Savings or Spending?

More often than I would care to admit, I hear people brag about how much they have saved. Often I will hear people say that they saved $50 on their groceries or they saved fifty percent on some purchase. Some people may even talk about saving for a vacation or some luxury item. I will suggest that such saving may not be truly saving at all, but rather spending in different areas. This is not to say that I am not guilty myself of saying I saved money when I felt as if I got a good deal or that I never put aside money for a large purchase.

I would argue that such savings is not really savings, though I may be able to purchase nicer stuff or nicer experiences. All of the above really translate into spending. At the end of the month if you do not have any extra to show for the money you saved while shopping, it really isn’t savings now is it? At least it is not the savings that will matter on a rainy day when you find that you need the money because of an accident or you were laid off of work, etc.

What then would I truly consider to be savings? Money that is not spent for over a year and is not designated for a specific purchase I would qualify as savings. Some of these savings may be invested, while others may be held in cash.

Spending less on items may lead to savings, but only if one has the discipline to actually put aside the amount spent rather than purchase another desired item or experience. It is an important mindset to maintain if one wants to build wealth.

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When Time is More Important Than Money

For most people that are affluent, there comes a time in their lives where time is by far a more precious commodity than money. Often they have either reached a point where they are truly wealthy  and will not need to work another day in their lives or they are very close to it.

At this point it is important to ask what it is that you truly enjoy. Is it your work or is it something else? Would you rather be volunteering or puttering around the house? Perhaps you have not quite reached the stage where you cannot decide to quit work entirely, but you could take a drastic cut in salary or income and decide to try consulting, part-time work or a new profession altogether.

But why would time ever become more important than money?

There is an important concept in economics known as the law of diminishing returns. It effectively says that an additional unit of X in general gives less satisfaction than the one before it.

To illustrate, think about the pride you may feel if you saved your first $100,000. Now imagine that you have already saved $1,000,000. Is the next $100,000 really as exciting as the first $100,000? If you are like most people, the answer is probably no. But $100,000 is still $100,000 isn’t it? Yes. But its relative usefulness has gone down.

Given that time is a finite resource (we each have 168 hours in our week), It is easy then to see if you already have all of the money that you need that time to do what one wants becomes more important than the additional money one may accumulate. It is important to recognize however that if one wants to fully get out of the “rat race” one have enough wealth to live the lifestyle one wants to live…

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Delegation: The Leveraging of Time

There is part of me that is afraid to write this article in that I know I am going to be speaking to a certain degree out of both sides of my mouth. We all only have so much time: 168 hours per week to be more precise.

There are plenty of studies which suggest that any work we do over 40 hours of work per week tends to produce diminishing returns in terms of errors and that if the average person does substantially more than 40 hours per week, then the amount of time that is spent correcting the mistakes tends to bring the actual total productivity back down towards that 40 hour work week figure. Yes, there are exceptions to this rule, but even some of the busiest executives that I know hardly work more than a 60 hour work week on a consistent basis. The reason? They realize they can get more out of relaxing and delegating the rest of the tasks that need to be done.

Many small business owners have a terrible time with delegation. It is a step that is necessary in order to reach the next level of success. Please note that many business owners make the mistake of thinking that one extra unit will create an extra level of productivity. They try this and often find out that they are actually making less money than when they were doing things on their own. This can cause many to throw their hands up in the air and say that delegation is not worth it. Like all things, there is a degree of truth to this even though it may not be the whole truth. Often, there are different levels in a business and one may have to save up enough resources in order to bring the business to the next level. It may very well be that one would have to be in a position to hire eight people rather than one additional person in order to achieve the next level of productivity. Perhaps you may be needed to help train or develop systems for seven people who are performing whatever your task is and you need an administrative assistant or a receptionist to help coordinate the schedules for everyone. Anything less and it could be that you are losing productivity in trying to bring fewer people up to speed and find yourself wondering “what happened?”

Given the statistics regarding productivity of people working more than 40 hours, I always find myself questioning whenever someone is working over 60 hours on a consistent basis. That being said, if you are working 40 hours per week and you knew that if you worked an extra 5 hours or so that you could generate X and that X was greater than the cost of a task that you hated or did not like as much as your work, perhaps it would make more sense to delegate that job elsewhere.


I knew a man who figured that if he volunteered to work in the office on Saturdays for 3 hours, then he would average $100-150 for every hour worked. It took him 30 minutes commute each way, so he had to give up a total of 4 hours of his day for which he knew he would average $300-450. He also knew that it would take him 3-4 hours to do his yard work should he choose, but that it would only cost $150/week to hire out the yard work and landscaping to be done by a professional company who could do it better. So each week he would come in to the office and pocket the profit he made by outsourcing. The same amount of time was spent, yet he made more money by hiring out. Some could say that this goes to show that there is more than one way to make your lawn green.

Are there areas in your life where you can benefit by delegation?

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Often we will hear about the costs associated with dining out on a regular basis whether for lunch or for dinner. And as I pointed out in It All Matters, there is a degree of truth to this. One of the costs that can add up as well is the cost of our entertainment.

I have had several clients point out to me in regards to sporting events, it is not just the cost of the sporting event itself, which for season tickets, can be fairly pricy in and of themselves, it is also the costs of getting food/drink at the events, the parking, the sports-related items etc. that can often come into play and double or triple the cost of the event.

How much are you spending on your entertainment? Is it derailing your chances to achieve the things in life you truly want to achieve? If you are spending 10% or more of your income on entertainment and you are not wealthy, you may want to rethink your priorities.

What is it about the event that your entertainment that you truly enjoy? In the case of a sporting event, is it the crowd, the game itself, or something else? Could you receive a similar level of enjoyment at a different level? For example, in the case of sports, if you are interested in experiencing a live game itself, there are many good high school teams that can be fun to watch at a fraction of the cost.  Similar things could be said of other events whether related to the performing arts, etc.

Another question that comes to mind is frequency. If one experiences the same thing again and again, it loses its value. Such is the effect of the law of diminishing returns: the more you experience something, the less satisfying it tends to be.

Would you be better off if you shared the cost of season tickets with some people so you each got to experience a portion of the event?

In a future post, I will include a list of low cost items for entertainment that both I and some of my clients I have enjoyed.


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The Benefits of a Roommate

In previous articles, I have pointed out that Americans have more space than they had 100 years ago. I have also pointed out that this space tends to cost more in terms of taxes, upkeep, and utility costs. Besides living in a smaller space, what can one do to leverage the space that one has currently?

May I suggest the benefits of having a roommate or renting out a room as a possible alternative? Often I will hear people say that they would like to be able to have a rental, and yet question when I suggest starting by letting out a spare bedroom. Sometimes they may point out that this is for when family/friends come to visit. Or they may say that they value their privacy and do not want anyone else sharing a space with them.

Let us take a look at some of the financial implications of being able to rent out a room for $450/month. Let us assume that you have a vacancy rate of 10% or that it takes a little more than a month to find a roommate. Let us also assume that due to various reasons that it costs $600/year to have the roommate in terms of upkeep costs, etc. Doing the math in this situation we would come up with an additional $4,260 in income.

If we were to have multiple rooms available to let, this figure could be increased accordingly. It is acknowledged that this amount could vary depending on the room in question.

What could you do with an extra $4,000+/year in income? What if you were to have this extra amount set aside for four or five years?  Would you then potentially be able to purchase a small rental unit of your own, or at the very least be in a position where the possibility is much more feasible?

For some people, the cost of loss of privacy is not worth it. I understand this. For those that do not mind, there may be some opportunity to be had in terms of improved cash flow and potential investment savings.

Let us take a look at the long term effects of having a roommate as described in our hypothetical example if you were able increase your rent by 3% per year and what would happen if you were able to get 3%, 5%, and 7% returns on your money respectively.

As you can see, we are talking about an opportunity cost that could be equal to several hundred thousand dollars over the course of 30 years. Now granted, this amount could vary based on returns and your tax rate. However, given the amount of money that is at stake, it behooves the question for many Americans, how much is your privacy really worth?

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In recent times there has been discussion of the 1% vs. the 99%. Strangely enough, in order to be in the top 5% of net worth you have to have $1.5 million in net worth including your home. The question is does a large net worth make you “wealthy?”

It depends.

Perhaps the best explanation that I have run across on what wealth means is that it is how long you could live given your current lifestyle, net worth, and investment income without working another day.

What sort of lifestyle are you living? If you need $300,000/year to live and have a net worth or $1.5 million, you are certainly wealthier than most. I would argue that you are not necessarily wealthy.

You would most likely have a little over 5 years-worth of wealth. That is to say you could live your current lifestyle for a little over 5 years (I am assuming at least some of it produces income) without working.

Now, what if we to have a true makeover and you were to cut your expenses down to $40K-50K per year and most likely live in a more modest home? All of a sudden, I would probably say that you are wealthy. Chances are you could live the rest of your life without working.

For those of us who are the 95%, I have several pieces of good news. One of the first is that you do not need to be in the 5% of net worth to enjoy life and enjoy it responsibly. For example, let us say that you own your own home. And you have $3,000/month in expenses as a couple. Let us also say that as a couple you bring in $2,000/month in social security. It is altogether possible with $300,000 in investments you could live a very comfortable retirement. The second is that you can usually make changes to adjust your lifestyle which can increase your wealth. The third is that it is never too late to increase wealth.

Wealth is a function not only of net worth/income producing assets; it is a function of our expenses as well. It is altogether possible that a man who owns a car wash and lives a modest lifestyle can be wealthier than celebrities who make millions, but spend it as fast as they make it.

On the other hand, if you increase your expenses, it is easy to lose wealth as well.

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Provocative: Your Home

Often I will hear people associated with real estate talk about someone’s most important asset being their home. For the sake of argument, let us forget the importance of health and the ability to work which I hope can easily be argued are more important than one’s home.

I will say this: if your home remains your most important asset, chances are that you will never become wealthy. Let me reiterate, if your home remains your most important asset, chances are that you will never become wealthy.

For some people this may come as a shock. After all, we have been taught about the importance of having a home and not flushing down money with rent. There is a certain degree of truth to this. I will even suggest that there is a large degree of truth to this if we are comparing similar spaces. The problem lies in that the average owned home is not similar to the average rental. They tend to be substantially larger, nicer and more expensive.

This may not in and of itself be a problem, but for the average American what value does a home provide other than a place to live? I will suggest not much. If you are skilled at restoring and fixing up houses in order to flip them, you may be an exception to this rule. If you rent out rooms of your place so that it is actually generating money for you, then definitely consider yourself an exception as well. For many, however their home is a box where they live that is taxed, subject to utilities, and serves as a storehouse for their stuff. If all you do is keep on upgrading to a larger and fancier box, and get used to a more expensive lifestyle correspondingly, you may be setting yourself up for failure.

The problem is simply this, for most people, one’s home does not serve as a source of generating wealth. It tends to rather be a means of forced savings assuming that one does not continually take out money in the forms of lines of credit, etc.

In order to become wealthy, you need to have assets that either grow or produce income in some fashion. This could be through a variety of means whether through the rental of real estate, a successful small business, or through the growth of securities in a portfolio. It is unlikely that this will occur

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Perhaps the Most Important Question

It is a question that most of us have annoyed our parents with when we were two or three years old. And yes, it can be one of the most annoying questions there is available. I will also suggest that it is the most important. The question is “Why?”


The reason that why is so important is that it allows us to gage the importance of anything we do and if we are honest… if we are stupid for doing something or not doing something. If we do not have a good answer to the why, then I will suggest that the rest of the questions, how, what, when, where, and who are meaningless.

This relates to almost any area in life. Two of the most important areas it relates to are goal setting and budgeting. Why do you live where you live? Why do you spend your time the way you do? Why do you eat what you eat?

There is a danger of getting caught into doing something simply because it is easy or because other people around you are doing something. But are these things truly what you value? Do you enjoy the results you are getting? If the answer is yes, I love what I am doing and the results that are coming from it, then fine. If the answer is no, perhaps you need to rethink some things. More importantly, are you taking different actions. After all there is a saying that the definition of insanity is doing what you have always done but expecting different results.

Don’t be insane.

Ask why you do things that you do. Or better yet, have someone you trust or someone who is objective ask you. Answer honestly and fearlessly. Through acknowledgment of the current situation you have a far better chance to change and hopefully to improve. Why would you want to improve? With that question I will answer it with another.

Why not?


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The “Anti-Budget” Budget

The reason that I work with people on their budgets is not because I care how they spend their money, it is rather my aim is to help them maximize the use of their money based on their values and goals. There are some people who cannot stand tracking expenses. It positively drives them crazy. They have money in their pocket and they want to spend it however they want to spend it at the time. If you know someone like this who would still like to save and not have to worry about their future, let me suggest the “anti-budget” budget. Though it may not solve all problems financial, it will go a long ways towards building wealth.

Start with saving 15% of your income. If you have not saved before, increase this amount by 1% for every two years that you are older than 20. If you are fifty and have not saved a dime until this point, this means I will want you to begin saving 30% of your income, because the fact is you are running out of time to create a large enough nest egg for your future. Yes, if you have not saved before, this is going to mean a tremendous change to your lifestyle.  If you are riddled with high-interest debt, any amount of this that is not matched by your employer for savings needs to go towards paying off the debt first. You will probably need to save for at least 15 years or until full retirement age, whichever is greater using this method. The more and earlier you can save the better.

Estimate your taxes that you will have for the year and set aside funds that you will need to pay for your tax bill. If you are an employee this is often handled by your employer. If you are not, you will need to talk with your tax preparer and get some good advice on how much to plan to save so as not to be caught with late penalties, etc.

Put aside 10-20% of your income for an emergency fund and for long term expenses such as vacations, cars, etc. In my article on an introduction to cash, I wrote down some good ways to consider on how to save money.

For the religious or giving, you may need to budget 10-15% of your budget towards these beliefs.

For those of you who are doing the math in your head, perhaps you are saying, but this means I may have to live on two/thirds or less of my after-tax income! Yes, you may. And this may involve preparing your own meals more, taking on a roommate, living in a less expensive place, and buying used. You may have to seek additional sources of income whether working a part time job on the side or something else. The plan is simple. It is not necessarily easy.

The good news is that you can spend the remainder however you wish and probably be in decent shape for the future provided you have proper insurance in place.


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A Family Discussion: Higher Education

During my senior year in high school, I was fairly concerned about getting into college as well as which college I would attend. For many, final application deadlines to college will arrive soon.

There is one important discussion that I will suggest needs to take place regarding college: what you expect to pay and what, besides a slip of paper, do you expect to get in return for your hard-earned dollars.  As some of the protestors of Occupy Wall Street will tell, just getting a degree does not entitle you to a good-paying job. It may increase your chances of qualifying for certain positions.

In this environment, it makes sense to shop smart when it comes to higher education.  This could mean looking at in-state public schools or schools that will grant an in-state rate if you live in a closely neighboring state rather than some of the pricier private higher education options. The lower cost schools could provide a potential for receiving a larger return on your educational dollar spent.

Another thing to consider is the major. Chances are that the average engineer will make more than the average artist. One has to question the financial wisdom of spending significant amounts of money in hopes of a career that will lead to a lower than average income. If you earn significantly more than the average person, chances are that you will consider your college education dollars well spent.

This is not to say that money is the only factor when it comes to education, but given the skyrocketing costs of higher education, it is a significant one for many. My suggestion is that you have a family discussion regarding the costs and probable outcomes regarding the decisions you make before falling in love with any particular college. The “dividends” resulting from the discussion(s) could be quite substantial and chances are that your child will thank you later on in life for having them.

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