Finding Value

Every dollar is equal, but the value you get from each can be wildly different. How can you figure out whether you’re truly getting the most bang for your buck, and when the value is low enough that it’s not worth purchasing?

Let’s think of three categories: needs, highly desirable things, and things that would be nice-to-have. This is, of course, excluding things that you’d really rather not have, like dolls that give you the creeps and your least favorite type of vegetable.

“Needs” is a category that can encompass more than just food, clothing, and shelter. For the modern person, a stable internet connection, health insurance, the ability to see friends and family, some form of recreation and a way to relax, etc., all can qualify as “needs” if without them you would be miserable. The mistake some people make here is assuming that just because something of this sort is a need, they should get the best one they can “afford”. This is very obviously false in the extremes – just because you need food, clothing, and shelter, does not mean you need Kobe beef, designer clothing, and a McMansion. But where is the most basic level that your need would be satisfied?

Honestly, you may not know the true level until you experience it. Elon Musk found out he could live on a dollar a day for food. “You get really tired of hot dogs and oranges after awhile”, he says, but $1 a day afforded him his absolute basic level of food need. Your level may be different (I personally can’t go below a ~$4/day diet of in-season fruits, veggies, eggs, and rice without experiencing negative health effects) but anything beyond this falls into the “highly desirable” category, and is no longer a need. For some items, you may not even feel deprived if you only satisfy your most basic level of “need” (Obviously Elon Musk has lower standards of food than I do, but similarly I probably have a lower standard of technology/internet access. If I have enough internet access to check my email and google things, I’m good.)

Don’t be tempted to upgrade the level of a need just because “It’s a good deal”. If the super fast cell phone plan is only $5 more per month than the basic plan, that’s still MORE (and, honestly, with a bit of research, you could probably find a cheaper cell phone plan – prepaid plans and wifi calling can be used for super cheap). We’re looking for your absolute minimum of a happy, healthy life here. The exact sum of all this is a bit irrelevant, but it can be fun to know just how little you actually need. My boyfriend, currently a bit unemployed and pursuing artistic goals, takes comfort from his calculations that he could happily live on $20/day all-inclusive.

The “highly desirable” level is where you *might* consider that cell phone plan upgrade. This is where the occasional meal out fits. The nice gym membership instead of just using water bottles as weights. Taking classes in your favorite hobby instead of just trying to figure it out from the internet. Things that make your life noticeably easier and happier. These are fine to spend money on, as long as you are aware of the trade off that’s happening (because now you have to *earn* that extra money, too.)

The “nice-to-haves”? The “it-was-on-sale” or the “I-might-need-it-someday”? Pretty pointless. I guarantee you most things that you purchase because they’d be nice to have will go unused or unappreciated. At worst, they’ll be a hassle if you ever have to move, and you may even feel guilty every time you look at them and note that you haven’t used them in ages. If you actually do end up needing it, buy it then. Not now. You’ll save more money in the long run by not buying most things than it costs to buy that one item full price.

Now, I’ll leave you with a TEDx talk by the architect of my favorite Tiny House, hOMe.

The Secret Art of Budgeting

I’m not against budgets. They are a useful tool, especially for people starting to understand and get a hold of their finances. But they’re just that – a tool. They help you design a lifestyle worth following, but once you figure that out, they tend to be able to go on autopilot.

If you’re going to do any one thing about finances, it’s tracking. Mint and YNAB are great tools that do this for you. Tracking can be a great way to figure out what’s wrong with your expenses in the first place – do you seem to spend an abnormal amount of money at Target? Were you unaware of how much you actually spend on sushi? Tracking can show some of the most egregious expenses you have, which are – thankfully! – often very easy to cut back on. The biggest gains can be made just by being aware of where your money goes.

Now, your budget is your realistic ideal of how much money you will spend each month. Forgetting about the numbers you found by tracking, think about what would be a reasonable amount to spend in each category. Don’t be afraid to do a little research – the USDA has low/moderate/high guidelines for how much the average individual spends on groceries. Check local market rent/price for the smallest house/apartment you would be comfortable living in, and don’t pay more than that. Allot a modest personal allowance for entertainment, eating out, and consumer goods.

Once you have your budget, now you can check it against tracking. If they are virtually the same, great! You can pretty much go on your merry way, or only concern yourself with the obvious gains you found earlier. But if your finance goals and your current financial habits don’t line up, it’s time to take a hard look at your lifestyle and habits. Once you find a sustainable habit to be more in line with your budget, you should generally be able to actually forget about the budget, as long as you keep to that habit.

For instance, groceries. Let’s say I look at the USDA chart and judge, that as a 22-year old city-dwelling female who likes eating well and grassfed beef, I decide my monthly food budget should be $300, or around $10/day. It’s pretty clear that making a habit of buying lunch or dinner out is Not An Option. Just a sandwich these days costs $7. So I make it a point to bring my lunch every day – and the internet has advice for me! I could bring in easy to make mason jar salads, fun bento boxes, homemade freezer meals, or simply bring in leftovers from the previous night’s dinner. The same thing goes for dinners – I might be able to fit in a take out night once per week, but I should get in the habit of cooking dinner every night with in-season produce and quality but inexpensive cuts of meat. Again, the internet is full of frugal recipes and tips on how to optimize grocery shopping.

The glory of this approach is that, after having designed my budget and finding a sustainable habit or guideline, I just have to follow the habit and the finances will follow. Try applying it to big purchases, too! Home location and size can make a big difference in lifestyle costs (be they financial, physical, or environmental) by forcing certain habits and tangential expenses.

How to minimize your tax liability/refund

Why would you want to minimize your refund? Isn’t that free money? OMG NO

That’s the money you paid over the course of the previous year. If you’re getting a large refund, unless there’s been a drastic change in tax code, it’s probably because you weren’t paying attention to your withholding and allowances.

Let’s imagine a scenario. You, Alfonso, and Babar each buy 12 candy bars from me, costing $1.53 apiece. You, knowing something about how multiplication works, hand me a $20 bill and are not very surprised when I give you $1.64 back. Alfonso gives me $40, and when I give him back his $20 and another $1.64 in change, he thinks (for some reason???) that I’ve given him free money. Babar gives me $15 and is unprepared when he owes more. As you can see, you’re in the best financial situation here. Babar is worse off than Alfonso, but Alfonso is in a position to make financial mistakes like blowing his “extra” $20 on frivolous things because he considers it free.

Similarly, taxes are calculable. They may be complicated, but they are generally predictable, just like how much those candy bars cost. You should know how much tax you are likely to owe AND how much is being withheld from your paycheck.

For most of you, this IRS withholding calculator will do it all for you. It will tell you based on received/projected income and tax-related information how many allowances to take. It even takes into account how much tax has already been withheld based on your previous paychecks – which is super helpful if you hold one or more job(s) for only part of the year. Don’t be afraid if it’s a weird number! I’ve had to put down 10 allowances before because withholding can be weird as a student with different income during the summer and the school year.

Times when you should run the IRS withholding calculator:

  • At the start of a year
  • When you start a new job
  • When your taxable income changes (i.e. if you change your traditional 401k/IRA contributions, or if your side-gig or taxable investments have started making money, etc.)
  • When your tax circumstances change (i.e. if you get married/divorced, have a child, buy a house and can now deduct mortgage interest, etc.)
  • Whenever you’re interested. Seriously, I do this for fun sometimes.

If your tax situation is too complicated for the withholding calculator (or it changed late in the year, with not enough time to change your withholding enough to make up for it), you may be a bit off. Especially for the self-employed, it can be tricky but it’s all the more reason to be aware and prepared so you don’t get caught off guard in April. If it’s the same situation the next year, you can base your withholding/payments on the previous year. If it changes every year, you may not ever be as close as you’d like, but since you are aware of your volatile situation, you’ll be prepared and have a plan in place, right?

Why do we vilify the IRS?

I ran across an older Freakonomics post today that talks some more about one of the consequences of vilifying the IRS – and a less outdated article from the Washington Post showing this problem hasn’t stopped since. The IRS has given tons of outstanding tax liabilities to private collections agencies, who get a hefty cut of around 22%. According to the Freakonomics post, the IRS could collect on this for as little as 3% of the cost if they could hire more employees. But politics and public opinion are such that the IRS cannot get a proper budget to hire actual employees.

As you saw in the John Oliver video last week, we need the IRS to run efficiently. We need service to be low-cost and quick so that this part of having a government is relatively pain free. Privatizing core government functions is nonsensical, expensive, and benefits only the private company. It’s not good for other governmental functions, nor is it good for the citizens who have to deal with it.

So why do we continue to vilify the IRS? They’re not the problem. They’re pretty much never the problem. Who do you think made taxes so complicated, and who do you think is keeping the IRS’s budget low? Congress writes the tax code. Congress writes the budget. WTF, Congress? Do you have any idea what you’re doing to us?

Emergency Fund: Not about emergencies?

Emergency funds are arguably the ground floor of healthy finances. At least, it’s on the first floor 2 story house. Or something. They afford you *time* to recover from or find a permanent solution to an emergency or a major change in your life, as well as security in knowing that if times get difficult, you can take a breather without having to worry about money.

You may be confused by typical recommendations, which say something like keep [3-12] months of expenses in [checking, savings, investments, credit] account and [do/do not] use it for infrequent but somewhat predictable expenses like car maintenance, sinking funds (i.e. saving for a house downpayment), annual doctor’s visits, taxes (oh, geez), etc.

All these options are perfectly valid and depend on your situation. Let’s explore what factors you may want to consider when establishing your emergency fund.

AMOUNT

What sort of emergency are you preparing for, and how much would it take to help you solve or recover from it? The amount you keep could be dependent on a number of months worth of expenses or on a total value that you could see yourself needing in an emergency. For instance, if you have a very stable stream of income and support, and you know you could figure things out quickly in a time of true emergency, 1 month of expenses might honestly be enough. If you have less predictable income, you would want to keep enough on hand to get you through lean times, so maybe 6 months makes sense. Maybe your biggest concern is healthcare costs or having to book a last minute flight for a family emergency, so you keep on hand the amount that would cost – which may even double as or be in addition to, say, a “3 month’s expenses” emergency fund.

LOCATION

Preferred location of the fund is based on how quickly you would need liquidity, and how much risk you want your emergency fund to be exposed to. You should also be considering whether or not you want to split your fund over multiple types of accounts. I think it makes sense in a lot of scenarios to put 1 month of expenses in a checking account to prevent accidentally overdrawing your account, another 2-6 months in a savings account for short term emergencies, and keep another 6 months in a brokerage or Roth “retirement” account for longer or larger emergencies. People who are very financially secure (say, with plenty of investments and owning equity in a home) sometimes even treat their Home Equity Line of Credit (HELOC) as an emergency fund, knowing and accepting the risk of liquifying investments if an emergency arises.

PURPOSE

This section is more about semantics than anything. What counts as an emergency? If you keep both your fund for truly unpredictable emergencies in the same savings account as you keep your growing downpayment for a house, do you consider it all your “emergency fund”?

Honestly, who cares? If you’re happy with your plan, I’m happy. So what’s your plan?