A number of my younger friends have asked for advice regarding personal finance. This is an attempt to summarize what I know. If you want more in-depth information I would suggest checking out my goodreads “personal finance” shelf.

People are more Important than Things: Don’t Make Money an Idol

In the eternal calculus of life, people are more important that money or anything else we can possess. It’s best to love people and use things, not the other way around. Money and possessions are good, a blessing, but it’s very easy for us to develop an unhealthy relationship with money and possessions which turns something good into something destructive. Some “bible” preachers mistakenly believe riches are an indication of God’s specific blessing and might even suggest that if you have enough faith, you will become rich. This is a great distortion of the Bible which often correlates material wealth with people who are against God. In the Bible, I Timothy 6:10 says “the love of money is the root of all sorts of evil.”  Jesus told numerous parables about how people were lost by getting tied up with riches and the danger of greed. I have seen first hand when people focus on the accumulation of wealth that their personal lives became much poorer and their character started to corrode.  Proverbs 30:8 is maybe the best short summary of the appropriate perspective for us to have, to be “neither poor nor rich.”  If you would like to understand what the Bible teaches about money, I would highly recommend the highly practical book Money, Possessions, and Eternity by Randy Alcorn and the theological study Jesus and Money by Ben Witherington III.

Our modern consumer culture encourages us to be dissatisfied with what we have, and to desire more rather than to be grateful for what we have. Yet, studies such as “$50k is the cost of happiness” have found that there is no correlation between money and happiness once someone has basic financial security: enough money for shelter (safe and stable place to live), adequate food to eat, clothing to wear and basic medical care. For a bit more own this topic check out how much money is enough. What’s more, it turns out that numerous experiments have repeatedly discovered that spending money on others produces more happiness than spending money on self.  There is a lot or really interesting research on the topic of being charitable but that will have to wait for another post.

Action:

• Take time to reflect on what truly matters. Benefits from the wisdom of people at the end of their lives captured in commands for life
• Practice gratitude!
• Adopt practices which encourage being thoughtful in your purchases such as only purchase items which were put on your shopping list before you started your shopping activity, delay any purchase you are considering for at least 24 hours, or maybe try a “shopping diet” where you only purchase consumables for a period of time such as a month, quarter, or year.
• Looking at the philosophy of minimalism advocated by people like Joshua Becker of Becoming Minimalist blog who advocates clearing material clutter out of our lives so we can focus on what’s truly important.
  

Make more than you Spend: Don’t be a Debtor

You should never spend more than you earn. This means avoiding unsecured debt. There are several reasons to avoid debt. First, being in debt means that we lose freedom and have obligations which control us. Romans 13:8 says “Owe nothing to anyone except to love one another”. Second, being in debt carries a huge psychological weight that most people underestimate. One of the more stressful times in my life was when I wasn’t sure if I could sell the house I owned for as much as I owed on the mortgage. The day I sold the house and paid off the mortgage felt like one of the most liberating days in my life. There are studies which show the stress from financial concerns actually lower a personal’s cognitive ability.

Often times people will go into debt because they are unwilling to wait until they have been able to save enough money to make an outright purchase. There is a great SNL skit about don’t buy if you don’t have the money. Take on debt only when the debt is a “good investment”. One example of this taking a mortgage out on a piece of property which is worth more than the loan. Another place that might make sense to take on some debt is to fund investments in the future such as education or starting a business. But even when there is good long-term value in the investments, care should be taken to minimize long-term debt and be sure that they long term returns are worth the debt.

Action

• Don’t buy things you can’t afford :). Most of the time going into debt isn’t about money management, it’s about learning how to be content.
• Use debit cards rather than credit cards, or if you using credit cards pay off new charges each month.
• If you are in debt, the make the minimum payment on all accounts which you owe except the one with the highest interest rate. Pay off that debt as quickly as you can, and then move on to the next highest interest rate debt until you have cleared all your debts. If the interest rates are about the same, pay off the smallest debts first so you feel like you are making progress.

Track Your Money: Otherwise Nothing will Change

If you don’t know where your money is going, then it’s unlikely you are controlling your spending. You are letting others decide for you… and they aren’t looking out for your best interests. Most changes will require you to understand what is happening to your money.

It is possible to track your money using paper and pen, it’s a lot easier to using an electronic system which can automatically harvest transactions from online financial institutes such as banks and investment firms. [Note: Most banks support free online access to your transactions. If your bank doesn’t offer this, I would encourage you to move your money to a bank that offers free online banking.] I personally use Mint, but there are a number of good options. Sites that can provide informed recommendations of applications include Nerdwallet, Wallethacks, and Wirecutter.

Once you have collected recent spending, you will want to categorize your spending which lets you understand where your money is flowing. Mint makes this easy using “Trends”. You can see how you have been using money, you can start to think about how you want to use your money. I have found two questions to be particularly helpful: “Is my spending aligned with my values?” and “How is my spending contributing to my well being?”.

Now is the time to make a budget. You shouldn’t create a budget out of thin air. You want your budget to anchor in reality. Start by looking for money to save. Identify categories that are you are spending more money than you want. Identify specific expenses that you can reduce. Set a budget based of removing those expenses. Hopefully at the end of this process you have some money left over. We will talk about what to do with this money later in this document.

Action

• Select a way to track your financials and get your data into it
• Analyze your current spend
• Make a budget so can direct your money to where you want it to go rather than wonder where it went
• Track how actual spend compares to your budget and adjust

Advanced

• Identify “one time spending” which re-occur such as gifts and budget for that class of expenses.
• Budget (and save) for durable good that will wear out in the future

Be Generous, Remember that It’s All God’s

The Bible teaching that everything is God’s, and that we are to be good stewards of what He entrusts into our care. We should enjoy God’s provision and take care of our needs, but we need to remember that it’s not ours to waste, but rather to invest for good. As Eph 4 made clear, we work not just for our needs, but to have something to share. The Bible called His people (the Jews) to give a 10% tithe directly to the temple, another 10% to support community celebrations, and 10% every three years to support the poor directly. These tithe were to be from the first fruits. In other words, not allocating what we “need” (which is more often our wants) and give the leftovers to God, but setting asiding this amount up front, and to live on what remains. While we are not bound by the mosaic law, it would be wise to follow a similar pattern, understanding that God is wise and not capricious in what He asked His people to do.

Our spending and our sense of what is a need tends to increase as we have more money. In surveys done in the US, the number one reason for not giving more is because people felt they can’t afford to give more, yet the percent of income given by the very poor is more than 3 times the very rich.

Growing up, my family insisted that if we received a gift of money, that a small portion of it was set aside to be given to a charitable endeavor and some put into savings.  Later in life I was exposed to a variety of Christian teachers who advocated 10% of income should be given away, 10% saved, and the remaining 80% is what to live on. I think the 10/10/80 is a good starting point, though I think the percent giving and saving should increase as income rises. Ronald Sider in Rich Christians in an Age of Hunger makes a very compelling case for a graduated tithe. Rather than a giving a fixed percent of income, he encourages a mindset of stewardship: everything is God’s. Rather than our income being “ours” to spend on ourselves, it is God’s to be used for what is important to Him. Sider suggests that as our income grows above the poverty line, that an increasing large percentage should be given away.

I would agree with Sider that as our income increases we should spend a decreasing percentage on daily consumption, but beside giving money away, saving/investing for the future are also appropriate options. The money saved and invested is not necessarily for ourselves. Having money in savings allows us to response not just to unexpected personal needs, but also help out others.

Action

• If you aren’t giving 10% of your income away, make a plan (e.g. cut expenses) so you have money to give away.
• Don’t know where to give money? Check out GiveWell
• Keep your receipts for when you do taxes.

Advanced

• If you are giving away 10% already. consider adopting a  graduated tithe
• Open a donor directed charitable giving fund such as Fidelity’s Giving Fund (Schwab and several other companies offer similar programs). This allows you to donate money at the time you received it (getting the tax benefit) but give money to an appropriate charity as you decide what is a worthy cause. Giving too much at one time to a charity can “break” them.

Saving for the Future: Don’t be Foolish

Life is filled with surprises. A wise person saves money to smooth over the difficult times. The Bible is filled with stories of how wise men saved during prosperous times which enabled them and their community to thrive when the days were more difficult. One of the most striking stories was how God used Joseph to save an entire region during an extended drought.

While droughts don’t usually effect us as directly as they did Joseph, we have our modern challenges. Our transportation breaks down, a surprising health issue, a good friend in need. Having savings can allow us to raise to these sorts of challenges without falling into debt.

I think it’s very important to remember that what you are saving isn’t yours, it’s God’s. The money in your savings may very well be for your needs in a time of trouble, but it might also be for someone you come in contact with. By remembering that God provided the abundance that allowed you to save, you will avoid to  temptation to put your trust in the saving rather than in God.

Action

• Memorize Psalm 23 as a reminder of God’s care for you
• If you have no savings, go back to your budget and figure out what expenses you can cut so you can set aside 10% of your income
• Set a saving goal. I would recommend at least $1000. Conventional wisdom suggests that you should have between 3-6 months of your essential living expenses in savings
• Once you have several months of living expenses saved, work on long term investments discussed below.

Start Saving Early: Compounding Is Your Friend

When people are at the start of their career, retirement seems a long way off. But investing for retirement is best started as early as possible.  This is because interest and investments compound over time (compounding calculator).

Imagine if a 22y-old was  able to invest $6000/year for five years ($30k total)  with 8% return (what the stock market has done over long durations). They would have more than a million dollars when they hit 70 years old. If this person decided they were going to put off saving for as long as possible and then start contributing $6k/year they would need to save from age 45 until 70 to have approximate the same amount of money when they reached 70. This has them paying out nearly 5x the amount of money ($150k) over 5x the number of years.

Action

• If your employer offers 401K or 403B plan, take advantage of the plan so long as their plan allows the money to be invested in low overhead index funds. If you company offers matching do whatever you can to get all the matching offered. This is “free money”. If you can afford it, make the maximum tax deductible contribution.
• Open a IRA (or Roth-IRA) account if you don’t have one. I like Fidelity, Charles Schwab, and Vanguard Group. There are several other firms which have a quality products recommended by the balance, nerdwallet. Start with an account that has no fees.
• Contribute as much money as you can to a Roth-IRA or traditional-IRA that is permitted by law. For most people reading this post the limit is $6k / year. For someone who is just starting their career (your tax rate is fairly low) I generally would recommend going with a Roth-IRA. If you are just getting started and haven’t figure out your investment strategy, I would recommend putting 100% of your money into Fidelity’s Total Market Fund. As you get closer to retirement age you will want to have a more balanced portfolio… but you have time to figure this out.

How to Invest for the Future

Generally people split their long term investments between cash, bonds, stocks, property, and in some cases a business. The general rule of thumb is that the best long term returns come from the stock market, but the stock market has more volatility than other options. Since 1941 the stock market has averaged around 11.5%/year (with some years losing significant value) with inflation running around 3.7% (so 7.8% returns). The worst 30 year period was 1968-1998 where inflation was 5% and the stock market was 7% (2% returns). Across the USA homes have appreciated on average 2.5%/year. For the last 30 years, the Bay Area real estate has had returns similar to the stock market with much less volatility. I wonder how much longer that can continue, though we still have more demand than supply.

I recommend using a passive investment strategy.  Many people think a more active management will result in better return.  Some people do a ton of research in the attempt to pick the very best stock. Other people outsource this work to a financial advisor they trust or a well respected mutual fund that is actively managed.  I would recommend not doing these things.  First, active management results in fees which eat into any gains you might have made and can result in taxable events.  More important, while many people can beat the general market over the short term, the book A Random Walk Down Wall Street documents there are only two big named investors who have beat the general market over the long term:  Warren Buffet and Peter Lynch. Since this book was written I believe there are some exclusive hedge funds which have also managed this feat. You are much more likely to win a large lottery than you are to beat the market over the long term. It’s very possible to beat the market for a modest period of time, but in the end, the market will do better than whatever strategy that you choose.  That’s because no one can successfully time the market.  People have a tendency to believe that they are able to choose when to buy and sell to maximize profits. No one can predict the future and so you only think (incorrectly) that you know the best time to take an action.

One of the simplest passive investment strategies is called the three fund portfolio. Originally developed by John Bogle who started Vanguard Group and continues to be popularized by bogleheads. Money is split between very low overhead index funds which track over overall US stock market, international stocks, and bonds. Given today’s global market, some people use just two fund, a US total index and a bond index fund.  A general rule of thumb seems to be the percent in the stocks should be 120 – your age.  So if you are 30, 90% should be in stocks, with just 10% in bonds / cash. I suggest that once you are “retired”, that it is good to have around 3 years of your retirement resources in something that is fairly liquid and not tied to the stock market. This would have been enough to weather the market downturns over the last century without having to sell stocks before they recovered.

Once every six months determine if your percent allocation (stock, bond, cash) is what you want and if not, do exchanges to get the ratio where you want if to be.  If you don’t own your home, you might what to consider a forth fund for your portfolio which tracks residential property. If you own a home this might not be necessary since many people have a significant portion of their net worth tied up in their home.

The final bit of advise I would give is to “keep disciplined”.  Fear of lose often drives people to buy high and sell low.  They buy high because they see huge gains made by everyone else and they fear losing out and so invest just as an issue peaks.  Then the bubble bursts, the stock falls, and it looks like they are losing all sorts of money.  Eventually panic sets in and the stock is sold after it has lost value.  Investing in the stock market needs to be done for the long term. The market goes up and down over time, but it continues to gain value over time. It’s best to put your money in, and then do your very best not to track the changes except for the purpose to rebalancing your investment allocation. In almost every case of a market downturn, the overall market has recovered in three years.

Action

• Learn about a passive investment strategy and decide based on your risk tolerates the appropriate allocation of your resources.
• Establish an every 3-12 months rebalancing exercise
• Don’t look at how your investments daily! Check them periodically for the purpose of rebalancing. Constantly watching your investments will only cause anxiety and likely lead you to taking foolish actions.

Envisioning Retirement

Many people think they will work until 65-70, and then retire. Others expect to work until they can’t work any longer due to physical limitations. I think it’s more productive to think of retirement as moving to a stage of life where what we do isn’t constrained by the need to produce income. It’s good to “retire” as early as we can. Not to have a life of idle leisure, but so you are free to invest your time in things that are truly worthwhile without being constrained by what salary you might make. Long term savings can also be used to start a business, launch a non profit organization, or become an endowment for a foundation.

How much should you save for retirement?  Conventional wisdom is the “4% rule”. The simple form of this is multiply your yearly spend by 25 and that’s roughly your target. Super conservative people use a 2% rule. You can reach financial independence more quickly if your lower your spend because this lets you save more money now and lowers the total amount of money you need to save. For example, if you switch from a 2 person cell plan of $85/month to a $45/month “budget” plan, you are not only able to put $480 dollars into your saving account each year, but you are reducing the amount you need to save by $25,000. Drop a 1 starbucks / day habit would reduce your total saving target by almost $27,000!! For more thoughts check out  Financial Samurai’s How much should my net-worth be based on income.

Action

• Check out Mr Money Mustache or other advocates of finance independence, retire early (FIRE). You don’t need to adopt this viewpoint, but it is very good food for thought. Many people assume that their current (or higher) spending patterns is mandatory to be happy. Many people have found that “downsizing” their spend was initially painful but ended up be great.
• Consider the counter-point to “retirement thinking” raised by Randy Alcorn in Money, Possessions, and Eternity. In the light of eternity and a God who cares for us, would it make sense to save less and be more generous today?
• Consider if you would like to start a business, invest in real estate, etc. Take care to do something you want to invest your life into, not just because you think it will make money. Remember the first rule “People are more important than things (e.g. money)”.
• Get a sense of what social security (if it doesn’t go bankrupt) might payout.
• Identify your “retirement” (financial independence) target, sometimes referred to as your ”number” which was popularized by the book Your Money or Your Life. For some generic numbers you could use something like the nerdwallet retirement calculator.

Insurance

In the USA, the number one reason for families to file for bankruptcy or to become homeless is medical debt. No one can predict medical health. Someone can appear to be completely healthy only to find themselves in the hospital racking up tens of thousands of dollars of expense a day. I think it is fairly irresponsible not to carry medical insurance in countries that don’t have good national health care. Often times people look for plans which have low deducible. While low deductible is nice, I generally encourage people to pay much close to attention to the catastrophic coverage. Whenever possible I encourage people to select plans which cover 100% of the expensive once a deductible is reached. With serious conditions, it is very possible to accumulate >$1M of medical expenses in a year. A plan which covers 80% of expenses means $200k is owned by an individual. I also encourage paying close attention to the drug coverage because for most people, they spend more money on the medicines than on the doctor visits. An alternative to classic health insurance are healthcare cost sharing organizations such as Christian Healthcare Ministries. Many countries provider very low cost health care through a national plan. For people living in these countries health insurance isn’t needed. In many cases is possible to be covered by one of these national plans if a person is prepared to make an investment of time and/or money to become a resident of one of those nations. Beyond medical insurance is home and auto insurance. Like medical insurance it’s most important to protect yourself against what you can’t afford. So if you are driving an old car you can afford to replace, it likely make sense just to carry liability insurance.

Buy a House?

Part of the classic “American Dream” is owning one’s own home. In the past, home ownership has been one of the most powerful ways for family to build wealth, but it’s not a guarantee. Part of what fueled the mortgage crisis was people purchasing homes they couldn’t afford assuming that the value of the house would continue to rise and that in the future they could re-finance based on the increased value of their home. Like all purchases, I think no one should purchase a home whose cost is more than they can afford.

There is often the question buy or rent. The first exercise I think everyone should do before answering this question is compare the cost of a home to the cost of renting.  The total cost of the house should be calculated (mortgage, property taxes, upkeep, insurance, deductible from taxes) and compare that to the he cost of renting something of equal size. In several markets, renting ends up being cheaper.

There are several reasons to consider renting rather than buying. The first is freedom. If you want to move there isn’t the hassle of having to sell your home. Switching residence can be done more easily, be it to change the size, quality, or location. There have been a number of studies which have suggested that people who rent have actually been more financially successful because they have been more willing to move to advance their career. People who own their own homes tend to be much more reluctant to move. Another advantage of renting is that you are often freed from having to deal with many of the hassles associated with home ownership: the maintanance to counter the inevitable decay and breakdown experience by all physical objects.

There are several reasons it can make sense to purchase a home, even if renting a place is less expensive at the present time. First is that home ownership can be a hedge against inflation. In many markets, it is reasonable to assume the price of rents will continue to raise. If a home is purchased with a fixed mortgage the cost of the mortgage stays the same, even though the price of everything else is rising. A second on reason to purchase a home is to create a space that meets your specific needs. Third, the home can be a leveraged investment if the value of the home grows more quickly than the mortgage interest (nice mortgage calculator)There have been several long term studies which suggest that homes tend to increase in value around the same rate as the stock market (faster in places like the SF Bay Area) while having the stability / safety of a classic bond.

Automate Your System

Tim Ferriss has a good guest blog post by Ramit Sethi about building an automated personal finance system. The punch line is that a without an automated system we are facing more financial decisions that we are able to process in a wise manner. Rather than having to face those decisions one at a time, we should put our finances on “automatic” as much as possible. The classic example of this is rather than each month deciding if / how much money to save, set-up an automate transfer into a saving account for some reason, set amount. You don’t have to think about it, it just happens.

Buy Happiness and Have a Rich Life

Added in 2022

There is a nice video clip by Joshua Becker which discusses how to use money to increase happiness which is based on the paper Prosocial spending and buying time: Money as a tool for increasing subjective well-being. They assert that once someone’s basic needs are met there are three ways that money can increase happiness (and added luxuries wasn’t one of them).

• purchasing meaningful experiences (typically shared with others)
• spending money that benefits others
• spending money to you can use your time for things that are valuable to you

There was an interesting conversation between Tim Ferris and Ramit Sethi about living a rich life. If you are living paycheck to paycheck the conversation between these two high net worth individuals could be off putting… but I think their conversation could be helpful to anyone who has achieved basic financial security. While listening to this podcast I realized I feel like I like living a rich life. What’s a rich life for me? Being hospitable which really requires modest funds: $20 here or there: an extra pound of fish and rice, a bottle of table wine, some flowers, or maybe covering the cost of a few appetizers at a restaurant when out with friends. These would be classified as purchasing experiences and pro-social spending, I don’t need a fancy car, I just want reliable transportation. I don’t “need” to stay at a 5-star resort, I am delighted to spend my vacation time sleeping in a tent inside a national park. I don’t care about designer labels, just give me highly functional clothing that is comfortable to wear.

Other Material

• jlcollins – don’t agree completely with him, but useful resources
• Economic Systems by Ray Dalio
• sloww.co money-mind-manifesto
• Theology of Money in 200 words – multiple takes