The Golden Rule of Personal Finance

by RickJWagner • 4 years ago

56 111 4 years ago

mattw212112• 4 years ago

I'm a happy user of You Need a Budget. If the golden rule is "Spend less than you earn", the practical way to achieve that is "You Need a Budget".

I use YNAB because it works for me, but I've used paper and spreadsheets in the past. The key is having the budget so you can understand where your money is going. You aren't always going to stick to the budget, but by paying attention and classifying all expenses, you can better understand things going forward and then plan better.

I don't care if you make $35K a year or $350K a year, you need a budget.

onetimename2• 4 years ago

As a former user who switched to Amex credit cards for all spending, it’s key benefit of automation is ruined.

I don’t think it’s entirely YNAB’s fault. But having to manually input each credit card transaction doesn’t make me feel it’s worth the monthly charge. Then it just becomes a spreadsheet.

EDIT: that is— the lessons are excellent and the mindset is important. But it’s monthly cost is another issue.

mattw212112• 4 years ago

(I'm not here to promote YNAB, I promise I'm just a happy user and not affiliated).

I use my AMEX for 90% of all spending. No issues importing transactions to YNAB. Sometimes there is a 1-2 delay, but they do import.

bambataa• 4 years ago

Why does using Amex stop you using YNAB? Syncs fine for me.

lotsofpulp2• 4 years ago

If the golden rule is "Spend less than you earn",

If that is the golden rule, then the platinum or diamond rule is to earn at least $x. There exists a lower limit under which certain parts of life are simply not affordable, such as saving for retirement, healthcare, education, children’s education, etc.

I don't care if you make $35K a year or $350K a year, you need a budget.

At $35k, I imagine everything coming in is going out. You really just need to focus everything on increasing income. For people in the USA at least.

Actually, because of cliffs in the qualifications for government benefits, the rule might be earn less than $x or more than $y, but not in between.

trey-jones3• 4 years ago

Increasing income is what you might be able to do in the future. Spending less than you earn is what you can do right now to keep the hole from getting deeper. The author is correct. It applies at all income levels. When I read the title of the article, I instantly knew what the golden rule was, because it's obvious.

If you make $35k, it is still possible. It might not be comfortable, and that seems to be the great success of capitalism in the 21st century: convincing people that they shouldn't ever be uncomfortable, or that they can't be without certain items or experiences that they most certainly can be.

Increasing income is great. Literally (almost) everybody wants this. There is high demand for increasing income. The supply is part of the issue, and the cost of increasing income is the next barrier. Bettering your situation takes effort, either to decrease your spending, or to increase your income. Doing both at the same time takes double the effort.

The last thing somebody making $35k (or $25k) needs is some provincial yuppie zoomer saying to them "Just make more money lul". It doesn't help anything.

wisnoskij6• 4 years ago

"here exists a lower limit under which certain parts of life are simply not affordable"

You do realize that like half the world lives in under a dollar a day right? It is expensive to live in the west, and technically you are right, but people even manage to have an apartment, etc, etc, etc, in NY city and live on $100 a month.

People spend money mostly to signal to others their wealth, and secondly to save the brain power it would take to find free alternatives. 35k is just so far below your income it is the furthest you can image or have acquaintances at that level. But if you make that, you would have some other arbitrary number where it was not affordable to live under.

tejohnso• 4 years ago

I don't care if you make $35K a year or $350K a year, you need a budget.

That's a catchy thing to say but if someone is making $350K a year and easily saving / investing six figures annually without a budget, telling themn they need a budget sounds a bit absurd. I'd say the further you are from being able to invest / save sufficiently for your long term goals, the more a budget will help you. Admittedly, not nearly as catchy.

mathgeek• 4 years ago

If you have income automatically set aside for investments and savings, you already have a lightweight budget in the form of "I set aside X% or $Y every month and the rest is discretionary."

vladvasiliu• 4 years ago

I think it can be useful even if you're able to save / invest "easily".

I'm in that situation. I'm fairly thrifty and don't spend much. But after looking back over my spending, I've realized there was enough useless crap that I could cut out. For example, I realized I was spending an enormous (to me) amount on lunches at work, though it was nothing fancy. It's just that I was working in a rather touristy / "rich" part of town, so aside from a pastry, everything was above €10. I started packing my own lunch most of the time and the cost went waay down for no discernible loss.

Bonus points for eating less and losing some weight, but that's a different story.

avereveard• 4 years ago

You need a budget at any income level. Saving more early means early retirement because compound interests stack well over years and years.

Or can save some hardness as you reach 55plus, when getting employed becomes harder but state welfare is still 10 years down the line.

An habit to budgeting helps because people aren't always top dogs.

mattw212112• 4 years ago

You just demonstrated that a high earner has a budget to invest a certain part of their money. I don't disagree that as your earnings go up that the budget can become higher level.

stewx• 4 years ago

Budgets are not needed if you pay yourself first (i.e., save towards your goals as soon as you are paid) and only spend the money you have left over. Then you can't go into debt and you are meeting all your goals.

CGamesPlay• 4 years ago

Plans aren't needed if nothing ever goes wrong. What happens on the day you can't pay yourself first? That's what the budget should answer for you.

samsolomon• 4 years ago

Yeah, the reverse budget. I'm a fan of this. It might not be quite as efficient, but there's almost no mental overhead.

remram• 4 years ago

That sounds like a budget.

wisnoskij6• 4 years ago

I think this misunderstands the point of a budget. A budget is not primarily designed to develop a growing savings account, tho that is a very good side effect.

A budget is designed so that when the rent becomes due on the 29th, or you are hungry and you want want to consume food on the day before your paycheck comes in, you don't discover you have $2.50 to your name.

You could put money aside for food every day, and for rent, and utility, as well, and that would be called a budget. IN fact just paying yourself first, is just a really simplistic underdeveloped budget.

mattw212112• 4 years ago

You literally just described a budget.

spywaregorilla3• 4 years ago

I feel like if I needed a budget, that'd be a sign that I'm probably being too careless with my money to begin with.

mattw212112• 4 years ago

I feel like if I need to do any design work, then I must be too careless of a coder to begin with.

P_I_Staker2• 4 years ago

I would like to do better financially, but don't care for budgets. Often, I find that I'm unable to make a purchase, due to those pesky buggers.

For example, I'm about to take a trip to Europe, which would never have been possible if I had "budgeted".

mattw212112• 4 years ago

I've taken many trips and budgeted for all of them. I plan in advance or if I feel like doing something spontaneous, I reallocate money from another budget item or from my discretionary bucket.

foogazi3• 4 years ago

I'm about to take a trip to Europe, which would never have been possible if I had "budgeted".

Curious why ? Sounds like the same thing

foogazi3• 4 years ago

For years I used YNAB and encouraged family to use it too

Then I got into FAANG and switched to buying whatever I want and fully pay off credit cards every month

UNTIL my wants got bigger and bigger - last minute vacations, concerts, a lot of “experience” stuff coming out of covid lockdowns

And now, RSUs are down , I spend more than I bring in each month, started drawing down on cash savings - YOLO - still driving a Camry though

I need a budget again

francis-io• 4 years ago

I can also recommend moneydashboard.com. I load in multiple banks and credit cards, it will update all my banking transactions via api into a central view. I can set a budget for each type of expense and it all just seems to work.

SanjayMehta4• 4 years ago

My rules were:

1. Always pay off the credit card bill every month. Completely.

2. Mortgage payment < 40% of take home salary.

3. Buy the cheapest new car you can afford and run it as long as possible.

4. Never buy branded clothing unless on sale.

5. Maintenance costs less than replacement.

In summary be a cheapskate and ignore the neigbours with expensive doodads.

jleyank• 4 years ago

I am not sure that trying to fix modern appliances is really (or even on paper) cheaper than replacing them. Maybe for the expensive models, but the lower end units seem to be “use 5-10 and replace”. I worry that the fancy/modern car electronics will push cars into this category. Carmaker motivstions don’t align with mine.

throwaway6977• 4 years ago

Modern appliances are designed with parts that fail easily and are just slightly too difficult, or dangerous, enough to repair on your own. Usually it's a plastic connector of some sort that will have an easily calculable time-to-disintegration measured in years.

For instance, I just fixed a 2c plastic clip that pretty much made my microwave unusable by virtue of the door being un-openable. In order to do so, I had to have my fingers about 3 inches away from a bare wire transformer which near totally obstructs what should be a very simple fix.

Plenty scary and dangerous enough for me to have to call the manufacturer and find a certified local repairer...

cbm-vic-20• 4 years ago

If your appliances are low-tech enough, and you have access to YouTube and don't have hand dexterity issues, you don't need to replace or even pay for a service visit. I've fixed a clothes washing machine when its belt seized. That was $17. My refrigerator was no longer staying cold: a $50 controller board clone from eBay works great.

bombcar7• 4 years ago

It depends on the appliance, and yeah, the cheaper ones are often NOT worth fixing if a major component breaks, but ARE worth fixing if it is a minor component/known issue. Youtube is great for this - search "model number" "problem" and if there's a video on how to fix it, it's common enough that the part is probably cheap (think ignitor for a dryer/oven, etc).

Friend had an older washer with a giant "timer dial" that was cheap to fix - the new dial cost like $50 and was simple to replace. A similar washer that I had had a single plastic part that held the dial in place break, and the only way to fix it was either bolt some metal strapping around it (which I did) or buy a new faceplate at $350 (+ shipping) - that's half the cost of a SpeedQueen (which I eventually bought when the pump crapped out. The SpeedQueens don't change year to year and they're basically laundromat machines so they're very repairable.

If you do decide to replace an appliance, there are people that will take away the old one for free, because they will repair and resell if possible.

mattw212112• 4 years ago

I'm with you on all of these except the mortgage/rent payment. 25% should be the goal IMO. I know it can be tough, especially at lower income levels. My solution for that is, if your income can't afford it then you need roommates.

jimmaswell2• 4 years ago

The housing market is cooling somewhat, but 25% is still pretty hard to hit today unless you're a high earner in a low COL area. I'm at 26% take home doing WFH in rural New Hampshire. Likely not practical if you live anywhere more urban than that. Rent or mortgage up to 50-60% is more common today.

fuckstick3• 4 years ago

mortgage/rent payment

These are not the same at all.

25% should be the goal

I think 70% should be the goal - why? Because I pulled it out of my ass. Do you have a sound financial explanation for this benchmark, because it sounds like arbitrary dick sizing.

60% of income on a mortgage in a relatively stable area without insane property taxes is likely a very prudent allocation of income, since you both have a good investment and a place to live. Spending 60% or even more of income on a mortgage may well be better than 25% on rent.

Another thing, 25% of income is very different at $30k then it is at $300k. This is something the budding personal finance advisor should understand.

then you need roommates

Is that what you’re going to tell people in their 30s with kids?

bombcar7• 4 years ago

What happened is the banks had a rule "total debt payments cannot be over 30%" years and years ago, based on their understanding of many customers and bankruptcies and such.

Over time this became "spend 30% on housing" which, if you think about it, is kinda insane. It's obviously a rule of thumb that doesn't fit directly to everyone (should Musk spend $720 million a year on housing? Should you buy a new house every time you get a raise/change jobs?).

It's like the "renting is throwing away money" - it's a marketing tagline that has become gospel truth somehow. There are times for renting and times for buying and each situation should be evaluated to the best of your ability with the knowledge you have.

ehnto8• 4 years ago

I would add, if your city permits it, buy a bicycle, or take public transport. You can have a car too, but every single trip you don't do in it is money saved. Kids are calling this "low car", in contrast to no car. Car dependence sneaks up on you, one moment you're a teenager with no costs the next you've got thousands a year in running costs and you're wondering where all your money is going. Fuel costs become non-negotiable, and maintenance is both hidden and a Russian roulette as to whether or not something major breaks.

Every time you don't drive the car, you play the maintenance slot machine one less time, and the accumulated effect of lower maintenance costs and lower gas is non-trivial.

The other thing I would add is to be honest with yourself, add up the car costs, rego, gas, tires, the maintenance schedule (you have a schedule even if you don't follow it). Your $20,000 dollar car probably costing you thousands a year.

jimmaswell2• 4 years ago

Even better, an e-bike. There won't be so much friction to getting yourself to use it, especially if you have hills that would be insurmountable to the untrained leg.

Tade0• 4 years ago

My father was "low car" before it was cool.

He bought his vehicle new and put 144k km on it over the course of 22 years.

Of course that was only possible because there was a public transport network in place.

I, after an initial period of driving long distances, sort of followed in his footsteps via remote work and getting groceries delivered - the latter feels like cheating though, since that's just someone else driving instead.

In any case I can't recommend this enough. Cars are amazingly useful, but when used daily costs pile up quickly.

wisnoskij6• 4 years ago

I feel like such a huge part of the cost in a car is completely upfront and if these "low car" people calculated how much they are spending per km driven, they would have a stroke and sell the car.

jfk132• 4 years ago

Also,

6. Learn to cook. https://www.bbc.co.uk/food/collections/1_dinners

And make your own coffee.

ehnto8• 4 years ago

I am actually embarrassed by the amount I spent on coffee before getting a machine. At $5aud a coffee, 3 per day, $15 a day, 233 work days in a year, $3,495 per year for 10 years, $34,950AUD. My esspresso machine cost me $500AUD and a bag of beans that does 60-70+ coffees costs me $15. Idiot!

elboru• 4 years ago

As a kid I felt my family was “poor”. My uncles and aunts had bigger and nicer houses/cars than my parents. My cousins had really cool toys and they rarely got a no when they wanted an expensive candy. My foolish child mind saw all that and thought we were “poor”. What I didn’t know was that my parents had bigger salaries than their relatives. They just didn’t give a damn about expensive stuff.

Later in life the same relatives struggled really bad when their incomes decreased, and they weren’t able to afford the lifestyle they were used to.

My family in the other hand never really went through economic struggle (at least it was not apparent to me and my siblings) even when my father lost his job and took him 6 months to get a new one.

My parents now live in a really nice house but they still have the ugliest and oldest cars ever lol. But that always reminds me to not fall for expensive stuff just because I can afford it.

harimau7772• 4 years ago

I would probably change 4 to "Never buy clothing because of the brand". If someone cares about clothing then buying high quality, well designed, and fashionable clothing makes sense. Unless the clothing is custom made, which is generally even more expensive, that means that the clothing will be brand name.

SanjayMehta4• 4 years ago

Most branded clothing is made in the same factories ("sweat shops") here as the no-name versions. I'm wearing a pair of jeans which cost me INR 500/- versus INR 2000/- on amazon (the retail price is INR 4000/-).

Balgair2• 4 years ago

Oh gosh, I feel like a dirty peasant here. Those rules (to me) are a fair bit high living. For my personal tastes, I would edit it to:

2. < 25% of net pay

3. NEVER buy new, only buy used, drive it into the ground and smoking

4. NEVER buy new, only buy via a thrift store (except undies and socks, buy those cheaply)

SanjayMehta4• 4 years ago

Buying a used car could have the downside of unexpected repairs.

jaimebuelta• 4 years ago

From David Copperfield, by Charles Dickens

Annual income twenty pounds, annual expenditure nineteen nineteen and six , result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery

parenthesis2• 4 years ago

The Micawber principle. (It seems there are two; the other is "Something will turn up".)

noneeeed• 4 years ago

You've reminded me that I need to watch the Armando Iannucci version of that again, it was such a good film with an amazing cast.

jsw97• 4 years ago

Don't pay fees.

SketchySeaBeast3• 4 years ago

Ironically for stuff like bank fees they require a minimum balance, so you're paying fees because you can't save as much and can't save as much because you're paying fees.

parenthesis2• 4 years ago

"If in doubt, spent nowt" is my principle.

You'll soon notice the discomfort of doing without a purchase you do need (so now you can buy it); you won't notice the lack of something you don't need.

helpfulmandrill• 4 years ago

This is like "eat less than you burn". True but completely unhelpful.

sgt101• 4 years ago

If you are smart you will spend less than you earn over a long period

To achieve this you need a plan. The plan can be responsible and also contain periods of spending more than you earn.

This will allow you to invest in your life, and the lives of the people that you love. For example, go on holiday with your kids while they are kids. This could cement relationships (not just with you) that will be really important in their (and your) lives. Another example; do the job that's a spring board, but lower paid than the job you really need. Ok, so you run up some debt - but you get access to your future career.

Education is another (more controversial) one. I invested in my education when I was young, but I am from another era and I am well aware that what young people are asked to put in for a doctorate now is just unbelievable. It paid off for me, it may not pay for you.

themodelplumber• 4 years ago

I would add birth circumstances to your pile, somehow.

For decades I spent wisely and executed on a plan while donating 10%+ of my gross to the megachurch into which I was born. Everybody in the church, including my parents, said it was an investment.

Spoiler: It was not

I still wonder how this could have been effectively communicated to me at an earlier age...the church teachings I received were designed to inoculate against outside opinions. When I joined the ranks of leadership myself, I also taught others to pay "God" before paying themselves.

By the time I stopped paying, I could have used my own donated funds to retire twice over.

kritiko• 4 years ago

Many religions include tithing as part of their teachings, and the Effective Altruist movement has adopted it. If the funds are directed well, it's an investment into the community and to charity. (And if a disaster befalls you, hopefully the church would come to your aid, so it's a kind of insurance...)

pelagicAustral• 4 years ago

I’m so bad at this game it’s appalling. I generally scapegoat my lavish shenanigans with the excuse that I’m single, no partner no kids. Live far away from family and in general I don’t think I’ll make it to retirement age anyway.

shireboy• 4 years ago

I scapegoat my over budget spending with the excuse I’m married and have kids :)

quanticle3• 4 years ago

One piece that's missing from this essay is the role of one's friends and family. When I had to replace my car a few years ago, I chose a modest Subaru. I was asked repeatedly by people in my social circle why I didn't chose something flashier, like a BMW or a Mercedes, because I was a software engineer now and "you can afford it, so why not?" Or, equivalently, "What are you going do with all that money, anyway, if you aren't spending it, you should give it to me." The idea that someone else can choose to spend less than they earn is very alien to a lot of people.

bombcar7• 4 years ago

You can always imply that 'alimony' or something is taking the majority, most people will quiet down at that point.

quanticle3• 4 years ago

Not when those people are family members. They know damn well I've never been married.

foogazi3• 4 years ago

because I was a software engineer now and "you can afford it, so why not?"

If you can afford it yeah - also live a little, don’t be a miser

quanticle3• 4 years ago

Because I prefer to be able to afford to spend six months to a year out of work. It's the same principle as startups working to ensure their runway is as long as feasibly possible.

havblue• 4 years ago

While we certainly don't spend more than we make, the fact that I'm not entirely in control of the budget was in the back of my head when I read the article. "Okay, I'll just convince my wife that organic food and private schools aren't that important..."

nunez3• 4 years ago

"i don't give a shit about cars" is the answer to that

maybe you spend serious dollars on bespoke japanese mechanical keyboards or something!

anyway, if you think your SO's spending exceeds your comfort levels, you should talk to them and tell them that! and if your friends/family think you should spend more...well, give them a link to your local coding bootcamp!

MrGilbert2• 4 years ago

I'm really struggling at the moment. Ended a long relationship, went into a higher paying job, and realized how expensive it is to live on your own. My salery is about average in my country (not much, like 10%-ish), and I'm paying off debts. These debts are what's killing me at the moment. Roughly 20% of my net income go into paying them off.

Avoid debts as the devil avoids the church. Just don't.

bombcar7• 4 years ago

That's the biggest problem with debt, it doesn't change when your situation changes.

At least you can cancel Netflix or whatever anytime, but you can't cancel existing debt without bankruptcy.

MrGilbert2• 4 years ago

Also, depending on your country and culture, filing for bankruptcy is an act that requires a lot of effort and (and that's maybe worse) may lead to stigmatization.

TheBestInterest• 4 years ago

Thanks for submitting my article, Rick. Much appreciated.

-Jesse

nunez3• 4 years ago

Sorry; this advice is not helpful.

(I originally said "this advice sucks" but realized that I came off too strongly.)

(I'm sure the OP is a fine person but I am allergic to advice like this and get a visceral reaction to it every time.)

The people I know that spend much less than they earn are either (a) homebodies that are perfectly fine with the "wake up -> work -> come home -> eat -> sleep" lifestyle, or (b) already have way more money than their lifestyle requires.

I'm not like the people in (a). I've never been like that. I can barely stay home as it is. And, at least in the US, everything outside of home costs money.

And while I get closer to (b) every year, especially now that I track all of my expenses and know where our annual spending baseline is, I'm not there yet.

I think there are a lot of people like me.

So financial blogger people or SJWs on /r/personalfinance saying "just spend less than you earn, bro" is exactly like people with like 10% body fat or whatever telling overweight people "calories in, calories out, bro; not hard!" (interestingly, many of those people have negative to very negative relationships with food)

I mean, you're not wrong, but it's also (a) not very good advice, (b) completely ignorant of people's personal preferences, and (c) makes me think the author is hiding something.

My advice is more practical: save progressively, make a goal, and track your spending. I acknowledge that this only works for people that don't already have runaway spending problems, but I think it's much more pointed than "just spend less!"

If you don't save, start with something small, like 1% of your income. Some amount that you won't miss. Increase that every month by a small amount. (I do like the idea of having a six month rainy day fund, though I think engineers can get by with less.)

By "make a goal," I mean this: you have infinite money. What does your life look like every year? Write everything down, no matter how outlandish, then actually do some homework and figure out how much living that life will cost. Sum everything up, divide that by 40%, and, boom, there's your number. Figure out how to get there, and get there!

If you track your spending while making minimal changes, then after a year, you'll know what your annual burn is. Then, over time, you'll know whether you (a) need to make more money to support that lifestyle, (b) whether your burn is increasing too fast relative to your income, and (c) have a better idea of what you need to save to guarantee your lifestyle without making any cuts.

You only live once. Why spend it constantly pinching pennies if you don't have to? So that your grandkids can spend your money after you die?

laacz• 4 years ago

OK, three days have passed, so I'm leaving this comment to hang. This advice is similar to "if you want to lose weight, eat less energy than you can spend". It's true, but it's useless.

The Golden Rule of Personal Finance

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