Wednesday, March 4, 2015

Breaking all the rules, part 2

Well, once again, a financial expert has helpfully stepped up to explain to me just why I'm doing everything wrong. Only this time, it's not just the way I shop for groceries that's completely misguided; it's the whole way I manage my finances.

Apparently, my whole adult life, while I've been under the impression that I was living frugally, building up my nest egg, and setting myself on a sound financial footing, I've actually been doing a terrible job of saving, and award-winning journalist Liz Weston has the numbers to prove it. Well, actually, they're not so much numbers as just bald, unsubstantiated claims, but hey, she's the expert, right? And according to her expert opinion in "5 poor ways to save (and how to do better)," I'm making at least four crucial mistakes:
  1. Paying my bills first. Ever since I got my first paycheck at the age of 16, my practice has been to deposit the money in my bank account and then draw money out of that same account, as needed, to pay for bills and other expenses. Whatever was left over was my savings. This, I've just been informed, is all wrong. "If you wait until your bills are paid to figure out what you can afford to save," Weston explains, "you've already lost the savings game." So apparently, Brian and I, while consistently saving one-third to one-half of our income, have actually been losing the "savings game." Just imagine how much we could have saved if we'd been winning! What we should be doing, according to Weston, is setting aside a certain amount each month for savings and then feeling free to spend all the rest—whether there's anything we actually need to spend it on or not. How this is supposed to result in saving more, I'm not sure, but the expert assures me it will, and who am I to say otherwise?
  2. Keeping all my savings in one account. Actually, these days I have two accounts: one at our local bank, where it's easy to access whenever we need it, and one in an online savings account, where we earn a bit more interest (though not a very big bit lately) and can easily transfer it into investments. But for many years, before I opened my online account (and, indeed, before there was any such thing), I had just one savings account for, well, savings. Any money I earned went into my account, and any money I spent, whether it was on gas, groceries, or a trip to California, came out of it. Once again, according to Weston, I've been screwing up big time. "Mingling your emergency fund with your future down payment, your vacation fund and next month's insurance premiums is a recipe for confusion, if not disaster," she chides. What I should be doing is keeping "multiple subaccounts" in my online bank, each one earmarked for a specific savings goal, to help me "track my progress" and make sure I don't raid the new-furnace account for a trip to Disneyland. Of course, I don't actually have any specific savings goals right now except saving for my eventual retirement, and the money for that goes into a separate, tax-advantaged account. Anything else I'm likely to need or want, I can afford to pay for, outright, from my one nice big lump of savings.
    Maybe the problem is that I'm not ambitious enough. I probably should be trying to save up for a whole bunch of things I can't currently afford, and that would give me something worth setting up a bunch of individual accounts for. Unfortunately, I can't seem to think of any. Our house is paid off, we don't expect to need a new car for over ten years, and even if we had a sudden and completely unprecedented urge to go on a weeklong Caribbean cruise, we could still pay for it in cash—though I suspect seeing the price tag would be enough to shock us back to our senses. I'm sure there must be something out of our current financial reach that we ought to be working toward, but I just can't think what.
  3. Having my savings account linked to my checking account. This is a handy feature that I set up when we first got our mortgage, nearly seven years ago, and our mortgage payments were scheduled to come automatically out of our checking account. Linking the checking account to savings ensured that that, on the off chance that I forgot to transfer money to checking in time to cover the withdrawal, it would come out of savings automatically, and we'd pay only a token $5 fee rather than a $35 overdraft fee. Sounds like a smart idea to me, but Weston knows better. "While you want your savings to be reasonably accessible," she explains, "you don't want instant access," because that would make it too easy to "raid the money on a whim." So apparently, it's better to risk a $30 overdraft than to keep your money where you can actually use it. Of course, if a genuine emergency were to crop up—say, a major medical crisis—your money would be safely shut away in an account where you couldn't reach it for several days, but no doubt she thinks it's better to risk being unable to pay your medical bills than to risk suddenly being seized with an irresistible impulse to spend all your savings right now.
  4. Not using automatic transfers. Since my online account earns more interest than the one at my local bank, I transfer money out of the local account whenever the balance gets too high and move it into the online account. Wrong again, says Weston: what I should be doing is setting up an automatic transfer to pull a certain amount out of my local bank each month and into the online account, where I can't get at it. The reason: "If you have to make a decision every paycheck whether to save and how much, you'll wear out your willpower." Oh, that's right, I forgot—I don't have any willpower. If I have access to my money, of course it will burn a hole in my pocket. Not that it ever has before, but Weston is the expert, so no doubt she can predict my behavior better than I can.
Now, here's the thing: I've been breaking these rules for pretty much my entire adult life. And during that time, I've always not only lived within my income but saved a sizable chunk of it (especially since my marriage). I've regularly funded my retirement accounts, if not always to the max, at least up to 10 percent of my income. Brian and I paid for our own wedding, paid cash for our last car, and paid off our mortgage—the only debt we'd ever had—in six years. And even with the major drop in my freelance income over the past year, we're on track to retire before age 60. Yet according to award-winning journalist Liz Weston, we're doing everything wrong and sabotaging any hope of ever achieving financial independence. Clearly, there's something amiss here.

I think the basic problem with this article is that it starts from the premise that the reader is hopeless with money. If you have it, Weston assumes, you'll spend it, so the only way to save any is to trick yourself. Set aside a fixed amount out of every paycheck and have it magically whisked away to another account, where you can't easily reach it. And then, to make sure you don't break the piggy bank, sort all the money out into little individual sub-accounts, each clearly labeled to remind you what it's for and stop you from trying to use it for anything else. All this is probably sound advice for people who really do have trouble managing their money, and if Weston made it clear at the outset that this was her target audience, I'd have no quibble with her article. I'd just read the first paragraph, see that it wasn't addressed to me, and move on.

But Weston doesn't do this. Instead, she leads off with, "Too many of us don't know how to save." Notice that us there? She's trying to make her advice sound universal. Instead of saying, "This is a problem for some people, and if you're one of them, here's what to do," she's insinuating, "Hey, look, this happens to everyone—to all of us—and it's okay, I know how to fix it." But the truth is, people aren't all alike. Their personalities are different, and so are their financial situations. And when it comes to financial advice, one size is never going to fit all.

I'm not asking Weston, or any other financial writer, to stop giving advice that doesn't happen to be relevant to me. I'm just asking them to stop claiming it is relevant to me. They don't know anything about me or my situation, and it's arrogant and obnoxious to pretend they know how I'll behave in a given situation—even to the point of insisting that if I think otherwise, I'm just deceiving myself. If these writers want to tell me what some people, or even most people, do with their money and why it's a problem, fine. Just stop assuming I'm one of them.
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