4 Ways Giving Makes You Better With Money

It sounds counterintuitive, right? Manage your money better by giving it away! However, there are some vital reasons why consistently giving makes us better financial managers.

Before we get into those reasons, let’s clarify what we mean by giving. Giving does NOT include purchasing an item for someone on a credit card which you cannot pay off immediately. Borrowing money to purchase something is not a giving, it’s spending. Giving does not involve debt.

It might be easier to substitute the word “giving” for “donating.” You cannot donate something you don’t own. So for the purposes of this conversation, when we talk about giving, we’re referring to the idea of donating our time, talent, or resources that we own. We are not referring to spending.

Giving isn’t just for holidays or celebrations, it should be part of your monthly budget. I teach my clients a Spending Formula to Win with Money and base their budget off of it.

Giving doesn’t always need to be financial either. Sometimes, you may be living on just enough to get by and in those cases, you can still give, but it may just be more with your time or your talent.

Now that we’re clear on the definition of giving, let’s discuss four reasons giving makes us better with money.

1. Giving Fights Our Natural Selfish Impulses

Besides “Dada” one of the first words my son learned was “mine.” You don’t have to teach children the concept of ownership, we’re hardwired to be selfish. You do, however, have to teach children to share and to give. Giving is a perfect way to counteract our natural selfish impulses. By giving first, we’re fighting the impulse to spend (and overspend) on ourselves.

Have you ever had the experience of taking $100 out of an ATM and then two days later you only have $10 left and have no idea where the money went?

If you give $10 first, you’ll be much more diligent out how you spend the remaining $90.

2. Giving Makes Us Happier

Social science research has shown us that we actually derive more pleasure from giving than we do from spending on ourselves. Our brains are hardwired this way, the act of giving produces endorphins (hormone released in the brain responsible for feelings of euphoria).

When you give consistently in a way that is meaningful to you and you know has impact, it has a greater positive impact on you and your happiness than ‘retail therapy’ for example, which is often followed by feelings of guilt and often greater debt.

3. Hoarders Never Win Financially

My father taught me a lesson when I was around 10 years old that I will likely never forget:

He placed a $1 bill in my hand and told me to hold it as tightly as I could. With one end of the bill inside my clenched fist, he pulled the other end to make sure he could not pull it out of my hand. He said, “Hold it tightly and don’t let go! If you let it go, I’ll take it back!”

He then pulled a $20 bill out of his pocket and tried to place it in my hand. Unfortunately, because my fist was clenched so tightly, he could not put the $20 bill in my hand.

He said, “If you’re tight and stingy with your money, you’ll block the universe from blessing you with more. The only way I can give you this $20, is if you open your hand.” I went from a clenched fist and opened my hand flat as he put the $20 bill in my hand.

If you think to yourself about the people in your life that you would drop whatever you’re doing to go help, they are likely the most generous people you know.

4. What You Do With Little, You’ll Do With Much

Finally, there’s a common limiting belief that if I just made more money I would give more. Some people believe that wealthy people are inherently selfish. I can tell you from my own personal experience that money simply amplifies your existing values and beliefs. Money, much like alcohol, can be a ‘truth serum’ which removes your inhibitions. There are generous wealthy people and there are wealthy jerks. There are generous poor people and there are poor jerks. The truth is that if you’re a giver and you give of your time, talent and financial resources when you have little, you’ll do even more when you have more resources.

Giving consistently isn’t just a nice thing to do, it’s a principled approach to managing our finances that has benefits far beyond the dollars themselves.  

Baby on the Way! Financially Preparing for Maternity Leave

Thinking about having a child? Or maybe you’ve recently found out you’re pregnant! A range of emotions hit you – excitement, bewilderment, surprise, and anxiety – but after some time, your rational mind kicks in and asks,

“Wait, can I even afford to have a child?”

“How much should I save?”

“Does my job even have paid maternity leave?”

These are the questions my wife and I had when we first started to think about having our first child. There’s so much involved with bringing new life into the world, we really didn’t want to add financial stress to the list.

We knew we would have to rip off the band-aid and talk honestly about what would be ahead. So first, we did some research and we came across some disheartening news.

  1. According to a newly released US Department of Agriculture study, the average cost of raising a child from birth through age 17 is $233,610 for a middle-income married family with two children. (not including college or vacations).The average middle-income family will spend $12,680 on child-related expenses in their baby’s first year of life.
  2. According to Pew Research, The U.S. is the only industrialized nation in the world that does not mandate paid leave for new parents.
  3. Family Medical Leave Act (FMLA) requires certain companies to offer 12 weeks unpaid leave. However, the vast majority of families cannot afford to go without a paycheck for three months, so many are forced back to work much sooner.

Pretty bad, right? The good news is that despite the costs and unfavorable policies, there are millions of American families raising happy, healthy children.

Below, my wife and I came up with the most important things to do and not do to financially prepare for maternity leave. We also created a FREE financial checklist, Baby on the Way! which covers many of these items below and more with additional resources. Fill in the information below to receive an email copy. 

1. DO: Check with your employer(s) for their maternity and paternity leave policies.

You’ll want to check with your human resources department to understand what their policies are and how they’ll apply to you. Maternity leave is actually considered to be a short-term disability, so you will want to understand whether you have or are eligible for short-term disability coverage, how long it lasts, and how much of your paycheck it will pay out (typically 50-60%). My wife was only eligible for short-term disability after being at her job for a full year.  We started trying once we knew she would be eligible.

You’ll also want to understand if any of your benefits will be impacted while you’re out. Accrued vacation? Sick days? Bonus? Health insurance? Life insurance? 

2. DO: Evaluate your health insurance coverage and check with your health insurance provider about maternity benefits they offer.

Along with speaking to your HR rep, also check with your health insurance provider. Many insurers offer benefits to assist you during pregnancy and post childbirth process, which can save you time and money. Benefits such as consultations, educational courses, breast pumps, and lactation consultants are just a few examples. The lactation consultant that my wife used two weeks after birth was as she claims, “A life saver”.

Also, make sure all healthcare providers are in-network. For example, make sure your obstetrician and their attending hospitals are in-network. There is nothing worse than getting a $2000 bill for your hospital stay that also comes home with you.

3. DO: Have a written monthly budget

Whether you have had a written budget before or not, it’s time to buckle down and write and stick to a monthly budget.

First, you’ll want to save as much as you can to prepare for a potential loss of income during pregnancy. You can start by cutting out non-essential spending to reallocate those dollars toward savings. Cutting cable, cooking at home, and reviewing monthly memberships is a good start. As a personal finance nerd, I was able to convince my wife to set up a baby fund before we started trying. It certainly came in handy when we discovered how expensive daycares were in our area.

Second, you can’t change what you don’t measure. You’ll likely have to reprioritize certain aspects of your finances. For example, if you were making additional payments on your student loans to pay them off quicker, you may want to reallocate that money towards an emergency fund or a separate baby savings fund.

Third, you want to have a pre-delivery and post-delivery budget to understand how your resources will be allocated before and after pregnancy. Particularly if your income will be impacted by short-term disability. What will it look like to live on 60% or less of your salary for a few months?

4. DON’T: Assume you can work up until pregnancy

Pregnancy can be quite unpredictable, so make sure you have flexibility in terms of your planning. You may be planning to work until your due date, but your little bundle of joy might have other plans! Understanding the financial implications of leaving work earlier will curb any additional anxieties if the situation arises.

5. DON’T: Go it alone. Lean on Your Village

Finally, and most importantly, you are not alone. Often times we have trouble asking for help, but this is an undertaking that is beyond one individual. The African proverb, “It takes a village to raise a child.” is so accurate. You’ll need to lean on others during this process. Often times we forget, the vast majority of the time, people are ecstatic to help us. Put yourself in their shoes. If you had a pregnant friend or family member ask you to give them a ride to a doctor’s appointment, how would you feel? Likely, you would be happy to help!

Financially speaking, baby showers are a great way for the ‘village’ to help you get what you need to prepare for the child’s arrival, but be sure to focus your baby registry on needs, not wants. Also, barring safety concerns with items such as cribs and car seats, second-hand items are a great way to save money.

For those in your village that may not be able to afford more expensive items on a baby registry, diapers, baby clothes, home-cooked meals, and babysitting are great low-cost substitutes. Allowing people to help and contribute, brings them joy and gives them a stake in the process and takes some financial burden off of you.  Find out who in your village has had a child three to six months ahead of you — they may be looking for someone to unload all of their baby clothes that no longer fit!

Again, millions of people have gone through this process and came out the other side and many of them have less financial resources. The best thing to do is to plan ahead and get organized. We wish you good luck!

For more additional tips and resources, be sure to fill in the information below to email a copy of our FREE Baby on the Way! Checklist.

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Financial Infidelity Part 2: How My Lie About Money Almost Ended Our Relationship

 
Money is one of the leading causes of stress in relationships. In Part 1, we discussed how and why financial infidelity occurs and how to overcome it. Part 2 is a personal story from my wife, who had to confront and overcome struggles with money in order for our relationship to survive and thrive. Continue reading “Financial Infidelity Part 2: How My Lie About Money Almost Ended Our Relationship”

7 Do’s and Don’ts of Managing Your Finances

Money management can be difficult. There are lots of opinions on how to manage your money successfully, but sifting through all that can be a challenge. We have boiled down our 7 top recommendations for managing your finances.

1. Do: Plan Your Spending Before the Money Arrives

You are the CEO and CFO of You, Inc. Think about running your personal finances like a business. Companies plan their revenues and expenses well in advance. Budgeting gets a bad rep, but successful, profitable businesses formally plan their finances and make decisions in advance of their spending.

Money is like a toddler. If you don’t monitor it carefully, it will wander off and disappear quickly!

2. Do: Aggregate Your Accounts and Track Your Spending

Aggregating your accounts, allows you to see the big picture and a number we highly recommend you track regularly – your net worth. It can be difficult to make tough choices if you don’t have the bigger picture in mind. Tracking is also important. You cannot change what you do not measure. In order to make meaningful change, know exactly how much you spent last month versus the month prior. Guessing doesn’t work well with personal finances. Once you build a habit of tracking your finances, making smart decisions about your money becomes much easier.

3. Do: Understand and Deal with Your Impulse Purchases.

For some it’s the mall, for others it may be online shopping. Have you ever gone into a store planning to spend $50 and come out spending $300? Evaluate how and why that happened. Keep in mind; it is a marketer’s job to turn a “want” into a “need.” Notice on television commercials, often the product or company isn’t revealed until the very end of the commercial. Instead of selling a can of soda, they are selling happiness. Instead of a gym shoe, they are selling peak athletic performance. Instead of selling their own product, they may have a celebrity endorse it as if it is heaven-sent. Companies hire social scientists who study how to influence human behavior, emotions and decision-making to get an edge in selling their products and services. Here are some examples to protect yourself and your wallet:

  1. 24-hour rule – Wait at least 24 hours before making purchases over a certain amount
  2. Do not go grocery shopping on an empty stomach
  3. Deconstruct advertisements: what are they really selling?
  4. Use cash for non-regular expenses
  5. Don’t fall for terrible excuses (“I deserve it”, “it’s on sale”, “I’ll pay it off next month”)

4. Do: Develop a Habit of Saving and Automate It.

Even if you start small (i.e. $25/week), put systems in place that force you to save. The government understands this very well, which is why employee payroll taxes come out of your paycheck even before you are able to touch it. Apply the same strategy for your savings. Some employers will allow splitting your paycheck to different bank accounts (i.e. 75% checking, 25% savings). Another idea is to set a recurring transfer from your checking account to your savings on the same schedule as your paycheck. There are other automatic features to consider such as:

  1. Auto escalating your 401k contributions – some employers with a 401(k) offer an option to automatically increase your retirement savings by a certain percentage on a regular basis (i.e. increase 1% annually)
  2. Keep the change features in checking accounts – Some checking accounts will round up your purchases and put the change in your savings account. It is the e-version of the piggy bank. If you purchase an item for $5.60, it will round up to $6.00 and $0.40 will be deposited in your linked savings account.

5. Don’t: Ignore Your Credit Score and Credit Report

A credit score is very important to be aware of and to know how to improve. Credit scores have traditionally been used to evaluate credit-worthiness for extending loans (e.g. personal loans, mortgage, car loans, credit cards) and the higher the credit score, the more financially credit-worthy one is. The reality now is that both credit scores and credit reports are being used beyond financial transactions. Credit scores and reports are being used for employment decisions, housing, insurance premiums, and even utilities such as cell phones and cable. The challenge is credit reports often have mistakes which can negatively impact your credit. Check out our Resources Page for resources on checking both your credit report and credit score.

6. Don’t: Ignore Your Workplace Benefits

If you work for a company and do not understand the full scope of your employee benefits, it may be time to check out your HR Benefits website or set up a meeting. Particularly with larger companies, there are often benefits that go underutilized that can save you hundreds if not thousands annually. One of the largest ones is the 401k match. For most people, this is a no-brainer to at least invest as much to maximize the match as it is a 100% return on your investment. Wellness Initiatives can often mean big savings as well. Many companies are offering rebates on health insurance premiums for wellness activities, such as physicals or wearing fitness trackers. Let’s think about that for a second, companies are paying additional cash to employees to be healthier. There are several other types of benefits, and we’ve created a FREE Guide to help you maximize benefits that are offered to you.

7. Don’t: Keep up With the Joneses

Most people are familiar with the term ‘Keeping up with the Joneses,’ but just so we are all on the same page, it refers to making material comparisons to your social circle. The idea that if your neighbors or friends buy a new car, you should too. We call this the comparison trap and its one of the lessons we learned paying off our student loan debt. Part of the problem with comparing your financial status with others is that it is very difficult to know someone’s complete financial picture. Money is still a private topic and everyone has different income, expenses, debt obligations and assets. The people you are comparing yourself to could be completely up to their eyeballs in debt or fund their lifestyle through an inheritance. Making comparisons, not only could be comparing apples and oranges, but it also casts your own possessions in a negative light.

“Comparison is the thief of joy” – Mark Twain

A few reasons why keeping up with the Joneses is a bad idea:

  1. The Joneses are broke! According to a recent Bankrate survey, 76% of Americans are living paycheck to paycheck with little to no emergency savings. Why keep pace with people that are one emergency away from financial catastrophe?
  2. When you compare yourself to others, it’s much easier for wants to become needs. Wanting a car becomes needing a brand new SUV. Technology like smart phones, that didn’t exist 10 years ago, are a now a need. We have a desire to show off and have our success validated by others.
  3. Companies are spending billions of dollars to market their products and services to you. Many luxury brands are selling a temporary feeling of exclusivity in exchange for premium pricing. For example, a luxury shoe could be made in the same factory as an off brand shoe, but once they slap the logo on, they can charge five or ten times more. Luxury and quality are not the same. It is easy to get sucked into the consumerism culture. Happiness from possessions is always temporary and fleeting.

This leads us to the fundamental challenge of managing your finances. We live in a consumerism culture and an economy fueled by consumer spending. On one hand, we have many of the influences we described (social, corporate, psychological, economic) with a clear mission to separate you from your income. Those influences contend with our own goals to keep our income and grow it for the future. These recommendations will help you be better equipped to keep more of your income to reach your financial goals.

If You Hate Maintaining a Budget, Track these Two Numbers Monthly

As personal finance nerds, we are interested in where every dollar goes, what bucket it falls into and how that compares to the previous week, month, and year. Most people are generally not interested in tracking every dollar. Some people say, “I’m just not a math person” or “that’s just more detail than I care to know.”

If forced to come up with two metrics to evaluate your financial progress, we would have to say without a doubt, it’s your net income and net worth. Let’s define both and then let’s talk about why these are the most important financial measures to track.

What is your Net Income?

Your net income is simply taking your monthly after-tax income (the amount that comes into your bank account) and subtracting all of your expenses during the month (housing, food, utilities, transportation, debt payments, personal, etc).

Net Income = After Tax Income – Expenses

If you were a business, your Net Income would be called ‘profit’. You need to know what your profit is each monthly. You don’t want to run a business that’s losing money each month. You want your net income to be positive each month and you want it to be growing over time.

A common mistake people make is that as their income increases, they increase their spending along with it (a.k.a. lifestyle inflation). So if you get a 3% raise at work, but you increase your spending by 4%, you could actually be worse off financially, that’s why tracking net income (profit) monthly is so important.

 

What is your Financial Net Worth?

Your financial net worth is simply adding up all your financial assets (everything you own) and subtracting all of your financial debts (everything you owe).

Net Worth = Assets – Debts

Financial Assets can include real estate, securities (stocks, bonds, mutual funds), vehicles, checking, savings, cash or anything you can sell and turn into cash. Alternatively, your debts can include mortgages, credit card debt, personal loans, home equity loans, student loans, etc.

Let’s be clear about a few things, first, never confuse your financial net worth for self-worth. Regardless of whether you’re a millionaire or your net worth is negative, it says nothing about who you are as a human being. We live in a ‘more is always better’ culture, we glorify millionaires and condemn the poor, but that is not the goal of this measure. Your financial net worth is simply a number that applies to you individually or as a family to track and increase over time to assess how close you are to reaching your financial goals (i.e. financial independence).

Second, the majority of Americans have either zero or negative financial net worth, so if they sold everything they owned, they would either have nothing left over or would still owe money. Many young professionals fall into this bucket due in part to student loans. Building your savings and getting out of debt both increases your assets and reduces your debt, thereby increasing your net worth.

Why are net income and net worth the most important numbers to track?

Good question! Why not Salary? Savings? Credit Score? The answer is simple, your net worth is the bigger picture goal, net income is how quickly you’re moving towards that big picture goal.  In your financial journey to your financial destination, your net worth would be the miles traveled to your destination, your net income is how fast you’re driving.  There are all sorts of metrics that you could measure if you were taking a cross-country journey, but if we had to choose only two, we would want to know how far we’ve gone (net worth) and how fast we’re moving (net income).

Both Net Income and Net Worth are simple formulas and there are only two ways to increase them:

  • Increase income/assets
  • Reduce expenses/debt

Increasing Income/Assets

Unfortunately, the majority of our expenses (after our essential expenses) are for items that decrease or depreciate in value. So when we buy a pair of shoes or a phone, if we were to sell it used a month later, we would receive much less in return than we paid for it. On the other hand, if used the same money to purchase stock ownership in the company that manufactured that shoe or phone, that stock could potentially increase or appreciate in value over time. When you hear phrases like ‘the rich get richer and the poor get poorer’ that is partially because wealthy people are more likely and able to purchase appreciating assets (e.g. businesses, securities) and the middle class and working class are more likely to buy depreciating liabilities (i.e. debt – a.k.a. stuff that makes us look/feel rich, but actually make us less wealthy). A depreciating liability, such as a car note, is a double loser because not only is the car rapidly declining in value, but it’s also financed from a bank, which means paying additional money in interest (increased cost & reducing value).

We have to change how we look at what we buy and whether showing off our expensive stuff is more important than actually growing our wealth. Recent studies have shown that 76% of Americans are living paycheck to paycheck, that includes high-income earners, so the people we compare ourselves to or try to impress are likely broke.

We also have to change the way we think about our income. It’s often said when talking about investing, that ‘you don’t want all your eggs in one basket’, you have to diversify your investment assets to reduce risk. Well it’s much less talked about, but just as important to diversify your income because having one source of income is just as risky as having all your investments in one stock.

In order to put more wins in the asset/income columns, the focus should be to develop multiple sources of income and free your income to purchase assets that appreciate in value. Building an emergency fund, increasing your 401k contributions, contributing to an IRA, are all ways to increase your assets in the near term.

Reducing Debt/Expenses

The other end of increasing your net worth is reducing your debt. Everyone has different types and levels of debt, but the most advantageous position to be in financially is having no debt. There are entire industries that rely on people getting and staying in debt. Credit cards, auto manufacturers, mortgage lenders, banks are examples. In fact, the credit card industry calls people that pay their balance in full every month, deadbeats. They are deadbeats because the card companies aren’t making any money off them in finance charges. If you choose to use credit cards, please be a deadbeat! Unfortunately, in our culture we have become accustomed to debt as a way of life. When we start to understand how much debt impacts our ability to reach our financial goals, we begin to make different choices. Keep in mind, our debt is someone else’s asset (i.e. banks, credit cards, auto companies, mortgage lenders), just like your loss is someone else’s win.  If you are a lender, the loan contract is an asset that appreciates. You lend someone $20K for a car purchase and you’re paid back $22K over 5 years.

In order to reduce losses in the debt/expenses columns, the focus should be to free your income to pay off debt more quickly and avoid additional debt. Also, reduce the purchasing of items that depreciate in value. Tracking your spending for a month, using only cash for 60 days or selling possessions are all ways to increase income or reduce expenses in order to reduce debt.

The Bottom Line

The bottom line is that we cannot wear or drive wealth. In one camp, the majority of millionaires live well below their means, drive used cars, and live in modest homes (read: The Millionaire Next Door).  However, in the other camp, the majority of Americans live far above their means, live from paycheck to paycheck and finance their lifestyle with debt. There are free online financial aggregators such as mint.com that will allow you to centralize all your financial accounts and calculate your net worth automatically. Tracking your net worth monthly allows you to become more aware of not only which camp you’re in, but also allows you to know how close you are from moving from one to the other.