Other than when the stock market crashes or another ten thousand people get pink slips, you never hardly hear anyone mention the economy, do you? Most people (you, perhaps?) view the economy as some external force over which nobody has any control. You feel like a victim of this capricious force and you can "only hope for the best".
Wrong on both counts.
The economy "happens" whether the news mentions it or not. No, it's not capricious. And no, you needn't be a victim.
In fact, being aware of the economy and how it moves can help you put tens (or hundreds) of thousands into your pocket, and help you prevent what you have from being sucked out of your pocket.
The good news is you don't need a degree in economics, nor do you need to understand those people who usually dress in black, or any of the gobbledygook they speak. The main thing you need to understand is that the economy goes up and down. It moves in cycles.
The Economic Cycle
Different people use different measures of the economy, so I figured why not create another one? Here's how I track the economy's cycles:
The exact numbers and scale used for this chart don't matter. All we need to know is (a) there are ups and downs, and (b) when those turning points are.
The chart teaches us a couple of things.
First of all, the economic cycle repeats. The economy always recovers from even its worst recession or depression, and it always crashes just when things look wonderful. Each bottom is followed by an uptick, which in turn leads to yet another crash.
Second, the cycle's wavelength is surprisingly constant. One measures any cycle or wave from one top to the next top, or one bottom to the next. Given that most people focus on recessions when they think about the economy, I choose to measure bottom to bottom. The dates in the chart show past economic cycles' bottoms — more or less. (And if you're dubious about my custom measure, you can check those dates with the Federal Reserve. They match. Again: exactness isn't a requirement here; as you'll see later, for the purposes of your net worth "close enough is good enough.")
What surprised me the first time I saw this picture was how short every cycle is: ten years or less, bottom to bottom.
That's not a long time.
Since World War II, we've had a recession every 7-10 years, almost like clockwork. When I mention this to people, almost everyone is surprised. (I was surprised too the first time I figured it out.)
Finally, the ups, downs, and turning points of the economy are inevitable. The cycle has peaked and bottomed, within its regular cycle, regardless of who was in the White House, or any other extraneous circumstances. For some reason, people love to blame whoever is President, or whichever party rules Congress, but recessions have occurred under every party's watch. No force or political party has interrupted the cycle, up or down.
The economy moves to a rhythm of its own.
It's probably not news to you that the economy goes up and down. On some level, we all know that. Here's the problem: this knowledge didn't prevent millions from getting slammed when the Great Recession hit a few years ago. Perhaps you got caught in the downdraft, too.
Why is that? I can think of two reasons.
First, the economy moves at the speed of a glacier -- slower than grass growing, paint drying or any other slow-moving part of life. When our attention span these days is measured in milliseconds, it's impossible to discern any movement. But make no mistake: the economy moves.
The second (and most important reason) economic downturns take folks by surprise is that few people understand how you can make subtle changes to your financial strategy depending on where we are in a given cycle of the economy.
And that's what this article is all about.
Let me say at the outset that nothing here changes the fundamental financial wisdom. You'll still need to earn more, spend less, get rid of debt, and invest. But what follows could potentially help you do all four of those things better than before.
Saving for college is daunting enough, but as any parent of college-age kids can tell you, you also need to learn a whole new vocabulary -- FAFSA, 529 plans, Coverdell accounts.
It can be a lot to process. One common question is the difference between a 529 plan and a 529 "prepaid" plan. While pre-paid plans aren't nearly as common as they used to be, it's important to know the difference. Here's all that you need to know:
Once again, my finely-honed procrastination abilities have cost me cold, hard cash. I seem to be an expert at putting things off...and paying for it.
My passport expires next April. But because many (most?) countries require that you have six months left on your passport before you enter their country, I need to renew it before traveling to Ecuador in November. I've known that I need to renew my passport since February but keep finding reasons not to.
- First it was because we were still in Savannah, and I didn't want to do the transaction from there. What if it was mailed back to me after we resumed our RV trip back to Portland?
- Then, of course, I couldn't do the renewal because we were on the road. There was a chance we'd be going to Mexico, so I needed to keep my passport with me.
- I started the paperwork when we got back to Portland. I printed everything out, then signed and dated the renewal application in mid-July. But I didn't mail it in. I know I have some spare passport photos around here somewhere and I wanted to use them. But I could never find them.
- Finally, life got in the way. I got busy with the dog and the blog. I did a workshop at World Domination Summit. Then there was Fincon.
Bottom line? When I found the paperwork on my desk yesterday, I realized I only had five weeks to get my passport renewed. That meant I had to request expedited service, which costs $170 instead of $110. My chronic procrastination cost me sixty bucks.
Believe it or not, that's cheap. Lots of times, my procrastination costs me more. Sometimes much more.
Kim and I traveled to San Diego last week for the sixth-annual Fincon, the conference "where money and media meet". I look forward to this event every year because it's a terrific way to connect with other financial bloggers, journalists, and entrepreneurs.
Like any conference, Fincon is packed with useful lectures and workshops about topics related to the field. (On Thursday, I participated in a workshop devoted to the past, present, and future of the early retirement movement.) It's also a great place to forge business partnerships with companies like Fidelity Investments and Ally Bank.
For me, however, the chief value of a conference like Fincon is the opportunity to hang out with my friends and colleagues.
A Meeting of Minds
Networking is a dirty word to a lot of people. It conjures images of slick guys in expensive suits who spam their business card to as many people as possible while pitching their product or service. There are absolutely some folks like that at Fincon, but they're rare. They're the exception, not the rule.
Because my peers have dubbed me "the grandfather of personal finance blogging", and because I've been fortunate to build and sell a profitable website already, I view my role at Fincon as a resource. I know next to nothing about modern blogging (although I'm learning!), but I still have lots of experience to draw upon. More than that, my decade in this field has allowed me to build a wide personal network, so I'm able to connect people who ought to know each other.
I suspect most new Fincon attendees spend their time attending the info-packed sessions. Not me. I spend my time in the hallways and lobbies, chatting with whomever happens to pass along. I chat with old friends like Jim Wang and Harlan Landes. I chat with newbies like Gwen Merz and Marcus Garrett. I chat with people who have tiny podcasts and I chat with people who have created massive followings.
When I network, I practice what I preach.
I go into each conversation without motive. This probably goes against every piece of professional networking advice, but I don't have objectives when meeting people. I let the conversation go where the conversation wants to go. Preferably, we chat about our personal lives: about our dogs, about travel, about Unbreakable Kimmy Schmidt. Because we're at a business conference, we do often chat about business, but I try not to steer things in any particular direction. I do my best to keep the conversation focused on the other person, not on me.
True story: Last year, at a smaller conference that feeds into Fincon, I co-presented about "the right way to network". I explicitly said that leading with your pitch is the wrong way to network. After the session, sure enough, a guy came up to pitch me on his product. I wanted to shoot myself.
This year, I enjoyed talking with dozens of people, many of whom I'd never met before. Highlights include chatting with:
Lots of people find dealing with personal finances to be a tough task. For some, money wasn't a topic of family discussions growing up. There was no place in the curriculum for it at any level of schooling. So, how then, if people aren't exposed to it in their youth, will they be prepared to deal with it as adults?
You can read Dummies Books. You can read magazines like Money and Kiplinger. You can pay for courses from financial "gurus". You can read blogs like Money Boss. But maybe the best way to master your money is to start treating your personal finances like a business.
This idea might seem strange at first, but it makes a lot of sense if you think about it. Businesses require structure. Building a business takes planning. It requires patience. The people who run successful businesses have to be accountable to shareholders, partners and investors. And sometimes they have to call on outsiders to help them with specific problems.
Is any of that really much different than managing your own finances?
Here are five business practices you can use to reach your own specific personal financial goals.
Have a Plan
All businesses start with a plan. They're not always hyper-detailed — some plans start on a napkin! — but all businesses begin with some sort of roadmap.
These plans cover, in one form or another:
- What products/services the business will provide.
- How much to charge.
- Who the target market will be.
- How much money will be needed to cover start-up costs.
- What needs to be done to reach the launch point.
You can use the same idea in your own life. Here at Money Boss, J.D. teaches that you should start by creating a personal mission statement. As an accountant, I think a key part of a personal plan is building a budget.
I know, I know. Lots of people hate budgets. Some folks are afraid of them. Others don't understand them. But budgets don't have to be awful.
Quite frankly, I believe a budget is a business plan for how you will run your household. It allows you to see what's coming in and where you're spending it. You can see how close you are to your financial goals. (Or how you're coming up short.) Actively budgeting keeps you accountable. It forces you to be completely transparent and brutally honest with yourself. But building a reliable budget takes time and patience.
J.D.'s note: As I mentioned in last week's article about The Money Boss Budget, I'm a fan of broad budget frameworks. They give you all the benefits of budeting without the drawbacks that come from being overly detailed. If you like tracking lots of categories, do so. But at a bare minimum, be aware of how much you're spending on Needs, Wants, and Saving.
Sadly, many people fail at budgeting. Trust me, I've been there.
In my youth, I lived paycheck to paycheck. I had no discipline. I had no financial goals. I was happy to live each day having fun and throwing money around like I was a trust-fund kid (which couldn't have been further from the truth!).
The funny thing is, my parents had taught me the value of money. But I lost my way for a few years. Eventually, I wised up. I swallowed my pride and asked for help. I moved back in with my parents until I could straighten out my money issues.
I purchased Microsoft Money and started inputting the past few months of my frivolous lifestyle. The results were eye opening! I saw just how much money I was throwing away on partying irresponsibly, on treating my friends, on buying things that I didn't use or need simply because they were "cool".
I think that's what really scares people about budgeting: It reveals the ugly truth about how they use their money.
Believe me when I say that my truth was very ugly. But you know what? When I put a new budget in place, it helped me change my ways. I was able to see my money problems and make changes. My sensible side got rebooted and I was able to align my spending with my goals.
I tracked everything I earned and spent. I actively managed the spending categories I had previously allowed to get out of hand. I cut out expenses that weren't necessary for reaching my newly-set goal of moving out of my parents' house. The nonsense spending was eliminated and my money now went to paying down my debts.
It didn't stop there...
I'm not a fan of budgets. Even before I became a money writer, I found budgets onerous. Their prescriptions sometimes seemed arbitrary -- why this much for groceries and that much for entertainment? -- and they didn't do a good job of taking into account personal differences.
During a decade of writing about money, I've come to like budgets even less. They lead people to the mistaken belief that there's only one right way to handle money, a concept I hate.
That said, there are certain budgets that I do like.
- I like descriptive budgets. These aren't spending plans designed to tell you where your money ought to go, but actual information about the spending habits of a particular population. Descriptive budgets aren't meant to be followed. They describe what actually occurs in real life instead of promoting a particular ideal.
- I like budget frameworks. Budgets fail because they're overly detailed and complicated, because they don't reflect reality, and because they don't reflect your values. Budget frameworks avoid these problems by looking only at the Big Picture instead of trying to focus on narrow spending categories. They offer guidelines rather than rules.
My favorite descriptive budget comes from the Consumer Expenditure Survey, which looks at the money habits of average Americans. I feel like it provides a reasonable baseline for analyzing typical spending habits.
For instance, here's how the average American household spent its money in 2014:
- 33.3% went to housing (including utilities)
- 17.0% went to transportation
- 12.6% of spending went to food (7.4% was spent on food at home, 5.2% was spen on food away from home)
- 8.0% went to healthcare (including health insurance)
- 5.1% went to entertainment (of which 1.2% went to pets)
- 3.3% went to clothing
- 2.3% went to education
Again, this info isn't useful for making decisions with your life, but it's a good starting point for looking at what is (and isn't) normal.
The Balanced Money Formula
I've looked at a lot of broad budget frameworks in the past ten years, but my favorite remains the Balanced Money Formula from Elizabeth Warren and Amelia Tyagi. In their book All Your Worth, Warren and Tyagi argue that in order to achieve financial balance, your after-tax spending should be allocated like this:
- At least 20% should go to Saving (which includes debt reduction).
- No more than 50% should be allocated to Needs (which includes housing, utilities, healthcare, basic food, and basic clothing).
- The rest — around 30% — should go to Wants (which is everything else).
The downsides of saving too little should be obvious to Money Boss readers. If you don't build a nest egg, your financial future is bleak and at the mercy of outside forces.
Warren and Tyagi are adamant that less than half your budget should go to Needs. If you pour too much toward necessities, you don't have room in your budget for fun or the future. Unfortunately, too many Americans spend 60% or 70% or more on Needs, which makes them feel as if they're victims of circumstance.
The authors are just as insistent that you should build room into your budget for Wants. "You should ask yourself," they write, "are you making enough room for fun?" There are people who can afford to spend more on Wants but — due to a scarcity mindset or something else — are afraid to open the pursestrings.
In the olden days, I was a vocal advocate for the Balanced Money Formula. I still think it's a great target for folks who are just starting to take control of their financial situation. If you're in debt or you're struggling to make ends meet, you should absolutely aim for this split.
But you know what? I no longer think the Balanced Money Formula goes far enough. It'll help you get on your feet, sure, and it'll allow you to save for the long term. But it still asks you to spend forty years in the rat race. I think there's a better way.
After my recent article about coping with haters, a reader named Sandy left the following comment.
Your site is called 'money boss'. How about...you make a detailed post on how you invest. Let's see some real life detail. I'm sure you won't want to post exactly how much you have invested and that's fine. I'm talking more along the lines of:
a: what stocks/funds you hold
b. what criteria you use to shift funds to maintain balance (good/bad/sky is falling markets)
c. your rate of return each quarter
d. how much you invest each month (ballpark)
...Let’s see whatcha got.
Although I'm skeptical that looking at my personal portfolio will be useful to anyone, and although I've already shared most of the following information at Money Boss and at Get Rich Slowly, let's take a look at how my money is invested.
First, though, let's talk about how I used to invest.
A Brief History of a Bad Investor
Before I decided to become boss of my own life, I did some dumb things with money. I was especially bad at investing. Like many Americans, I didn't understand the difference between investing and speculating. I looked at the stock market as a place to get rich quick. I didn't have the knowledge or patience for long-term planning.
As a result, my first forays into investing were great examples of what not to do:
- During the early 1990s, I followed my cousin's advice and began investing in mutual funds. Over the course of a very long year, I plowed a little more than $2000 into a variety of Invesco mutual funds. But I cashed out all of my money when I decided I needed to buy a Macintosh Classic II computer.
- During the late 1990s, in the midst of the tech boom, some friends and I formed and investment club. Every month, the six (or eight?) of us would meet to choose which stock we wanted to purchase, then we'd each contribute $50 to buy as many shares as possbile. Our stock picks sucked. We continually bought whatever was riding high. We had no concept of sensible investing. We were gambling — and we lost. The tech bubble burst. After two years, we cashed out and folded our investment club. (For years, I've wanted to write this full story for fun. I have all the records from the club, and I'm still friends with all the members.)
- In March of 2000, as the tech bubble reached maximum size, I jumped on the bandwagon for the Palm Pilot IPO. On the day the stock went public, I bought as many shares as possible. Within weeks, I'd lost half my money.
- My final bout of investing stupidity? In the autumn of 2007, I had dinner with a friend who worked at the corporate offices of The Sharper Image. He told me that the company's stock price had dropped but management was certain they could turn things around. It was just a passing remark in a much larger conversation, but I took it as a sign. The next day, I bought $3500 worth of Sharper Image stock at $3.14 per share. (That was the bulk of my Roth IRA money for 2007.) Within a few months, The Sharper Image declared bankruptcy and the value of my stock dropped to $200. Then to zero.
Gambling and speculating are fundamentally non-money boss activities: outcomes are at the whim of fate. Investing, on the other hand, is a conscious, directed activity that relies on discipline, knowledge, and patience.
The first thing I ask new Money Boss readers is to develop a personal mission statement. I want them to discover a goal that will keep them motivated long-term, keep them trudging to work every day, keep them saving half their income. What will prompt them to ignore the things modern society says you have to have in order to be happy?
By getting clear on the one thing that matters most to you, it's so much easier to make smart choices with money, time, fitness, and more. When you know what you really want, everything else is noise.
Recently, I've come to realize this same idea can be applied on a smaller scale to everyday circumstances: Whenever you face a mountain of choices, whenever life becomes overwhelming, you can use the "One Thing" principle to give you focus.
The New Normal
On June 29th, after fifteen months and four days traveling the U.S. in our RV, Kim and I arrived home to Portland. In our overly-optimistic minds, we both believed we'd be back to normal work routines by July 1st. Hahahahaha! We were wrong.
The first complication came with fur:
Three weeks before the end of our journey, we picked up a puppy from my cousin in northeast Oklahoma. Tahlequah -- named for the town in which she was born -- is a good dog...but she's only four months old. As a high-energy hound, she needs three hours of exercise and attention every day. Sometimes more.
After arriving home, we had to unpack. Three times. Before I could work on Money Boss and Kim could work on her projects, we had to not only extract all of our stuff from the motorhome, but also sort through dozens of boxes we'd crammed into my office before we left. (Our house-sitters had access to the rest of the condo, but we converted my office to a shared storage space.) Plus we had to unpack stuff from the storage unit we'd rented when Kim and I joined households a few years ago.
Meanwhile, our friends wanted to see us. Colleagues wanted favors. We wanted to get back on an exercise program. (During fifteen months on the road, we both packed on the pounds. Now we've returned to Crossfit and paleo, and the weight is falling off.) We needed to go shopping. We needed to repair and/or replace all of the many things that managed to break while we were gone. We needed to fix up the Mini Cooper and sell the motorhome. Etcetera, etcetera, etcetera.
Simply put: After we got home, we were overwhelmed. I, especially, bounced from one thing to another without ever finishing any particular task. If this was our new normal, it sucked. Something had to change.
I'm pleased to announce that, at long last, The Money Boss Manifesto is available to download. This free 87-page PDF collects all of the material from my "financial freedom crash course" into one convenient document. You don't even have to give me your email address to access it! You can grab the guide here:
About the Guide
For many, money is a mystery. It’s not the numbers that are complicated — the math behind wealth-building is shockingly simple — but it’s the mental baggage that bogs us down: the psychology, the emotions, the discipline, the peer pressure.
The best podcasts, audiobooks, and digital courses about personal finance and financial independence
Last week at the Financial Independence forum on Reddit, a user asked for podcast and audiobook recommendations related to personal finance, financial independence, and self-improvement. Livealegacy wrote:
I have about two hours a day that I spend driving and I'm looking to invest this time in myself...I'm looking for everyone's favorite investing/PF podcast or audiobooks. Might as well get smarter every day so if you have others you recommend outside of FI, this is about investing in myself so please share.
As an audio junkie myself -- I like to listen while I exercise or, sometimes, as I'm falling asleep -- I thought it would be useful to catalog all of this info in one place. There's a lot here. Let's get started!
I'm a recent convert to podcasts and still struggle with how best to listen. I want to be able to access them the same way I access my shows and songs on iTunes, but that doesn't seem possible. All the apps want to push new episodes to me. I want to fetch new episodes myself, but track my favorites so that I can tell which episodes I have (and have not) heard. All so confusing!
As I've mentioned before, Radical Personal Finance from Joshua Sheats was the show that got me hooked on this format. Sheats explores PF topics in detail and has a strong focus on financial independence. I like his approach.
Based on the comments at Reddit, I think these podcasts might be of interest to you money bosses:
- Afford Anything Podcast with Paula Pant. My colleagues (and friend) started a podcast about money and entrepreneurship. This is high on my to-listen list.
- If you're into real-estate investing, check out Bigger Pockets with Josh Dorkin and Brandon Turner. The hosts try to provide info for both beginners and experiences investors.
- Stacking Benjamins does a great job of covering the gamut of money topics and opinions. The hosts aren't afraid to explore different ideas and viewpoints. Plus, they consciously work to keep their show hopping so it doesn't drag.
- The Financial Independence Podcast is from Brandon at Mad Fientist. He interviews people about techniques and strategies for achieving early retirement.
- Todd Tresidder does an occasional Financial Mentor podcast that focuses on financial independence and financial planning. Tresidder's a thoughtful and knowledgable fellow, and that shines through on his show.
- Get Rich Education with Keith Weinhold looks like it's more about real-estate investing than anything, but there are episodes on topics like the stock market and investing in yourself. (I've never heard of this show, so can't vouch for content and quality.)
- The Survival Podcast with Jack Spirko is a "daily online audio show about self-sufficiency and self-reliance in the modern world". I haven't listened to this yet, but I like the about page.
- The Voluntary Life looks like it's right in my wheelhouse. The show covers entrepreneurship, travel, minimalism, and financial freedom. Lots of content about financial independence here.
- Several Reddit users praised Econtalk, a podcast about how economics affects daily life. From the about page: "The emphases are on using topical books and the news to illustrate economic principles. Exploring how economics emerges in practice is a primary theme."
Lastly, you might want to check out Adulting from Harlan Landes and Miranda Marquit. This show isn't specifically about money, but the hosts are both personal-finance writers (and Landes is financially independent). As a result, there's lots of discussion about how to handle money responsibly.