainment push the idea that purchasing is one of the greatest goods. “You’re helping the economy when you…”, “You’re supporting a worker each time you…”, “The top ten fashion trends for fall are…”…The list is endless. The one message that holds true is that consumption is a virtue. The other side of the coin, saving, is like the dark side of the moon; hardly seen, sometimes spoken of, and far less glamorous.
To cure the ill that has fallen some 38 million families in the U.S., priorities and perception must change. The way we see the world must be reshaped. The only way I see this occurring is from rhetoric (talking about this issue), education and examples from the top. By the top I mean people that have visibility and those that are influencers. I do not see the modern family or the Protestant work ethic that Max Weber wrote about in the early 1900’s coming to the rescue. The former has disintegrated compared to what it once was and the latter has been largely filtered out of society over the last four generations.
For me to realize that we might be at a point where society must rely on politicians, movie stars, sports heroes and reality TV to encourage society to save its money is enough to make me want to move to the dark side of the moon.
A recent study from Tilburg University and the University of Chicago (see link below), estimate that American’s waste $44 billion annually on the purchase of name brands, while they could buy the exact same product via a store brand alternative.
On average, store brand products run 50% less than name brand. If you’re looking to find a quick way to cut the cost of your expenses, it might be easily found in changing from name brand to generic items. If you’re financially savvy, you likely already practice this approach when shopping. For example, if you go to Costco, they carry Aleve in a generic form, which sells for less than the name branded product and provides you with a greater quantity of pills.
Don’t get duped into having your emotions played with via such marketing messages as “Choosy mom’s choose jif!” Please, if you’re a choosy mom and care about your child’s college fund, you’re going to buy the generic at a discount. While you’re at it, you can teach your child/children a personal finance lesson. Killing two birds with one stone.
If you’re a brand name addict, take a step back and reevaluate what you’re doing and why you’re doing it. Your financial future matters more than the financial future of General Mills or Pfizer drug company. If a generic exists, give it a try and make sure to think about what you’re saving in percentage terms, not just dollars. Paying $5 rather than $7 means you just saved nearly 30%!
An interesting piece was recently written by Morgan Housel on the Motley Fool. At its highest level, the author argues against goals and provides a number of reasons as to why goals should not be your focus. As a person that is very much ‘goal oriented’ I anticipated that I would disagree with the authors argument. Surprisingly, I think Mr. Housel is pretty spot on.
The piece is not so much an argument against goals as it is an argument for systems. We all want certain outcomes whether they be precise or not. The author tries to escape the idea of having a goal, but it’s actually pretty difficult to do, if you’re going to commit to doing X on a regular basis. If you take to doing an action, you will expect a certain outcome to follow.
The weight and value of the piece comes from the discussion about the development of systems. “Systems” can be thought of the traction behind actually getting you from point A to point B. The problem with a lot of goal setting is that ends up being a shell. The goal exists, yet it is truly empty otherwise. Not everything is as easy as flipping a switch and turning on a light. Most goals take much time dedication and sacrifice to achieve. Without a system in place, the long road to reaching the goal will be only traveled in part or not at all.
If you have a financial goal or a goal that hinges on a certain amount of fiscal success, it is vitally important to not just focus on the end. The entire journey from where you’re currently at to where you want to be needs to be evaluated. Creating a system, some routine that is done on a regular basis, is a great idea in order to achieve the ultimate outcome.
On a final note…The entire subject kind of reminds me of the response to “How do you eat an elephant?” Answer – “One bite at a time.” That’s how you accomplish any large goal.
You may be working on various ways to tackle your financial obligations and shore up your credit worthiness. Though you have several choices to make in order to become debt free, yet you need to smarten up your plan of attack to take on those troublesome debts effortlessly. For that reason, it is important that your approach to debt repayment is practical and an effective one.
Are you aware of your credit?
Prior to creating a debt repayment plan, it is important that you get a stronghold of your credit reports and credit scores. These are what will make or break your efforts to become debt free. Here some of the justifications for you that establish the importance of tracking your credit:
- A good head-start – According to the debt experts, most of the debtors like you have misconceptions regarding the total amount of outstanding balance owed by them. However, if you want to become debt free, then it is best to list all the details of your loans as well as respective creditors in an organized manner.In this case, your credit report will come in handy since they’ll contain all such financial information that you may require to create a smart debt repayment plan. For instance, you can locate any collection account that you’ve forgotten or find out the recently added outstanding balances that you owe through your credit reports (it can be from Experian, TransUnion or Equifax).
- Better credit awareness – Though you may believe to have a good credit rating after making regular monthly payments, yet the reality might be something very different. On the flipside, the amount of outstanding balance you owe may be the cause of a slumped credit score. However, it is difficult for any of you to decipher and analyze the actual financial condition through a credit report.Simply put, your credit report will only provide you with information related to all the credit accounts that you have, their balances and your payment history. Additionally, you can easily make out the impact of your debts on your credit rating through your credit scores. So, the moment your outstanding credit card balances approaches the set credit limit, from then on your credit score will start to suffer.
- Improved credit report – Usually, it takes a considerable amount of your time and commitment to repay all that you’ve amassed over the past few months or years. Just remember you aren’t going for a sprint, rather debt repayment is a marathon and so, you’ll have to be strong in your resolution to become debt free and agile with your budget to cut down bad expenses as well as build up an emergency fund.You must find your own sources of inspiration and stick with the repayment plan till you have no debts to repay. Another important thing that you shouldn’t forget is to monitor your credit report and this applies even if there is no financial obligation for you to take care of. This is one of the best ways to keep yourself motivated and manage your debts with ease.
Once you have become disciplined and have been paying off your dues on time, all these activities will be reported to the credit bureaus and that’ll show on your credit reports. As a result of a widening gap between credit limits and your outstanding balances, there is are high chances that your credit score will also improve. However, if you had opted to settle your loans or file for bankruptcy, then keeping a tab on your score can at least assist you in monitoring your development as you put in all the efforts to rebuild your credit and ultimately your life.