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One of the biggest jokes in the world of personal finance - if only you stopped buying Starbucks every day you’d be rich. If you’re on Twitter, Douglas Boneparth has some great digs on buying coffee.
The reality is:
$5 coffee x 365 = $1825
Even if you bought it everyday, two thousand dollars a year isn’t going to change your life. The other reality is that sometimes it’s that coffee that literally gets you through the day - an extra pep in your step before a big meeting or a quad shot to help those eye bags because your kids kept you up all night. Just buy the damn coffee.
Here are the three areas you need to pay attention to before cutting your Starbucks or Dutch Bros habit.
Transportation
Forget The 2021 Model…
You knew it was coming. You don’t need to be driving the latest and greatest model car to and from work to impress people you don’t care about. Your car is a mode of transportation that should be reliable and meet the needs of things you actually do. It’s unfortunate our consumer culture has facilitated a constant trade-in and up mentality where you never actually own anything; it’s all rented.
Look at your phone for an example. Did you notice a few years back when you didn’t get the 2-year pricing anymore and you pay full price for the phone in monthly payments? At that same time, they introduced the option to trade into the newest iPhone when half of your first was paid off. Convenient. They know that and got you on the hook.
The same can be said for cars. Leases are equivalent and unfortunately are getting more and more popular. Be in the latest and great model, for what? Find something reasonable, pay a fair price for it, and take care of it.
Apple is rumored to be working on a car. If its model updates are similar to the phones, they’ll be selling people on the latest model with a half inch bigger screen and a better camera.
Car Loans
Auto loans are a great way to build your credit when you’re just getting started, but for the same reason can be incredibly dangerous. A few years spent in the military seeing 18 year old kids finance chargers and corvettes at over 20% interest showed me just how dangerous interest can be.
Sadly it’s very true.
A couple hundred dollar a month car payment can be a large portion of your take-home pay. You shouldn’t be paying more than 8% interest on any loan. If you are, you either have bad credit (which is okay) or didn’t shop around well enough. If you have bad credit, I wrote a piece explaining credit and how to build a great score which you can read here.
If you have a car payment, have been making steady, on-time payments for a year, it may be worthwhile to look at refinancing. Right now is a favorable time to be refinancing with historically low interest rates.
A friend of mine earlier this year recently took his interest rate from 6.24% to 3.24%, a year and three months after getting the car. Let’s look at the difference this makes.
$20,000 at 6.24% interest for 60 months = $389 payment
This makes total cost of the loan $23,334 (including interest). Let’s say he makes a year of on time payments bringing oustanding balance to $15,332 at which point he refinances at 3.24%.
$15,332 at 3.24% for 48 months (assuming same pay time) = $341 payment
Total cost of this new loan is $16,368. If we add that to the $4,668 we’ve already paid, the total cost of both is $21,036 or two thousand dollars cheaper than the original. Big difference!
That two thousand gives wiggle room for the fee that will be tied into refinancing.
Now you shouldn’t always refinance just because you can. The reason being is fees. Refinancing requires more money out of your pocket so you can save money.
The comparison you’re making is whether the amount you pay in interest with your current loan is more, less than, or equal to the amount you would pay with the new loan PLUS the fee. If you can get an interest rate that is at least 1 percent lower, it’s probably worth refinancing. Anything less, wait some more time and keep making payments and trying again later.
Shelter
Another monthly expense that takes up a huge part of your take home pay is where you live! When finance folks make recommendations on budgeting, rent/mortgage is never more than 40% of your income.
This guy might be living a little beyond his means.
A few months back I was having a conversation with a friend about plans after graduating college. He expressed interest in moving to an area where some family had moved but was concerned about prices. The following example explains how important location arbitrage is!
If you have $1500 a month to commit to renting every month, that will get you a lot further in terms of home amenities in a place like Michigan than it will in New York City. There’s a whole tribe of people that take work from home jobs in the US but live in cheap countries like Thailand where it costs a few dollars a day to live.
You can’t always choose the place you live, but keep in mind the burden of living costs if you’re anticipating moving.
Refinancing A Home
In the advent of low interest rates, many Americans have been opting to refinance their home to get a better rate. Now is a great time to do that, not only lowering your payment but lowering the total paid over the life of the loan.
Similar rules apply here when it comes to refinancing. Because refinancing requires a fee which usually represents a percentage of the dollar amount, they can get quite large when it comes to a few hundred thousand dollar homes. Let’s look at another example.
$300,000 home financed for 30 years at 4% = $1432 monthly payment
Total loan cost = $515,608
Let’s say you’ve paid diligently for 10 years on the home and can now refinance at 3%. Your new payment will be $963, which on another 30 year loan will save you 93 thousand dollars!
This chart shows you breakeven around year 4 and everything after that is gravy!
If you can get an even one percent better interest rate on a home refinance, you should do it. Nerdwallet (chart pictured above) has a great refinancing tool that shows you potential cost savings. Check that out here.
Your Work!
One of the last and probably easiest things you can do revolves around your work! This is all about knowing your worth!
Know.your.worth.
But really - knowing how you fit a role and why you meet or exceed the listed qualifications is critical to upping your salary. You can do that in two ways.
The first is applying for jobs. I, no kidding, have probably applied for 150 jobs since the beginning of this year. It’s pretty much been terrible, but I’ve learned a ton about the job market in my perspective space.
Understanding salaries for different roles based on requirements can help give you an idea of what the ‘going rate’ is for a position. When you’re made an offer, you can confidently suggest that based on XXX other jobs, you should be paid this much.
Now, if the job is offering 50k and you’re wanting 100 - that probably won’t happen. But it’s important to understand that job offers are negotiations. Even entry-level job pay has wiggle room and knowing your worth as well awareness of similar roles can help you eke out a little more dough.
Why is this important? Well for starters we like more money. The real catch here is that all you have to do is ask. What’s the difference between two people coming into the same position, one being paid 50k and the other being paid 52k? A better negotiation. A simple counter for extra 2 thousand dollars a year will pay for entire years’ worth of burnt frappucinos at Starbucks with literally no downside.
Ask for more - you deserve it.
Second, and in a similar vein, is raises. Many companies incorporate raises into pay structure but a lot do not. If you’ve worked the same job for two years without any pay change, ask for a raise! Again this type of request is best if backed by knowledge about how you fill the role and other positions, but there is virtually no downside to asking for a 3% raise because of your fantastic work, assuming you do good work
A great way to pitch yourself for raises is knowing what you’ve accomplished at a place of work. In the Navy, every yearly evaluation we had to write up what we had done over the past year. The verbiage always made it sound like I did a lot when in reality all I did was mop the hallway of the ship.
Pictured: Me
The evaluations we did always sounded like this; “Supervised 1500 man-hours leading to the complete repair of 63 units which helped us end the global war on terrorism”. How could you not get a raise from that? Keep track of what you do, even if you have a simple job. Knowing how many burgers you flipped at a fast food joint gives you all types of leverage when it comes to negotiating pay.
Takeaways
It’s not the small things that get people in hot water with their finances. It’s the big stuff. Owning a car or house you can’t afford can get you over your skis real quick. Buy something reasonable for your needs and refinance when it makes sense. Also, while saving money is good, there’s a floor where you can’t cut expenses anymore. Use negotiation through industry knowledge and tracked accomplishments to work your way into higher pay.
As ALWAYS - the goal of this newsletter is to help people. This is a one-way communication, but it doesn’t have to be. If you’re struggling with budgeting, want an opinion on a specific issue, or want to talk investing, drop me a line. Reply to this email and it’ll get right to my inbox. I’m here for you.
Talk next week
~Brock
Finance is hard for everyone, especially people not interested in it. Learning about personal finance and investing is my fiery passion and I’m trying to share that knowledge with other people looking to learn and improve. If you found something helpful here, the best way you can thank me is by sharing it with someone. Can you give me a hand?
