Spend It All

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Good Advice

Here’s a statement you might not expect from a financial expert:   you should spend all your money!  In fact, you should spend the entire month’s income, even before the month begins.  You should spend it on purpose, by creating your cashflow plan before the first of the month.

Now, some of your money should be spent into your savings account.  Some should be spent paying down debts.  Some should be spent by investing into your retirement.  But it should all be spent.  Your income needs to exactly zero with all expenses, including savings and investments.  Why?  Because it isn’t until you lay out all income for January with all expenses in January that you  can make educated decisions about how much to allocate to the various competing uses your money can have.

You’re in Control

The beauty of using a cashflow planning tool like ThriveWealthy is that it puts you more in control of how your money is spent!  Since you are now making educated decisisons and prioritizing the things you value as most important, you are actually able to achieve more, and enjoy some of the better things in life.  Why not give this great free tool a try today?

ThriveWealthy Cashflow Software

It Won’t Happen to Me

Nobody likes getting sick, having their house burn down, or dying in a car crash.  Unfortunately, these things happen every day to a single group of people:  people who didn’t think it would happen to them today!  Today’s post deals with the important and too-often neglected topic of insurance.  What kinds do I need?  Which types of insurance are superfluous?  What should my philosophy on insurance be?  We’ll answer those and more as we unpack how insurance in its various forms can be a great blessing to our lives.


We’re all in this together

At its most basic level, insurance is the banding together of a large group of people to create a fund which pays the expenses of a few of the people when disastrous circumstances hit.  You’re not very likely to need open-heart surgery next week, but someone near you will.  We just don’t know who!

In this context, insurance is a wonderful blessing because it offers protection for unusual events beyond our control.  While you likely couldn’t afford the $300,000 medical bill for diagnosis, surgery, and treatment for heart disease, you can afford a few hundred dollars a month in insurance premiums.  All these premiums from a large number of people go into a big pot of money to be used to pay the expenses of the few members who contract a serious medical condition.

When to buy, when to pass

Given that understanding of what insurance is and how it works, what should be our insurance philosophy?  Should we buy every kind of insurance that is offered?  Or if we shouldn’t, how should we differentiate between the vital and the superfluous?

Generally, I believe it is the wisest course to insure yourself against any event that is reasonably likely to occur and would have disastrous financial consequences.  In this statement, you’ll notice two inexact terms:  “reasonably likely” and “disastrous consequences.”  You’ll have to apply these for yourself in your specific situation, but let’s take a look at a few examples to illustrate the idea.

An expensive lapse of judgment

When you buy a car and head out on the road, there are multiple potential disasters that can occur.  You could neglect to stop at a red light and demolish a $45,000 truck, along with your own vehicle.  Or worse yet, perhaps you injure the drivers or passengers, creating a stream of medical bills.  So, is this insurance worth having?  First, is it reasonably likely to occur?  Certainly!  Driving is one of the most dangerous things most of us do in our daily lives.  Second, could it have disastrous financial consequences?  Yes again.  This one is a no-brainer: car insurance is vital.

I never get sick

Some people think they can get by without health insurance.  They feel healthy and think that it’ll be cheaper to just pay for minor medical expenses out of pocket.  While this plan can temporarily provide relief to the budget, ultimately it is playing with fire.  You set yourself up to erase years of hard work, saving, and investing in a moment.  A friend of mine was recently diagnosed with cancer, having no insurance, and he now has medical bills approaching half a million dollars.  Another man I know recently broke his thumb in two places, and is facing the possibility of needing surgery—which will cost more money than he has.  In both cases, these men thought they were healthy and could go without health insurance.  Unfortunately, none of us will stay well forever.

As with car insurance, it is strikingly evident that a health issue can be financially disastrous and has a reasonable likelihood of occurring.  Even if you can’t or don’t want to pay the premiums for an expensive plan, you must at least get a basic policy that will limit your exposure in the case of a major health problem.  High-deductible insurance plans are a good fit in this case—you generally pay for minor services yourself, but your maximum out-of-pocket might fall somewhere between $10,000 and $20,000.  Obviously, this would still cause financial difficulty to most families, but it would at least be survivable.

Avoid death by a thousand cuts

Finally, let’s look at an example that doesn’t pass the test.  Many electronics stores offer insurance for computers, TVs, or other big-ticket items.  These tend to be quite profitable for the electronics store, and consequently a bad deal for you.  These types of insurance fail the “financially disastrous” test.  If your TV were to break after the manufacturer’s standard warranty has expired, you’d be without a TV.  Guess what?  Plenty of people survive without a TV!  If you’re managing and saving your money well (as taught by the ThriveWealthy system), you’ll be able to save and pay cash for a new set quickly anyway.  And by avoiding paying extra for unnecessary insurance policies in other areas (pet insurance, laundry machine insurance, insurance providing you with a rental car when yours is involved in an accident), you’ll have more money available to save for that new TV quicker!

So, when it comes to insurance, it’s important to recognize events that are reasonably likely to occur and would have disastrous financial consequences.  For these events, it is absolutely vital that you carry insurance with appropriate limits.  Insurance policies that fail this test are superfluous and you’ll be better off to save or invest that money instead.  And enjoy the comfort and security that goes with knowing that you are protected from financial disaster and are being a good steward of your resources.


Invest or Save

In today’s post, we’ll explore the important distinction between saving and investing — two terms that, though often erroneously used interchangeably, must be treated in distinctly different ways on your path toward a thriving life.

Be Prepared for the Unexpected

Saving ought to be done first — and for a specific purpose.  As we’ve discussed previously, one of the first milestones you need to hit as you pursue the thriving life is to save a full emergency fund of 3-6 months of expenses.  The emergency fund is not an investment; rather, it exists to protect you from the unexpected expenses that will most certainly come your way.

Damage car

Great places to keep an emergency fund include savings accounts and money market accounts (fnbodirect.com is a great place to get started).  Though the interest you’ll typically earn on such accounts is quite low, they provide a few important benefits that you need for emergency savings.  First, your principle is protected.  This means that your value won’t go down in times of economic recession.  This is important because oftentimes unexpected drains on your cash will come during times of economic hardship nationwide.  With your savings in an account at a bank or in a money market account, you can rest assured that the $10k that you put in will be there when you need it.

Make Your Money Make Money

On the other hand, an investment ought to involve significant growth.  While a savings account is earning less than one percent, a good investment should earn in the neighborhood of ten percent.  But here’s the catch: that 10% rarely comes linearly.  Unlike a savings account which will return 0.5% per year, every year, an investment may earn 5% one year, 30% the next, and -15% the year after that.  The returns are a function of the market you’re invested in (e.g., the stock market or the housing market), so you never know how the investment will do in a given year.  But, you can look at history to draw reasonable conclusions at what the investment should do long term.

Exhibit A

Take for example a mutual fund we’re quite fond of here at totalthriver.com:  Fidelity Contrafund.  This fund is primarily comprised of stocks of large U.S. companies such as Google, McDonald’s, and Coca-Cola.  The following chart shows the return for each of the last four years:

2008 2009 2010 2011
19.78 -37.16 29.23 16.93

As you can see, 2010 was a great year for this investment, and 2009 was a lousy one.  Of course if you knew that ahead of time you could make a killing!  But since none of us have such knowledge of the future, we must simply follow the averages.  This fund in particular has averaged 15% per year over the past 3 years, and 8% per year over the past 15 years.

Time Horizon is Important

Because even good investments like this one can fluctuate violently, most financial experts only recommend investing when you plan to leave the money alone for five years or more.  Generally, this is a long enough period to ride out the turbulent ups and downs of the market, and give yourself a high probability of making money with your investment.  For short-term savings (e.g. for a newer car or living room set), you’re usually better off to take the guaranteed 0.5% of your money market than risk losing 20% of your money should the market take a bad turn one year.

Make It Happen

In closing, it’s very important to recognize the difference between saving and investing.  As you make progress toward your financial goals, you’ll need to be very intentional with which of the two you’re doing.  Will you be using the money in the next two years?  Open a money market.  Will you be leaving the money alone for the next five years?  An account with scottrade.com or a visit to your local financial advisor (see the “investing ELP” section at DaveRamsey.com) are great places to start.  And as always, be sure to check back at TotalThriver for help along the way!


Wandering into Trouble

I’ve enjoyed many hiking and camping trips since I was a young child.  Walking through the forest, listening to the sounds of wildlife and seeing the sun gleaming through the trees, I’ve had a chance to appreciate the beauty and creativity of our Father’s world.  Occasionally, my hikes have become extended for a bit longer than I was planning on, due to an underestimation of how long a climb might take or a casual disregard for things like maps and compasses…. 

Oblivious to the Peril

The funny thing about getting lost is that you don’t realize you’re about to get yourself in trouble until you suddenly realize that you are in trouble!  On a certain camping trip with a buddy of mine in Arizona, we hiked out into the desert loaded with many gallons of water.  We found a good site, set our provisions down, and trotted off in search of a good “sitting log” to place beside the firepit.  We found a good one a short while later, and began carrying it back to our campsite.  At first, we thought it was pretty funny that our campsite was taking so long to get to.  “Strange how it only took us 10 minutes to find this log, but we’re taking 20 minutes to carry it back,”  we laughed.  Slowly we realized that we were actually lost, and we’d been walking for so long because we didn’t know where we’d left our jackets and water!

A few hours later, tired and thirsty, we found our campsite as the sun finally set.  This set us up for a cold night (the coldest night of my life, in fact), since we’d wasted our afternoon and now had only a half-built shelter.  But we were thankful at least for the jackets and water that we had nearly lost.

This story is an example of how we can be walking along unaware, and suddenly find ourselves in an overwhelming situation.  We were too confident that we wouldn’t get lost, and by the time we recognized our precarious position, it was too late.

Common Financial Dangers

In a similar way, we can tend to be very blasé with debt in America today.  We look around at our friends and neighbors, and many of them have student loans.  Everyone’s got a mortgage, and some debt on their cars.  And of course we’ve all got to have our credit cards!  But even though we all know that people get trapped and pulled under by debt, we mistakenly think that this can never happen to us.

Confident of our ability to keep our debt in control, we walk right along the edge of a financial cliff.  We buy a nice big house, great new cars, and a brand new living room set—all on payments.  At the end of the month, we’ve got $25 leftover after all the credit payments are made, and we think, “All right! Everything’s going great!”  But then comes something unexpected, and all of a sudden we’re $175 under instead.  No big deal, we think, “I’ll just pay the minimum credit card payment this month, then get everything cleaned up next month.”  But again, something unexpected comes, and now the balance we carried last month is compounding on us.  On and on it goes, and the debt pulls us down deeper and deeper.

Recognize the Trap

This story has sadly happened to too many people who are able to escape only through a long and painful bankruptcy.  If you’re fighting this now, know this:  many have overcome this situation through wise money management, hard work, and tenacity.  If you’re still dabbling with debt and don’t think this could ever happen to you, think again.  Banks are not evil, but they are concerned with making money, not ensuring that you keep your head above water.  Knowing what you can afford and what you cannot is your responsibility, and you owe it to your family and to God to manage the money He’s given you wisely.

The most reliable way to make sure that you can afford something is to simply buy only with cash (or debit cards/checks).  The one exception might be a mortgage on a 15-year fixed rate with the monthly payment of 25% of your take-home pay, which can be a reasonable debt, provided that you have a substantial down payment.  And some financial experts would contend that there are a few other “reasonably safe” debts as well, but use these very carefully.  It is much easier to lose your way than you think.  Decide instead to take control of your financial life by eliminating debt and paying with cash.  The confidence and freedom that come with becoming debt-free will serve you well on your path to a thriving life.

Overcoming the Unexpected

Most of us have been through the following story at some point in our lives: We resolve to “do better” with our money. That credit card company has taken advantage of us for the last time! We’re angry that we let ourselves get into such a vulnerable position and we’re angry that the credit card company hit us while we were down.

So, we get out the yellow pad or the computer spreadsheet and we get to work on a budget. We allocate our money carefully, taking our best estimate at what we’ll spend in the following month on groceries, gas, and utilities. Everything’s going fine until the 9th of the month…

That sinking feeling

On that day, two tires go flat on our usually-reliable family car. Your dentist sends you a second bill for the work done last month to resolve a clerical error. And your electricity bill is $30 higher than usual. What in the world is happening?!? Why is this all hitting at once???

Unfortunately, these unexpected things do seem to hit us just when we think we’re getting it all together. However, even though they seem like a string of improbable flukes, the root of the issue closer than the mechanic’s garage or the dentist’s office–the problem is us!

When we get used to living life without an advance financial plan (a budget), we quickly lose touch of what we really spend each month. Ask me before I started budgeting what I spent on groceries each month, and I would have said, “like $150 or so.” (reality = $400) Or ask me how much I spent on car repairs per year: “like $450 I think…” (reality = $60 per month)

The point is, our perception of reality is quite different than the truth of the situation, and we tend to underestimate how much we spend each month on these “unusual expenses.”

So be encouraged–you’re not alone when you’re hit by a “string of flukes,” in fact almost all of us have been there! If you’re starting (or restarting) budgeting for the first time, be generous with your grocery budget, and include $60 per month or more for car repairs. You may not need it in the first month, but soon you will, and having $180 sitting in your account waiting to be spent on car repairs makes that phone call from the mechanic a great deal less stressful!

If you haven’t yet downloaded the most recent version of ThriveWealthy, please spend a few minutes trying it out for yourself now. And as always, let us know of anything we can do to improve your experience at TotalThriver.com! Remember, we exist to help you Thrive!