CHAPTER TWO
THE FIX STARTS WITH YOU
Without knowing what we want for our lives, we can’t tackle each day with purpose. We would just be clocking in our hours, going through the motions, and phoning it in. That may be sufficient for us to survive our time on this planet, but it isn’t enough to truly live. Before addressing the more technical areas of personal finance, this chapter will develop your thought process to help you discover what you really want. In other words, you will work on identifying, quantifying, and prioritizing your goals.
I always start my meetings with clients by asking what their goals are. A question that seems so simple is truly the hardest one. Talk about treacherous terrain. I’m not a therapist, but I should consider becoming one just to handle the prickly situations this question gets me into. Sure, some people get excited—maybe they sought me out because they have a goal and need my help to achieve it. But more often than that, people become defensive, tangled, or upset and I end up giving out more tissues than financial advice.
The prerequisite to making good financial decisions is being honest with yourself and with others. Not everyone is prepared for that; they think it’s a numbers game. Good financial decisions must be good for the individual, or they’re not good at all.
Honesty requires striking a balance between what our emotions tell us and what is realistic. We all have dreams, and many of us are fortunate enough to live in societies where we are free to pursue them. But life is not an Instagram account—you can’t just filter away the details.
Every person has circumstances that potentially limit, even dictate, what is possible. Your greatest desire might be to become a finalist on The Voice, but your actual voice is more suitable for the shower than Interscope Records. Don’t give up your bathroom jam sessions because, sure, they make you feel good inside. But you would not be a responsible person if you quit your job to audition across the country for a reality vocal competition. Deep down, you know this.
Being honest gets even more complicated when you need to communicate your goals with important people like your partner, family, or colleagues. For example, I bet you can guess one of the most controversial goals that many young married couples deal with—no, it’s not whether hubby’s T-bone steak is cooked to a perfect medium rare (what is this, 1950?!). It’s at what point the couple believes they are ready to have children. We will discuss that more in Chapter 7, but the takeaway here is that your goals become more complicated—not less complicated—when you try to fit them in place with anyone else’s. Being truthful with yourself and communicative with others will put you on the best track toward achieving them because you won’t have to hide from what you want. As we explore ways to embrace challenges that Millennials face at different crossroads in life, I will constantly remind you of how important this is.
REAL TALK: YOUR HONEST GOALS
So, what are your goals?
Stop reading and take 10 minutes to think about what they are. I want you to do so knowing that these next 10 minutes are just to get your gears turning. You don’t need to figure them out today, but the sooner you do, the sooner you can put a plan into action. After all, your goals are very serious and personal choices, and they should be given the right amount of consideration.
Ten minutes. Go.
If you had trouble identifying your goals, don’t lose your mind. For the purpose of moving forward, I’m hooking you up with some ideas. Having sat down with many young and motivated Millennials, here are their most common goals:
1. Paying off student debt
2. Starting an entrepreneurial business venture
3. Building an emergency fund
4. Paying for a wedding
5. Purchasing a home
6. Starting a family
7. Being financially independent
Hopefully, you can identify with at least one of these common objectives. Now, write down your goals. Really. Go get a piece of paper and pen and write them down, because seeing them in front of you makes them real.
Before moving on, I must address on the record that “making sick bank” is not a goal. Sometimes, I hear young people boast, with ignorance, that making tons of cash is their goal. I tell them they are wrong.
Earning money is a wonderful thing, but without a purpose for earning that money, it’s just something you do. Be motivated by the prospect of achieving something you worked hard for and really want because that motivation is truthful and deliberate. The number in your bank account can facilitate and help you reach your goal, but it can’t ever be the goal itself.
Once your goals are written down, you need to quantify them by time and value. This makes them measurable.
Let’s use an easy example to quantify: throwing a wedding. Surprise! Your loving boyfriend or girlfriend has popped the question. According to Heather, it wasn’t much of a surprise when I proposed to her on the steps of Lincoln Center in New York City. My own impatience spoiled things the night before, when I not so subtly suggested she get a manicure and wear a nice dress tomorrow. Whoops.
Let’s say both sets of parents have retirements to worry about. Maybe your parents are also still supporting your degenerate little brother (you might consider buying him a copy of this book). Therefore, you and your fiancé are on your own to pay for the big day.
No big deal. Let’s get to work. Quantify the goal by time and value.
First, by time: When do you want to get married?
Second, by value: How much will the wedding cost?
You decide you cannot possibly wait longer than two years to experience wedded bliss. After researching the price of wedding vendors, you determine you can put it all together for $18,000. With some real-world fourth grade math, you can easily come up with a plan of action: divide $18,000 by 24 months to reach an amount of $750; the amount you must save every month to walk down the aisle.
Do this for every goal you have written down.
As you might have noticed, quantifying goals with fixed prices is rather easy. You divide the value by the time to arrive at what you would need to save each month to reach that goal. However, there are some goals that don’t have an explicit price tag. These are often your long-term goals. Financial independence, a concept known to the older folks as retirement, is the best example of our moving target. The goal shifts and develops with time, and your vision of it may change as you age. But nonetheless, you could put a signpost in the ground today and add it to the list with the knowledge its priority and cost will not stay the same.
Having identified and quantified your financial goals, we are two-thirds of the way there. The last piece is prioritizing them.
Goal priority allows you to organize your financial goals so that you can easily select which you should be saving for at that time. It accounts for your first and last dollars of available savings. In other words, assuming you have more than one financial goal, goal priority helps you understand how to allocate your monthly savings. It also shows you how to amend the plan if you are unable to accomplish one or more of the goals within the timeframe you originally set.
Let’s assume you, the newly engaged couple (congratulations again), also want to save money to buy a townhome. You’ve quantified the goal by time and value: you would like to buy in five years, and the place will cost $300,000. With a 20 percent down payment, closing costs, and some money for furnishings and renovations, you calculate that you will need $75,000 to meet this goal. Using that easy math again, you conclude that you need to save $1,250 per month for five years to purchase the townhome, in addition to the $750 per month for two years for the wedding.
Keep in mind this has nothing to do with being able to actually save money to achieve these goals. That’s cash management. But at the least, you have successfully put yourself in a position to understand the cost of your goals and decide which are most important to you now.
If you, the glowing power couple (congrats again, seriously I’m so happy for you guys), decide you want that wonderful dream wedding even sooner, and it’s way more important to you than owning a townhome in five years, you can consider putting the home savings goal on the back burner for now. Get it? Using this basic exercise, you can evaluate and prioritize any kind of goal, no matter how big or small.
Last of all, I want to reiterate that it’s okay for your goals to change. As a matter of fact, they often do. Life is fickle, and as we navigate our way through it, we find ourselves wanting different things at different times. Whatever the catalyst for change is, having already identified some goals puts you in a better position to pivot toward new ones.
Now use that list of goals as your bookmark moving forward. Let your goals remind you, every time you open this book, why you are committing the time to learn.
YOUR PERSONAL FINANCE ARSENAL
The first chapter explained the obstacles facing Millennials today. They are so complicated and risk sidelining our futures if we don’t approach them right. And it’s hard to look our problems in the face. Hell, if you’d rather be surfing your Netflix queue than absorbing personal finance, I get it. Stranger Things is awesome. But now that you understand the reasons, you have a choice: you can wallow in your struggles or you can overcome them.
Our haters love to say we are jaded, impatient, or entitled. Without question, I know they are wrong. We are not the crybabies they paint us out to be; we just don’t have the tools to do it better. If we had to wage war for our own financial futures, we’d be going to battle without any weapons. That needs to change if we’re going to change. These weapons do more than help you defend yourself—and you don’t even have to debate the Second Amendment to use them! They equip you to be proactive in the financial situations we explore in The Millennial Money Fix, and to act with the confidence of knowing you are the one in charge.
Consider the key themes of personal finance your weapons. They will help you make the best decisions when faced with life’s most important crossroads, which we will cover in the coming chapters. Some themes, such as cash management, are omnipresent, so they come up often. Others, such as estate planning, come up less often and at very specific times.
Okay, enough hype for now. Your key themes of personal finance are as follows:
Cash Management
“It’s all about the Benjamins,” said the legendary Puff Daddy, and he was right. I am willing to resort to late 90s hip-hop to prove the salient point that cash is king. Above all other lessons and strategies, this will be the mantra you return to the most. Your ability to manage and understand cash dictates just about everything we will discuss throughout this guide. You will need to understand these sub-concepts about cash:
Cash Flow
Cash flow is the amount of money being transferred in and out of your life. Mastering your cash flow is key. To become a master, you need to look at what you are earning and what you are spending like Neo looks at the Matrix: it’s fluid. At any given time, you must know how much liquid cash you have available in light of your deposits, withdrawals, and payments due. You should be able to quantify your monthly ins and outs, while also keeping the bigger picture in mind. Meaning, you should be able to visualize your cash flow three months in advance, noting any moneymaking opportunities or big-ticket expenses that may be on the horizon.
Understanding your cash flow can help you truly understand your lifestyle and find places to save money. You may think you’re living frugally because you skipped your buddy’s bachelor party in Vegas last month, but don’t pat yourself on the back until you’ve reviewed the final numbers. You could be living like a Big Baller Boss at home and not even know it.
Cash flow is the first step toward financial freedom. It’s the concept upon which all the other concepts are built.
Savings and the Time Value of Money
If you can manage your cash flow, you might acquire some savings, which is the second aspect of cash management. Savings might sound self-explanatory, but to appreciate its significance, you need to understand the time value of money.
Simply put, receiving a dollar today is worth more than receiving that same dollar in the future because if you have a dollar today, you have the opportunity to earn a return on that dollar. You have the chance to put your money to work and have the interest on that money compound with time and be worth more.
Compound interest is a financial mechanism so powerful that Albert Einstein is alleged to have called it the most powerful force in the universe. Now that’s genius.
Loans
The last aspect of cash management involves borrowing money, or taking out loans. When used responsibly, loans can help you facilitate major objectives, such as starting a business or—as discussed earlier—financing your education.
But that same “time value of money” concept that can benefit your savings can bite you in the ass with loans. To borrow money today, you often accrue interest as that loan matures. Therefore, that loan will almost always cost you more than the amount you borrowed in the first place. It makes sense, because why would anyone (other than your parents) lend you money with no strings attached?
Loans can be extremely dangerous to people not financially equipped to pay off their debts. This is especially so for Millennials, who often have no choice but to utilize loans to finance their much-needed higher education—degrees that are earned at a supremely high cost.
Insurance
Throughout your life, you are going to face different types of risk. Purchasing insurance is a way to transfer some of that risk to another entity, such as an insurance company, so that you can alleviate the cost of experiencing a loss or damaging occurrence. The Millennial Money Fix will focus on a few specific risks facing Millennials and what can be done to mitigate them. We will discuss when and why you need insurance so that you can protect the people and things that are most important to you.
Investments
Everyone loves to talk about investing. I call it the sizzle of personal finance.
The concept is that to grow your wealth with time, you simply cannot stick your cash in a shoe-box. There are tools, disciplines, strategies, and theories on investing. I can see why people believe that investments alone will change their lives, but let me fill you in on a hot piece of advice: investments are not any more important than the other themes here. They must work within the context of your financial capabilities and ultimate goals. You need to earn the right to even start investing.
It kills me when people get turned on with stories of self-anointed “day-traders” who made money fast in a few aggressive moves. Good for you, I’d say. If you are hoping to obtain a shady investing secret or the next sexy stock from this book, just put it down and slowly walk away. You’ll be back someday.
Taxes
I have never met anyone who gets excited about paying their taxes, and I think half of my fraternity brothers are now accountants. No one wants to pay the government more than they should. For the purposes of this guide, I am going to introduce the role that taxes play in your financial life. There’s no evading them, because that’s illegal, but there are legitimate ways to lessen your tax burden by understanding how the tax system works and positioning yourself strategically from a tax planning perspective.
For many Millennials, taxes are pretty straightforward. However, I want you to have at least a basic understanding of how they work.
Employer Benefits
The best perk that comes with full-time employment is the chance to participate in employee benefits. Employers use these benefits to retain you, their talent, in their quest to remain competitive in a market space. Benefits range from health insurance, retirement plans, long-term incentives such as options and stock awards, commuter benefits, and many others. Some may not put dollars in your pocket directly, but do not underestimate their value. Group benefits offer significant cost savings, especially with items such as health insurance.
If you do not have direct access to employee benefits under your current scheme of employment, we will discuss options for collective benefits that may be available to you by the nature of your profession or otherwise.
Understanding the value of employer benefits will also help you move beyond your base salary and bonus to more critically evaluate future job opportunities.
Estate Planning
When you transcend this earth, what do you want to happen to the people and things most important to you? Who would make a financial or medical decision for you if you can’t make one for yourself? Have you ever thought about these things?
You can bet your assets we need to cover estate planning. This piece of your financial puzzle creates certainty for our time on and off this earth, especially for committed couples and those with children. Estate planning is not a warm and fuzzy topic; it can be kind of depressing to have to contemplate things we’d rather bury in the back of our minds. But I can promise you that like the other previous themes, having your estate in order will help you sleep better at night. It will ensure you never really lose control, even when you do.