Okay, this may be one analogy too many, but stick with me here…..
Good Health = Diet and Exercise
My exercise of choice is running. When you run enough, you begin to see things through a bit of a “lens of running.” It seems just about anything can be made analogous to running.
My standard diet and my running mileage tend to be pretty balanced these days, which keeps my weight fairly consistent. I find that when I am presented with “splurge food” — cake, ice cream… really anything chocolate is an achilles heel for me) — my brain often processes it in terms of running.
One piece of chocolate cake with frosting = about 400 calories = 4 extra miles of running
For every falter from my standard diet, I need to make up for it with additional exercise (extra miles).
Once you start looking at chocolate cake as extra miles (and, therefore, extra time away from your family), it becomes much less tempting!
But, if I decided to increase my mileage an extra 20-miles-a-week, I might not think too much about a piece of cake (or two… with ice cream). Hopefully if my miles cut back later I have the fortitude to reign back in those extra calories!
Sports work exactly the same. Pick your favorite sport — for me, it’s college football.
Every point the defense gives up is another that the offense needs to make up for.
If your offense scores eight touchdowns in every game, your defense can probably afford to relax. But, if the quarterback gets hurt and those TDs stop coming, will the defense still have what it takes?
On the other hand, if your defense consistently holds the other team to single-digit points, it won’t take much offense to get you to a bowl game.
Hopefully you’re still with me — here’s where it comes together.
This offense and defense mindset is how I think of the daily back-and-forth of personal finance. Offense — that is, your income (cash money) coming through the door — is vitally important. You can’t put dinner on the table for your spouse and kids without an income. But, it is your personal finance defense that dictates how far your offense takes you.
Defense – Start with your reoccurring expenses
Review your budget (you do have a budget, right?). Reevaluate everything.
- Get out of debt ASAP. Compound interest works both ways – the way it works with debt is it steals your future.
- Have two car payments that are bleeding you dry every month? Can you sell one or both cars and get something more affordable (consider the Financial Samurai’s 1/10th Rule for Car Buying – yes, that means that if you make $50K/year, your car budget is $5K)?
- Can you “cut the cord” and ditch cable? How ’bout NetFlix? Do you need that? If you are an Amazon Prime member, check out the included video collection – not perfect, but probably good enough for you to say goodbye to Netflix.
- Cell phone bills are a big one (our bill with Verizon was about $135/month, we switched to Google’s Project Fi and now average about $60/month (and have better international coverage too!)).
- Set your thermostat lower in the winter (yes, it is okay to wear a sweater in the house) and higher in the summer.
- Eat at home by default. Pack your lunch for work.
Defense – Save First
Limit the amount of money you have to make bad choices with. Ratchet up your 401(k) savings (if your employer offers a 401(k)). Utilize multiple direct deposits or scheduled transfers and setup funds to automatically route to paying down the principal on your mortgage or investing in your IRA.
Defense – Figure out your “take home” hourly rate. If you know your effective tax rate, use that. If not, for our purposes, use 25% effective tax rate.
Hourly Pre-Tax Wage X (1 – Effective Tax Rate)
Gross Salary / 52 (weeks in a year) / Average hours-per-week X (1-Effective Tax Rate)
Hourly Example: $20 per hour X (1 – 25%) = $15/Hour
Salary Example: $40,000 per year / 52 weeks / 40 hours-per-week X (1 – 25%) = $14.42/Hour
Defense – Make good choices
The next time you’re presented with a purchase — say, going out to lunch with colleagues at work for $15 or buying the latest $750 Apple iGadget — do some quick head-math on how many hours of your life, away from your family, that will cost you (at $15/hour, the lunch will cost you one hour… the iGadget will cost you fifty hours!).
Yes, these choices really matter. Let’s look back at that $750 iGadget again to see why. If instead of buying that iGadget, you make one similar ($750) good choice every year for 30 years and you can:
- Pay off a $250K, 30-year, 5% fixed rate mortgage almost 3-years early and save almost $27K in interest!
- End up with almost $76K in a Roth Individual Retirement Account (IRA) that you would not have had otherwise (assumes a 7% rate of return).
Again, both of the above examples are from making a single good choice that redirects $750 from something you’ll want to throw away in two-years anyway, to building real value for your future.
Think the iGadget is an extreme example? You can also get that $750 by skipping that $15 work lunch once a week for a year ($15 x 50 weeks = $750). Yes, not going out to lunch one day a week for 30 years can not only save you $22,500 – it can also turn into an extra $76K in retirement savings.
If that is what you can do with one good choice (“Man, that iGadget is nice, but I’d have to work for 50 hours to pay for it… and instead I can put that money towards my family’s financial future and triple my money”), imagine the future you can build for your family with two, or three… or ten good financial choices a year. You don’t have to be perfect (everyone has that piece of chocolate cake every now and again… and even the best defenses get scored on) – but strive to be consistently above-average and use the value of those good choices to positively impact your family’s future (don’t just let that extra money sit there waiting for your moment of weakness – turn it into an extra principal payment on your mortgage or deposit it in your Roth IRA)!
In finance, this is called “opportunity cost” – what you could have done with that money if you hadn’t used it for something dumb.
Offense – Put some extra points on the board
Generally, most people have a lot more control over their defense than their offense. I am a salary employee and cannot make more money simply by working more hours at my current, full-time job (though I hope that the hours I put in equate to quality work and value to my company and that will equate to a higher salary when merit increases come around). My wife, on the other hand, can earn extra money by picking up extra shifts. Again, personal situations will vary and you have to balance the value of the dollars earned against the time away from your family.
Here are some ideas for putting extra points on the board (or extra miles in the bank, if you prefer that analogy):
- Work overtime, if available. 1.5X your usual hourly rate tends to make this the best route for those able to take advantage.
- Ask for a raise or get a better paying job.
- Rent a room in your house.
- Take on a part-time job or side-hustle (drive for Uber or Lyft, babysit via Care.com, grab some work on Elance if you can code, create digital art or have accounting skills to offer).
When your offense falters
Consistent, good defense (often called being frugal or “living below your means,” though I dislike this phrase) is really just Living Middle Class. The great thing is, these choices are largely under your control.
No matter how safe you feel your income is, remember most people don’t see an income loss coming. This might be that your company is purchase by a competitor, they decide to outsource your function or department (happens quite a bit in IT, but also in other places you might find surprising (such as a hospital emergency room deciding to have a private physician group staff their emergency room – yes, doctors can get laid off!) or they simply go out of business (yes, I’ll in reference Enron). It also might be something worse – like an auto accident that leaves you unable to do your job. In any of these cases, your next job (assuming there is a next job for you) may be a significant pay cut.
If you were spending 100% of the combined income you and your spouse were bringing in, you and your family are in trouble the minute you lose one of your incomes (or even part of one)! Some of this is not having savings to fall back on (if you were spending 100% of your income, it is impossible to save) but even more so it is that the bills you’ve signed up for (when you said “I can afford it”) that will keep coming in even if your income falters. You were were playing for a tie, your quarterback got hurt and your defense is too soft to step-up. You were having ice cream for dinner every day because you were running 60-miles-a-week, but then you tore your achillies… and you’ve still got that sweet-tooth!
Every dollar that you send out the door is another point you have to put on the board or another calorie you have to burn. Guard your dollars. Protect them. Fight for them. Get some extra when you can and put them to good use. Finally, remember there are no guarantees and your income can take a hit at anytime (this, literally, keeps me up at night) – so keep your expenses low, your cash flow positive and your defense sharp!
What do you do to limit your spending in our consumer-centric society? Do you have recommendation for a way to increase income? Share with the rest of the class!