Listen up, Youths. Kat's Gonna Help You Not Make Her Money Mistakes.

"Kat Callahan" (kyosuke)
12/13/2015 at 21:26 • Filed to: None

American Millennials have the highest student loan debt and the worst savings rate in U.S. history. So, youths, here’s what I have learned from a year of taking my savings/investments from close to $0 to close to $12K, taking my credit score from about a 600 to 720 and keeping debt levels needed to build positive credit history after trashing it:

1) It is never too soon to start saving, and no amount is too small to start.

2) “Pay down your debt before you start saving!” is really bad advice. If you have small amounts of debt, this could make sense, but if you have large amounts of debt, it is much safer for you to build three to six months of emergency funds in liquid assets in order to pay the immediate bills, than pay down even a significant portion of your debt, only to lose your job, or have a major calamity, and have to charge your debt right back up again. Debt can be forgiven, settled, reduced, extended, refinanced etc. But cold hard cash won’t magically appear when you need it.

3) Yes, Virginia, you too, can successfully invest in the stock and bond markets, and make a consistent, if tiny, return over time, if you invest in low-risk, low-yield ETFs and mutual funds from Vanguard. Ignore the up and down of the stock market, look to your quarterly dividends and the overall trend of the fund. Years like 2008 are rare, and overall growth has not been impeded in the markets, even if you take into account the Great Depression. It just means weathering the dips and recognising, dude, you’re 35~40 years from retirement, you’ve got plenty of time. There is no get-rich-quick, but there is get-comfortable-slowly.

4) Don’t settle for the terms you were initially offered on anything. A loan, a credit card, even an employment contract, etc. Always be willing to walk away towards something better unless terms get better for you over time. Even credit cards or loans can be refinanced or moved to a different lender. With employment, don’t quit or threaten to quit, but keep track of your requests, increase your urgency, and eventually quietly start looking at other opportunities.

5) Cutting spending, in the sense of removing items or services upon which our habits are built, is a lie for most people. Most people, as much as I love him, are not Mr. Money Moustache, but we can still learn a lot from him. We can celebrate the few who can do it because most of us can’t. The trick is not in changing the habits of what you spend on, the trick is in optimising how you spend. Reduce, sure, but recognise that we are creatures of habit, and making your habits cheaper or more rewarding is a lot easier to accomplish than cutting habits out of your life. Everyone is different. It’s easier for me to reduce utility usage than it is to stop going to the corner store for a Red Bull. Knowing that helps me use my habits to optimise spending and saving rather than unsuccessfully attempt to drop a habit. For many people, dropping their StarBucks habit is easier than cutting electricity. We’re all different. Know your habits.

6) Loyalty programs only work if you really are loyal, and if they work with your habits. Most point cards and loyalty programs do not work for me because I make purchases, especially large purchases, only rarely. Bonuses never work out for me. Programs for airlines only make sense if you commit to one airline, at least initially. For me, that’s Delta, but if I hadn’t had personal reasons for avoiding them, there are better earners, like American and United. But I know that my habits will get me further with Delta now than trying to jump around again, even if Delta doesn’t offer the most or the best.

Store programs only work if they are a part of your habits, either personal or business. I find the only two programs benefiting me in Japan (where every store has a point card) are T-Point (accepted at FamilyMart, my corner store, as well as SoftBank, my cell phone carrier, and at Yahoo shopping, where I buy KOR stuff, and at Eneos where I always buy my gas), and Autobacs (because I do buy a lot of car related stuff, for obvious reasons). Autobacs now also takes T-Point, so I am going to spend my current Autobacs points, and from now on, put even that onto T-point. Only join programs where you’d be spending money even if there was no program, and always see if there are ways to move your purchasing habits towards substitutes or even the same products where your program works.

Likewise, only get a loyalty based credit card (cashback, points, miles) if it will help offset your spending. Never look at such credit cards as opportunities to get into more debt. You’re looking to get more out of your current spending or reduce your spending via your rewards. You’ll wipe out the value of any rewards or bonuses with interest charges if you look at your new credit lines and think it means you can increase your spending. If that’s something you might really be tempted to do, do not even bother. Wait until you have more maturity or self-control. I didn’t have that kind of self-control until I was 28. I certainly did not have it at 22 or 25. That’s nothing to be ashamed of, but it’s something to know and accept, if you can.

7) All of this advice is good, but whether it’s putting money into savings and investments, or reducing debt, or optimising spending, or rebuilding your credit the two most important factors (next to, you, know, paying at least minimum balances if not full balances on time, every time, ALWAYS), are time and increased income. In that order. Time heals all wounds, time allows you to argue for better terms, and time will make your money grow and rewards to accumulate. An increase in income allows you to pay down debt faster, contribute to savings, investments, and retirement funds faster, and allow you more flexibility in general when you’re working with cash.

8) MONEY IS NOT FOR SPENDING. MONEY IS FOR FREEDOM. If I could just impress one thing on whomever will listen, it is the idea that points, miles, yen, dollars... whatever liquid assets you’re talking about, they’re best all thought of as “freedom points.” The freedom to take a trip because you can and it won’t hurt you, the freedom to go back to school or get extra training, because you can and it won’t hurt you, the freedom to move if you need to take a better job, the freedom to walk away from bad terms or bad contracts, and most importantly of all, the freedom to look your boss in the eye and say, “No, sir. I will not do it it. You’ll have my resignation on your desk by the close of business.”

Yes, we spend, and we spend because we have to, and we spend because we want to, but understand that money’s greatest power is freedom. Is the spending you do now worth the freedom you might give up later for those same points? If the answer is yes, because it helps you reduce stress, maintain happiness, etc, GO FOR IT. If not, put those freedom points to work making more freedom points. 80 year old you will thank you for it.

DISCUSSION (33)

Biggus Dickus (RevsBro) > Kat Callahan
12/13/2015 at 21:38

TLDR. Unless you are insanely risk averse just put your money in a fund or ETF that tracks the S&P 500. Historically, it has returned on AVERAGE 7-8%.

Kat Callahan > Biggus Dickus (RevsBro)
12/13/2015 at 21:41

DING DING DING. Get this man a prize.

And that’s where I store my long-term retirement funding in the VFINX, which is Vanguard’s S&P 500 tracking fund. For more liquid assets, I use a different fund which has a low-risk, low-yield, but income generating (and inflation beating) fund.

TractorPillow > Kat Callahan
12/13/2015 at 21:44

Exactly like me!

Biggus Dickus (RevsBro) > Kat Callahan
12/13/2015 at 21:46

I play the market a bit with some idividual picks but I keep a significant chuck of my 401k and longer term savings in an S&P tracker. However, I’m also invested in at least 12 different Mutual funds or ETFs.

For short term liquidity, I keep that money in either a money Market fund (I use Capital One 360 for that, no that is not in my wallet). For medium term liquidity I keep my money in US Government or A and higher rated bonds with maturities less than a year.

Dr. Zoidberg - RIP Oppo > Kat Callahan
12/13/2015 at 21:50

I am shocked by the number of people I know who make as much or more than me and my wife, yet constantly complain about living paycheck and not being able to afford XYZ whilst having frivelous spending habits they seem to ignore. There was a Jez piece on couples having problems with debt, like student debt. One person quoted in the article described her husband’s $200 monthly bill towards his debt as “crushing” and was the reason they couldn’t afford a house. $200?? You don’t even want to know what we’re paying on our student debt. But anyway. Two hundred freaking dollars is the roadblock to your better life? Get the hell out of here.

Kat Callahan > Biggus Dickus (RevsBro)
12/13/2015 at 21:50

I don’t play the market at all. I strongly believe that choosing a plan and sticking with it, only rebalancing if goals change, or as you get closer to retirement, etc is the best for me to go. Everyone is different. But again, some people enjoy playing the market, so they spend their freedom points for the entertainment. It leads to less stress and more happiness, and good for them.

I spend my entertainment freedom points on travel, car stuff, and KOR. Which, ideally, should lead to a higher quality of life and lower healthcare bills in the future... So it’s all about managing your freedom points effectively.

Biggus Dickus (RevsBro) > Kat Callahan
12/13/2015 at 21:56

Well said. I get plenty of stress at work so I figure why not add a bit more. Also, I don’t really play/speculate the market much. I only use about 5% of my portfolio at the most for that. Most of my personal stock picks are all long term.

Kat Callahan > Dr. Zoidberg - RIP Oppo
12/13/2015 at 21:58

Right, and I like said, it’s not even about frivolity. My red bull corner store habit is a frivolous. But I KNOW it’s frivolous, I also know it’s part of my routine, and it is the routine (not the fact it is an energy drink or whatever) which keeps me balanced. Knowing that I won’t change that habit lets me ask, where can my usage change that I don’t even notice? Surprisingly, I found that it’s easy for me to just... like... not use lights or heat very often, and I never use air conditioning in summer, etc. So I can afford my red bull corner store habit. It’s all about balance that works for you. But just as most people can’t cut out something that’s really important to them, I refuse to believe most people are incapable of recognising where there is spending that doesn’t matter to them. They just don’t know it. If $200 a month out of a middle-income or higher income is the difference between taking on a mortgage or not (“good debt” assuming you have decent credit and do your research), you’re missing something.

George McNally > Kat Callahan
12/13/2015 at 22:05

Save that money :-)

My wife and I have been setting aside 15% of our paychecks in 401k’s and IRA’s for the last 33 years.

After awhile.....it adds up rather nicely.

When we retire in a few years, our retirement income will be higher then what we make now.

Tohru > Kat Callahan
12/13/2015 at 22:05

My credit score is lower than a 80’s kei car’s displacement. I’m 30. Can’t get a loan for $2500 without a co-signer. I’ve fucked up.

Kat Callahan > Tohru
12/13/2015 at 22:12

Yowch. That’s unfortunate. I did my fucking up at around 23, by the time I hit 28, I was able to start getting small amounts of credit. Hit 30, seven years, all that crap fell off, and my credit limits started increasing. I changed my spending to the credit card, but kept making my on time payments. Now at 32, I’m in the Very Good to Excellent credit range, depending on the score model used.

Time to wait, and increased income (cash flow) to optimise spending towards a goal. There’s no other way. I wish there was.

Dr. Zoidberg - RIP Oppo > Kat Callahan
12/13/2015 at 22:20

We’ve been spending years finding way to cut costs without making ourselves unhappy. We have a pot a coffee brewed every morning because we both know if we leave the house without caffeine, we will definitely be buying some. Conservatively, that 6 dollars not spent on caffeine that day. Times 30 days in the months. Time 12 months. And so on. I buy overpriced fancy creamer because I can, and pricier grounds, and because with what I’m saving, it would be stupid to deprive myself of something I enjoy (caffeine on demand) and force myself to drink something that didn’t taste good just to save a few clams that day. Just a silly example.

When I said frivelous, an extreme example I had in our minds was a mutual friend who bought a vehicle that was probably the cost of their annual income, and now complains they can’t afford a house or to rent here or there, etc. It’s like, yeah, when you committed to making 400 dollar payments on something you really didn’t need, not to mention insurance, yeah, you have to sacrifice something else, or make more money. If you want a new car more than anything else, and you’re a hard worker, and by God, that’s what you need, more power to you. But when it really wasn’t your top priority and now you feel you can’t advance in other aspects of life, well then you may have not made a good decision. I know people who make less than me that wouldn’t be caught DEAD in any used car. It’s like, at the cost of refusing to look “low-income” in a car, you have effectively significantly lowered your remaining disposable income when you bought that new whatever. I know it’s unpopular to question another person’s auto choices on here (and I would never ever ever say such things to a person’s face), but yes, buying a CLA ($32k) with income equal to a CLA is in fact not the best idea.

davesaddiction @ opposite-lock.com > George McNally
12/13/2015 at 22:23

Well done!

Kat Callahan > Dr. Zoidberg - RIP Oppo
12/13/2015 at 22:25

People criticise the $1000 I spent on my beloved little Logo, so I dunno if that’s really that true! :D

Truth is, I genuinely love my car. But I’m also well aware that I’ve spent $1000 on a car, and if it got totaled tomorrow, it would pretty much have no great impact on my life. I’d be upset, but my finances wouldn’t be bothered at all.

Santiago of Escuderia Boricua > Kat Callahan
12/13/2015 at 22:31

I’m not sure what counts as frivolous, but I’m dumping almost all of my discretionary income into building my race car. I probably won’t become a professional racer, but maybe I’ll get picked up as a race engineer and get a job I love

Dr. Zoidberg - RIP Oppo > Kat Callahan
12/13/2015 at 22:31

My pickup cost $1000. It runs, it drives, it stops (though it didn’t when I bought it), and I like it. To me it’s priceless. I live vicariously through everyone on here who own vehicles made in the millenium. Perhaps one day, I will drive a $2000 car!

Kat Callahan > Dr. Zoidberg - RIP Oppo
12/13/2015 at 22:33

Mine’s a 2000, maybe it counts? I’m not planning to get a new car until the Logo dies, and it’s perfect mechanically. It runs strong. It doesn’t even have 100,000 miles on it (90 something, I think).

Kat Callahan > Santiago of Escuderia Boricua
12/13/2015 at 22:38

Only if discretionary means “money I am not using to pay bills or pay down debt.” If that’s what you mean by discretionary, then yes, you’re being dangerously frivolous. If you do not have an emergency fund, or a savings account, or investments, or a retirement account, some of that money should be going there. If you do, and you still have income you want to spend on your car because it makes you happy, then cool.

shift monkey > Kat Callahan
12/13/2015 at 22:39

I’m still pretty young, but the money is for freedom part just recently started making sense to me. I've done hard thinking and I'm considering getting rid of the car I have just to have that extra money. I'll probably put it towards a travel fund sometime soon.

Dr. Zoidberg - RIP Oppo > Kat Callahan
12/13/2015 at 22:47

Well I won’t say the same about my wheels. For example I have to put a towel under my clutch pedal because there’s a leak in the firewall somewhere and it’s been raining everyday for the last three weeks ~_~ But that’s the price I pay for fancy creamer!

Kat Callahan > shift monkey
12/13/2015 at 22:47

Mr. Money Moustache would definitely say that’s the way to go. I don’t know that I would (unless you’re driving a recent model luxobarge on a terrible loan rate, then yes, kill it with fire). If you can do it, great! But a lot of people can’t. I find that many small steps can be both easier to live with and more lucrative than any one major change.

Also, start a retirement fund now. I don’t care if you put $5 in it. I don’t care if you can only put $5 in it for the next year, or $1 a month, or whatever. Open an Individual Retirement Account, preferably a Roth, because you no doubt are in a low, potentially the lowest, tax bracket right now, and contributions go in at your current tax bracket and come out TAX FREE. Just get something anything in an account you can’t touch and get used to the habit of putting something, anything, in there on a consistent basis. Trust me on this.

shift monkey > Kat Callahan
12/13/2015 at 22:51

I'll definitely take a look into it, my employer offers a retirement plan. even though I'm a very long ways from retiring, it's never too early to start!

Tapas > Kat Callahan
12/13/2015 at 23:00

Great advice! And related song:

Spoon II > Kat Callahan
12/14/2015 at 00:47

Sound advice! As far as habits go, one that a lot of people overlook is eating out constantly. I started cooking more and the amount of savings from that alone is phenomenal

Kat Callahan > Spoon II
12/14/2015 at 00:58

For me, I do tend to shop at the corner store more often than not, even though prices are higher than the supermarket. The reasons for this are: I waste food if I buy too much of it at once, which makes any savings at the grocery store pretty moot, so now I only buy dry goods stuff like that from the supermarket, and I get T-Points at the corner store (which load onto a Visa card and can be spent like cash, so basically cash back). In the end, it’s cheaper for me to “eat out” by getting perishable stuff at the corner store, which I can reach by foot, than by driving to the supermarket and loading up on stuff to try to “save money.”

It goes to show why I harp on “habits.” A lot of financial advice naysays your habits as “bad” and urges you to change your habits. I advocate knowing your habits and optimising them instead. It may not save you any more, and it might even save you somewhat less, but it will save you money, and you’ll feel happier about the process, which is its own reward and savings overtime.

Santiago of Escuderia Boricua > Kat Callahan
12/14/2015 at 07:24

I’m putting enough into my 401k to max out my employer matching, but that’s about it

haveacarortwoorthree2 > Biggus Dickus (RevsBro)
12/14/2015 at 11:30

This is great advice. The only thing I would add is that if you do know a little about investing but don’t want to play individual stocks, there are sector or industry ETFs and funds available. Since I bought it, my BRAGX shares are up literally 5900%. Of course, my energy fund (because I wasn’t smart enough to sell it when it was high) is now down 18%. So you can play around a bit without increasing your risk a lot and potentially avoid some of down areas that hold the overall S&P 500 tracking funds down.

Biggus Dickus (RevsBro) > haveacarortwoorthree2
12/14/2015 at 11:42

Sounds like a much more mild version of a friend of mine that bought into a 3x Brent Tracking ETF about a year ago. I’ll have to ask him how that one is going.

Dru > Kat Callahan
12/14/2015 at 15:21

Kat, haven’t seen you post in a while, though I think you are primarily on Jez?

Anywho, just wondering if you are planning on spending your career in Japan and then retiring there? Or perhaps haven’t thought that far ahead? Curious how that might impact your planning given your unique situation.

Cheers!

MonkeePuzzle > Kat Callahan
12/14/2015 at 15:50

I AM saving my money, I’m putting all into a negative yield 0% savings account called “project car”

Kat Callahan > Dru
12/14/2015 at 18:18

1) I’m pretty much just Jalop now, actually. But I’ve been working on a couple of really big pieces, not so much on little pieces. I’ve also been engaged in a protracted grievance dispute with my current Japanese employer, and currently in negotiations to change to a far more lucrative position.

2) I’m naturalising to Japan and so of course I am planning to retire here, but, I’m not stupid, so I have retirement accounts/social security in both countries. Should something go wrong with my Japan plan, I won’t be unprepared.

Dru > Kat Callahan
01/07/2016 at 10:49

Sorry for the delay here, but how difficult is it naturalizing to Japan?

Kat Callahan > Dru
01/07/2016 at 23:34

Not that difficult, in comparison to many other countries. 5 years physical residency, limited language requirement (basically, early elementary school), background check, pay your taxes, have a steady income, provide enough evidence of your family history to construct your family tree in the family registry database, some interviews, and an essay in Japanese about why you want to naturalise.