If there’s one thing I am most proud of it’s that I became 100% financially independent (meaning I relied on no other entity or person for income or financial assistance) before the age of 30. Yes, there was a certain degree of luck that went into that (e.g., if I’d started my first company in 1999 or 2008 at the stock market peaks I almost certainly wouldn’t have survived it independently), but I also followed a very simple set of broader financial management rules that allowed me to achieve financial independence at a relatively young age. Here is a basic outline of those rules:
- The key to financial success isn’t saving more. It’s investing more. In yourself. You have to maximize your primary source of income by making yourself valuable to other people in some way. Saving more isn’t how most people become wealthy. Wealthy people maximize their primary source of income.
- Never stop learning. Education is the gateway to differentiating yourself from the crowd and constantly improving yourself so you can adapt and evolve with the ever changing economy. The internet is a gold mine of information and educational resources. Use, Khan Academy, my Understanding Money page and empower yourself with the most powerful tool you can have – knowledge.
- Don’t do something you love. Do something other people will love you for doing. Very few people earn a living doing something they truly love. But many successful people love what they do because other people value them for doing it.
- Keep your finances simple. Reduce the number of bank accounts and credit cards you have. Consolidate your brokerage accounts. Make your financial life more manageable. Use a personal finance app like Mint to track your finances so you can stay on top of your income, spending and investments.
- Automate your finances. Make sure you have auto bill pay set-up and automatically transfer funds from a savings account to an investment account on a monthly basis. Automate your investment account in a systematic plan of some sort so you don’t get caught up in the allure of “stock picking” and trying to become the next Warren Buffett. Reduce your taxes and fees as best you can. This means taking a moderately long perspective with your investments (at least 12 months plus) and never paying for high fee investment accounts and managers.
- Follow the 50/30/20 rule. Spend 50% of your after tax income on essentials (housing, utilities, food, etc), 30% on personal needs (vacation, toys, leisure, etc) and save 20% of your income.
- Stop spending money on useless “stuff”. It’s very unlikely that all that extra stuff you’re buying is making you happier. In fact, it’s probably just putting a strain on your financial budget. Don’t spend to impress your friends and your neighbors. You’re not winning any gold stars for owning things you can’t afford. As I said in my book: “The person who mistakes ‘money’ for ‘wealth’ will live a life accumulating things, all the while mistaking a life of owning for a life of living.”
- Get in the financial markets! But think of your portfolio of financial assets as a Savings Portfolio and not a get rich quick “Investment Portfolio”. Allocate your savings in a diversified portfolio of stocks and bonds. Do not leave your cash sitting in the bank earning 0%. Max out your company 401K at least up to the match. Then invest in a Roth, SEP or 529. Invest the rest in a taxable brokerage account via low fee diversified index funds via an approach that follows a specific plan that is in accordance with your financial goals and risk tolerance. If you need an advisor to help you maintain your investments then don’t pay him/her more than 0.5% per year! Make sure they adhere to a fiduciary standard.
- You might need life insurance at some point in your life. As a basic rule of thumb only buy life insurance if you have family members whose financial lives would be substantially altered for the worse if your income was lost. This is most common for people in their working years when they have young children. In the vast majority of cases buying a term insurance contract that covers this period (usually 20-30 years) will be the least expensive and most prudent approach to use. Do not buy variable annuities or whole life insurance as a form of life insurance.
- Reduce your debts. Pay off your credit card every single month. Thinking of buying a home? Don’t think of it as an “investment”. Think of it as a massive long-term expense that will barely keep up with inflation. A house is place where you will live, not a place that will make you rich. Use Khan Academy’s buy/rent calculator before you decide to “invest” in the “American dream”. If you buy a house then pay it down as quickly as you can. “Mortgage” is Latin for “Death contract” for a reason!
- Work your ass off. But remember that you don’t live to earn money. You earn money to live. Balance is better than excess.
Financial success doesn’t just happen — you have to work at it. You may think that you are pretty money savvy; however, even the most fiscally successful individuals tend to be guilty of making these three big money mistakes.
1. Not having a goal and a plan for how to achieve it. Without a plan or goal, you will lack focus and end up spending more money. A dollar here, a dollar there might not seem like a lot at first, but not knowing where your money is going or what your expenditures are can greatly affect your financial security.
To create a goal that you will actually stick to this year, concentrate on reducing three of your largest expense categories and attempt to whittle those down.
The key is to make any goal a habit first. And most important, make it a tiny one. By focusing on reducing just a few areas of overspending, you will be less likely to feel deprived and more likely to stick with your goals in the long run.
For example, you may spend the most money each month on eating out, entertainment or shopping. Focus on reducing each of those three categories by 10 percent to 20 percent over the first six months of 2016. This could mean bringing your lunch to work a few extra days per week or replacing one of your nights out on the town with a get-together at your house instead.
Also, be careful not to change your lifestyle too drastically right away. Your goal should be to reduce expenses gradually over time in order to change your long-term behavior. So start small and go from there. This means eating out only one time less in January, or if you tend to buy lunch every day, aim to bring your lunch from home just one or two times in the first few weeks.
2. Only one person in the family knows where the money goes. Most families have one person who’s largely in control of managing the money — and that’s fine. The problem occurs when this leads to financial atrophy in the family, where no one but the person holding the checkbook knows where the money goes or is involved in the decision-making process.
If you are not part of the bill-paying, investment decision-making and retirement-savings process, you’re at risk if your spouse dies, becomes seriously ill or if you get a divorce. Know the details of your family’s finances, spending, investments, debts, savings, etc.
Have monthly meetings about your financial situation so everyone is “in the know.” These meetings don’t need to be onerous. Sit down with your family to review the balances on all of your accounts, review your rate of savings relative to your income, and discuss if anything needs to be tweaked.
There are numerous benefits to sitting down as a family to review account balances and savings rates together, the most basic of which is that everyone in your family will now be aware of what accounts are out there.
Knowledge is power. Laying all the cards on the table is a powerful way of fostering financial peace of mind among all family members. Coming together as a family to review the family budget not only encourages discussion of finances, in general, but creates strong awareness and mindfulness around spending and saving, which can have a powerful impact on the bottom line.
Finally, family finance meetings have the added benefit of fostering healthy communication and teamwork among all family members and can teach younger members important financial principles that will benefit them throughout their lives.
Be sure you know where all important documents are stored. Examples include tax records; statements for all retirement, checking, savings and brokerage accounts; insurance policies; wills; deeds; mortgages and auto titles.
Know the passwords to important financial websites, such as your checking, credit card and investment accounts. When tax season comes around, get involved in the process and help collect the tax documents your accountant needs to complete your return.
“Come up with a plan, focus on three trouble-spot spending areas, get involved and make sure your money is working for you in a diversified portfolio.”
Target-date retirement funds are allocated and diversified based on your specific retirement date, and they rebalance automatically as you get closer to retirement.
Investing in exchange-traded funds and mutual funds can also be an option for building a well-rounded portfolio. Each share of an ETF or mutual fund holds a bucket of stocks and/or bonds. Some ETFs and mutual funds track to a specific index, such as the S&P 500, but note that others can focus on a very specific sector of the market, such as emerging markets.
If you’re just starting out and looking for more diversification in general, it may be best to start with general index-tracking investments and get comfortable with those before branching out into more specific market areas.
An ETF or mutual fund focusing on an individual country, such as China, or a specific industry, such as utilities, may not be ideal for a newer investor with limited investment experience.
Now is the time to take control of your financial future. Make your new year’s financial resolutions happen!
Come up with a plan, focus on three trouble-spot spending areas, get involved, and make sure your money is working for you in a diversified portfolio.
Searching for a job can be a frustrating and time-consuming experience – and worse yet, it can be extremely expensive. But if you’re tax-savvy, you may be able to recoup some of your job search expenses in the form of tax deductions. Follow the rules regarding what you can write off, and save all documentation related to every write-off you take. And don’t make the mistake of overlooking the deductions you’re due – ultimately, it can add up to a great amount, and every bit you save may go a long way in helping you get through a rough patch.
Eligible Job Search Expenses
1. Expenses Within Your Field
Job search deductions apply only if you’re seeking an occupation within your field. For example, you wouldn’t be able to go from a job in finance to one in education and write off those job search expenses. But if you need to take a part-time job to support yourself while you look for a job in your field, you can take deductions related to the part-time job search.
Unfortunately, if it’s your first time looking for a job, you’re out of luck. You can only claim job search deductions after you’ve been employed.
2. Resume Preparation
The costs to prepare your resume are deductible expenses. For example:
- Did you hire someone to professionally rewrite your resume? That’s a tax-deductible expense.
- Are you sending resumes via snail-mail? You can write off the cost of postage and envelopes.
- Did you fax you resume? Keep the receipt, because the cost to fax is deductible too.
3. Phone Calls
The cost of speaking to a potential employer over the phone is deductible. If you spend 45 minutes speaking with an HR representative, Uncle Sam can reimburse you for a portion of the cost, whether you get the job or not.
4. Employment and Outplacement Agency Fees
If you decide to utilize the services of an employment agency, it is considered a job-seeking service and is tax-deductible. However, be cautious: If your employer pays you back for employment agency fees, then you have to claim that on your taxes as part of your adjusted gross income (AGI), and it is no longer tax-deductible. However, if your employer does not reimburse you, those expenses are yours to claim.
This is particularly important if you must travel a substantial amount for interviews. A friend of mine drove from Mississippi to Louisiana (a round trip of approximately 200 miles) to interview for a position. He did not land the job; however, he was able to deduct the mileage for those trips.
In 2013, the standard mileage rate is 56.5 cents per mile for business-related purposes. For my friend, that equaled $113 in deductions. Even if you’re not traveling very far per trip, keep a log of how much you’re driving to interviews, job fairs, or employment-related training seminars. You may be surprised at how much the mileage adds up.
6. Other Traveling Expenses
Let’s say you’re a video game developer who lives in New York, and you book a flight to California to attend the Game Developer’s Conference where you hope to get a lead on a job. Since your reason for travel is primarily to look for a job, you can write off airfare and lodging expenses. Just be sure that the amount of time you spend looking for a job is more than the time you spend on leisure, or the trip may not be deductible.
7. Moving Costs
If you live in an area that doesn’t offer substantial paying jobs in your field, you may find it necessary to move to a region with more opportunities. According to the IRS, you can deduct moving costs, provided that your new workplace is at least 50 miles farther from your old home than your old job location was from your old home. You also must work for at least 39 weeks during the first year following your move if you’re an employee. If you’re self-employed, you must work that amount, as well as a total of 78 weeks during the first two years.
So what can you deduct? You can claim 24 cents to the mile for moving purposes in a car. You can also deduct plane tickets and lodging expenses, and the cost of packing and shipping items to your new home, plus up to 30 days of storing them. Furthermore, costs incurred for shipping a car and pets to your new home are also deductible. Just be sure to begin looking for a job immediately after you move if you don’t already have one.