Launch Your Finances - Conor Richardson.+Add.Feed Info1000FOLLOWERS
Hi, I’m Conor Richardson. I write about Personal Finance for Millennials: paying off debt, saving cash and designing your financial freedom. Thousands of people read my material to learn how to pay off debt, save more and find the financial freedom to design their life. This means eliminating credit card debt, paying off student loans, saving serious cash, funding your retirement etc.
Over the past decade, there has been a shift in the way older generations view Millennials. Initially cast as egocentric, spoiled, and over trophied, it seems the matriculation of Millennials into the workforce has assuaged these initial fears. Plus, academic research shows that Millennials are not that different from their older baby boomer parents. However, there is one element that sets Millennials apart from older generations. Money. While Millennials don’t have a ton of money right now, a historical shift is about to occur. The shift will leave Millennials as the global guardians of capital. This places Millennials at the helm of controlling global wealth. With this control, will come a change in how money is managed. Here are five reasons that Millennials stand to control the future of money.
1. Millennials are about to receive a massive transfer of wealth.
This transfer of capital will take place in various forms – gifts, changes in business control, inheritance, investment transfers and more. Millennials will soon be responsible for a significant piece of global wealth and that means a change to how wealth is managed.
As a generation, over 90% of Millennials check their mobile device within 15 minutes of waking up. It is fair to say that technology is ubiquitous in their daily lives. This means that they have become accustomed to sharing personal photos and opinions on Instagram and Facebook, and they are equally comfortable linking private information, such as bank account details, to mobile apps like Venmo or Paypal.
3. Millennials are comfortable sharing data.
Millennials feel safe sharing their personal data because as digital natives, Millennials are incredibly comfortable navigating complex technology and understand the value that technology can play in their daily lives. As a result, they show a greater propensity to share personal information such as age, location, income, or birthdates. The caveat to this exposure is that Millennials expect an advantage in sharing this data. Specifically, they expect fast, efficient, and reliable service and advice.
This means that we are entering a new era of corporate responsibility and Millennials aren’t afraid to put their money behind their beliefs, or tell their robo-advisor to do so.
5. Millennials will set a new course for money management.
Robo-advising is a relatively new way wealth managers have removed the initial hurdles of investing and mastering the basics of personal finance for the Millennial generation. Business is booming for companies like Wealthfront, Betterment, and Personal Capital who have tapped into the underserved and technological savvy Millennial wealth management market by providing an investment management experience that occurs predominately online. Armed with superior technology and proprietary algorithms, these companies have digitally streamlined the investment, portfolio allocation, and wealth management process.
It comes as no surprise that robo-advisors have become the new craze in Millennial money management. Millennials have observed the costs of the old way of managing money, face-to-face meetings and high fees, but don’t see the benefits. This has created a void, and Millennials once again looked to technology for the solution. And it delivered. With relatively low costs and leveraged technology, it looks like robo-advising is here to stay.
Millennials are in control of the future of money, whether older generations like it or not. Armed with the knowledge that a massive transfer of wealth is about to occur, Millennials need to prepare themselves for this new found responsibility by increasing their knowledge about personal finance now in order to effectively manage the tide to come. With education and practice, they will be able to rely on their digital savviness to master money in a fresh and exciting new way. By doing this, Millennials will control the future of money.
“If something is built to show, it’s built to grow.” – Jonah Berger
When a marketing professor from the Wharton Business School writes a book on making things catch on, you read it. In his New York Times best-selling book, Contagious, Jonah Berger explores why things catch on. For more than a decade, Berger has been researching why certain products sell more than others and why some products leave behavioral residue while others immediately leave our thoughts. Berger claims that “Virality isn’t born, it’s made.”
In Contagious, Berger introduces Daniel Kahneman, a Nobel Prize winner in Economics, who is famous for his research on a concept called “prospect theory”. Simply put, prospect theory is the idea that the way people actually make decisions is different from how they should make decisions. While this may seem intuitive to some, it runs juxtapose to key assumptions in economics. One of the basic assumptions of economics is that people make decisions that are rational and optimal. In contrast to this, Kahneman’s prospect theory suggests that we often do the exact opposite.
In fact, his theory becomes amplified when we are dealing with large numbers and high dollar purchases (think car or home purchase). What we know from Kahneman’s research is that people do not always evaluate things in absolute terms. Here is an example. Let’s say you are in the market to buy a new alarm clock. You walk into a store and are about to buy the perfect alarm clock for $35. Right before you swipe your card someone in line tells you that you can buy the same alarm clock for only $20 if you go to a store right down the street. What would you do? Most people would immediately head to the other store. Now, let’s say you were at Costco about to buy a $700 TV. But right before you swipe your card, someone tells you that you can buy the same TV for only $685 if you go to a store right down the street. What would you do? Most people would proceed with their check out at Costco. In other words, forego the $15 in savings. But why does our behavior differ over the same $15 in absolute savings? Because how we actually make decisions about purchases is not always economically optimal, even when the absolute dollars are the same.
One of the key messages from Kahneman’s research is that people don’t always think about purchases in absolute terms ($15) but rather we evaluate purchases by a “reference point”. In both scenarios described above, the reference point is zero dollars. But the further away we get from zero, the less inclined we are to feel the impact of absolute dollars. The $15 seems more significant savings when purchasing a $35 alarm clock. But not so much when purchasing a $700 TV.
This is why people get into trouble when it comes to big purchases. We tend to lose sight of absolute terms. For example, if you are looking to buy a house, and are mentally prepared to spend $200,000 (roughly the national average) to purchase the house, sliding several thousand dollars up in price becomes less painful. At the end of the day, what’s really the difference between $200,000 and $240,000? When signing for the mortgage, it won’t feel like that much. But in absolute terms, you are spending a difference of $40,000! As a stand-alone number, $40,000 becomes more pronounced. In order to protect yourself from your natural inclination to purchase more than you should, it is imperative to create budgets and stick to them. Decide what you are going to pay before you walk into any major purchase and use prospect theory to your advantage.
As professor Berger points out, “Practical value is about helping.” If we arm ourselves with knowledge about how we actually make purchases, perhaps we can make better decisions and spread the word along the way.
Where you live matters. Not only does it affect your daily life, where you grab a coffee or your daily commute, but it also influences your personal finances. This is especially true if you are trying to become debt free. If you are aiming to eliminate debt fast – credit card debt, student loans, or auto loans – then the city you live in can have a tremendous impact on your ability to pay it off quickly (especially for student loans).
A recent survey, by my friends over at Credible, shows the top five best and worst cities to live in for paying off student loan debt.
Top 5 Best Cities:
1) Dallas, TX
2) Jacksonville, FL
3) Houston, TX
4) Columbus, OH
5) Austin, TX
Based on the nearly 9,000 survey participants, Credible has determined these cities are the best places to live for paying off student loan debt due to their low debt to income ratio and low cost of living.
Knowing where to start is difficult, especially when it comes to changing your relationship with money. Alright, maybe you intuitively understand your spending is a little out of control, perhaps you are only just starting to pay attention to your savings, or maybe a friend disclosed how much they have stashed away for retirement (and it is a lot higher than yours). Any of these scenarios might lead you to dig a little deeper into this whole personal finance thing. So now that your interest is peaked, where do you begin?
For anyone new to the world of personal finance, I always suggest coming up with a vision of where you want to be. Naturally, that starts with an assessment of where you are today. The first step in understanding where you are is to list out all of your checking, savings, investment, and retirement accounts.
Below is a list of accounts that you can print out. Fill out all of the relevant accounts with their individual balances. If you only have one account, do not panic, this is only the beginning.
Now that you have all of your accounts and balances listed out it is time to assess where you stand. Let’s take a look at your Total Balance. How are you doing? Well, that depends on how much you earn throughout the year (your total taxable income). If you earn more then you should have more saved and if you earn less then you need to have less saved. This is because the metric for savings is a ratio of income to savings, or what I like to call your Flash Savings Number (Flash Savings Number = Total Savings/Total Taxable Income). This ratio gives you a quick view into your financial savings health. And a great rule of thumb is to have 2-3X your salary saved by the time you are 30 years old, or a Flash Savings Number of 2-3.
Below is a list if salaries with a recommended corresponding savings number ranging from two to three.
There are two types of readers at this point. One is breathing a sign of relief and the other 99% are screaming Holy Shit! If you are in the group with the anxiety attack setting in, do not worry. You can now leverage the fact that you know you are behind on your savings to insert positive habit changes into your financial life. With persistence, you will be able to turn your finances around in a matter of months.
Whether you are hitting your total recommended savings or not, now is a perfect time to come up with some short-term and long-term goals. By creating this list of goals, you will give yourself a metric to judge performance and, from time to time, you can look at back at your progress. Fill out your goals in the chart below (seriously, get out a pen and write them down – don’t just think about them).
Now that you have completed your financial self-assessment, evaluated your savings, and set short-term and long-term goals it is time to get to work. But what are the next steps? Over the next couple of articles, we will investigate how to create a budget, which will allow you to pinpoint areas of financial strengths and weaknesses. After evaluating your budget, we will create an automatic money flow system that will allow you so save money while you sleep.
For now, you are at the starting line. Knowing where you currently stand will give you the visibility to determine exactly where you want to go.
For some people, the prospect of turning around their finances is absolutely terrifying. The task seems too big, too difficult, or too complex. And taken as a whole, they are right. It can seem quite intimidating. But the debt eliminator, the cash stasher, and the investment accumulator all know that success comes by breaking down large goals into achievable steps.
Writers start out with the novel in mind, but they break down each book into chapters. Those chapters are subdivided into shorter stories, and the writer begins by focusing on specific scenes within the chapter. Over time, the writer has stacks of short stories on their desk that they later weave into a story. Eventually, a manuscript is created, and with careful editing, a book is born.
Your journey starts with one dollar. As the writer of your future, focus on improving one scene, or area of your finances that needs work – savings account, credit card loan, car note, investment account – the choice is yours. Concentrate on fixing that one issue. When that task is complete, move onto the next area of improvement. Over time, you will accumulate small wins that will begin to shape the story of your financial success. One chapter will lead to another and, with professional advice and refinement, another success story will have been written.
Focus on one dollar at a time. Your story is waiting on you.
Engineering financial success is the best way to get rich. Millennials need to learn this formula. The problem is that it runs dangerously juxtaposed to the ingrained social values of consumption and hyper spending. Raised in a world where having the latest phone, car, or clothes is the proverbial choice, it comes as no surprise that savings and delayed gratification are becoming extinct concepts. And why have it any other way? Millennials were raised during a time when having the latest and greatest toys and taking expense vacations was normal. But times have changed. The key to getting financial ahead is to realize that, as a generation, Millennials are economically behind their parents. So how do you catch up? The answer is by what I like to call – socioeconomic downsizing.
Millionaires through this blog have spouted tidbits of wisdom on how to save, where to spend, how to invest, and the freedom in financial savings. The quickest way to get rich, as Chris Sacca shared earlier, is to live well below your means. This choice, to actively live below your purchasing power, or to socioeconomically downsize, is the key to getting rich.
By definition, socioeconomically downsizing is the active choice to live one or more rungs lower on the economic ladder than your current incomes allows. Let’s look at an example. Jane and Bob, a happily married couple from Dallas, Texas, each earn $50,000. With a combined total household income of $100,000, they are in the top 28% of household incomes. They have two choices, to live high on the hog and spend like they are making $100,000 a year (which they are) or they can choose to socioeconomically downsize and only live on $50,000, or just Jane’s salary. With this choice comes a major lifestyle change in the amount they can spend on rent, food, transportation, and fun. This choice to downsize completely changes their day-to-day life.
Instead of living in the nicest part of town, paying a monthly rent of $1,100 (or roughly 20% of the monthly take home pay) the couple will now pay $580 – if they choose to downsize. Instead of spending $600 per month on new cars, Jane and Bob will now pay $200 a month – if they choose to downsize. Instead of taking two ski vacations this year, they will stay in town and enjoy a staycation – if they choose to downsize.
So why would anyone choose this masochistic path?
Because this choice will allow Bob to save roughly $30,000 per year (his after-tax income). Over time this will allow the couple to accumulate roughly $150,000 in savings in just over five years. Now instead of living “within their means” for five years, with the conscious choice to economically downsize, they will have accumulated 1.5X their household income in savings. Put another way, Jane and Bob have saved more in 5 years than the average 50-year-old.
Once the initial curtailment of spending is engrained into their daily habits, Jane and Bob will become remarkably acclimated. And as the savings for retirement, a rainy day fund, and an emergency fund are accumulated, Jane and Bob can start the process of looking for their dream house, a new car, or start savings for their future child’s college tuition. They have already put in the sacrifice early to accumulate their base savings quickly and can take enjoyment in watching their investments grow for the rest of their lives. For them, the hard part will already be over. Of course, all of these wonderful results only come about if they choose to downsize.
Be Jane and Bob. Socioeconomic downsizing is the quickest way to get rich and ensure the future you want. Fight the urge to spend and downsize your tastes for now so that in the future you can do as you please.
Most Americans have a well-formed mental image of the typical “American millionaire”. Television and the media have a done a wonderful job associating images of millionaire movie stars, professional athletes, and entrepreneurs with items of extreme luxury – fancy cars, expensive jewelry, and private jets. It should come as no surprise that most people correlate this type of hyper-spending with wealth. Nothing could be farther from the truth.
The typical American millionaire doesn’t act or look like George Clooney. Instead, they lead a highly unsexy and frugal lifestyle. This frugal mindset is key to their rich life. They typically don’t spend lots of money on suits, watches, or other non-productive purchases. In fact, in the groundbreaking book The Millionaire Next Door, authors Thomas Stanley and William Danko reveal that over half of American millionaires have never paid more than $140 for shoes, $235 for a wristwatch, or $400 for a suit. Why does the media continue to push images of wealth and consumption on today’s society? Because it is sexy, and sex always sells.
Being unsexy, however, is the quickest way to get rich. But don’t just take it from me. If you want to be rich, then you should focus on the words of billionaire venture capitalist Chris Sacca (@sacca), who told Entrepreneur Magazine in 2016, “My best piece of advice for the quickest way to get rich is to not spend any of your money, and then you’ll have more than you need.” Additionally, Sacca noted, “People get out ahead of themselves in debt with spending on all of their desires. But if you learn to live pretty simply and well, well under your means, you feel incredibly, incredibly rich and that frees you up and gives you the option to start something new, to leave the job you’re not excited about, where there might be a glass ceiling on you. Just don’t spend your money and you’re well on your way to becoming a millionaire.”
That is about as unsexy as you can get, and I love it! Sacca shines a spotlight on one of the major hurdles confronting Americans, our tendency to acquire debt and thereby encumber our path to wealth. Sacca also touches on one of the fortified paths to becoming a millionaire, living well below your means.
Staying out of debt and living below your means allows you to accumulate savings at an exponential rate. Having your money work for you, instead of you working for your money, is one of the hidden treasures of the wealthy. Listen to the rich because they are telling you the quickest way to make millions.
We all want the rich life, but most of us never make it. Instead, we watch as those around us achieve financial success every day. Oftentimes, we wonder why that person was able to achieve success while we still haven’t. Maybe they had help? Maybe they are just better than us? Maybe they got lucky? But if you study the behavior of financially successful people, or have been around them long enough, a pattern emerges. Here are five things financially successful people do:
1) Set Goals: Financial success is often achieved in a stepwise sequence. The get rich quick story, while sexy, almost never happens. Instead, financially successful people adopt a workmanlike approach towards reaching their goals. Whether it is climbing the corporate latter towards a higher salary, curbing an expensive habit, investing heavily or adhering to a diligent savings plan – achieving the goal is always top of mind. Over time, reaching each goal one by one eventually snowballs into financial success. The byproduct of years of planning and execution catches our eye, as the success story. But the truth is that success was attained through a strict adherence toward achieving goals.
2) Learn Continuously: No one ends up on the road to success by accident. Even with people who seem to make it overnight, if you actually explore how that person achieved financial success, there is always a period where they put in hard work and honed their craft. It is only when that person reaches their optimal performance that we take note of their success. Whether devouring a new book or soaking in the knowledge of people around them, successful people make continuous learning a habit in their daily life.
3) Align With Smart People: Surrounding yourself with successful people will elevate you towards success. Financially successful people understand this principle and align themselves with people who will further their goals – not with people who distract them. If they are trying to learn how to invest, they will surround themselves with professional investors, industry experts, or engage friends who have already made successful investments. Additionally, they are eager to share their knowledge because they know that the ability to teach a subject is the trustiest form of mastery.
4) Evoke Energy: The road to success is rocky. It takes an enormous investment of time and energy to reach your goals, and staying positive during the journey is key to success. Whether it is gaining inspiration from a new article, book, or an interesting person, successful people always find a way to turn everything they touch into inspiration. This, in turn, ignites those around them and provides a source of constant energy.
5) Think Big: Those who we aspire to be like didn’t aim to achieve something small. Along the path to success, financially successful people had the audacity to dream big. When successful people step up to the plate, they don’t take small swings at success. Instead, they take the largest swing they can muster. Even if they fall short of their initial goal, success becomes a natural result.
The next time you meet someone who is financially successful, observe their behavior. Chances are that one of these five traits will manifest itself. If you choose to examine and emulate, then you too will be well on the way to financial success.