YOLO Responsibly

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Attention: If you are a Millennial who believes in a YOLO lifestyle, then this post is for you. If you haven’t heard of the term YOLO, but you make impulsive and sometimes questionable financial decisions, then this post is also for you.

The acronym YOLO (“You Only Live Once”), which arose from Drake in 2011, comes from the Latin term “Capre Diem," which means seize the day, and don’t worry about the future. While I agree we all should seize the day, and live life to the fullest, both YOLO and Capre Diem embrace impulsive, and sometimes risky behavior, since you are not thinking about your future. But I get it, I too like to live in the moment and be spontaneous even if sometimes it isn't the best decision in the long run. But sometimes living in the now and living the YOLO lifestyle can be very expensive and cost us more than we may realize. We need a compromise; a way to YOLO and also make smart financial decisions. I called it YOLO Responsibly.

The goal of this post, is the turn you into a responsible decision maker, while still enjoying the “now." Like all of my other tips and advice, the process of becoming financially responsible and staying on track is simple. Below I show you how to YOLO Responsibly.

Step 1: Create a “YOLO Savings Account” or what my mother calls “Mad Money”

Step 2: THINK & TAKE A DEEP BREATH (Obvious, but most people forget this)

Step 3: Act

Step 4: Follow-Up

Step 1 (Mad Money Account): If you take anything away from this post, please remember this; create a Mad Money account, which will be used towards your YOLO spending. Of course, there is no such thing as an actual YOLO Savings or Mad Money account at a bank, but this is what you will refer to it as. Use this money every time you have a YOLO or even FOMO (“Fear of Missing Out”) moment. It’s important to be spontaneous and enjoy every minute of your life, especially your youth but we need to be responsible as well. It's important to budget your Mad Money properly and be disciplined. If you run out, just start saving again, but never divert monies from savings or retirement to fund your Mad Money. You must never spend more on a YOLO moment, then what you have saved in your Mad Money Account. I understand this many be difficult for you, but its critical you follow this step.

There are several different funding methods you can choose from, but my personal favorite is the “Round-Ups” feature from Acorn, which we spoke about in “Opening A Brokerage Account." A Round-Up uses the spare change captured from rounding up every transaction you make to the nearest dollar. All you need to do is link your credit and or debit card to your Acorn account. For example, if I purchase a cup of coffee for $3.50, Acorn will charge me an additional $0.50 and add $0.50 to my Acorn account. Once I build up $5.00, Acorn will automatically invest the $5.00 for me. You will be surprised how quickly the pennies add up to real dollars. If this method is too slow, then I would encourage you to use another feature from Acorn, called "Recurring Investments." Acorn automatically takes a specified amount from your checking or savings account each day, week or month and invests it for you. You can also save the old fashion way, by putting money away each week into an envelope or jar. I’m not a huge fan of this because you may “forget” to add money to it each week, and the money won’t be invested, so you are missing out on potential earnings through investing.

Becoming financially responsible is all about learning how to balance life. While saving for retirement and paying off student loans is important, we all need to have a little fun in life. When building your budget, I would recommend building in a Mad Money line item into the “Your Wants” section of your budget. It doesn’t matter if you make $30,000 or $300,000 a year, we all can and should have Mad Money savings, so we can be spontaneous and have fun, while not going broke.

Step 2 (Think): Although Step 2 may seem like the logical thing to do, many of us don’t think before spending our hard earned money, and then later come to regret that decision. When a fun, exciting opportunity is presented to us, we sometimes act irrationally and spend way too much without even realizing it.  Spending money is super simple, retailers and others make it so easy. For example, if you want to purchase an item on Amazon or an app from your I-Phone, you can do so with one click. In today's online retail market there is no need to type in your credit card number or mailing address because it is already stored. We need to take a deep breath a not rush to buy things impulsively. Generally, an impulsive buy isn't something you actually need because if it were, you would have it already or would already be savings towards it. 

Before making a YOLO purchase, you need to think about the following:

1)      Do I actually need this?

2)      What will happen if I don't buy/participate in this event/experience?

3)      How much money do I have in my Mad Money account?

4)      What are the pros/cons of buying versus not-buying?

5)      Is there a less expensive alternative?

After reviewing these questions in your head, you will make a much smarter decision. It does not matter if you buy it or not, it just matters that you think about what you are doing, and have the least amount of regret. Usually, I find after I think it over for a day or two, the correct decision becomes very clear to me.

Step 3 (Act): The easiest step of them all. Now that you clearly thought out your decision go ahead and either buy or do not buy the item or experience you want. 

Step 4 (Follow-Up): Most of us including me, never do this. But I found it helps me make smarter financial decisions in the future. We all make mistakes and throw away money from time to time. But it is essential to use these mistakes as learning opportunities, so we do not repeat them. As we (being millennial’s) begin to earn more and more money, our financial mistakes will only grow larger, if we have not learned from our previous errors. So it's critical to realize when you mess up, figure out why you messed up, and try your hardest not to repeat the same mistake again. And sometimes the opposite is true, where you should have spent your money on that new coat, or once in a lifetime trip with your friends. But don't worry because those once in a lifetime events, will happen again.

I hope you will take these tips to heart and try your hardest to YOLO Responsible. Now go have some fun and always remember to YOLO Responsible :)

SHOW ME HOW TO SAVE

Dwayne “The Rock” Johnson once said, “Success isn’t always about greatness. It’s about consistency. Consistent hard work leads to success. Greatness will come.” I really like this quote, because of how it applies to your financial success. Saving money is difficult for most people, including me, but it could not be more important for our future. It doesn’t matter if you make $30,000 or $300,000 a year; we all need to save as much as we can, even if it’s only 5 dollars week. It’s the consistent action which builds success. When people tell me they can’t save, my response is always the same. I ask "do you have a goal," "have you set a daily, weekly, or monthly saving targets," and "have you analyzed your budget to see where you can reduce your expenses." Usually, the response is the same, “no." Some people have a goal but have not set savings targets or analyzed their budgets. And that’s the problem. I have created a simple process to change one’s thinking about saving. The principals of this strategy can and should be applied to saving for the things like a $150 pair of shoes, or saving for your children’s college education. The steps are the following:

Step 1: Create a Clear Goal

Step 2: Budget Analysis and “Sacrifice”

Step 3: Consistent Action

Step 4: Discipline

Step 5: Success

Step 1: Create a Clear Goal. We must start by writing down what we want, how much it will cost, and how long it will take you to achieve your goal. When you have a clear, well-thought-out plan, it is so much easier to achieve success because you hold all the answers. You know how much you will need to save, how to cut expenses, and when you will achieve it. One way to prevent yourself from losing sight of your goal is to take a picture of it and hang it somewhere in your home, where you will see it every day. This will help keep your focus throughout the process of building your savings.

Step 2: Budget Analysis and "Sacrifice." If you read "Congratulations, You've Graduated College. So Now What?” which you can access here, you will have learned how to build a detailed budget. Analyzing your budget and identifying where cuts can be made, will be your starting point. The best area to make cuts, in my opinion, is in the “Your Wants” section of your budget. This is where money is spent on things like travel, clothing, restaurants, bars, and luxury items are.

Let’s use a simple example. You want to buy a new TV that costs $500, and you allow yourself 6 months to save for it. You have identified three categories in your budget (restaurants, bars, and clothing), for which you can reduce your monthly spending. Currently, you spend $100 per month on each category. In total, over the next 6 months, you will pay $1,800 for the three categories. Thus the math is simple; we need reduce spending by 27% which is $83.33 per month. We have several ways to achieve this, including; 1) cut spending on all categories by $27.78 per month, 2) cut one category for five months, and or 3) alternating between removing categories each month. You can customize your savings breakout however you like, these were just three options. I recommend you find the solution which best fits your needs, by reducing the impact on you.

Step 3: Consistent Action. The best way to consistently save money to is to remove yourself from the process entirely. One way to achieve this, is to set up daily, weekly or monthly automatic transfers by withdrawing monies from your checking account, and sending it to your savings account. Most major banks will allow you to do this for free. This way you can consistently save money, and you will only need to focus on spending less. Now instead of a $500 TV, you now want to a save $50,000 for a down payment on a home. You give yourself 7 years to save, and you begin to strategize on how you will achieve this goal.  In addition to setting up daily, weekly or monthly automatic transfers to your savings account, I would recommend setting up an automatic electronic transfer from your bank account into a brokerage account, and invest the monies how you see fit. Depending on your risk tolerance you can invest in safer securities, like U.S. Treasury or Municipal Bonds, or more risky securities like stocks and option trading. Whatever you choose, it’s vital to understand the products you buy and how to invest, which we will discuss in a later post.

Step 4: Discipline. The last step before reaching success is maintaining discipline. You need to stay focused on your goal and how you are going to achieve it.  If you have followed step’s 1 – 3 correctly, it may and probably will be difficult. But I promise, you will get there and you very proud of what you accomplished. 

Step 5: Success. Yay, we made it! You now have $500 for your TV, but before you buy that TV, check for sales and if possible, wait for Black Friday or Cyber Monday. Another possibility is you no longer want the TV. After saving consistently for 6 months, you realize just how difficult it is to save, and you decide to keep the TV you have for a little longer. I find this happens to me often, but it very important to reward ourselves for a job well done. So go ahead and get whatever it is you want in life. Just stick to the plan, and you will get there. 

Please leave comments and questions below.

Congratulations You Graduated College. So Now What?

Congratulations you have officially graduated from college, let's drink, party and celebrate! Just kidding, I'm not sure what all the celebration is about, because after 4 years of college, you more than likely have never taken a personal finance course. Even if you were a finance and accounting major like me, you likely have never taken a personal finance course. And if you're one of 44 million Americans, you've officially been given the responsibility of paying back tens of thousands or even hundreds of thousands of dollars in student debt! We will tackle the challenges and solutions of student loans in a later post, but for now, let's focus on creating a budget and sticking it to. Creating and sticking to a budget early on is crucial to your future success as you are building the core values for your future. In my opinion, the most essential value is being disciplined. Being disciplined will not only allow you to stay on budget but will enable you to begin growing your money and begin building real wealth. But don’t worry, this post is designed to show you how to create a substantial budget, and how to optimize that budget to fit your lifestyle. Okay enough small talk, let's dive in.

The 50/30/20 Rule: This is a relatively simple budget we can all follow. It breaks down your income into three distinct categories; your needs, wants, and savings. Let's say for example you earn $50,000 a year after taxes or $4,166.67 per month. Let's break this budget down. 

Your Needs (50%): $2,083.33 should be spent on items such as your mortgage/rent, student loans, credit cards, utilities, groceries, cable, phone, transportation, and healthcare, just to name a few. The good thing about this component of your budget, is most of these items are the same or similar every month so we can better predict future months. Napkin Note: As a general rule of thumb, let's try to keep your mortgage/rent expense under 35% of your total after-tax income. Those who do not follow this rule will find it difficult to fulfill the "Your Wants" section of your budget, which is basically where all the fun is. But don’t worry, it‘s fairly easy for you to spend less than 35% of your income on rent. In my budget below, I have been able to spend just 26% of my after-tax income on rent.

Your Wants (30%): $1,250.00 can be spent on travel, clothing, parties, eating out/bars, and or anything above the "your needs" component. Basically, this section is all about you, and making you happy. So please spend it however and on whatever you want. If it is not a necessity, then it will more than likely fall into this category. 

Your Savings (20%): $833.33 should be placed into your savings account until you have at least 6 months or $16,250 as an emergency fund. I arrived at this number since it is 6 months of "your needs" and 50% of "your wants." Some people might argue a 6-month emergency fund is too large, versus a 3-month fund. At the end of the day, the decision is up to you, but I feel a lot more comfortable with knowing I have 6 months of expenses secured then just 3 months. And the good news is you will be able to build a 6-month fund after 20 months of savings.

Having an emergency fund is critical, and most people do not follow this step, but having one will provide you with comfort, should you become unemployed, have health bills or just spent way too much one month by accident. Please remember your emergency fund should never be used for "your wants." Should you want to go on a $1,500 fancy vacation, then you will need to lower "your wants" and increase "your savings" until you have $1,500 above your emergency fund. But remember you can and should budget for a vacation in the "your wants" section of your budget as I did in the budget I created below.  Once you have established your emergency fund, we will discuss what you should do with the additional savings in a future post.

You may have noticed I have not mentioned anything about your 401-K contribution. That is because this is a pre-tax item. Meaning contributions are taken from your paycheck before taxes are deducted. Once you become employed, generally after 90 days if your company has a 401-K program, 3% per paycheck will be automatically deducted from your pre-tax earnings and placed into your 401-K. Unfortunately, 3% is not enough, and you need to try to contribute at least 8% - 12%, and please strive for 12% at a minimum. Under IRS rules, we are allowed to contribute $18,500 per year of pre-tax income, which does not include any monies your company matches. I will review this benefit and more on 401-K and IRA accounts in a later post, but for now, just keep this in mind.

I want you to know I understand the 50/30/20 budget may be challenging, especially for those of us with loans and other obligations, but sacrifices must be made for your future. I completely understood those who want to live in the now and enjoy life today, and my mission is for you to be able to achieve that. But it would be irresponsible for me to tell you what you want and not be realistic. Saving and investing for your future will secure your future financial independence at a much younger age then you think if you are consistent and disciplined.

The 50/30/20 rule can and should be customized to meet your needs, but please do not lower the 20% savings level. This was a pretty broad overview of the 50/30/20 rule, so now I want you to be able to dig in deeper, and learn about all your expenses. I have created a generic budget based on a person's after-tax income of $50,000 in a high tax state and city like New York, NY. Please use this as a guide as you begin to create your own budget.  You may look at this and be completely overwhelmed, but please review it line by line and it will start to make sense to you. If you have any questions or comments, please write them in the comments section below.

50K After Tax Budget Post 1 7.20.18.jpg

Budget Optimization: Now that we understand how to create a budget, we need to learn how to optimize it. As soon as the first month is complete, I would like you to create another budget template like the one above, but this time use exact numbers based on what you actually spent each month. You will then clearly be able to see if you stayed on, under or over budget, and specifically in what category. For example, I have allocated $250 per month in my budget for restaurants, but lets so I actually spent $350. I now have a mental note in my head to either decrease spending on restaurants in month two or increase my budget to $350, and decrease other items in my budget by $100. After a few months, you will have crafted a unique budget that fits your needs.

As I hope you are beginning to understand, none of this is rocket science and should be reasonably simple for us once we know our budgets. Then why doesn't everyone create a budget, you might ask? I believe the answer is something I mentioned before, discipline. Some people think this takes too much time and work, and they can better manage their own budgets in their head, using the "in my head" method. This is equivalent to a pilot flying a plane from New York to Paris only using a compass. Yea, the pilot, might make it, but he won't take the most efficient route, saving the airline time, wear and tear on the aircraft and most importantly money. We only earn so much money. And we must be able to use each dollar as efficiently and effectively as possible. In my opinion, creating a budget and tracking your spending habits will help achieve this. My primary objective is to help you succeed and grow. So please leave comments and questions below, so I can better answer your specific questions and concerns.