A low effort, high impact strategy to secure your financial future

Khe Hy
Khe Hy
May 7 · 7 min read

Until you make the unconscious conscious, it will direct your life and you will call it fate — psychologist Carl Jung

We‘re all intimately familiar with those situations where we choose to ignore a feeling or behavior — that we know deep within our core would make our lives better. It could involve forgiving a friend or tackling that lingering task on your to-do list; we try to ignore it, but we know it’s quietly “directing our life.”

The simple money formula

For many of us, money is a behavior dictated by the unconscious parts of our brains. After all, if you’ve landed that great job, isn’t there an easy formula you can lean on:

Is income > spending?

If the answer is TRUE, then all is good — and as Jung proclaims, we can just let “fate” handle it from here.

Which makes budgeting seem like overkill. An unnecessary nuisance that never seems to fit into our demanding work schedules or our overtaxed attention spans. Shouldn’t budgeting be filed alongside eating your broccoli or getting eight hours of sleep? “Nice to have — but not right now.”

This post will show you the secret power of budgeting and how a daily practice of less than two minutes can eliminate worry and provide the foundation of a compounding engine of wealth. A true win-win.

Why Engineers?

The benefits of pulling all nighters writing code seem to have paid off in career choice. According to Glassdoor, Software Engineer was the 3rd highest in demand job in 2019 with 141k openings and a median base salary of $103,035. And if you’re still worried about money at those levels, there’s a good chance your money avoidance is at the root of the problem.

Furthermore, engineers thrive in the world of logic, rules and formulas — can you think of a better canvas to combine that mindset, income and solutions-oriented thinking?

Two categories of spenders

When it comes to spending, there are two types of people. The Penny Pinchers are hopped up on apps and spreadsheets. They track every expense in complicated worksheets with pivot tables and conditional formatting. They can tell you how much they spent on Ubers in 2015 and when they’ll hit their early retirement number. They’re not fun to be around at restaurants (“I didn’t have a drink”) and one can confidently say that they don’t let themselves enjoy the fruits of their labor.

A penny-pincher

On the other end of the continuum, there are the Avoiders. They are profligate with their spending, demonstrating confidence and self-assuredness that makes Penny Pinchers envious. But deep inside, the Avoiders harbor some dark Jungian attributes — guilt, shame, and fear — about this reckless spending behavior.

An Avoider, making it Rain

Despite outside appearances, it’s no fun being an Avoider. They also don’t get to enjoy the fruits of their labor.

Strike a balance, grow your balance

Yes, there lies a sweet spot between Avoiders and Penny Pinchers. They know the details of their personal finances without being beholden to them. They have a framework for their future, with flexibility to adapt to any surprises. And they have tools, that take less than two minutes to use each day, that compound their hard-fought earnings and set their future selves (and families)up for financial security and freedom.

Knowing is power

Peter Drucker, “the founder of modern management,” proclaimed that the path to mastery begins with simple awareness:

And thanks to mobile phones, apps, and online banking, it’s incredibly easy to measure the movement of all our money. Here’s a four-step plan to get you started:

Step 1: Pick an app

There’s absolutely no shortage of budgeting apps out there. And while the app itself isn’t going to meaningfully change your money behavior — the awareness of your transactions will.

Here are three apps that could provide a good starting point:

  • Mint is free, easy to use, and has a clean app. As a free product, it’s limited in its customizability but totally gets the job done.
  • Tiller is $59/year (equal to $4.92/month) and is based entirely in Google Sheets. This gives it a high customizability, with a caveat that you should be comfortable manipulating spreadsheets.
  • YNAB (You Need a Budget) is $83.99/year (equal to $6.99/month). The set-up can be a bit daunting, but it’s simple, highly customizable, and has a nice suite of analytics. (Personally, I love this app so much that I volunteer to help people set it up.)

Step 2: Start categorizing transactions

Once you’ve picked an app and begun synching your transactions, they’ll start showing up each day in your app’s dashboard. Depending the specific app, you’ll have various categorization options. They will allow you to create a “hierarchy” of your spending needs.

A good starting point is to organize your spending (and other outflows) from Most Important to Least Important. The Most Important category should cover things like rent, bills, student loans, and car payments — items with serious repercussions if they don’t get covered in a timely fashion. Here are some examples:

  • Rent/Mortgage
  • Student Loans
  • Car Payment
  • Insurance (Car, Health, Auto)
  • Commuting Expenses (public transit, tolls)
  • Phone
  • Internet
  • Electricity
  • Gas

The nice thing about these expenses is that they’re mostly all fixed (with the exception of utilities) so they should be fairly easy to budget. And if you have kids, you may want to carve out child-related monthly expenses:

  • Childcare
  • School
  • Daycare

Next, there are Variable Monthly Expenses. These are important, but there is some flexibility here. As you’ll see, you still need groceries and household goods, but you might be able to pass on your Netflix subscription.

  • Groceries
  • Hygiene and Pharmacy
  • Household Goods
  • Medical Care (co-pays)
  • Pet Care
  • Digital Subscriptions

Then there’s Discretionary Spending — a pretty broad set of categories that cover life’s non-essential purchases. These will have a high degree of variability based on your life circumstances and spending tendencies, but they can include:

  • Going Out
  • Books
  • Activities
  • Vacations
  • Home Furnishings
  • Clothing
  • Gifts
  • Classes

Some of these can also get tricky because they are lumpy (i.e. you probably only take a handful of vacations a year), and ideally your budgeting app will let you accrue for that expense — so that you’re not hit with a last minute surprise.

Step 3: Creating your spending waterfall

So you’ve put your transactions through the maze of categories (and interest payments) and — surprise — have a little left over. What’s next? How should those precious savings be allocated?

The specifics will vary based on individual situations, but there are a few high-impact decisions that can go a long way in securing your financial future.

Build up an emergency fund

Now that you understand the dollar cost of your basic necessities, it’s helpful to start building some runway in the event an emergency occurs (loss of job, medical surprise, or family commitment). A good rule of thumb is 6 months of basic living expenses (vacations get cut out of this calculation), but this can vary based on your number of dependents, your partner’s financial situation, and whether you could go back to living with a family member.

Get that 401(k) match

Next, check to see if your company offers 401(k) matching — it’s basically free money (for your retirement). Employers on average match 2.7% of an employee’s paycheck, and that money will then compound (in a tax-efficient manner) for multiple decades.

Consider paying down high-interest rate debt

Once you’ve collected the “free money,” look for instances where you’re paying it away in the form of high-interest debt. The likely culprit is credit card debt, but this can include other types of personal loans (umm, that new TV) or even payday lending. Depending on the interest rates, private student loans could also qualify.

When it comes to paying down debt, there isn’t a specific interest rate threshold to determine which debt to pay (i.e. pay off debt that’s > 5%). That’s because debt is impacted by its tax deductibility status (i.e. mortgages and federal student loans), your tax rate (both Federal and State), and your investment alternatives (i.e. opportunity cost). But remember, it’s hard to go wrong paying down debt — especially the kind with high interest rates.

Step 4: Identify your long-term savings goals

Your options multiply tremendously when you make it into this last phase of the waterfall. Here it helps to take stock of your long-term goals such as buying a home, saving for your kids’ college, an epic vacation, helping out family members, getting a head start on your retirement, or all of the above.

Morningstar offers a Master List to help you start identifying these goals, which include:

Now don’t beat yourself up if the number of goals feels overwhelming, or if you can’t see how your current income could ever get you to a specific objective. Investing is a long game and like Einstein said, “Compound interest is the 8th wonder of the world.”

You’re on the path to mastery

With these simple steps, you’ve easily crossed the Pareto Principle of sound financial planning. And thanks to the power of these apps and the ability to automate saving and investment decisions, you’ve already unleashed your personal compounding engine that can be maintained in less time than it took to read this post. And herein lies the best part of budgeting: it frees up both time and mind space, enabling you to spend time on the activities you love and the people you care about most.

Better Programming

Advice for programmers.

Khe Hy

Written by

Khe Hy

CNN’s “Oprah for Millennials” + Bloomberg’s “Wall Street Guru.” I write about fear, ambition, and mortality. http://radreads.co/subscribe

Better Programming

Advice for programmers.

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