Wealth Archives - Abnormal Money

Aggressively Saving is Not Enough

With today’s inflation aggressively saving is not enough to retire comfortably. Learn what else you need to do.

When I was an undergrad I had a strategy professor who desperately tried to drive into my skull that cutting costs was never enough for a company to succeed; the first priority should be increasing revenue. This made sense but went against my instincts as everything in the supply-chain world was about cutting costs and increasing efficiency.

This is an essential concept in personal finance as well. Yes, we should be saving 50% of our income, but we won’t see any progress until we start to actively attempt to increase our salaries.

How to Increase Your Salary

Maybe the quickest way to increase your salary is to get a new job. It’s well known that job switchers receive pay increases that they simply would not have if they stayed at their current company. For whatever reason, loyalty to companies is not rewarded monetarily, never forget to look out for yourself!

If you want to stay at your current company look into educational opportunities that your company supports. It can be a master’s degree or certification. This can look different depending on your role and industry. Examples can include a 6 Sigma Blackbelt certification, or CFA/CPA designation. Master’s degree content can vary widely but almost always puts you in a position for an increase in responsibility, and therefore pay.

Pick up a side gig – some are easier to start immediately making money (think Uber and Lyft). Others like blogging take a lot of time usually without immediate results. That’s why driving for a ridesharing service is so popular there’s basically a guarantee that you will immediately start making money! Whatever you enjoy doing see if you can monetize that, streaming on platforms such as Twitch is incredibly popular. If you’re already gaming why not stream and try to monetize that?

It’s Not Easy

One reason increasing your salary isn’t talked about in personal finance circles is because it is hard. It takes a lot of effort, and you don’t see the payoff immediately. We can make instant impacts on our personal cash flow with budgeting and saving but most of us will be working the same job we’re in for probably another 2-3 years.

Here’s a way to visualize the difference between staying in one job and consistently investing assuming an average 8% rate of return on your investments. For simplicity’s sake, we’re not taking into account any investments that require larger capital outlays such as real estate purchases.

Demonstrates growth of savings using an 8% annual return. One scenarios shows a consistent amount of savings and the other shows what happens if you increase your salary and therefore your savings.

The person who consistently saves 40% of their $50,000 income could expect to have $1.09 million dollars after 21 years, that’s awesome! But take a look at the person who aims to increase their salary. They keep investing 40% of their salary but eventually reach a $90,000 income. They should end up with around $1.56 million dollars in invested savings. We’re talking about a difference of almost $470,000! With inflation currently around 9% in the USA, it’s probable to say $1 million won’t have the same purchasing power in 21 years as it does today. Every extra dollar earned and invested will help!

Drake is a freelance writer who’s interested in history, economics, art, & beer. He writes about popular personal finance topics and shares his personal finance experiences Make sure to check out more posts on Abnormal Money.

Should You Diversify Your Portfolio?

Ben Graham, the famous investor known for mentoring Warren Buffett and advocating for value investing, had a couple of brief rules for allocating your portfolio funds.

He has a simple rule depending on if you are an enterprising or a defensive investor.

How do you determine if you’re an enterprising or a defensive investor?

It’s not down to your age, but instead how much time you’re willing to put into managing your portfolio.

Enterprising vs. Defensive Investing

If you can’t really be bothered to take the time to properly value companies and invest in them, you’re a defensive investor.

You want to see your investments grow modestly without much effort.

If you get a lot of enjoyment from valuing companies and you want to spend the time to make these decisions in your portfolio then you’re classified as an enterprising investor.

Portfolio Allocations

Ben Graham advises that the enterprising investor limit his portfolio allocation to 75% in equities and 25% in bonds.

He advises that you never hold less than 25% of either bonds or equities.

You can rebalance your portfolio to be more or less conservative.

Graham’s argument for holding 25% of your portfolios in bonds is that it would give you the confidence to stay in the market whenever there is a market downturn.

An important note is that when Graham was writing his various editions of The Intelligent Investor US Treasury bonds were returning much more than they are today.

In 1963 the average US Treasury bond yield was 4%.

In 1980 the average yield was 11.43%.

In 2021 the average yield of a US Treasury bond is 1.42%.

That’s not even a large enough yield to keep up with inflation rates.

That’s why today Buffett suggests that the defensive investor keep 90% of their funds in a low-cost S&P 500 index fund and 10% in a low-cost bond fund.

The Truth About Portfolio Diversity

Portfolio diversity is an admission that you can’t select winning companies to invest in, which is okay.

Not everyone wants to dedicate the time and effort to learn how to evaluate companies and then consistently monitor them for investment opportunities.

But look at Buffett’s advice. Even when you buy the entire market through an index fund, he claims it’s best to place 90% of your portfolio in that one fund.

Sometimes diversifying can detract from our overall returns, especially if we diversify into high-cost equity funds.

What matters in the end is that you include a portion of your budget to be put towards investing.

If you do that, you’re already ahead of 45% of Americans.

How is your portfolio allocated? Would you consider yourself a defensive or enterprising investor?

Author Bio

Drake is a freelance writer who’s interested in history, economics, art, & beer. Drake graduated with a degree in Supply Chain Management and began working at General Motors. He writes about popular personal finance topics and shares his journey. Make sure to check back for more posts on Abnormal Money.

Saving To Invest Is Difficult

A lot of people don’t save to invest their money. To be honest it goes against most peoples’ nature.

Living within your means is difficult. Especially now with all of the advertising we are bombarded with every day.

It’s difficult to save and invest. We have to give up those shoes we want or a couple of dinners at that restaurant we really like.

It is guaranteed that you’ll have to cut your budgets in some areas to invest money.

Sometimes it can feel like a chore to sacrifice things now. To save some of the money you work hard for and not use it on yourself.

The big question is why do we save to invest? What is the purpose?

Why Do We Invest?

We Want To Be Our Own Boss

We save because if you’re like me, you don’t want to work for someone else for your entire life.

When you have a salary and no other sources of income, you become much more dependent on your job.

We save because one day we don’t want to have to punch the clock or get up extra early for that meeting someone else set.

We want the financial independence that comes with investing so that we can make our own decisions and do what we want to do.

We Want The Option To Quit

Sometimes we’re treated unfairly at work. Other times we’re asked to take on responsibilities we’d rather not.

If you don’t have a safety net built from your investments then you really don’t have an option other than to comply in your current job or find a new one.

Often we enjoy our work and want to keep working. We don’t need financial independence immediately so that we can quit.

Rather, we want financial independence for the mental relief it offers.

We would all feel a lot better about going to work if we knew we didn’t have to.

We Want To Be Wealthy

Let’s be honest, no one gets wealthy from living off of a salary. Those executives who get millions of dollars in salaries have outside investments as well.

If you want to build wealth then you need to save your money and invest.

That can be in the stock market or a market you’re more knowledgeable about.

Maybe you have an eye for art and want to collect original pieces.

You love classic cars and appreciate that the right ones can actually increase in value, unlike most new cars.

Maybe you’d love to have your own business one day, and you’re waiting for the right one to come available so you can purchase it.

You need liquidity in all these situations. You won’t be able to invest in what you want unless you have money saved and prepared to invest when the time is right.

We Don’t Want To Work Forever

Even if we enjoy our jobs now, there will be a time when we would rather pursue other things than our careers.

When you grow older spending time with your family and kids may become more pressing than getting your next promotion.

The average retirement age in the United States is 64. I’m a long way off of 64 and I can’t imagine working for someone else for that long.

When your priorities change you want to have the financial independence and flexibility to adjust your life accordingly.

Unless you’ve found your dream career you can do until you die, most of us think we’d like to retire early and spend time pursuing hobbies or crossing items off our bucket list.

Once again, we need the income from the investments we’ve made over our life to realize these dreams. None of this is possible without being financially independent.

Investing becomes easier once you have a goal in mind. Proper preparation can make difficult tasks become so much easier.

Why do you save money? What are you investing in now? What are your investing goals? Let me know in the comments below.

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Use a Budget to Make You Wealthier

A budget will make you wealthier and can increase your total liquid assets. People 35 and younger in the United States had median total liquid assets of $3,240 in 2019.

Liquid assets include things that can be easily accessed like checking & savings accounts, money market accounts, prepaid cards, and a few others. This amount has probably decreased due to COVID-19 limiting employment opportunities for many people.

Compare the number of liquid assets to the $44,390 median amount of total debt for the same group. That’s almost 14 times more debt than liquid assets!

I don’t know about you but that is a ratio I feel very uncomfortable with. The good news is that we can improve our financial health is by sticking to a planned budget.

Why

There are a couple of popular budgets to consider when planning your financial future. I’ll take a look at some by using the most recent figures for the real average personal income in the United States which was roughly $52,000 in 2019.

It’s important to note that this is significantly higher than the median personal income of $36,000, but it’s easier to use the average here because we will be using the average personal income tax rate of 22.4% when budgeting our post-tax dollars.

Below are three budgets that can help you get you spending under control. Using these budgets will surely increase your wealth in the long term.

Dave Ramsey’s Budget

Dave Ramsey has a proven method for budgeting called “zero-based budgeting”. To use this budget, we need to track where every dollar we make is going.

This intense focus on each category can be helpful for people who need a lot of structure but might be off-putting for others. Here is our budget using the average personal income in the United States.

Dave Ramsey Budget (Zero-based budgeting) Annual Income Average Income Tax Average Post Tax Income Budgeting Expenses Saving Giving (Tithing) Food Utilities Housing Transportation Health Insurance Recreation Personal Spending Miscellaneous Monthly Yearly — Above are all 11 of Dave Ramsey’s budget categories and monthly/yearly contributions.

A lot is going on here but it’s important to note that the average income is reduced by $11,628 when we apply the average tax rate of 22.4%. That’s why it’s important to reduce your taxable income by saving your pre-tax dollars.

One issue I have with this budget approach is that some costs can vary a lot by geographic location. To live in a safe place near your workplace, you may have to spend more than 25% on your living expenses.

If you decide to use this budget template, make sure you keep the savings percentage at 10% at least when you’re adjusting other costs. This isn’t my favorite budget method, but I know it’s effective because of the success people have had with Dave Ramsey’s program.

50/30/20 Budget

This budget was popularized by Elizabeth Warren in her book All Your Worth: The Ultimate Lifetime Money Plan. The appeal of this method is its simplicity. Instead of having to track eleven different categories like in Dave Ramsey’s plan, you only look at three general categories.

We devote 50% of our income to needs, 30% to wants, and 20% to savings. This budget still requires setting aside time and go over your receipts or bank transactions and assign the transactions to these three broad categories.

It’s easier to keep track of this budget if you add expenses up as you go instead of sorting through every expense at the end of the month.

I like this budget because of its simplicity but some people may find they need more structure to keep them on a budget.

The Richest Man in Babylon

The last budget we’ll look at comes from a book I read some years ago, George Clason’s The Richest Man in Babylon published in 1926. The book reads like a parable with a biblical inspiration set during the Babylonian empire.

The table below shows the budget outlined in the book:

Clason's The Richest Man in Babylon Budget Annual Income Average Post Tax Income Budgeting Expenses SUM Necessary Expenses Paying off Debt Savings for future investments Average income tax Monthly Yearly — Basically a 30% savings rate with a dedicated portion put towards paying down debt.

70% of personal income is allocated to necessary expenses, and the remaining 30% is split between using 20% to pay off debt and saving 10% with the goal of future investment.

This budget is nice because it explicitly provides a couple of implications for your budgeting.

You can set aside a portion of your 30% savings to pay off debt, and after that, this budget will look more like a 70/30 plan instead of a 70/20/10 plan.

If you have debt, you can use some of your savings in the other plans to pay that off too. It’s important to make investments to diversify your income streams and this budget makes sure that’s an explicit goal.

Investing should be a cornerstone of any budget. Make sure you understand why we should invest so you’re motivated and consistent.

Any Budget Is Better Than None

If you follow any of these budgets and you earn around the average income in the United States, you’ll have more liquid assets in savings than the median American under 35 years old after 5-9 months of saving.

It’s a great idea to keep your progress somewhere where you see it every day, whether that’s on your bathroom mirror or on your fridge.

Being constantly reminded of the progress you’re making will keep you encouraged as you start saving money and work towards financial independence!

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