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 grand tapestry of life, people hold a value that eclipses money or any material asset we may accumulate. The principle should be simple: love people and use things, not the reverse. While money and possessions are valuable resources, the danger lies in fostering an unhealthy relationship with them, thereby transforming a blessing into a destructive force. An early life lesson for me was to choose to share with others, even if it meant your possessions or money were at risk.

Contrary to some interpretations that equate material wealth with divine favor, religious texts like the Bible caution against the pitfalls of financial idolatry. In the New Testament, I Timothy 6:10 states, “For the love of money is a root of all kinds of evil.” Jesus himself frequently cautioned against the perils of greed through his parables. In my personal experience, an obsessive focus on wealth often correlates with deteriorating personal relationships and diminishing character. As Proverbs 30:8 succinctly advises, we should aim to be “neither poor nor rich.”

If you’re interested in delving deeper into the biblical perspective on wealth, consider reading ” Money, Possessions, and Eternity by Randy Alcorn or Jesus and Money by Ben Witherington III.

Consumer Culture and the Illusion of Happiness

Today’s consumerist culture perpetuates a cycle of dissatisfaction, pushing us to desire more instead of appreciating what we already have. Research, including studies like “$50k is the cost of happiness” which indicates that beyond meeting basic needs such as shelter, food, clothing, and healthcare, additional wealth doesn’t equate to additional happiness. Moreover, studies have shown that spending money on others produces more happiness than spending money on self. There is a plethora of intriguing research on the psychology of charity, a topic deserving its own dedicated discussion.

Taking Action: Re-center Your Priorities

1. Reflect on What Matters Most: Take inspiration from the wisdom of individuals who have reached the twilight of their lives. Their insights often point to the importance of relationships over material gains. My summary in commands for life.
2. Cultivate Gratitude: Practicing gratitude can bring about a profound shift in your outlook, focusing your attention on what you have rather than what you lack.
3. Mindful Spending: Adopt strategies to make your purchasing decisions more intentional. For example, stick to a pre-made shopping list, delay any impulsive buys by at least 24 hours, or embark on a “shopping diet,” limiting your purchases to essentials for a specific timeframe.
4. Embrace Minimalism: Looking at the philosophy of minimalism promoted by people like Joshua Becker of Becoming Minimalist blog. Clear material clutter out of our lives so we can focus on what’s truly important.

By refocusing on what truly holds value—our relationships, our character, and our contributions to the world—we can break free from the dangerous idolatry of wealth and material possessions.

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’re uncertain about where your money is going, chances are you’re not in control of your spending. In such cases, you’re inadvertently allowing others to dictate your financial choices, and rest assured, they aren’t prioritizing your best interests. Implementing thoughtful changes requires a clear understanding of your money’s journey

Harness Technology for Financial Tracking

While traditional pen-and-paper methods can work, modern electronic systems offer a more efficient way to monitor your finances. Most banking institutions now provide free online access to your transactions. If yours doesn’t, consider switching to a bank that does. Personally, I use Simpifi for tracking my finances, but I don’t know it. There are many viable alternatives. Websites like Nerdwallet, Wallethacks, and Wirecutter offer insightful recommendations for financial management applications.

Categorize and Evaluate Your Spending

After you’ve gathered data on recent expenditures, the next step is categorization. Tools like Mint’s “Trends” make this simple. This not only helps you understand where your money is going, but also lays the foundation for intentional spending. Reflect on the following questions to evaluate your habits:

• Is my spending aligned with my values?
• How is my spending contributing to my well-being?

Build a Realistic Budget

Creating a budget shouldn’t be an arbitrary exercise; it needs to be rooted in reality. Start by identifying areas where you’re overspending. Then, pinpoint specific expenses that can be reduced or eliminated. Use this information to formulate a realistic budget. The goal is to have some money left over at the end of this process, which we’ll discuss further later in this document.

Actions:

1. Choose a Financial Tracking Method: Select an application or system to track your financial data and input the necessary information.
2. Analyze Current Expenditures: Break down your spending into categories to gain insight into your habits.
3. Formulate a Budget: Use your spending analysis to create a budget that aligns with your financial goals and values.
4. Regularly Compare and Adjust: Consistently measure your actual spending against your budget, making adjustments as needed.

Advanced Strategies:

• Plan for Recurring One-Time Expenses: Identify expenditures that occur periodically but not regularly, such as gifts, and incorporate them into your budget.
• Future-Proof Your Budget: Make provisions for durable goods that will eventually wear out, saving a little every month to replace them when the time comes.

By following these guidelines and taking a proactive approach, you’ll be well on your way to achieving financial well-being, putting you in the driver’s seat of your own financial journey.

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 of 2009 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 of 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. Historically people suggest comparing equally sized homes but I don’t think that’s right. You should compare the rental place you need now, to the house you want to own a few years from now. The total cost of the house should be calculated (mortgage + property taxes + HOA + upkeep + insurance – deduction of mortgage/property taxes from state/federal taxes).

There are several reasons to consider renting rather than buying. In many markets, renting ends up being cheaper even when factoring in the equity you are building. This is especially true if you want to sell and move to a new place in less than five years… the average time it takes for the accumulated equity which match the expenses from the loan (origination fees, points), real estate agent commissions, etc. The second reason is freedom / ease of change. If you want to change the size, quality, or location of your residents, terminating a least is much easier and taxing than selling a home you own. Third,  you are freed from having to deal with many of the hassles associated with home ownership such as the maintenance to counter the inevitable decay and breakdown experienced by all physical objects.

There are several reasons it can make sense to purchase a home. In some places the fully loaded cost of buying a house is cheaper than renting. Second, home ownership can be a hedge against inflation… so even if the house is more expensive now, if rental prices are rising, a fixed rate mortgage will ultimately be cheaper than the rent. A third reason to purchase a home is to create a space that meets your specific needs. Forth, 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.

IF you decide to purchase a property take your time. Understand the neighborhood, what you are looking for in terms of size, style, age, layout, etc. What sort of yard you want, or no yard. Visit open houses with whomever you might be purchasing the property with. Make notes about what you like, and don’t like. Determine how much work you are willing to put into the home. Do you want a turn-key. you just move in, a place that will be ok now and you will do bits of remodeling as you go, or a place that needs so much work either you choice to live somewhere else during the remodel (effectively doubling your housing cost(, or live in the house which is more like camping while the remodel is going.  Just remember, remodels always take more money and time than anyone predicts.

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 / 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 (especially that are shared with others)
• spending money that benefits others
• spending money so you can use your time for things that are valuable to you

When I think of my “optional spending” I typically consider the return on investment. I consider the hours of enjoyment vs the cost. Anything that provides an hour of enjoyment for less than $5 seems like a great deal. For example, I spend around $12k on stereo equipment and music which gave me quite a bit of enjoyment over the years. When I last calculated the cost, it was $1.72 / day, which was $0.40 / hour of enjoyment. The $12k a few decades ago seemed like a lot of money, but it has was much less expensive than purchases a fancy coffee each day.

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 am living a rich life. What’s a rich life for me? First of the list is being hospitable. Having some space in our home for others. Hospitality is typically not v very expensive: an extra pound of fish and rice to have more people for dinner, a bottle of table wine or some flowers to enliven a shared meal, or maybe covering the cost of a few appetizers (or dinner) at a restaurant when out with friends. These would be classified as purchasing experiences and pro-social spending. More expensive would be to plan and fund a vacation or trip for friends and/or family. Here is an exercise to explore what a rich life is for you.

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