Archive for August 30th, 2007

Getting "Beyond Paycheck to Paycheck"

Published by Ryan Healy on August 30th, 2007 in Books, Money, Work | 20 Comments

High school teaches us basic algebra, geometry and calculus. It teaches us how to appropriately research papers and cite sources. We learn U.S. and world history. But, most school systems fail to give us a basic financial education.

In his notorious book, Rich Dad, Poor Dad, Robert Kiyosaki points out this fatal flaw in our school system and proceeds to give us a financial education. Of course, he then released a handful of other books that more or less say the exact same thing, but that's not the point. In the grand scheme of things, being financially literate is one of the most important skills anyone can have.

This is the number one reason I majored in Accounting and Finance. It wasn't because I love crunching numbers and valuing stocks. It was because I knew that learning the basics of money and finance is an invaluable weapon to have in my arsenal. I don't regret this decision for a minute, but I recognize that you don't need to study the topic for four years to learn the basics. All you need to do is read the right books.

Beyond Paycheck to Paycheck, by Michael Rubin, is certainly one of the "right" books. The book is "a conversation about income, wealth and the steps in between." And it's a conversation we all need to have.

So what financial advice does Michael give to young adults seeking to better manage their money? He was kind enough to let me pick his brain on the topic. Below is the Q&A that ensued:

What is the best way for underpaid entry level workers to save some cash?

It seems like every financial expert is all over young people for spending too much on coffee. Look, there is a savings opportunity there for some folks, but most entry level workers aren't going to come up with an extra ten grand a year by pinching pennies at Starbucks. Instead, you've got to put major focus on major expenses, like your choice of housing and car. If you're an underpaid entry-level worker, you can't live in the neighborhood of a fairly paid middle-manager or drive the car your boss drives. Not yet. Once you commit to high housing or car expenses, you pay them for a long time.

What is the biggest financial mistake young people make after college?

Overly aggressive spending on housing or a car—but we just talked about that. Another common financial mistake by new graduates is not signing up for their 401(k) plan, especially if they are fortunate enough to work for a company that provides them with an employer match. Although money is often tight for young people, they will still likely experience the largest increase in pay they'll ever get – from virtually nothing as a senior in college to perhaps $30,000 or so at a new first job. If a new grad making $30,000 can immediately become accustomed to living on $27,000 – still a $27,000 raise – he or she will be saving 10 percent from the get-go. With a 50 percent match, that's $4,500 saved for retirement – and it will grow from there.

Why should I be worried about retirement already?

Actually, no twentysomething should be worried about retirement. You've got all the time in the world. It's only if you haven't done anything about your retirement and are now a fortysomething that you should be worried. The key for twentysomethings is to just get started. By starting to save for retirement while you are still in your twenties, you remove one of the key sources of potential worry later-on: procrastination during your youth. Thanks to the miracle of compounding interest, the amount you have to save when you are young is quite minimal compared to what you'd have to save if you wait just a few years.

Author's Note: You can get a free basic motivational summary showing you your personalized numbers by clicking here.

What do you mean when you say, "connect with your money emotionally?"

That's first on the list of the Top Ten Saving Strategies. When you are emotionally separated from your money—from your cash—you spend more. It's just human nature. When I speak to audiences, hardly anyone raises their hands when I ask "How many of you are paid in cash?" In fact, few people even get a real paycheck anymore—it's all direct deposit. Our spending is the same way: no cash, almost all credit cards. Most people have no idea how much cash they have in their wallets until they find themselves at a place that has the audacity to not accept credit cards.

Why does that matter?

Because when you're not connected to your money emotionally, you spend more. Spending cash hurts—right away. Credit cards are painless—until you get the bill.

Is the solution to get rid of your credit cards?

Absolutely not. There are plenty of positives about credit cards—but that's another discussion for another day. For now, simply recognize that an emotional separation from your money means you will spend more. (Doubt me? Think about casinos.) So try this: next time you go to the mall, leave the credit cards at home. Take some cash with you and see how your spending habits change. You'll find that when there are two options for something you need, one at $59 which is "good enough" and another at $79 that is "better," being forced to spend cash means you'll likely take the one for $59.

You say constant budgeting isn't required, what do you recommend instead?

The beauty of following the first nine of the Top Ten Saving Strategies is that you'll be saving so much that you don't need to micromanage your finances. Budgeting can limit your desire for spontaneity, making it hard to keep at it. But you can get away without budgeting at all if you simply commit to saving. After all, if you're saving 15 percent of your income, what's the difference how you spend the other 85 percent?

What should you do with the money in your 401(k) account when changing jobs? What if you are leaving to pursue your own business?

The big advantage of rolling your 401(k) account into a regular IRA upon changing jobs or going into your own business is that you don't wind up with 401(k) accounts all over the place after you—like most of us—job hop a few times. Simple is better because simple gets done. Roll each 401(k) account into an IRA and you'll never have more than one 401(k) plan to keep track of. Plus, you'll benefit from the virtually unlimited investment choices available to you in your IRA.

Getting "Beyond Paycheck to Paycheck"

Published by Ryan Healy on August 30th, 2007 in Books, Money, Work | 20 Comments

High school teaches us basic algebra, geometry and calculus. It teaches us how to appropriately research papers and cite sources. We learn U.S. and world history. But, most school systems fail to give us a basic financial education.

In his notorious book, Rich Dad, Poor Dad, Robert Kiyosaki points out this fatal flaw in our school system and proceeds to give us a financial education. Of course, he then released a handful of other books that more or less say the exact same thing, but that's not the point. In the grand scheme of things, being financially literate is one of the most important skills anyone can have.

This is the number one reason I majored in Accounting and Finance. It wasn't because I love crunching numbers and valuing stocks. It was because I knew that learning the basics of money and finance is an invaluable weapon to have in my arsenal. I don't regret this decision for a minute, but I recognize that you don't need to study the topic for four years to learn the basics. All you need to do is read the right books.

Beyond Paycheck to Paycheck, by Michael Rubin, is certainly one of the "right" books. The book is "a conversation about income, wealth and the steps in between." And it's a conversation we all need to have.

So what financial advice does Michael give to young adults seeking to better manage their money? He was kind enough to let me pick his brain on the topic. Below is the Q&A that ensued:

What is the best way for underpaid entry level workers to save some cash?

It seems like every financial expert is all over young people for spending too much on coffee. Look, there is a savings opportunity there for some folks, but most entry level workers aren't going to come up with an extra ten grand a year by pinching pennies at Starbucks. Instead, you've got to put major focus on major expenses, like your choice of housing and car. If you're an underpaid entry-level worker, you can't live in the neighborhood of a fairly paid middle-manager or drive the car your boss drives. Not yet. Once you commit to high housing or car expenses, you pay them for a long time.

What is the biggest financial mistake young people make after college?

Overly aggressive spending on housing or a car—but we just talked about that. Another common financial mistake by new graduates is not signing up for their 401(k) plan, especially if they are fortunate enough to work for a company that provides them with an employer match. Although money is often tight for young people, they will still likely experience the largest increase in pay they'll ever get – from virtually nothing as a senior in college to perhaps $30,000 or so at a new first job. If a new grad making $30,000 can immediately become accustomed to living on $27,000 – still a $27,000 raise – he or she will be saving 10 percent from the get-go. With a 50 percent match, that's $4,500 saved for retirement – and it will grow from there.

Why should I be worried about retirement already?

Actually, no twentysomething should be worried about retirement. You've got all the time in the world. It's only if you haven't done anything about your retirement and are now a fortysomething that you should be worried. The key for twentysomethings is to just get started. By starting to save for retirement while you are still in your twenties, you remove one of the key sources of potential worry later-on: procrastination during your youth. Thanks to the miracle of compounding interest, the amount you have to save when you are young is quite minimal compared to what you'd have to save if you wait just a few years.

Author's Note: You can get a free basic motivational summary showing you your personalized numbers by clicking here.

What do you mean when you say, "connect with your money emotionally?"

That's first on the list of the Top Ten Saving Strategies. When you are emotionally separated from your money—from your cash—you spend more. It's just human nature. When I speak to audiences, hardly anyone raises their hands when I ask "How many of you are paid in cash?" In fact, few people even get a real paycheck anymore—it's all direct deposit. Our spending is the same way: no cash, almost all credit cards. Most people have no idea how much cash they have in their wallets until they find themselves at a place that has the audacity to not accept credit cards.

Why does that matter?

Because when you're not connected to your money emotionally, you spend more. Spending cash hurts—right away. Credit cards are painless—until you get the bill.

Is the solution to get rid of your credit cards?

Absolutely not. There are plenty of positives about credit cards—but that's another discussion for another day. For now, simply recognize that an emotional separation from your money means you will spend more. (Doubt me? Think about casinos.) So try this: next time you go to the mall, leave the credit cards at home. Take some cash with you and see how your spending habits change. You'll find that when there are two options for something you need, one at $59 which is "good enough" and another at $79 that is "better," being forced to spend cash means you'll likely take the one for $59.

You say constant budgeting isn't required, what do you recommend instead?

The beauty of following the first nine of the Top Ten Saving Strategies is that you'll be saving so much that you don't need to micromanage your finances. Budgeting can limit your desire for spontaneity, making it hard to keep at it. But you can get away without budgeting at all if you simply commit to saving. After all, if you're saving 15 percent of your income, what's the difference how you spend the other 85 percent?

What should you do with the money in your 401(k) account when changing jobs? What if you are leaving to pursue your own business?

The big advantage of rolling your 401(k) account into a regular IRA upon changing jobs or going into your own business is that you don't wind up with 401(k) accounts all over the place after you—like most of us—job hop a few times. Simple is better because simple gets done. Roll each 401(k) account into an IRA and you'll never have more than one 401(k) plan to keep track of. Plus, you'll benefit from the virtually unlimited investment choices available to you in your IRA.

ABOUT RYAN HEALY

Ryan Healy is the Co-Founder and COO of Brazen Careerist, a social network for Gen Y professionals. He lives in Madison, WI and blogs about social media, recruiting, entrepreneurship, generational issues and how to make the world a better place. Ryan is also a featured keynote speaker, sports lover, tireless worker and devoted friend, boyfriend and son. To learn more about Ryan, visit the about page or check out his profile on Brazen Careerist.

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