The new Carnival of Personal Finance is up at Broke-Ass Student and I am happy to see my recent post on Earning a High Happiness ROI included. There are tons of great submissions to this carnival, so check it out! Here are a few of my favorites:
- Money and Such has a great post critical of the 401(k) system. This really hit home for me as I’ve switched jobs a few times in the last 5 years and each time I rolled over my 401(k) into my new employer’s 401(k). This is a huge mistake, as leaving a job is a rare opportunity to roll your 401(k) into an IRA, with more options and the potential for much less cost. I’m still kicking myself.
- Plus6 questions whether going on a purchasing fast is really helpful in the long run. The post offers useful suggestions for getting a handle on your finances without drastic measures. I have read about “buy nothing” experiments like the Compact and I think they can be useful for increasing awareness of materialism, but may be too drastic for most people for a steady length of time. I am always in favor of spending less on material goods and more on life-enhancing experiences.
- Money Smart Life offers some tips on traveling with credit cards. Check out the comments too! Some excellent points there. I have a Capital One card for travel because CapOne charges no foreign currency transaction fee. The card also offers 1% cash back. Not a bad deal.
- Searchlight Crusade speaks up for the often-maligned condo/townhouse/PUD. I am very happy in my condo and would probably have bought it even if single-family homes in my neighborhood were more affordable. There is a lot to be said for not having to mow the lawn!
- Finally, here is a great post from Grad Money Matters on staying disciplined. I particularly liked how the author compromises on lunches out by brown-bagging it three days a week and dining out the other two. That is a great balance between saving like a miser and spending without a thought. I’d bet those two days a week are even more special because of it, too.
I could go on, but you really should check out the carnival for yourself–there’s a lot of great content there.
Many people believe–and from what I understand, at least one finance guru recommends–that when digging yourself out of debt, you should eliminate all non-essential spending and put as much money as possible towards paying off your debt. I disagree.
To me, this plan is just like a strict diet where you can’t have so much as an ounce of chocolate until you’ve reached your goal weight. It might work for the most disciplined people, but for others it will be a miserable process and, at the end, it may result in a binge that negates a lot of hard work. Whenever you’re being careful about finances, living frugally, or paying down a significant indebtedness, it’s easy to start down the path of miserdom. A little bit of breathing room in your budget will go a long way towards staying happy and healthy even while you’re paying down your debt.
I have a huge amount of student loan debt and recently started paying it down (at least the higher-interest debt) aggressively. In order to have more money to throw at the loans, I’ve become very frugal in some areas–I’ll dutifully go out of my way to save a few bucks on groceries, and I haven’t turned on my air conditioner even though it’s been really hot and humid lately. But I won’t think twice about putting my sack lunch in the office fridge if my colleagues decide to go out. One way to look at it is that the economies I’m making elsewhere allow me to put more money on things that are really important to me; that’s kind of the theme of this blog, after all. But the bottom line is that I am willing to carry my debt load for a few extra months if it means staying sane during the whole process.
To keep your discretionary spending from getting out of control, it’s probably best to budget a modest amount and stick to it by withdrawing that amount, in cash, upfront. Obviously, if you’re trying to pay off your credit card debt, you should probably not be charging discretionary purchases.
If you do need to–or feel you need to–cut out all non-essentials while you’re paying down your debt, I would encourage you to make a double or triple effort to find activities that are free. Take advantage of the free day at the museum or the free seats at your local theater, meet friends for a picnic, join a book club, volunteer–there are so many ways to stay active without spending a dime that you never have to feel like you’re missing out. And you will probably find that even after your debt is paid off and you have more spending money, you’re still taking advantage of these budget opportunities.
An important ratio in finance is the return on investment (ROI), which is, of course, the amount of money gained (or, sometimes, lost) relative to what you put in. When you’re talking about finance, you’re talking about exact dollars, and the formula is precise. But I think the concept behind ROI can be applied to spending that will yield intangible gains as well. (Now, I usually bristle when I hear people talking about “investing” in a depreciating asset like a high-end dishwasher or a nice pair of shoes, so I’m breaking my own rule here. Just this once. For now.)
The concept here is simple: Whenever you’re considering a purchase or expenditure, take a moment to consider whether it will make you a happier person or a better person or a more interesting person. If it won’t, that’s a strong argument for walking away. Unlike the finance ROI, what I’ll call the “Happiness ROI” is impossible to quantify, but you can break things down into rough categories:
- High HROI: This, of course, would be things that don’t cost much (if anything) but improve your life a good measure. Examples might be an afternoon at a museum, happy hour with friends, a subscription to a news magazine. Everyone’s list will be different, but if you assess something as having a high HROI, don’t hesitate to spend the money.
- Medium HROI: This category might include things like travel, tickets to the symphony, and gifts (including charitable donations). These things are also very good for you, but cost a lot more. Medium-HROI expenditures may have to go into the budget and you may even have to save up for them (I’ll detail my own means for saving for travel in a future post), but they’re probably worth it if you can make the room.
- Low HROI: This speaks for itself. I think most consumer purchases–purchases of things rather than experiences–fall under this category. An unnecessary new gadget, a pretty dress, an HDTV–none of it is exactly character-building. That’s not to say that you should never buy these things (I confess I’ve bought all of the above within the last year), but these are the purchases you should think hardest about. This is the time to ask yourself what you’re giving up to make the purchase. Maybe you’ll have to give up something like a day of vacation or a bit of your retirement fund, or you’ll have to wait an additional month to be debt-free. Is it worth it?
Finally, there’s a whole other category of spending that doesn’t fit into the HROI analysis: Necessities. These you have to buy no matter what, and should budget for (and have an emergency fund available for the big stuff). It doesn’t give me a warm fuzzy feeling to buy toothpaste or write a check to the plumber, but it has to be done.
My philosophy about spending is not to scrimp and save every last dime, but to be mindful of what your spending is doing for you. Scrimping can be destructive, for instance, if you are continually turning down your friends’ invitations because you don’t want to spend $10 on a couple of drinks. Spending can also be destructive, if you are turning down your friends’ invitations because you spent your last $10 on lottery tickets. Sticking mostly to purchases with a higher HROI will allow you to live well and still meet your financial goals.
Today’s post from one of my very favorite columnists discusses the extreme case of people spending thousands of dollars every month on their personal appearance:
But something appears to be getting lost in this new, weirdly overblown mutation. Maybe it’s all just another example of that fantastic inverse relationship our popular culture is adept at perpetuating: The more we spend on externals, the more we scrape and inject and try to enhance every body part, the further away we get from, you know, true attractiveness.
I’m all for people spending their own money however they see fit. I fully understand that some people have so much of it that perhaps $50,000/year in Botox treatments and Creme de la Mer is really a drop in the bucket. And I also appreciate that in many professions that pay well, a bit of conspicuous consumption is expected, and personal upkeep required, so that some amount of outlay may actually be considered a sort of investment towards a higher salary. Fine.
But at a certain level, I think this crosses that line into some new territory of shallowness. And it also would seem to me that such spending just begets more spending, because the more you analyze (and try to remedy) what you perceive as your physical shortcomings, the more you’ll notice other faults, etc., etc., forever, until you’re fretting over every tiny wrinkle and freckle, no matter how imperceptible to others, and probably getting prematurely gray in the process! Talk about counterproductive.
These people may be financially well-off, but are they living a richer life? Quite the contrary, I would say.