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Financial Independence Thinking, Financial Planning

Create and Live by Your Own Financial Rules

financial rules

Readers, do you manage your finances following some conventional financial rules (of thumb)? If you want to pursue financial independence, in this post I encourage you to do your homework and think outside the box. Don’t always rely on shortcuts when managing your finances.

Each time I get a little sad when I hear on the radio or podcast, or read in a magazine or newspaper publication, or get asked by a friend, “How much should I save each month?”. My immediate reaction is this, “Why do you need someone else to tell you how much you should save? Why should you allow someone else to tell you how to manage your finances? Just so you don’t feel guilty about spending 30% of your after-tax paycheck on disposable things (based on the 50-30-20 rule of thumb)? Why subject yourself to financial rules of thumb that limit your savings rate? Shouldn’t you try to save as much as you can?”

My Views on Financial Rules of Thumb

This is not to say I’m a complete opponent to financial rules of thumb. I understand that not everyone is as financially savvy or financially confident as I am. Hence, for those people, I acknowledge that financial rules of thumb can serve a purpose in their financial planning. Those people need to start somewhere, and financial rules of thumb can give them a good anchoring point. Yes, anchoring point (as you’re starting your financial independence journey), that’s what these rules should only be.

Think of the rules as training wheels on a bicycle. As a child masters more riding skills, it’s important to adjust the training wheels higher off the ground, and keep doing this until the child feels confident riding the bicycle without the training wheels. Similarly, as we progress on our financial learning journey acquiring more financial knowledge, skills and wisdom, we need to leave the conventional rules of thumb behind at some point, and gradually transition into making our own financial rules.

Another caveat I have on financial rules of thumb is this: if you use those rules, remember to treat them only as rough guidelines. Don’t use the rules as shortcuts when managing your finances. The rules should not replace the need to do research, do math, or evaluate if a short-term financial decision is in alignment with long-term financial goals (e.g., “Yes, I can afford to spend 20% on housing, but I can also save extra $500 toward my retirement saving if I only spend 15%”.). As with any rules, always question the rule’s limitations.

Unfortunately, many people take financial rules of thumb at face value. As long they are following the rules, they think they’re doing well financially. And if they would to be saving a little more than the recommended (say, 25%), they think they’re doing great. And why wouldn’t they when they see one financial media article after another from people and/or institutions of authority recommending similar numbers? You can see examples here, here and here.

It’s easy to have other people (or institutions) do the homework for us, and follow the crow when we don’t know what’s financially possible (see here to find out for yourself). Even someone like Joshua Sheats (the voice behind Radical Personal Finance podcast) didn’t take the time to question the 10 to 20 percent savings rate rule of thumb. Despite his in-depth exposure to the personal finance literature and having built a career as a certified financial advisor, it took Joshua years to have realized the connection between his savings rate and the amount of money he had. In this podcast, Joshua shared with his listeners about his own frustrations and what he started doing in recent years as a result of having Jacob Lund Fisker’s Early Retirement Extreme and the Mr. MM article referenced above.

When I learned that even Joshua (whom I admire in the realm of personal finance) at one point used the rule of thumb to guide his savings rate and didn’t even question its limitations, I can only imagine how many other “users” aren’t aware of each rule’s caveats. Yes, Joshua was still saving a good percentage of his income, but according to his podcast, he could have done better. As such, when one applies financial rules of thumb managing his/her finances, the act itself is serving as a double-edged sword. One the one hand, the user does get some forms of boundaries (e.g., what percentage to save). On the other hand, a typical user might not intuitively think about flexing beyond the boundaries and consider other possibilities (e.g., How would my financial situation improve if I save 50% of my income?).

Our Story

Then, there’re people like my husband, who wasn’t aware of financial rules of thumb when he started working full time. This can be a financial disaster for some in the long term if they save only 5% of their take-home income or not save at all (or even have a negative savings rate). It was a different story for my husband. Mr. FL has always been a smart, frugal person. He doesn’t fall into greed and he has very little desires (that require spending money). Even though he didn’t know much about the stock market in his early 20s, he was very good at accounting and he had solid financial goals. So, Mr. FL just saved as much he could toward reaching his financial goals. From what I know of him, even if he had known about the financial rules of thumb, he would’ve never subjected himself to them.

As for myself, I wasn’t aware of financial rules of thumb until I was in my mid-20s (thanks to all the news media exposures on Yahoo Finance). Even after that, I didn’t revise my approach to managing money, especially when it came to savings rate. For one, the rule of thumb on savings rate was too easy for our situation. The recommended savings rate ranging anywhere from 10 to 20 percent of one’s after-tax income, while our savings rate was at least 50% (and as high as 70%) all the years throughout our married life thus far. And we didn’t want to spend more money. Second, we thought it was silly letting some financial rules of thumb dictate how we manage our money. At the time, we were both already financially savvy and we mostly knew what we were doing. We liked the financial progress we were making, and we weren’t going to let some rules of thumb allow us to think twice about how we’ve been managing our finances. This is especially important when (third reason) most of the rules on savings rate were too conservative for helping us achieve our financial goals (e.g., early retirement in our early 50s). Such financial goals were radical in mainstream America, and when pursuing radical goals, it was important that we apply the same attitude (being radical, that is) toward our lifestyles (e.g., maximizing our savings rate).

What I Learned from My Parents

While growing up my parents weren’t the kind that would purposely sit me down and give me a talk about money. And I thought money was just not to be talked about. However, that didn’t stop me from paying attention to how they were living their lives. Aside from having learned about frugal habits from my parents, I also observed (and overheard conversations between my parents) that my parents were very great savers. At the end of each month my parents would sit down and sum up their incomes. Then, they would allocate a pile of bills to pay rent, a pile to pay for utilities, and a pile to spend on groceries and necessary household items. I noticed that they didn’t set aside money to spend on clothing, eating out, or vacation. Those were not necessities in the household. As an adult, my parents’ money behaviors left profound imprints on my relationship with money.

Nowadays, both Mr. FL and I are very happy about our financial situation. And I’d like to attribute a big part of our financial success to having had the smarts and intuitions early on in our adult years to have created our own set of financial rules of thumb. To us, having been oblivious to the conventional set of financial rules of thumb, has truly been a blessing in our household.

Readers, if you’re thinking about or already on the path pursuing financial independence and early retirement (FIRE), you need radical ways of thinking, and live your life accordingly. Conventional financial rules of thumb can hinder creativity or thinking outside the box. If your goal is FIRE, don’t take the easy way and let others do the homework for you. Financial independence thinking is about thinking outside the box and being creative and radical with our money.

In my next post I will share our financial independence journey, and how having a savings rate of 50% or more over the past 8 years (the time Mr. FL and I’ve been together) has been helping us getting close to FIRE. Over the years, we’ve been seeing a strong connection between our savings rates and years to reaching financial independence.

I would love to hear what you’ve to say or add.

Are you aware of some of the conventional financial rules of thumb? If so, when/how were you exposed them?

Do you have your own set of financial rules/mantras/philosophies you live by each day? How have those rules been serving you?

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Financial Empowerment, Girlfriend to Girlfriend Money Chat, Women and Financial Literacy

Girlfriend to Girlfriend Money Chat: The Challenges and My Vision

girlfriend to girlfriend money chat

Part I of Girlfriend to Girlfriend Money Chat looks at some of the reasons women generally refrain from talking about personal finances with those they’re close with. Then, I share some of the internal struggles I’ve been experiencing, my vision for my girlfriends (and other women around the globe) as related to their financial confidence and sense of empowerment, and a plan of actions so that my behaviors align better with what matter to me.

In the same Money Fit Women Study I referenced to in a previous post, the survey also revealed that despite a substantial percentage of women having expressed the desire to become more engaged with their finances, many felt uncomfortable discussing money topics with their friends. Let’s take a look at the statics below:

girlfriend to girlfriend money talk challenges

After reading the survey results, the psychologist in me immediately got to work and started examining the dynamics within my circle of friends.

My Circle of Friends

It’s true that my friends and I rarely discuss our financial situations with each other. I’ve never thought about it this way prior to having read the survey results.

So what did my girlfriends and I typically chat about? Discussion topics usually varied from tips on styling our hair, shopping for a pair of over-the-knee boots, which dentist to go to, who to hire to remodel our kitchen, which tailor to use, how to shop for our significant others, what to wear for a first date, how to cook quinoa, which Netflix show to watch next, how to create a pivot table on Excel, what to wear with a pencil skirt, which bakery offers the best scones, and the list can go on and on. However, our conversations rarely centered around discussing personal finance topics. As most of my girlfriends are currently between the ages of 25 and 40, many of our recent discussion topics revolved around parenting, in-laws, the workplace, health and nutrition, wedding planning, baby showers, personal styles, romantic relationships, career changes, entertainments and leisure travels. We are like a team of experts on those aforementioned topics. Everyone always had something to share and we could all relate one way or another.

Were money concerns just something that didn’t come up? A 2013 Wells Fargo Financial Health Study reported that money is the biggest stress in life for 39% of Americans (survey sampled 1,004 adults, ages 25-75). In the same survey, a third of Americans said they lose sleep worrying about money and 49% expressed regrets about saving and spending in the past five years.

So why don’t we discuss our finances? During all those get-together times, I thought my friends and I didn’t hold back…or at least I thought so until I read about people’s relationships with money and started examining my own life and those around me.

It turns out that in general nearly half of Americans (44%) said the most challenging topic to discuss with others is personal finances, whereas death (38%), politics (35%), religion (32%), and personal health (20%) ranked as less difficult (source).

Sure, my girlfriends and I loved texting each other when we found double coupons or alerting each other when an item had a price reduction. Yet, we had no idea how much each of us were spending on clothes, bags and shoes each year. We’ve causally shared how much we spent on the wedding photographer, our hospital bills for labor, the amount we spend on daycare, or the price we paid for a single bag. But these numbers were readily available. Money was certainly involved, but there was nothing too personal about this kind of sharing. We recommended which CPA to use filing tax returns, but we didn’t share how much tax we owed or how much money we were getting back. We shared how much we spent going on a helicopter ride while visiting Hawaii, but we left out that we also purchased a timeshare during the trip. We shared that we own a house and a rental, but left out that we only paid 20% down payment on each and that we were still struggling to pay off over $50,000 student loans. We bragged that we didn’t have debt, and left out that we were living paycheck to paycheck. We shared that we had health insurance, but left out that we were paying over $700 to insure a family of 4 each month.

Yes, we talked about money, but we always felt hesitant and/or reluctant to fully expose our financial situations. At the same time, very few of us felt comfortable asking another person where the money was coming from or questioned motivations and reasoning behind her financial decisions. Those of us who were listening might have shared a “look” with each other by raising our eyebrows, and the topic of discussion quickly got changed.

My Internal Struggles

I, too, feel uncomfortable discussing my financial situation with my closest girlfriends. Just thinking about it gives me goosebumps. This has nothing to do with how financially savvy I am.

Spread the message. Encourage others to begin their financial learning!

Financial Empowerment, Financial Journey, Financial Planning, Girlfriend to Girlfriend Money Chat, Lifestyle, Marriage and Money, Money Habits, Money Psychology, Personal Finance, Women and Financial Literacy

A Woman’s Financial Responsibilities in Her Household: Part I

In Part I of A Woman’s Financial Responsibilities in Her Household, I discuss some gender generalizations regarding how money responsibilities are handled in a typical household and share with you some introspection regarding my situation during the earlier years of my marriage.

There are many aspects to personal finance and financial planning, ranging from budgeting, paying for a vacation, purchasing a home, purchasing insurances, retirement planning and estate planning. This is important to keep in mind as we discuss household financial responsibilities.

Women and Financial Responsibilities

Gender Generalizations

In most households, the typical stereotype type is that the wife is responsible for balancing the checkbook (e.g., managing the day-to-day budget) while the husband attends to bigger picture financial planning (e.g., purchasing insurances, tax planning and investing retirement funds).

Certainly, there are households where the wife doesn’t participate much in or any part of the family’s financial responsibilities. This was illustrated in a 2013 Fidelity Investments Couples Retirement Study, where two in ten women admitted to having only some or no input into the day-to-day financial decisions in their households. Then, there are households where the wife is the CFO. And in between, there are households where both the wife and husband participate equally in every aspect of the family’s financial situations.

In general, though, women still view managing and balancing the family’s checkbook and budget as a woman’s role. These women believe such responsibilities are traditionally deemed more feminine. Husbands, on the other hand, are more suited to attending to the bigger picture household financial planning, as they are being seen more technical savvy and/or have a higher risk tolerance personality.

This gender generalization around household money management is evident in the 2014-2015 Prudential study on Financial Experience & Behaviors Among Women. The study reported that women respondents ranked themselves highest on their knowledge of managing debt and managing money (about 30% gave themselves an “A”) and lowest on their knowledge about generating an income stream in retirement and investing (less than 10% gave themselves an “A” and many gave themselves “F”). Such findings certainly give some insights into what women in general value and do well at when it comes to financial responsibilities in the household.

Many of my married girlfriends recalled their mothers taking care of the family’s basic day-to-day budget. Once married, my girlfriends just automatically followed their mothers’ footstep when it came to managing finances in their own households. Yet, when it came to their household’s bigger picture financial planning, many of my girlfriends didn’t have much of a clue.

For instance, some didn’t know all the various liabilities they have, some didn’t know all the different retirement accounts their husbands have, some didn’t know if their husbands received stock options as part of the compensation package, some didn’t know how much their husbands were putting into their deferred tax accounts, some didn’t know what their car and/or home insurances covered (or would not cover), some didn’t know if their husbands had disability insurance, some didn’t know how many brokerage accounts they had, many didn’t know what universal liability insurance is, and the list went on and on. Their husbands were taking care of those responsibilities and didn’t always involve their wives in the process, either consciously or subconsciously.

Throughout those conversations and discoveries many of my girlfriends expressed a lack of time to spend on long-term financial planning. I could relate in many ways. Like my girlfriends, I was happy filling my day with work, childcare, household chores and exercises. I enjoyed spending time planning social events for myself and my family. I took pride in doing interior decorating, planning for holiday gatherings and shopping for the lowest bargains (extremely time consuming).

When would I have had the time to learn about investing in the stock market, keep track of my family’s investment portfolio performance, peruse through the IRS website to reduce family income tax, learn to calculate how much life and/or disability insurance my family needs, or work on estate planning with my husband?

I’m sure if my life situation forced me to I would have done all that and perhaps more, however, my husband was taking care of all those financial responsibilities so that I didn’t have to. We were each great and efficient at what we “owned”. That was the whole idea behind the concept, division of labor, right? At least I thought so.

Spread the message. Encourage others to begin their financial learning!