Financial Friday - What do I do with all this $$$?
After a big increase in earnings, how do you make sure you're not wasting it?
Sounds silly, right? Whether you’re making the leap from intern to developer or engineer to engineering manager, there might be a significant pay increase involved. I’ve literally seen people go from $14/hour to $85k, $150k, $200k or more. After the euphoria (and a quick splurge) wears off, you may be thinking, “Now what? How do I make sure I’m not wasting/throwing away my money?”.
After two decades managing some high-performing (and high-earning) individuals, I can’t tell you how many times I’ve heard about how some engineers and managers were living paycheck-to-paycheck and earning well over $100k - some over $250k! It made me think the guest speaker at our next meeting should be a financial advisor!
Live a little
Look, after years of hard work, no one can blame you for wanting to live it up or celebrate a little bit. After all, you deserve it! However, there’s a difference between having a nice dinner out and getting into debt for years buying 10 different European sports cars in 12 years (oh sorry, that’s a story for later)… so let’s see if we can find a happy medium.
As a person that probably has interests and hobbies, I’m sure there’s something you’ve always wanted, but couldn’t afford. For example, those ultra-high-end planar magnetic headphones retailing for $1,199 or that gaming laptop for $2,999 with the RTX 3080 and 120hz QHD display. You can “easily” justify the purchase based on the years of work you’ve done and the 50% (or 100%? 200%?) pay increase you’ve just received.
I’m not one to fault anyone for spending some well-deserved money to get some enjoyment (so money DOES = happiness??), but after that initial expenditure, it’s time to take stock and evaluate the exact value of the actual increase, your long-term goals, and what your “new normal” budget will look like.
You do have a budget, don’t you?
OK, I’ll admit, as a 20-something, I didn’t have a budget, either. I knew my bank balance to the nearest thousand and didn’t think much further than the next coming weekend. However, you can do better! Even if it’s rough numbers, it’s a good idea to think about how much of your paycheck you’re spending on what. For example, there are probably some big-ticket items like rent, car payments, credit card bills, student loans, and then there are the “ankle biters” that can add up like fast food, eating out, drinks with friends, subscriptions, etc. Without a rough budget, you won’t know how much you can actually spend on PS5 games without affecting your ability to eat.
I know, I know… “stuff happens” and you can fall into the trap of using credit cards to supplement your spending habits which ends up spiraling into living paycheck-to-paycheck while paying off one credit card using another credit card then using debt consolidation to get it all into another lump sum loan so you can free up more credit to buy more stuff… or was that just me, after college?
There’s nothing inherently fun or exciting about budgeting and saving (there should be a good game that lets you min/max your spending!), but think about this: would you rather spend $1400/month ($16,800/year) on a Porsche payment or spend half of that on Amazon stock about 10-20 years ago (April 2003, $22 - Nov. 2021, $3500)? In hindsight, the answer is easy, but it’s never that cut and dry when you’re living in the moment as a relatively-well-off 20-something. FYI, I chose the Porsche 911 payment (sad trombone). I’m not going to say I regret it since I was able to check some boxes off of my life list, but I certainly could have benefitted from owning some AMZN circa 2003.
What I can confidently say is this: When I was making good money in my mid 30s, I wish I had saved more than I did.
Where do I start?
Look, as a certifiably intelligent engineer, it’s OK (in fact, it’s recommended!) to admit that you need help when you’re out of your element. You may know everything there is to know about Python, but are you also a master plumber? Typically not, and when you need plumbing help, you ask for it. Similarly, you may need to take a step back, take a look at how much you’re actually making after taxes and expenses, and start to quantify your spending to determine what you can actually save.
What are you saving for? It doesn’t have to be saving just for a “boring”, non-specific goal like retirement. Think about some other goals you might have that could also lead to some greater financial independence. Your savings could be applied to a plot of land to develop, a franchise to invest in, or some other startup to fund. Saving and budgeting does not have to be boring!
There are tons of financial self-help/advice articles and books out there so Google those or refer to the links at the bottom of this article, but I encourage you to ask for advice from those more experienced than you. It could be be a parent, an uncle, a seasoned co-worker, or someone at your bank. As always: gather the info, aggregate it, and make an informed decision on what you think you can actually live with. What works for someone doesn’t necessarily mean it will work for you! For example, if someone told me when I was 27 that I needed to stop renting and just save money to buy a house and own a white Toyota Corolla to save up for my kids’ 529 plan, there’s no way I would have listened.
Most banks and credit cards support budgeting, already! If you look at your statements online or on your phone, most purchases are tagged or categorized (you can usually adjust these if they’re incorrect) and then there might even be a handy chart to see what your spending looks like. If you don’t have one, check out some tools like Mint (and other suggestions below) that allow you to link your accounts and start tracking your spending and saving.
Credit cards can be great tools for tracking your spending, but use them responsibly. Just because you have a few thousand available to spend, doesn’t mean you need to max it out. Spending what you can afford, then paying it off every month can build good credit history (boring) along with earning those sweet rewards points (not boring!).
What about a Financial Advisor?
I don’t think this is a first step you need to take just yet. Financial Advisors, Certified Financial Planners, or that guy at the bank that won’t stop calling you, may be helpful, but again, I wouldn’t start there. Yes, they are trained and certified to know about the different nuances and options you have for saving and growing your wealth (when should I start calling my savings my wealth?) but, often they are incentivized/commissioned/bonused to sell certain financial products that their bank or institution provides. For example, they may want you to put your money into one of their managed brokerage accounts so they can “save you the trouble” of picking/choosing investments. There’s too much to detail here, but that also involves fees and you could still lose money or underperform the market.
Assess your situation using the budgeting tools that are out there, and if you still need additional assistance then perhaps it could be time to talk to a Financial Advisor. As always, do your research and be wary of being sold “products” that are actually more beneficial to them than you.
Okay, enough with the lecturing, sheesh!
If you’ve never bothered to save your extra money before, then anything you do to start saving would be an improvement (yay, this is easy!). Keep going out with friends, renting a nice apartment, making payments on a nice car, but start putting something away for an unexpected emergency or accident. It could be a change of jobs (easy come, easy go?), a change of scenery (I always wanted to move to Seattle…), or a medical situation. Either way, the statistics show that most adults can’t afford an unexpected expense of more than $1,000. Don’t be a statistic.
Next time, we’ll talk about stocks and how many intelligent people think they can “beat” the system - only to find out they can’t…
Real-world examples
Last thing, I swear! To make it “hit home” here are some real-world examples from my life or my close friends/colleagues that can hopefully make you think about the type of decision and what you might do to avoid being in a similar situation:
A middle-aged, married parent of two children with a gross salary of nearly $200k annually needed a bonus payment to be “expedited” to afford some moving expenses. This calls to mind the previous statistic - most adults can’t afford an unplanned expense, sometimes as small as $1,000.
A 30-something, single, paralegal needed to liquidate a 401k to afford $5,000 in unexpected expenses. Note - to those who don’t know, pulling money from a 401k early is bad.
A 40-something, single, experienced IT consultant took an auto loan of > 10% APR on a luxury vehicle when a cheaper, reliable vehicle would have been a better financial choice.
A 40-something, married parent of one with a gross salary of nearly $100k needed an additional $5,000 loan just to afford a down payment on a home. What do you think that means for mortgages and other expenses moving forward?
Links
Mint - https://mint.intuit.com/how-mint-works/budgets/
Simplifi - https://www.quicken.com/simplifi/features/
SoFi - Budgeting w/Credit Cards
Bankrate - 7 Ways to Get Free Financial Advice
Hot off the presses - CNBC - Why You Should Start Saving in Your 20s
https://www.cnbc.com/select/why-you-should-start-saving-in-your-20s/