Kicking Financial Ass Read online

  Look at median annual incomes across the world, adjusted for purchase power parity (PPP). If you make more than $1,500, you are already better off than more than 50% of the planet.

  Do you make more than $50,000 per year? Forget about the top 1% because you are in the top 0.31%. It would take the average laborer in Ghana 312 years to make the same amount. If you are reading this book, chances are you either had the money to buy it or the time to read it. Either way, you are better off than most people in the world.

  Next time you have a bad day, take the time to reflect and count how lucky you are.

  2. Practicing Gratitude

  What do Oprah Winfrey, Richard Branson, and Tim Ferriss have in common? They consciously practice gratitude.9 Gratitude is defined as the quality of being thankful, a readiness to show and return kindness. Psychologists have said that when we appreciate the present, we become happier. Some studies have shown that being grateful can increase happiness levels by as much as 25%.10

  Grateful people are more giving, less selfish, and more generous. Gratitude brings people closer together and improves relationships. Ray Dalio, one of the most successful hedge fund managers in the world, said one of the secrets to happiness is having “meaningful relationships.” Being grateful toward others helps build these meaningful relationships.

  Gratitude is real. To practice gratitude, write down the good things that happen each day. One way to do this is to keep a journal. I use the 5-Minute Journal, which was recommended by Tim Ferriss, but you can use any form. Either before bed or as soon as you wake up, write the top three things you are grateful for and spend a few minutes thinking about them. After a few weeks, look back and reflect on your list of things you were grateful for. It will change your expectations of what really makes you happy.

  CHANGING YOUR REALITY

  “You will never be happy if you continue to search for what happiness consists of. You will never live if you are looking for the meaning of life.”

  — Albert Camus, philosopher

  What most people do not realize is that happiness does not come from money. One part of the happiness equation stems from changing your reality or, in Mark Manson’s words, “solving problems.” To be happy, we need something to do. It is an activity, not something that is passively bestowed upon you after the purchase of something. It does not magically appear after you receive that raise or promotion or finally have enough money to buy that new car.

  Living day-to-day brings its own set of problems to solve, like what are you going to eat for dinner, planning a date, and so on. Happiness is a work in progress because solving problems or taking action is a work in progress. When you solve your health problem by getting a gym membership, it creates a new problem of working up a sweat, having to shower before you go to work, and changing so that you do not stink up your workspace. There is always more work to do, more happiness to pursue. Note that Manson means that solving problems is key, not having problems you are unable to solve.

  According to Tim Ferriss in his book, The 4-Hour Workweek, the question you should be asking isn’t, “What do I want?” or “What are my goals?” but “What would excite me?” “Excitement is the more practical synonym for happiness, and it is precisely what you should chase. It is the cure-all.”

  What creates excitement? Taking action. Want to take ballet lessons? Do it. Want to learn how to scuba dive? Do it. Want to learn a new language? What is stopping you?

  To progress, you need action! Every big name in the world is advocating it. Action, not money, makes you happy. This is how you change your reality with the happiness equation.

  “You’re not supposed to optimize for money; you’re supposed to optimize for happiness.”

  — Mr. Money Mustache

  You should take action to feel more control over your life.

  TAKE ACTION TO FEEL CONTROL

  Taking action makes us feel like we have control over our lives, which helps drive how happy we are over the long term. People who feel they have little-to-no control experience low levels of happiness, regardless of their circumstances. They can be rich, famous, or have won the lottery, but if they feel they had no control over it, like they did not earn or deserve it, they will be unhappy and likely depressed. This explains why some celebrities become addicts and even take their lives.

  How do you take control of your life? There are three ways:

  1.Take responsibility for your actions. You cannot control everything that happens in your life. Setbacks happen to everyone. The difference is how you respond.

  2.Set goals and achieve them. No matter how small, setting daily goals builds momentum and allows you to accomplish big things over time. For example, if you work out for 20 minutes a day, eventually you will find yourself more fit in the mirror.

  3.Minimize your reliance on external validation. External validation is seeking approval from other people. It is about how you feel you appear in society. Internal validation, on the other hand, raises self-esteem and baseline happiness.

  FOCUS YOUR SPENDING

  While taking action allows us to feel control over our lives, we still spend money almost every day. This is not to say you should not spend money, but be conscious toward the things you spend money on and ensure that they will improve the quality of your life in the most measurable way. They should be meaningful to you, not to your friends or family. One way to implement this approach when spending money is to ask yourself, “Will this take away a negative?”

  Tim Ferriss suggests creating a list of things that drive you crazy or drag down your quality of life. Spend money to solve these problems, and test these changes weekly to find the smallest changes in spending that result in the biggest increase in happiness. For example, I find that having unreliable cell service makes me frustrated. I would rather pay a higher monthly fee from a reliable carrier than pay less with a budget company. The cost to my sanity would be too great if I tried to save money on an inferior service.

  Another approach is to write down the things you spend money on regularly that do not bring you happiness. Then, create another list that brings you happiness and rank each on a scale from 1 to 5. By performing this exercise, you identify and remember what expenses make you feel happy or unhappy. So, the next time you swipe your card, you will be able to remember your motive. When you understand what triggers feelings after a purchase, you can reflect and avoid the expenses that make you feel broke, guilty, or afraid and focus on the spending that brings you joy. Over time, cut back or eliminate the expenses that make you feel guilty, like taking an expensive taxi home or buying a house you cannot afford.

  LEARN FROM THE BEST

  If you want to retire earlier and be happier, learn from the best. What is the recommended way to do this? Mimic people who have done it before. The book The Millionaire Next Door studied the habits of the wealthiest people in the world. The authors, Thomas J Stanley and William D Danko, studied the habits of the people they perceived as rich: Those with big homes, fancy cars, and living in wealthy suburbs. They came away surprised. The people they interviewed had high incomes but were drowning in debt. They were spending more than they were saving, running on the “Hedonic Treadmill.” Not only that, but they were miserable worrying about their finances. Remind you of anyone you know?

  The authors then changed their tactic to look for people who had over a million dollars but lived modestly. What they found was shocking. They discovered that “over 80% of U.S. millionaires are ordinary people who have accumulated their wealth in one generation.” People with actual wealth followed the tried-and-true philosophies in this book by living on less. They are long-term investors, own shares, avoid debt, and save. They live in modest homes and neighborhoods. They do not focus on material possessions and are happier.

  Remember, peak happiness per dollar is achieved when you make between $75,000 and $80,000 a year. Then why save and invest to have more money? The reason why is so you can retire faster, maintain that level of
income throughout your retirement, and do things you love in your spare time. The most precious resource in the world is not money but TIME. The only way to gain time is to cut back your spending now so that you can save more, invest more, and be happier now by focusing on things that will actually make you happy like gratitude, meaningful relationships, and taking control of your life.

  SUMMARY

  Changing your attitude about money has everything to do with investing and budgeting. To be able to live within your means, budget, and save for retirement requires an entirely different perspective on money altogether. While this book serves as a guide for what you need to do to retire, it all starts with your attitude about money.

  •Aim to be happier without using money as the influencer. Ask yourself, “What do I need right now to be happy? Do I need anything other than what is happening right now to be happy?” “Am I being externally or internally motivated?” Focus on what makes you happy and your core values.

  •Remember the happiness equation: You can work on changing your expectations, improving your reality, or both to be happy.

  •To change your expectations, rethink your perspective or practice gratitude. When it comes to rethinking your perspective, focus on how lucky you are. You are alive right now and likely in the top 1% of the world’s population in earnings. As for gratitude, remember that it brings people closer together and improves relationships. The world’s top performers all recommend it.

  •Set goals and achieve them. Taking action allows you to feel like you have control over your life, which leads to greater happiness over the long term.

  •Focus your spending on items that not only improve the quality of your life in the most measurable way but are meaningful to you, not to your friends or family.

  •Learn from the best. Your next-door neighbor could be a closet millionaire. People who avoid debt, save money, invest wisely, and live in modest homes and neighborhoods are happier on average. These people have realized that happiness is driven by things other than money.

  CHAPTER TWO

  KNOW WHERE YOUR MONEY IS GOING

  FIND OUT YOUR NET WORTH

  Most people are not sure where their money goes. After the big expenses, like rent and food, it is like the rest of the money just disappears. It does not help that many have debt. I have been in debt for most of my adult life, between paying for my undergrad and then my MBA. And, let me tell you: Saving and paying down debt does not become easier with time. It seems that something always comes up to take priority.

  Most people should not strive to become financial experts, but rather, we should learn enough to make our money work for us.

  NO REGRETS: A FRESH SLATE

  When it comes to money, it is hard to wonder, “What if?” What if I bought Apple stock when I had the money? What if I bought a house 20 years ago? What if I was better with my finances? Financial regret. This regret can destroy your confidence in your financial future, making it impossible to trust your financial decisions. It eats at you and reminds you of how you arrived at where you are. Trust me. I have a long list of missed opportunities. It is hard to let go of the frustration and resentment. The good news is that you are making the right decisions now and starting with a fresh slate.

  To take control of your finances, first make peace with the past. To accomplish this, find out how much money you have earned in your lifetime, and then find out your net worth by creating a balance sheet of assets and liabilities. Having a positive net worth is good because it means you have more money than you owe. The second step is to track expenses. The final step is to create a budget by separating your accounts into buckets. The more you can automate your accounts, the easier it will be to save.

  FIND OUT HOW MUCH MONEY YOU HAVE EARNED

  How do you know how much money you have earned in your lifetime? A short-cut is to dig up old tax returns and look at your gross income. You can look up bank statements online, too. Knowing this number helps with a few things:

  1.You have a better sense of how much money has entered your life and what is possible in the future.

  2.It opens your eyes to how much money you have earned.

  3.You know where you sit financially today.

  4.It will reset your relationship with money.

  Find Out Your Net Worth

  What do you have to show for all that income? Your net worth is your total assets minus your total liabilities. In other words, the value of everything you own subtracted by the total of everything you owe. For many, this number will be negative, meaning you owe more money than you have. This may or may not be a surprise, but the extent of it might. That is okay because it is better to know.

  Net Worth= Assets – Liabilities

  On a piece of paper, write down the following, with the dollar amounts, to determine your net worth statement:

  Liquid Assets

  •Cash

  •Savings bonds

  •Savings accounts and checking accounts

  •Investments—mutual funds, index funds, stocks

  Fixed Assets

  •House: Use a realtor or an appraiser for an estimate of your house.

  •Vehicles: Look up the blue book value.

  •Any other material possessions you can put a value on if you think someone would be willing to buy it. Exclude any depreciating consumer stuff like your furniture or consumer electronics unless you are ready to sell them right now.

  Liabilities

  •All debt, which includes the balance owing on your house, the balance of your car payments, and student loans.

  •Any other loans of any kind.

  Once you write everything down and complete the equation, you have your net worth. Why have a net worth statement for your finances? You now know where you stand in your financial life and can begin to plan to reduce your liabilities over time. If you do not know where you are financially, you cannot start to improve your financial situation.

  Statistics show that those who monitor their budget on a regular basis are more likely to stick with it than those who do not.

  To accumulate money, you need to know:

  •How much you are spending,

  •Your financial net worth, and

  •How to invest your savings productively.

  There is no way around it. You need to understand your spending, and you must invest your money, so remove any barriers.

  WHAT SHOULD YOUR NET WORTH BE?

  The average net worth by age of Americans is broken down like so:11

  Age Range Net Worth

  Less than 35 years old $6,900

  35 to 44 years old $45,740

  45 to 54 years old $100,404

  55 to 64 years old $164,498

  65 to 69 years old $193,833

  70 to 74 years old $225,390

  75 years old and over $197,758

  For millennials, the median net worth is $6,900. That is scary. The primary reason is student loan debt as people are coming out of university, often with a net worth that is negative until they turn 30. Even still, the average American peaks at a little over $225,000 in net worth in their 70s before it starts to drop as they draw on their savings in retirement. This is not enough to retire! Unless your annual spending rate is $9,000, most people will be continuing to work throughout their later years.

  What should your net worth be then to be above average? Rules of thumb, such as dividing your age by 10 and multiplying that number by your annual gross income, exist, but these estimates are flawed. There is no right number. The most important thing, especially in your 20s, is to start building your net worth and pay off your debts. Choose the age you want to retire and work backward. If your goal is to retire by age 40 and you are 25 right now, determine how much you need to save per year to hit the 25 times your annual spending rate.

  BUDGETING TECHNIQUES

  Budgeting sounds easy enough, but most people do not budget. One of the most widely adopted budgeting tools is the 50/30/20 budgeting plan. T
he idea is that you spend 50% of your money on necessities, 30% on discretionary items, and 20% on savings. The problem with this approach is having to track every expense. Tracking expenses, creating artificial budgets, and trying to dictate how you should live your life is an idea that just makes me want to give up. And, what constitutes a necessity? At what point are you spending too much on food and clothes? Therefore, I recommend the 60/40, spending/savings budget to start.

  In The Barefoot Investor, the author, Scott Pape, recommends having three financial buckets where you put your money on autopilot and never think of it again. Those are your blow, mojo, and grow buckets, or in other words, your spending, emergency fund, and savings bank accounts. I agree with this approach. However, I like to add a fourth bucket, your short-term savings bucket. Your buckets or bank accounts would look like this:

  Spending bucket:

  Daily expenses.

  Emergency bucket:

  Safety money. Save at least $1,000 at first, and then once you are debt-free, build it up to two months of your salary as an emergency fund.

  Savings buckets:

  •Short-term: For the occasional splurge, vacations, and down payments.

  •Long-term: For your long-term wealth and security.

  Using this system, you can pay off your mortgage, create an emergency fund, and save for retirement all at the same time. It is simple, but it works. The goal is to be able to explain to someone in 30 seconds or less how you manage your money. If you cannot do that, your budgeting technique is too complicated and less likely to be successful.

  What portion should you put into each bucket? The benchmark should be to spend 60% of your income, i.e., your spending bucket, and to save 40%, also called 60/40 budgeting. That is impossible you say, “How can I live on 60% of my income?” It is easy once you know how to save money. Moreover, if you can dedicate 40% of your income toward index funds, you will be able to retire in 22 years. If saving 40% is too hard, start a side hustle to increase your income. I discuss this in detail in Chapter 9: Have a Side Hustle. You can either decrease your expenses or grow your income to meet the 60/40 budget. Thousands of ways to increase your income exist. Dual incomes help but are certainly not required.