It’s a Q&A Edition of Optimal Finance Daily: Episode 1362. And I’m your host and personal finance enthusiast, Diania Merriam. We are going to change it up today and address some audience personal finance questions on the show.
If you’ve been listening for the past couple of months, you may have noticed that I’ve invited you all to send your questions over to finance AT oldpodcast DOT com and on today’s episode we’re going to address a few questions that have a common theme.
These Optimal Finance Daily listeners struggle with their spending habits, and trust me folks I have been there as well! So hopefully I can provide some good food for thought on the questions today.
Putting the “Personal” in Personal Finance
I wanted to point out that one of the things I really love about the FIRE and personal finance communities is that there are so many people willing to provide their diverse perspectives on various money issues. Personal finance is so personal, there really isn't one right answer.
So when it came to putting together responses to these questions, I consulted the Facebook Group I run called For the FI Curious. Of course, I first got permission from the questioners before doing this but I wanted to collect some more varied feedback so that we can all ponder more than just my one opinion.
If you’re looking for some financially minded friends, check out For the FI Curious, and it’s a joint Facebook group between Optimal Finance Daily and The EconoMe Conference. In this group we aim to inspire you on your path to financial independence and share resources for your journey.
For now let’s get to today’s questions and start optimizing your life!
Personal Finance Question 1: “What Next After Paying Off My Debts (apart from student loans)?”
Our first question comes from Robyn, who says: “I'm on a debt free journey. I've paid off everything except my student loans (and I’m working on it now). I'm not sure what to do next. I'm also working on a 3-6 month emergency fund. I had so much consumer debt and now that I don't, I'm relaxed with spending. I guess I'm struggling with making a plan or goals. I've been listening to your podcasts which are really helpful and greatly appreciated. My ultimate goal is financial independence and learning how to live that out.”
DIANIA MERRIAM: Well it sounds to me that you do have a goal of financial independence, but perhaps just need to solidify what that goal really means to you and build out a plan to get there.
It sounds like you had a lot of excitement around your goal of getting out of consumer debt and now that you’ve done that, you’re more relaxed with spending because you’re not as committed to your goal of financial independence.
Which is understandable… pursuing financial independence is essentially everyone’s goal if they ever want to retire one day. It seems like something you “should” do, because it’s something everyone should do.
What's Your “Why” for Financial Independence?
But if you really want to prioritize this goal, I think you need to have a clear vision of what your life could look like when you reach financial independence. What is your “why” for FI?
If you’re able to visualize your commitment to pursing financial independence in the moment you’re about to make those daily spending decisions, you’ll start to get more excited about what you’re gaining vs what you’re losing by not buying XYor Z right now.
Getting out of consumer debt is so awesome, and worth celebrating with some additional financial goals. You’re building incredible momentum here and I think the way to keep it, is by redirecting those dollars you were once throwing at your credit card debt.
Student Loan Debt vs. Credit Card Debt
When it comes to student loans, I’ve learned that this type of debt needs to be tackled differently than credit card debt. There are various options like pay as you earn, student loan forgiveness programs, and refinancing options.
I’d encourage you to check out Travis Hornsby’s speech from The EconoMe Conference on YouTube. It’s called “Student Loans Never Need to Hold You Back” and it does a great job of analyzing the many options you have on student loans. I’d also check out his company called The Student loan planner for additional resources in coming up with your student loan repayment plan.
Next I’d look at the gap you have between your expenses and your income, and I suspect you’ve already done a good job of this when you were getting out of credit card debt. Let’s just say for the purposes of example, that you have a gap of $1,000 per month gap between your income and expenses that you previously were throwing at credit card debt. Some of that may now go towards your optimized student loan repayment plan.
Another portion of this could go to a retirement vehicle like a 401k, IRA, HSA, or. If your employer offers you 401k with a match, the first thing you should do is contribute enough to get this match, that is free money! Finally, a portion of that $1,000 can go to your emergency fund, and once that fund is at the level your comfortable with, you can start throwing that money at your retirement vehicles.
Allocating Dollars to Goals
I think the key here is that once you reach one financial goal, just reallocate those dollars to the next goal and plot all of these goals out in advance so there is no wiggle room to relax on where those dollars are going.
Based on what you’ve shared, some good goals for you could be:
- Optimize Student loan repayment
- Build up emergency fund and
- Fully fund retirement vehicles.
If you plug all these into the many early retirement calculators available online, you can even see how far you are from financial independence and track against that.
For me personally, knowing that I’m 7 years from FI keeps me motivated and by regularly monitoring how I’m tracking towards that goal, I can celebrate the wins along the way.
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To learn more, visit our “start here” page or click on each logo below to learn more about each show!
Question 2: “How Can I Control My Monthly Spending?”
Our next question is from Emeline: “My question is how can one control his or her monthly spending? What tools or suggestions do you think you can give to someone who spends a lot online every month on the basis that it’s essential? How can he or she control those online spending habits??”
DIANIA MERRIAM: Thank you Emeline for this great question on controlling spending habits. The funny thing about habits is that they are ingrained and often mindless, so I think the first thing is to just bring some mindfulness into the equation.
When I was getting my spending under control, the first thing I did was track every dollar I spent through a simple app on my phone. This served 2 purposes — the act of forcing me to write down my spending at the time I was making the transaction made me think twice before I clicked that “buy” button.
Secondly, having awareness of my spending at its worst, allowed me to see progress as I got better at spending less, and progress creates momentum!
So let’s say this month you track all your spending, and you had $1,000 of wasteful spending… and next month you have $950 of wasteful spending… that is progress my friend.
Now the month after that, maybe you push yourself to not go over $900 and if you keep tracking in that direction over time, you’ll continue to reign in your spending.
I’m also wondering if the convenience of online shopping is a slippery slope. What if you allowed yourself to buy these “essential” things, but only if you got in your car and went to the store to lug them home?
Perhaps adding this level of friction and inconvenience will help you analyze how truly essential these purchases are.
Ask Yourself: Is It A Need or a Want?
Finally, when I was working to change my spending habits, I found this exercise of a mental checklist very helpful, again mainly to make me pause and be more mindful about what I was doing. I would ask myself: is this really a need or much more of a want?
If it was a want, could I delay this purchase to celebrate a financial milestone or use it as a treat for reaching some other goal? Many times I would add this want to a list of things to buy eventually, and that alone would be satisfying because I would continue to come back to it and question how much I really wanted it, rather than buying it on impulse.
If it was a need, is there a more resourceful way to get this need met? Could I borrow this thing from a friend or repurpose something I already had? Perhaps I could I buy it used?
Over time, this mental exercise became a habit, just like my mindless spending was a habit. And the creativity and resourcefulness I discovered through reducing my spending, became so much more satisfying than a mindless click of a mouse.
Question 3: “How Do I Curb My Major Spending Problem?”
Finally, we have this question from India who says:
“I have a major spending problem. I've always wanted financial freedom and I've been blessed to reach some semblance of it. My issue is that the more I have the more I spend. I’m not a big ticket item kind of person, I'm a buy-a-million-little-things kind of spender and that adds up quickly. I'm watching my money slowly dwindle and the issue is that I spend more than what I bring in.
On payday 80% of my income goes to bills, 10% to savings and what's left over for 2 weeks can blow through my hands in 2 minutes…it's driving me crazy! Tomorrow isn't promised so I want to live for today BUT when I overspend and tomorrow comes, I'm not going to be prepared for it.
It's a strange position to be in and I'm not sure what to do. I have a budget when it comes to bills — I know exactly how much is due and when and I'm never late. How do I budget what little bit is left so I'm not dipping into savings while I wait for my next check??”
DIANIA MERRIAM: I’m sure we can all relate to India in some ways — it seems like a classic case of lifestyle inflation. Your income increases and your lifestyle increases to thwart any gains on that gap between your income and expenses.
India, I think you’d be a great candidate for automating saving and investing. Get that money out of your account before you even see it and give yourself a realistic budget for discretionary spending each month.
And for your discretionary spending, I’d recommend you check out an app like You Need a Budget. This app is rooted in zero based budgeting where every dollar is allocated before it even hits your bank account. Thinking through in advance how you will spend or save every dollar sets your intention each month and knowing that your saving and investing is done and automated will help you not to feel guilty on the money you are spending.
Again, tracking is key here.. as Peter Drucker said, “if you can’t measure it, you can’t improve it.”
Go into this exercise with open eyes, be really clear on where you’re overspending. Track it, and watch it improve over time to keep you motivated to keep going.
Mindset Shift: Spender to Saver
I think a mindset shift is also necessary here so that you don’t feel deprived as you move from being a spender to a saver. Here’s what helped me — I realized at some point that I am always spending every single dollar I make. I’m either spending it on stuff now, or I’m using it to buy freedom and options.
Over time, I started to get much more excited about buying some more stocks in my after tax brokerage vs. a new pair of shoes. I also had the realization that my money is capable of working so much harder than I ever can. By saving and investing, I’m going to benefit from compound interest where my money will make even more money. Watching my investments grow is now so much more exciting to me than some shiny new possession.
Personal Finance Questions: Sign-Off
Well I hope you enjoyed tackling these questions here with me today on Optimal Finance Daily. A special shout out to Josh and Rob who chimed in on the Facebook group with their 2 cents on spending and saving — Rob recommends YNAB as well and Josh chimed in with the great suggestion for zero based budgeting.
If you have a question you’d like addressed on the show, go ahead and send it over to finance AT oldpodcast.com and don’t forget to check out our Facebook group — For the Fi Curious.
So with that, I hope you have a great rest of your day, and I’ll see you here tomorrow, where your optimal life awaits!