Budgeting with The Millennial Money Woman

MMW

[laughter] That’s exactly right. But in the end, I always think that on a long-term perspective, if you want to focus long-term, which is what finance really is about, it’s long-term, not short-term. In the end, really, it’s the person that makes those upfront sacrifices, like not going to the bars every night, not going to the restaurants every night. You can still go a couple of times, right, but not every night. And it’s really that person that uses their money, saves and invests it that comes out to be a winner in the end. 9 times out of 10, that’s the case because they already start practicing healthy finance habits.

Megumi

Yeah, and I think that’s such a great point, because part of the reason why I feel like Millennials get a bad rap is this whole, “Oh, they’re spending so much money on avocado toast and iced coffee.” And I think that’s also part of the reason why, at least for me, looking online for financial advice, I would run into these really condescending lessons like that. And it’s like, I mean, I’m not buying that much avocado toast, or the fact that I got iced coffee this morning is not why I can’t afford to buy a house in L.A. I don’t think — those two things might not be completely unrelated, but it’s not as related as you’re making it seem.

MMW

That’s true.

Megumi

I feel like there is sort of that balance that you have to find of the, I guess, instant gratification versus delayed gratification, righ,, of if you really, really want that iced coffee in the morning, do it. It’s fine. Don’t beat yourself up over it. But I have some friends who are working with a financial planner, and their financial planner pointed out, you guys are spending thousands of dollars on so much coffee at Starbucks. You need to stop. They had this caffeine addiction. And it was so much of their money. And it was just– they travel a lot, so it was just a convenience thing for them, but they realized, you know, just spend a few hundred dollars on the fanciest coffee machine. And that saved them so much money.

MMW

That’s right. Yeah. Like you said, it’s moderation. And I try to often relate finance to food because I am a carb lover. Right? My entire diet is literally carbs, which I know is terrible. [laughter]

Megumi

Carbs are the best.

MMW

Right? Okay. So that’s what I do, but then I try to calm down on my carb craving. And maybe instead of seven days a week, three meals a day of eating carbs, I’m going to try to eat carbs maybe seven days a week, but just one meal a day. Right? So it’s not going from hero to zero or from zero to hero because chances are, like dieting – I’m sure many people know this – if you go and totally try to cut something out of your diet, maybe it’ll work for a few weeks, maybe even months, but there’s a really high chance that you’re going to bounce back, and it’s going to be worse. You’re going to gain weight, etc., etc. And I think of it as, it’s like a finance diet. Right? You don’t want to cut out Starbucks or avocado toast or whatever your guilty pleasure is completely. You’ve got to enjoy some things. You’ve got to enjoy life or what your hard-earned money actually gets you, but at the same time, you also want to think a little bit about the future. So making a touch of a sacrifice today to get a much better tomorrow.

Megumi

Exactly. I had did– I had did? I did an episode before about better ways to think about budgeting and saving. And I mean, the word “budgeting,” I hated it. Even now, I think because, for so long, budgeting just felt so restrictive and negative, it still kind of makes me cringe. So even I, myself, I did a whole episode on trying to frame it in a more positive and motivating way. And I’m still kind of struggling with that, but it is such an important part of your personal financial health. And it is such a simple yet difficult, and I feel like sometimes, complicated concept. Why do you think that it’s such an important part of personal finance, and why did it get such a bad rep?

MMW

That is a great question. I think that the B word, it’s super scary. And I think a lot of times, people just don’t really know how to approach it, the budget. Everyone knows what a budget roughly means, but maybe they don’t actually know how to approach creating a budget, or they just don’t simply block a period of time out of their weekly schedules. I mean, everyone’s busy. I get that. But if you literally put on your calendar at nighttime, let’s say, two hours and just say, “Budgeting,” I think that really helps you prepare also your mindset for that budgeting time period, that time block. But I think a lot of people approach it already with a really timid manner. And, I mean, it’s not really fun. It’s not your most fun time of the day, but I think it’s just another part to your financial toolkit. Right? And in a way, a budget is a positive thing because it’s going to help you reach your financial goals, whatever they are. If your goal is to, I don’t know, travel to a beautiful vacation spot this year, and you have to save $3,000 to get there, your budget’s going to be your best friend in that case. So I would try to consider it, change your perspective from having a budget be something really scary and unknown and really uncomfortable, to a budget being literally a tool in your financial toolkit that is literally going to create a roadmap for you to accomplish your ultimate goal for this year, at least, which is to go to this amazing vacation travel spot.

And I think a lot of people just don’t realize that budgets are actually a positive thing. And I think media might also have to contribute to this, where the perception is that budgets are negative. And it is a disgusting word, kind of [laughter], but I think really the key to creating a budget that actually works is being honest with yourself. I mean, I think, first, you need to be introspective in order to create a budget that will literally work for who you are as a person. And by honesty, I mean really peering into the expenses that you have. I mean every cent. If you know you’re a Starbucks fanatic and you just don’t want to look at the money because you’re scared, like, “How much do I spend–” that’s happened to me, by the way.

Megumi

Been there. Been there.

MMW

Yep. I knew I was spending, but in my mind, I was like, “Okay. As long as I don’t know what I’m actually spending, I don’t have to be scared.”

Megumi

Yes, exactly! And it’s so easy to just close your eyes and be like, “You know what? If I just ignore it for one more month, and then it’ll magically disappear, I think. Right? That’s definitely how this works.”

MMW

That’s right. And I think we’re not the only ones out there. And that’s fine. That’s normally how some people cope with that stress, but I think then it’s the point where you really have to start changing that perspective, again, like I said before, where you want to figure out– write down your goals, actually. Before you even start a budget, write down your goals.

What do you want to achieve in the short term and in the long term? Do you want to retire early? Do you want to work for the rest of your life? Do you want to take that great vacation this year? Really try to figure out what it is that you want to do in your life and how much money that’s roughly going to cost you. And once you figure out these goals, then you can start working on a budget. So you can kind of adjust how much you spend and possibly how much income you have, and you can create a road map that will literally help you accomplish these goals. So I think if people start with the mindset that a budget will help them accomplish their goals, their financial goals and their dreams, whatever it is, buy a Porsche, buy a Ferrari, etc., a budget will probably help you get there. So again, it’s just that positive mindset. It’s a change of mindset that you need in order to really start that momentum with creating a budget.

Megumi

Yeah. And I think it is kind of similar to, like you were saying, food. Instead of thinking about budgets like we think about diets, of it’s this really restrictive thing and all it’s telling you is what you can’t eat, what you can’t spend your money on – don’t spend money on ice coffee; don’t eat the avocado toast – when in reality, maybe it’s that you have this long-term goal of gaining muscle or losing weight or whatever it is. And maybe that does mean that you can’t eat pizza and pasta for every single meal, seven days a week even though you might want to, but by eating pizza just a couple of times a week, you are going to get to those whatever muscle gains, whatever health goals, fitness goals faster. And in the same way, budgeting isn’t about, hey, you can’t spend money on a new handbag or that expensive bottle of wine. But instead of spending money on that, think about how in one year you’ll be able to go on your vacation.

MMW

That’s exactly right. And moreover, when I was looking up a couple of facts here for this podcast, I think I was stunned to see that some statistics show that 30%, for example, of Americans, they have no emergency savings fund, which is like– it’s basically a liquid account for in case of an emergency, like a flat tire or something, so you don’t have to use your credit card and rack up debt on your credit card. You can literally go to this emergency savings fund and pay for whatever unexpected expense pops up in your life. And the fact that 30% of Americans literally have zero dollars in an emergency savings fund, it’s just staggering. Even more, 57% can’t cover a $500 emergency. And I think that those statistics, they really open not just my eyes, but I’m sure a lot of other people’s eyes, and saying that you really do need to start thinking about how you want to structure your income-slash-expenses in the form of a budget, so you are financially secure in case there is an emergency. And again, a budget will help you, will protect you. Literally will help protect you in case of an emergency. If you budget in every month you put $50 from your income toward an emergency savings fund, then you’ll be able to build it up that way. And a budget is something– it’s a tool that will literally help you accomplish that and avoid being one of those statistics, essentially.

Megumi

Yeah, and I feel like this year, especially with the pandemic and all the people who are furloughed or laid off or got pay cuts or whatever the case is, it’s really shown us how important it is to have an emergency fund. And I know some financial advisers were talking about how previously they had recommended having a three-month emergency fund versus now, they recommend having six months’ worth of living expenses in your emergency fund to cover anything that might come up.

And I think what’s interesting also, you had brought up the media perception in budgets, and I think that’s true. Like we had been talking about before, you don’t want to be the Debbie Downer at the party who either can’t go out or is always counting her money because she has a budget and she has to stick to her budget. I can’t think actually of a single time in a TV show or a movie or a book or anything where budgets were seen as this good, positive thing. It was always like– what’s a– is Frugal Fran– is that a thing? Did I just make that up? I don’t know.

MMW

[laughter] You might have just made up something, that’s awesome.

Megumi

Oh, no, it should be Frugal Fiona!

MMW

There you go!

Megumi

[laughter] So you have Frugal Fiona, who’s always just like Debbie Downer type. But it’s like, no, we should be celebrating Frugal Fiona who owns a house and is able to share her financial education with people instead of– and I do think it is partly– I know I’m getting a little bit off-topic here — but especially in America and capitalism and this huge commercialization of everything. And it’s always “buy, buy, buy” everything right now. If you buy this Tesla, it’ll make you happy. If you buy this new jacket, these new shoes, you’ll be happy. And a lot of people also use shopping, online shopping, and overspending as a way to cope. It’s like all of these different things add up to create a culture where budgeting and saving money is either bad or not at all a priority. And instead, spending and making yourself feel good now with these material things is what is supposed to make you happy, when in the long-term, it’s just going to cause even more stress. You get stressed because you have credit card debt, but then you don’t look at it because that’s scary and you don’t want to have to deal with it. So then you cope with it by spending more money, and then it’s this endless vicious cycle.

MMW

That’s exactly right. Yeah. And you make a great point that, yes, our society as we know it, is consumer driven. And literally the plan or the call to action that the large corporations have for consumers is, “Buy now,” or, “Do this before it’s too late.” And I think a lot of us, like you said, really get caught up in this cycle. And what’s more is, I think that the fact that we are– we tend to be more on the materialistic side of things. That really does contribute to a concept that’s known as lifestyle creep. And lifestyle creep, essentially, is something where, as your income increases, through promotions, job changes, or bonuses, for example, your lifestyle also tends to increase or creep up in this case in relation to your paycheck, right? So let’s say you have a job, you earn $60,000 a year, and then all of a sudden you get this mega bonus, and it’s– [laughter] I know. You never know. It might happen.

Megumi

It’s going to happen.

MMW

Yeah. New Year, right? New Year, new changes. New you. And let’s say you jump from $60,000 to $100,000, which is a pretty big jump, but it can happen. And a lot of times, and I know this through my mentorship program, the mentees that I help on their financial paths, they typically increase their spending, their lifestyle, as their income increases.

So here’s a great example. I had a mentee. She had a great paying job. $50,000, roughly. And she had this big promotion, I think, to $80 or $90 thousand. And she needed a new car. And what did she do? She could have gotten a $10,000 used car in decent condition, but she ended up getting a $50 or a $55,000 Lexus, brand new, essentially. [laughter] And it’s like, I get it. You definitely deserve that. She worked really hard in school. She worked her butt off for many years, and she gave up a lot, too. Where most people were partying or going out, she decided to take on a second job, get a roommate, etc. to make ends meet. Sometimes you just have to do what you got to do. But now, obviously, she got this fantastic promotion and wanted to buy herself this really nice car. Unfortunately, I met her after she made the financial commitment to buy this car. Yeah. [laughter]

But I think this is a great story to hopefully pass on to some of your audience, and hopefully your audience gets a promotion. I really hope that. But this story might maybe dissuade some of your viewers to maybe not go for that brand new car. Because cars really do depreciate 20 to 30 percent or more the second you drive a new car off the parking lot. I mean, depreciation is just ridiculous! So you had a $50,000 car, and now it’s worth $35 or $40,000, just because you bought it and you drove it off the parking lot, it’s just ridiculous. So something to combat that– maybe instead of getting a $10,000 car because you don’t want that, you can maybe get something in between, right. So maybe a $20,000 car that’s used. So you get the depreciation out of the way, you still have a decent car. It is nice. And it doesn’t cost you that much, though. And that’s something that I try to help my mentees realize that even though your income increases, you also want to increase your savings rate and your investing rate. Because if you want to become financially independent at a certain age, you do really have to give up at some point your joy, right, or your expenses currently to make your financial goals or your retirement goals, whatever, meet those goals in the future. So, yes, you might have to increase your savings right now and enjoy and reap the benefits of that savings rate.

So let’s take an example. You save 30% on a $50,000 salary currently, and all of a sudden, let’s say, you get a $90,000 salary jump. Well, most people, they tend to keep their 30% rate the same. But we can increase that, right? We can increase that to like 50%. 30-50% savings on a $90,000 salary. Try to live the same way you did before you got that salary increase. And trust me, your investment accounts and your bank accounts will really thank you later.

Megumi

That makes a lot of sense. And I think that, again, I guess it goes back to that consumerism thing and not that you should not celebrate a promotion. That’s awesome and you should go out and celebrate. But this is not just an opportunity to spend more, but an opportunity to save more and to be able to invest more. If you are just continually saving at the same rate as you did when you were at your first job out of college, you’re not going to have that much saved. And I guess we’re going back to the moderation again. It’s not the Lexus or the $10,000 car that you don’t want, but finding a happy medium where you’re still able to get a vehicle that works, that you like, but maybe isn’t as flashy as it could be.

MMW

That’s right. Yep. It’s all about moderation. And I think, again, that comes to you realizing what your financial goals are in the future. So if you do that exercise, right, that we talked about earlier, before you even start a budget, before you start monitoring your income and your expenses, I think it’s really important to figure out what goals you actually want to accomplish in your life. And if you keep referring to those goals that you originally set – your financial goals – then I think making that decision or making that sacrifice is like understanding, okay. I’m not going to spend $50,000 on a new car. Instead, I’ll spend $20,000. But I remember my financial goal, which is going on a vacation this year or retiring earlier than my friends. That’s going to justify my sacrifice in the current day. So, again, it’s always referring back to those goals that you originally set. And I think that will also help you feel better about some of the financial sacrifices that you might be making today.

Megumi

Yeah, I think that makes a lot of sense. And I think that, for some people, they think of savings as solely for retirement and retirement feels so far away for so many of us. And it could be something that you’ve thought about in this vague way just because your company offers a 401(k). So you’re like, “Oh, yeah. I guess I’ll put money in there.” But you don’t think about it in more concrete terms of what do you want your retirement to look like? Do you want to be able to afford this big house somewhere? Or do you want to be able to retire early? Or do you want to be able to enjoy retirement traveling around the world? And what kind of money are you going to need to do that? And on top that, like you were saying, vacations or a house or whatever it is. Kind of these maybe not short, but short to medium-ish goals as well, that the savings can help you achieve.

MMW

That’s right. Yeah, exactly. Those are all life milestone goals, really. And again, a budget is the first thing that’s going to help you. And I actually have a couple– I have four actually, to be exact, types of budgeting rules of thumb that I’ve helped with a couple of mentees. And staying on this track, I think, really helped them accomplish their goals, so I want to share that with you and your audience.

So these four, again, they’re rules of thumb, so they’re obviously very flexible, but it is– it is recommended to stay within these rules of thumb. But again, remember, personal finance is personal, so it depends, obviously, on your situation.

But I’m going to start out with monthly housing debt because I get that question all the time. Like, “How much should I actually be spending on my house?” or “When am I buying too much house?” And it’s a great question because, me personally, I went to college. I had a tiny, tiny, tiny dorm. It was probably like 200 square feet. It was tiny. And when I was done with college and I was actually earning money, I was like, “I want the biggest place I can possibly afford.” So I’m sure others are out there thinking that, too. And I unfortunately, made the wrong decision. I got way too much space for me.

But monthly housing debt? How much should you actually be spending? And the rule of thumb here is, you should be spending about, or a little bit less than, 28% of your gross monthly income. So less than 28% of whatever you make gross per month is what should go toward housing costs.

And just to give you a little bit of background, gross literally means whatever you make. Whatever your paycheck says you made before taxes are taken out, before Social Security is taken out, before your 401(k) contributions are taken out. That’s your gross number — that huge, big number. And then our net, that is the smaller number. So that’s after taxes are taken out, etc., etc. So I just want to make sure I make that differentiation.

Megumi

Yes.

MMW

So the second rule of thumb relates to total monthly consumer debt. So total monthly consumer debt can mean anything from credit card debt to auto debt to student loan debt, etc. Mortgage is also another one. That’s typically less than 20% of net monthly income. So if you have credit card debt, if you have car debt or if you have student debt, that should be less than 20% of your net monthly income. So that smaller number.

Megumi

I have a question for you. Say someone has credit card debt, and I’ve talked about this on the podcast before. Credit card debt is typically quite expensive for people. If someone does have a large amount of credit card debt, that is, say, more than 20%, should they be focusing on putting more money out of savings or some of the other categories in order to pay off this expensive debt?

MMW

That’s a great question. And, yes. The answer is absolutely yes. So assuming, let’s say you hear this podcast, and you’re like, “Yes, I want to make a budget. I want to be able to pay off my consumer debt.” And if your consumer debt is over– your payments are over 20% of your net monthly income, absolutely. I would definitely say, “Tailor your budget.” So again, you look at your expenses. And yes, if you do have some money going towards savings or a 401(k), etc., I think the number one focus should be paying off your consumer debt, so in this case, credit cards. And like you said, credit cards, they can rack up interest rates to 20%, 24%. It’s really high and very, very expensive versus let’s say you used your money to invest in the stock market instead of paying off the credit card debt. Historically speaking, the stock market has returned about 7% in the last 50 years versus credit cards, which cost you up to 24% of interest on top of what you already owe. So the way I kind of think about it is, if I use my money and I have the option between investing in the stock market and earning 7% or paying off my credit card debt, let’s say at 24%, I would go and pay off my credit card debt and I would consider that a 24% return on my investment basically, right, because I’m chopping off that interest rate. So that’s a huge return. So absolutely, definitely go for credit card debt first. Pay that off.

Megumi

Got it. And then in the future make sure we don’t have as much credit card debt.

MMW

Absolutely, yes. That’s exactly right. And then the third point is actually total monthly debt payments. So that includes absolutely everything that you owe in terms of debt. That could be furniture debt payment, right? That includes mortgage debt. It basically includes everything that you owe, and it also includes credit card payments. So credit card is more specific toward your total consumer debt, but everything is included in the total monthly debt picture. And your total monthly debt picture should be less than 36% of your gross monthly income.

Megumi

36%?

MMW

Exactly, yes. And the final aspect, the fourth point here in this budgeting rule of thumb kind of spreadsheet, if you will, is retirement and savings. And I get this a lot, like “How much should I actually put toward my retirement and savings accounts?” And again, the answer really varies. So, for example, in your situation, if there is someone who does have credit card debt, I would probably suggest to first pay off that credit card debt and then worry about retirement savings, just because I would hate seeing someone having to pay 24% interest. But once that credit card debt is at a pretty manageable rate or completely paid off, then I would say, personally, I would love to see people saving and investing their money of about 30% or more of their income. And that is a lot. I know. That’s very high because– everyone’s–

Megumi

Slowly doing the math in their head right now.

MMW

Yeah. I know most rules of thumb, they kind of say between 10% to 15% of your monthly income should be saved and invested. But the reason why my rule of thumb is basically double is because I know that a lot of people, they do want to achieve financial freedom, whatever that means to them. Right? If that means not worrying about money, not having to live paycheck to paycheck, or if that means being able to retire at age 45, whatever that definition is to you. I think that the point is they want to be above average. They want to do something that the average person probably won’t. And in order to accomplish these above average goals, if you will, you do have to do some things that the average person won’t. And in this case, it would be having to save more than the average recommended rule of thumb, which really does lie between 10% – 15%. But in this case, if you want to accomplish your financial freedom goals, you’ll probably have to increase that to 30% or more.

Megumi

Got it. And do you recommend putting a certain percentage of that aside for a retirement account or some sort of retirement savings versus putting some of that aside for more short-term goals? Is there a percentage of the 30% that you’re saving, or 30%+ that you’re saving, that you’re like, “Definitely don’t touch this. This is going towards retirement”? And everything else you can put towards vacation or houses or whatever your shorter term goals are.

MMW

Great question. I think that’s really up to the individual. I can definitely tell you what I do from a personal savings and retirement perspective. So, for example, my retirement plan, I have an employer matching contribution, so it’s a 401(k) plan and the employer contributes up to, I think it’s 3% of my salary, right? So let’s say someone is making– let’s just make this easy –$100,000.00, and the employee puts in $3,000.00. Then the employer will put in up to 3% of their salary, so $3,000.00 in this case. So the employee will have $6,000.00, right? $3,000.00 from the employee, 3 from the employer, which is amazing. And that’s really one of those great benefits from 401(k) plans or other employer sponsored retirement plans. I mean, employers, they actually want their employees to save, and they want to help the employee save for retirement. And one of those ways is by having the employer contribute by making a matching contribution and even some employers provide a profit-sharing contribution. And what that means is if a company in any given year that offers this, a profit-sharing contribution, makes a profit, right, like the name says, the employer typically provides a small percentage of that profit into the employer sponsored retirement plan.

Megumi

Ooh.

MMW

Yeah, it’s pretty cool. I mean, it might just be a few hundred bucks, right? It might not be much, but in the end, a few hundred bucks makes a difference. And every employer is very different the way they set up their retirement plans. But that is another option. So I think, to answer your question, long story short, how much do I put in, or how much would I recommend someone to put into retirement? Absolutely up to whatever your employer matches. So that’s like free money basically. If you put in zero, your employer will give you zero. If you put in $2,000.00 and the employer would contribute up to $3,000.00, well the employer’s only going to give you $2,000.00. So you’re doing the employer a favor. So definitely take full advantage of that employer contribution. Then I would say– I would love to suggest to add as much as possible or even try to max out your retirement accounts because, let’s face it, our generation, are we going to get Social Security assistance when we retire? Probably not. Maybe a little bit.

Megumi

Not looking good.

MMW

Exactly. It’s not looking good and cost of living is increasing. Rent is– everything is just increasing and our salaries have been fairly stable, right? They have not really been keeping pace with inflation, at least not the past few years. So I’m looking at things at a little bit more of a bleak perspective. So that’s why–

Megumi

My episodes have been so depressing lately! I’m sorry guys, I swear it’s not always going to be so depressing. [laughter]

MMW

That’s what we’re here for. We’re trying to help you.

Megumi

Frugal Fiona here!

MMW

That’s right! I mean, so I would definitely try to encourage everyone that’s listening to contribute more towards your retirement plans than normal just because, in the end, chances are you’ll be living off of what you have saved for retirement. So, yeah, I would say if you can do it, 20% toward retirement, absolutely go do it. But the minimum, definitely take advantage of any employer matching contribution. Then the other part is obviously enjoying life and saving that money for a vacation or whatever it is. And typically, that can be, yeah, about 10% or so, 5% -10%. And if you get bonus money or holiday money and you don’t have credit card debt, then use that bonus or holiday money, and use that toward one of those shorter-term goals as you will.