Bentzen’s Blog

My Approach to Personal Finance
by Brian Bentzen 

Being $350 thousand dollars in debt causes me a bit of personal stress.  I can take solace in knowing that my education will eventually pay for itself, but my 5/1 adjustable rate mortgage could spell trouble if I’m unable to refinance or sell my home.  On top of this I have a few thousand dollars on the credit card that accumulated during 8 years of post-secondary education.  At about an average of 6% interest I’m paying $21 thousand a year to my creditors.  Or to be more accurate, I’m not paying this amount of money because I’m deferring my payments for the next three years while I finish my residency.  At that time I’ll be closer to $400 thousand in debt, so I have a big hole to climb out of when I finally embark on my professional career at the age of 30.

I became interested in better managing my personal finances when I finished school and bought my first home in 2007.  Books like Automatic Millionaire  and The Intelligent Investor taught me the basics and I came to the undeniable realization that the stock market offered the greatest return over the course of time.  This  would offer the best chance to retire with enough money to not have to worry about income.  Even better than retiring with enough money, I’d like to be able to make sizable donations to charity in my retirement and set up endowments to be sure that the causes I support will live on after I perish.

John D Rockefeller taught his children to give away 10%, save 10%, live on the rest and account for every penny.  My approach to finances is similar.

Charitable Giving

Goal: Give 10%.  

In our current recession you might expect this would be the first part of the budget to disappear.  According to a recent Time Magazine Article,  charitable donations may actually have increased this year.  Americans generally are concerned about their fellow citizens and if they feel like they are making a difference, they are more likely to donate.  This article states that about 70% of the US population will donate an average of $2000 this year.  That adds up to about $420 billion.  Additionally, according to Elizabeth Boris of The Urban Institute this injection of private funds amounts to only 19% of non-profit funding.  She says 32% comes from government funding, which means the government is paying another $700 billion to non-profits.  That would add up to another $2300 for each US citizen.  With a US mean (average) income of just over $60,000, as a country we are giving about 6.2% to charity.

These numbers seem a bit inflated to me, but the end result may be reasonable.

Even if you don’t give any additional money to charity, if you are paying taxes your government is paying at least part of your share.  Whether the government should do this could be the subject of another post.  

Savings

Goal:  Save 10%

The goal of saving 10% of your take home pay may seem unattainable.  Many Americans spend more money than they make resulting in negative savings.  The US Department of Commerce keeps track of the personal savings rate.  Over the past few years, the average American saves approximately 1% of disposable income.  What would happen if you earned the US median income of about $60,000 ($45,000 after taxes) and were to put just 1% of your take home pay into the stock market starting at age 25?  If the market continues to gain on average about 10% a year when you are 65 you would have $237,000.  If you continue until age 70, you’ll have $393,000.  If you wait until age 30 to start saving, you’d have to wait to 70 to get to $237,000.  The person who starts socking away 10% a year at age 25 could retire at 60 with $1.42 million, at 65 with $2.37 million or wait until 70 to retire with $3.93 million.  If you start at age 25 and put away 20% you could retire at 60 with $2.85 million!  The choice is clear to me.  I’m willing to live a less flashy life now, so I can be sure I’ll be able to provide for myself and family when I’m older.

Going from 1% annual savings rate to 10% is a big step, but one you can tackle gradually over a period of months or years.  Its best to start an automatic savings plan that will force you to pay yourself first, effectively taking a certain percentage of your paycheck and putting it someplace you cannot easily get to it.  You can start with 1% and gradually work your way towards 10% or even higher.  If you have a job that will match retirement contributions, you are already twice as well off as the rest of us.  As your income gradually increases throughout your life, if you are living comfortably enough try to continue living the same lifestyle as before you got the raise.  Add the difference to your savings.

Live off the other 80%

This is the hard part.  There is no way to automatically pay all your bills with less money than before, although you can automatically pay your bills every month to save yourself time and possible late fees.  Some items cannot be trimmed from your budget.  These are the basic necessities like food, shelter, clothing, water, heat, etc.  You can’t stop paying your car payment or insurance either, but you can drive less, for instance, by doing all your shopping on one day each week.  You can also call your insurance company’s competitors looking for a better quote.  

Track Every Penny

This part of the plan forces you to confront your personal spending habits.  You can use a paper balance sheet, a spreadsheet, or purchase a computer program such as Quicken or Microsoft Money which allows you to download your credit card and checking account information directly into the program for easy record keeping.  I’ve used both Microsoft Money and Quicken and found both helpful in tracking spending.  By breaking down your spending into categories, you can determine which spending is absolutely necessary and which spending is purely discretional.  You may be shocked to find out how much money you spend over the course of one month in a given category.  The classic example of this is coffee at Starbucks.  If you spend $2 a day on coffee, at the end of the month you’ve spent $40.  If you buy lattes, you probably spend more like $80 a month.  

When you look at your transactions every month, ask yourself why you made the purchase and if it was necessary.  If you have a gym membership for $75 and you went to the gym twice last month, can you cancel your membership and pay each visit?  If you spent $300 at restaurants, can cut your bill in half next month?  If you go out every weekend and spend over $100 on alcohol, can you change your habits?  If you smoke 30 packs of cigarettes a month, can you quit or cut back and save yourself another $120?  Do you need the $90 cell phone plan or the $100 cable plan?  Every expense adds up, and if you can decrease one expenditure, you can apply the savings to whatever you choose.

Summary

I believe that by following Rockefeller’s plan, you can set yourself on the path towards a bright financial future.  My own goals are aligned with the give 10%, save 10% and live on 80% rule, but I aspire to save an increasing amount every year and follow Rockefeller’s example of contributing to non-profit endowments.  I hope this has been helpful, and will follow up with articles that focus mainly on what to do with your savings and how to decrease your spending.  

Brian