How 4 “Good” Financial Decisions May Actually Lead To Financial Issues

October 03, 2017

“I don’t understand. How can I be financially struggling if I did everything I was told to do – get a degree, a good paying job, a car and a house?” This was the question posed by a young woman a few years out of college, wondering how she found herself living from paycheck-to-paycheck.

I told her that I am sorry. We are all great at giving general advice without explaining the boundaries needed for the advice to actually help and not potentially hurt someone financially. Getting a degree, a good paying job, a car and a home can all be tools to help you become financially secure if done strategically, with boundaries. If not, each decision can sink you into financial insecurity:

Getting a degree

An article by McGraw Hill Education mentioned that those with a college degree earn an average of a million dollars more than people without a college degree. There is a value to earning an education – if done without straddling you to debt that will take you into the next century to payoff.

I believe in doing what you love, but if you are sacrificing 4+ years of your life and possibly your finances for 10+ years of student loans, you should at least know the following about your future career: the minimum education requirements, the average cost to get the degree, the average starting salary and the average length of time it may take you to finish paying off the loan.

An article by Bankrate does a great job breaking down the numbers for you. Basically, you do not want to spend $150,000 on a degree that may only pay $40,000 a year. A rule of thumb is the total of a student loan should equal your minimum first year starting salary.

Even better, look for companies that will foot the bill for you. Employers like Starbucks offer programs that can help you get your degree tuition-free. Other employers offer tuition reimbursement programs to help you pay for college.

Worth it or not?

One of the best analogies I ever heard of pursuing a Master’s degree is to a tattoo. You really want to make sure you want to get one because the cost can be lifelong. If you are thinking of pursing a graduate degree, use graduate school ROI calculators to estimate if the cost is worth it. Bottom line: getting a degree is financially beneficial if you can do it cost effectively with a degree that will open the door to employment instead of a sinkhole of debt that will take you a century to climb out of.

Buying a car 

Yes, depending on where you live, you may need a car for transportation to get you to the job that will help you become financially secure, but this does not mean that car has to be a 2017 BMW when your salary can only afford a late model Corolla. If your car is older, driving it until the wheels fall off may be one of your best financial decisions.

An article by Consumer Reports mentioned that keeping your car until it at least hits 200,000 miles (on average about 15 years) could result in savings of $30k or more. Buying a vehicle with a history of reliability, following the manufacturer’s maintenance schedule and not skimping on parts can get your vehicle to the 200,000 and above mark.

Car loan guidelines

If you get a car loan, consider sticking to the 20/4/10 rule: 20% down, finance terms of no more than 4 years and a total monthly expense under 10% of gross monthly income (car finance rule of thumb).

When I was younger, it was hard not to feel tempted to “treat myself” to a new car. Today, the average monthly payment on a new car is $479 and the average car loan is $30,032. If you got a car at age 25 for even half that amount and invested the extra $240 in a mutual fund earning about 7%, you could have close to $300,000 by the time you are 55. So the next time you think about getting a new car, think to yourself, is it worth $300,000?

Purchasing a home

Buying a home when you are financially prepared can be a wealth builder. Buying a home when you are not prepared can be a wealth stripper that can haunt your credit in the form of a future short sale or foreclosure. Before purchasing a home, pay off high-interest rate debt so you have more disposable income and have a budget so you know how much of a mortgage to get to help you maintain your lifestyle.

Mortgage guidelines

The guidance is to get a housing payment (principal, interest, taxes, insurance and HOA fees) that represents about 25-35% of your take-home income. If you love to travel, consider looking for a mortgage closer to 25% of your take-home income to still give your budget room for your favorite activities.

Consider all the costs

Keep in mind that choosing a mortgage payment strictly based on what you pay in rent does not fully account for the additional cost of homeownership. For example, when our air conditioning went out in our $1,000 a month apartment, we called maintenance and had a brand new air conditioning unit with no cost out-of-pocket. If we were homeowners with a $1,000 mortgage, that same incident may have cost an additional $5,304 for a new air conditioning unit.

Home repair rule of thumb

A rule of thumb is to save about 1% of the purchase value of your home for repairs. The number can be adjusted based on the age, location and type of home.

Looking for a better paying job 

I am all about looking for better opportunities, but before you do, consider what you are giving up. I have a friend that accepted a job with a $20,000 pay increase. Sounds great, right?

Better pay does not always mean a better job

But after talking to her, there were a few details she had not considered. One, she was a single mom and her old job was very flexible in allowing her to work remotely and leave early or late so she could attend her child’s events. Her job also paid 100% of her medical premiums and paid almost 100% for her daughter’s. Her new employer’s benefits were going to cost her about $500 a month, instantly wiping out almost 1/3 of her new salary.

Her old job was also closer. The extra commute for her new job was going to cost her an additional $60 in gas monthly and $100 in monthly parking fees. Her old employer had a robust tuition assistance program and lots of opportunity for growth. Her new employer was a much smaller firm with no tuition assistance. She would also have to rebuild relationships – relationships that helped her get promoted and allowed her to have a flexible schedule.

Do your homework before taking the plunge

Before you take the plunge, do some homework. Go on websites like Glassdoor and research employee comments about your possible future employer. Employees are not shy about giving their opinion or sharing information.

Finally, do not make a decision emotionally. If you are frustrated, give yourself time to cool off before leaving. If you are overworked, take some PTO and carefully decide if leaving makes sense. The last thing you want is to have to take a step back in your career because of a bad move.

Moving toward financial security

Strategically making decisions regarding pursuing an education, a vehicle, a home and even a job will help ensure that each decision will take you a step further into financial security, instead of plunging you into a spiral that you may spend the next decade (or two) digging yourself out of. If you need help, consider consulting with a qualified and unbiased financial professional. Your employer may even offer one for free through a workplace financial wellness program.

This post was originally published on Forbes, September 3rd.

You Are Not Your Financial Situation

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When I tell people what I do for a living, I almost always get questions on how to become financially secure. As I started to talk to people, I noticed that a pattern started to emerge. People started connecting themselves to their financial situation vs. seeing their situation as a temporary situation. Continue reading “You Are Not Your Financial Situation”

A Message in a Bottle

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Sometimes I read something that touches me and makes me remember that, no matter what is going on in my life, things could always be worse.  And then I remember to pick myself up, dust myself off and get back to the business of living my life with less whining.  When I read this article, I had one of those moments.  Continue reading “A Message in a Bottle”

Did Mom Miss Out on this Important Gift?

May 13, 2013

Yesterday, Americans spent nearly $20 billion saying thanks to mothers across the country for their priceless roles as domestic CEOs. Hopefully, you had an enjoyable Mother’s Day weekend and had the opportunity to celebrate with the moms in your life too. While my son and I were making our special recipe of blueberry explosion pancakes in the kitchen for my wife (well, I was primarily trying to minimize the mess he was making out of love for his mommy), I started thinking about my memorable Mother’s Day gifts of the past. As a child, I’m sure there were more than just a few kindhearted but lame attempts at breakfast in bed, homemade cards, flowers, and gift certificates. Even as an adult, I still struggle to find the best gift for my mom and I am sure that I’m not alone when I say that it’s tough to find a substantive gift that adequately says thank you enough. (However, I did come across this open letter to moms everywhere from Kid President and it’s sure to make some moms smile in realizing how awesome they are!) Continue reading “Did Mom Miss Out on this Important Gift?”

GUEST BLOG POST: The Course to Financial Success: A Marathon, Not a Sprint

November 09, 2011

On Sunday, October 30th, I ran the Marine Corps Marathon in Washington, DC.

Call it a “runner’s high,” or chalk it up to trying to distract myself from my painful feet, but I spent much of those five-plus hours in deep philosophical thought.  I thought about the courage of our military, as I studied the faces and dates of too-short lives emblazoned on the backs of so many runners.  I thought about the dedication of the spectators, who not only waited for several chilly hours to catch a 10-second view of their runner, but also propelled 19,999 other runners to the finish with their motivating and humorous signs.  My favorite:  “26.2 miles?  Because 26.3 would just be crazy!!” Continue reading “GUEST BLOG POST: The Course to Financial Success: A Marathon, Not a Sprint”

GUEST BLOG POST: Q&A with Liz Davidson on the Gender Gap in Financial Literacy

June 16, 2011

Question: Your research is showing the gender gap in financial knowledge is still prominent. It seems there shouldn’t be a gender gap at all these days. Shouldn’t women and men be pretty equal in their financial knowledge and overall financial security?

Liz Davidson: Well, yes, you’d think so. But there are several issues at play here: Continue reading “GUEST BLOG POST: Q&A with Liz Davidson on the Gender Gap in Financial Literacy”