Life Lessons 101

Everything you needed to know, but was never taught in school.

Is Social Security Running out of Money?

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So the answer is Yes, and No. Should you worry, the answer again is Yes and No, or how much are you willing to slow the issue.

The Problem

OK, you might think that is not a good answer, but it is correct. The statements about Social Security running out of money, is actually it not being able to make full payments. (example)

So, and this is just as an example, let’s say you should expect $1,000 dollar a month payment. We’re using that number just for simplicity. Being only able to pay 78%, means that instead of $1,000, you’d only get $780. If you were supposed to get $2,000, you’d get $1,580. Either way, it’s a fairly serious cut in payments, and it will be in that position in just a few years.

So you will get some funds, but you are at risk of losing some. This is most likely going to affect young Gen Xers as they just hit retirement. Older Millennials will be right behind them.

Why is is a Problem

Most people are surprised to learn that Social Security doesn’t pay what you are used to making, rather it is a portion. So their lifestyle takes a hit right off the bad. When you drop that further, it makes normal every day life more difficult as well.

Outstanding debt is harder to pay, and it makes it difficult to make normal necessary payments.

This wasn’t considered as big of an issue when most people had paid off their house by the time the retired, but with more people renting, and buying homes later in life, you could run into a situation where you still need to make a house payment, car payment, etc.

Why is it Running out of Money

Social security needs incoming money to continue to make payments. Workforce participation has been dropping, and that hurts the money coming in. With the Pandemic of 2020, 2021, 20?? there has been layoffs, people quitting, people retiring early, etc. This is reducing the number of people putting money into the system and increasing in the number of people taking money out of the system.

How Bad Will it Get?

In theory, Social Security could essentially run out of money and not be able to pay anything. However, that would be political suicide for anyone in office, and their party, so our government probably won’t let that happen.

Instead, they will increase the payments going in (increase taxes), reduce the payments going out, change the age you and withdraw from, or other things to keep it going. I’ve be surprised if they let it actually get that low, however, they’ve known about this issue for 20+ years, and they like to kick the can down the road. The longer they wait, the harder it will be to solve this problem.

What can you do?

So the real question is, what can you do? You can always run for office, but one person trying to fix a problem that the rest of the politicians only seem to give lip service too doesn’t sound likely.

Instead, consider opening a 401K or similar retirement fund. The earlier you do it, the better, however, anytime is better than never. It’s much like the best time to plant a tree was 20 years ago – so you can enjoy sitting in its shade today. The second best time is today, so it can start to grow and be ready in the future.

Additionally, look at getting out of debt. Anything you can do to get out of debt to reduce future payments will help you. Doing so will help you more than you can imagine.

Financial Freedom Types: Savers

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The first type of financial freedom I want to look at is savers. Mostly because this is the easiest one to implement. However, some may also say it also takes the longest to achieve financial freedom and won’t necessarily make you “rich”.

The saver is the person who creates a budget and sticks with it. This lets them control money instead of letting it control you.

By using a budget, they have money they can put into their savings account and use for either a rainy day, or to make that bigger purchase they want, like vacations, etc.

Because they budget and pay cash (i.e. not take out a loan) for most items, they pay less overall since they are not paying interest on their purchases. This means they typically have strong wills, forgoing impulse buys, because they are delaying their gratification to save, knowing not today, but tomorrow will be better because of it.

They will often shop sales ads, clip coupons, and know what items normally costs and it’s associated value. Because they know the value of an item, they often buy higher quality goods that cost more, knowing purchasing something once is almost always better than buying it again and again when it breaks.

This methodology is often touted by the likes of Dave Ramsey and his crew, as well as books like The Millionaire Next Door, people who belong to the FIRE (Financial Independence, Retire Early) movement, and others.

Pros

The great news is anyone can be a saver. You don’t have to earn a certain dollar amount a year to get to that point. Additionally, you don’t have to have a certain skill, possibly outside of basic arithmetic.

The other pro, is that you can start at any time. My wife and I sat down and budgeted our honeymoon before we were married, so we didn’t go into debt over it. It meant we didn’t go on a fancy trip to Paris, or Hawaii, but we stayed someplace nice, that we could afford, and still had a great honeymoon. It was a nice early on step, and while we only had a little saved, we worked at it, got better, and before long were able to save more.

The more you do it, the easier it is. If you’ve never had a budget, writing one and following one will be hard. But with each month, and each year, it gets easier and easier until you don’t even think about it. It’s just natural. With the other methods, you see coming up, there tends to be some up and down motions that you can’t control.

With each year, because it’s easier to follow, you’ll notice your savings will increase. Sure, a large expense will come up, just as it would with any person, however, you have the money ready for it.

The more money you make, the more you can save. This is where if you are also part hustler, or you have a good paying job, get an unexpected windfall, you are just that much further ahead. But it still works even if you only have smaller salary than others.

Saving is a perfect choice for someone who is risk adverse. As we’ll see in with Hustlers and Investors, they all take risks…risks that could cost them their money and they can’t recover. Saving money by buying frugally and budgeting takes no risks.

Cons

Let’s face it, not everything can be a pro, no matter how much I like it. (And as a saver myself, I like it and have my biases.)

Clipping coupons means you can live within your means and being financially free, but is rarely a way to being wealthy.

Some of your friends might make fun of you for not being willing to splurge on expenses today, because they don’t see a reason to live for tomorrow.

Because you are saving your money, it only grows slowly, especially at first, and especially as you have to pay down and finally off any outstanding debt.

Shopping for the best deal can take time. It takes time to clip coupons, comparison shop, and prepare a weekly meal plan, time that some people don’t want to put into it.

An unexpected major expense can side track your goals. As much as I hate to admit it, bad things sometimes happen. And sometimes they are outside of our control. One bad illness, losing your job, etc, can cause a financial problem that you can’t just budget around. Now as a saver will have a good budget, they should have insurance to help protect and cover problems like a car accident, or getting sick, but that doesn’t necessarily solve all of your issues – but they can minimize them.

The biggest con I see to be a saver, is for those people who take it to an extreme. I personally see this with some people in the FIRE movement, where their sole focus is on saving money, and to keep from spending anything. It causes them to sometimes be too focused, and they forget to have fun, and relax as they’re so focused on having money to retire early. You need to make sure you’re willing to live your life.

Three ways to Financial Freedom

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If you read through many finance books each one will offer you a way to reach “millions” or “financial success”.

Of course, “their way” is the “only way” and all you have to do is follow their method. Unfortunately, the time it takes to write, edit, and publish a book, things often change and that exact way doesn’t work anymore.

With that still, you’ll find that they generally fall into one of three basic categories for helping you reach financial freedom, and I’d like to go over each of them with you.

I’ll then break it down a little further in follow articles talking about the pros and cons of each methodology.

The basics of these three ideas can be grouped into the Hustlers, the Investors, and the Savers.

Savers

Savers are the ones who can control how much they spend. They budget well, and know how to stretch it to get every penny’s worth from that dollar. They control their money, instead of letting it control them, and they do well because of it.

Let’s look at the savers, and how they get to financial freedom.

Hustlers

These are the people who look to earn more income, either through fast track promotions and raises, side hustles, or starting their own business. They’ll simply out earn the standard person and make their money that way.

Let’s look at the hustlers, and how they get to financial freedom.

Investors

Investors look to have their money make money for them. Either through the use of compounding interest (less likely) or investment in stocks, bonds, etc.

Let’s look at the investors, and how they get to financial freedom.

Inherit – is missing

There is two big reasons why inheritance is missing from this list. First, you can’t write about how to inherit money, you’ve generally got to be born into a family with wealth for that. The other option of course is to marry into that type of money, but there you are either in it for a long time, or your goal is to marry someone who is older and you expect them to die soon – this will often lead to legal battles and has various ethical issues which we don’t want to even begin to go into.

However, there is also another big reason you don’t see a lot of books for that – most millionaires (at least in America) didn’t inherit their wealth. In fact, according to Chris Hogan, the author of Everyday Millionaires, less than 10% of millionaires inherit their wealth. And over 70% inherited nothing at all. The rest had to earn it via one or more of these three methods.

That means reaching millionaire status, or some level of financial security, is generally available to most people.

Creating a Budget Part II – The Envelope Method

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So spreadsheets aren’t your cup of tea… That’s okay! Not every method works for everyone.

The good news is that you don’t have to have a fancy computer, or fancy software to make a budget and track your spending. Some things you can do real old school.

Sure, you’ll still need to do a basic spreadsheet to calculate your spending. If you haven’t read Creating a Budget Part I, go back and read it and then return here as you’ll need that information for this method. 

Go ahead and compile a list of your needs, wants and work/business expenses (see Creating a Budget Part I to see the breakdown on these). Now determine what you spend each month on these categories. Now put them into order of importance. First rank your needs, then rank your work/business (you can skip this if it doesn’t apply to you) and finally rank your wants.

Each month, after you pay the bills for your needs, including your credit cards. The remaining money gets divided into your envelopes. Now look at your spending spreadsheet and divide out the remaining money into cash and put it into your envelopes.

If the money doesn’t match that means you’re spending more than what you are bringing in and you’ll need to revise your budget to match. That may mean getting rid of or reducing spending on some of your wants.

If you separate the money out into the envelopes and still have money left over, you may want to consider an emergency fund for those months where you need to overspend because something out of your control happens – you have to spend more on gas because the prices went dramatically up, your car needs new brakes, your microwave broke, etc.

This method can be great for those just starting out and wanting to get their finances in order as it keeps you from overspending. Some months you’ll have extra money left in an envelope(s). These will be for things you don’t spend money on each month.

As tempting as it may be, don’t remove the money from this envelope as you will need it later down the line. This allows you to spend more the next month if you want, or you can save the money for a rainy day, or pay down some debts to get out from under your creditors once and for all.

So no matter which method you decide to do, just stick to it. The longer you use the budget, the easier it becomes to continue using it. Remember to update it as you go, as things can change or you forgot to add something that you need. Your budget can help you get your spending in order and hopefully put more money back in your pocket. Happy budgeting!

Creating Your First Budget – Part I

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Creating a budget can be a really important first step when moving out on your own. When you graduate from high school and/or college, most people can’t wait to get out on their own and start living their own life.

However, what most people fail to realize, until it is too late, is if you’re not careful you’ll spend all your money too fast and won’t have enough left to make it to your next paycheck. A friend of mine used to call that problem – “Too much month at the end of the money.”

Many times when you live at home with your parents you won’t have a lot of expenses that you’ll have to pay when you’re on your own. For instance, you probably won’t be paying things like rent, utilities, internet, cable, etc. Some of those are obvious, others, not so much – like insurance, or realizing that your water bill is not included with your electric bill.

People get accustomed to spending a certain way in their youth and are used to much more disposable income. When living on your own, things tend to reverse. You have less disposable income since you now have more bills to pay.

So how do you keep more money in your pocket? All you have to do is learn how and where you money is going, so you can control it, instead of your money controlling you. The easiest way is to create a budget.

Now a lot of people think that a budget is something that restricts you – limiting what you can spend. I like to think of it as a tool to help you. A budget is something that lets you define what you want to spend your money on, to make sure there is money to spend on it, rather than other things that distract us.

Budgets help you track where your money goes, how much you have left and if there is a place you can cut your spending to save money.

The first step to creating a budget is to create a spreadsheet. Everyone’s lifestyle is different, so not all things will apply to everyone. Make your spreadsheet match your lifestyle. 

Break your Spending into Sections

I recommend breaking your spreadsheet down into two to three sections.

The first section should be your needs section. This includes things like rent/mortgage, car payments, gas for your car, utilities (water and electricity), food, phone, internet, tuition and insurance. Depending upon where you are in life, some of these may or may not be needed.

Your second section should be your wants (things that you want, but don’t necessarily have to have). These would include things like dining out, cable/streaming services, travel/vacations, entertainment (movies, amusement parks, concerts, conventions that aren’t business related), hobbies and replacement of items (clothes, shoes, new car, house renovations,etc.).

The third section does not apply to everyone – work/business expenses. Some people don’t have any extra work expenses, however some people have extra work expenses that are not covered by their employer or they are self employed. These could include things like special clothes required, office supplies if you work hours at home, tools, etc. If you are self employed then everything you need to run your business would fall under this category including things like insurance, inventory, licenses, advertising and travel for the business.

By separating these items into sections you pay off your needs first and then once those bills have been paid, then move on to the wants section. This also allows you to see just how much you are spending on items.

Those Starbucks coffees that you love really add up! Most people don’t realize just how much they spend on many things that they purchase, thinking it’s just $2-5. However, when you add them all up, you see just how much you are spending. A budget lets you see a month view and from there you can determine if that’s what you want to spend your money on. If it is, great, spend you money on Starbucks. Just don’t do it, at the expense of a need – like your rent.

Now you can see things you can cut or reduce spending on to keep more money in your pocket.

In the column next to each item, put what you anticipate spending on this category each month. Some of these are fixed costs, others will variable costs. The variable costs items you might want to look at a few months so you can determine an average.

For example, your car payment or rent will be the same price each month. We’ll say you pay $300 for your car payment each month, so you would put $300 in the second column. Now things like utilities can vary. Many times your utility bill will show a graph on it for what you have paid for the past six months to a year. You can use this to determine your average payment. Just enter the average in the second column.

Some things you’ll just have to guess on like your groceries. Later down the line you’ll have a better idea of what this costs you and you can change the amount in column two to match what you typically spend.

When we set up our first budget, we were surprised by how much we spent in some areas. After our first month we started adjusting ourselves and our spending habits. We’ve been doing this for about twenty years and its become automatic for us, but we still periodically review to make sure we’re keeping on track.

Then create columns for each month. You’ll want a new budget for each year. As you spend your money each month, be sure to enter it under that month’s column for each category. If you don’t spend any money on that category that month, just leave it blank.

Once you complete that first year’s budget, you can use that budget to determine the next year’s budget. Just take your averages in each row and use them to set up column two for each category. Sometimes we find that we need to add some to one of our expenses, like gas which went up in price, so we take out of something some where else, or we use that new raise to help us cover the cost.

Sticking to your budget isn’t always easy, but with hard work and determination it can help your get your finances in order and allow you to control where your money goes.

If setting up a spreadsheet seems too difficult or just something you know you won’t stick to, you can always use the envelope method. To learn about the envelope method, check out “Creating a Budget Part II” and I’ll walk you through it.