I was having a conversation with a good friend of mine about personal finance recently. He knew that I was able to pay off my $35,000 student loans in 9 months. But I don’t think he knew just how much money I’ve been saving and investing ever since. I’d like to think that he was pretty impressed when he found out since he asked me how I manage to do it regularly. In other words, he was wondering how I’m able to live on only a small percentage of my salary. I didn’t have a good answer right then and there and so I just said something like Kubo Queen helps out a lot. That wasn’t a lie. Kubo Queen does help out tremendously. However, there are also simple principles I stick to when it comes to handling money. And by sticking to those principles I’m able to do luxurious things like maxing out my 401k account, maxing out my HSA account (which is really just another investment account), and putting away a big chunk of money in our savings account all at the same time. Since I wasn’t able to discuss the principles with my good friend at the time, I thought it was a good idea to write about them here for everyone to read and think about. So let’s dive in.
Maximize your earning potential
The most important thing you can do, without a doubt, is to make sure you’re earning enough money. It can be quite difficult to quantify just how much is enough. You certainly don’t need to be earning a million dollar salary to be comfortable, but, obviously, you’d want to be earning much more than the minimum wage in the state you live in. I’d wager that as long as you’re making at least around the median household income in your city or area, as a single man or woman, then you are probably making enough money to support yourself. For example, the median household income in my city is about $50,000 a year. My salary is $72,000 a year. And, sure enough, I am able to pay for essential bills, invest/save a significant amount, and still have money left over for nice treats for Kubo Queen and me to enjoy. I can lecture you about being on a monthly budget and cutting down your lifestyle all day long, but if you’re only making $25,000 a year in my area it would be pretty difficult to do what I do. So, to be frank, the most important principle is to maximize your earning potential.
There are many ways to maximize your earning potential. You can get a 4-year degree in a technical and lucrative field like computer science or engineering. Another option is to skip 4-year universities altogether and go to a trade school or apprenticeship program instead to learn a well-paying trade like plumbing or nursing. If you’re brave, you can even learn about investing in real estate like acquiring rental properties, which bring in money every month. As you can see, there are a lot of possibilities. Of course, you won’t be making much money while you train and learn, but you will eventually. I was broke throughout my college years, but my degree is paying me back handsomely today. And I suspect that it will continue to do so years from now. So, in short, always look at how you can invest in your skills to maximize your earning potential and stay relevant in the market.
Minimize lifestyle inflation
Another big principle I follow is minimize lifestyle inflation. Lifestyle inflation is a phenomenon where people increase their spending habits, usually whenever their income goes up. This is apparent in people who have just recently graduated from college and landed their first full-time employment. Just imagine being young and freshly out of school with a pretty good paying job. Spending tends to creep up fast. Now, of course, there are natural and good reasons for increasing one’s spending habits. In other words, it’s okay to inflate your lifestyle by a conservative amount. However, I suspect that many people do not know what it means to have a conservative inflation in lifestyle. A good rule-of-thumb is this. If you are not able to save, invest, or pay debts with at least 25% of your take-home salary then you are most likely living beyond your means. In other words, you’ve inflated your lifestyle significantly. And, no, I’m not talking about people who are earning a minimum wage. I’m talking about people like you. Young and single professionals who are earning at least $50,000 in an affordable city or an established and career-oriented person earning way more money than I am.
So how do I personally minimize lifestyle inflation? It’s simple. For the most part, I still live like a student! Right before I started working my first job out of college (my current job), I went out to buy some clothes to wear around the office. I didn’t really want to be a slob and continue wearing what I’d worn throughout college. However, I realized that I didn’t need an expensive wardrobe either. So I bought myself three chinos and five shirts, and I’ve been wearing and rotating them for work ever since. I will get new ones eventually, when there is a real need for new ones, but nobody in the office cares or even notices.
I also still prepare, cook, and pack lunches from home to work. As I’ve mentioned in the past (cooking article), doing this will help you save a lot of money since you will not be eating food prepared for you by someone else. Another benefit is that meals prepared at home are generally healthier for you than those prepared at some restaurant — especially at a fast-food restaurant. Also, don’t forget that, with enough practice, you can learn to cook dishes with much better flavor than the ones you can buy from random restaurants. These reasons are why I still prepare, cook, and pack lunches from home to work to this day; even though I could technically afford to eat out for lunch daily if I wanted to.
Those are just a few examples of what I do to minimize lifestyle inflation. The next principle we will discuss is closely related to this one. In fact, they complement each other really well.
Avoid unnecessary debt
As you may now know, I hate having debt. I hate it so much that I paid off my student loans within a year of starting my career. In return, it freed up a lot of money that I can use towards useful things like saving and investing. And now that I’m finally debt free, I plan to avoid debt at all cost except for a mortgage in the future. Being debt free is amazing. I sleep better at night knowing I don’t owe anybody money. It’s also comforting to know that in case I lose my job I won’t have debts and debt collectors to worry about. And that I don’t have to tap a significant amount of my emergency fund just to service some debts. This truly is a luxury.
I avoid consumer debt by not attaching so much value and self-worth to material possessions. For example, I do not care for expensive or brand-new cars. In fact, I see cars as nothing more than a depreciating tool to wheelchair my butt to work everyday. I do not derive pleasure or satisfaction from owning cars. So, consequently, I don’t spend much money on them. I do not have any car loans. The car I drive was paid off a long time ago, during college, by Kubo Queen. And if something happens that leaves us no choice but to get another car, then we will do so, but it will be a car we can actually afford and it will be paid in cash. This attitude automatically protects me from one of the most common possessions people get into debt for.
Another example of how I avoid debt is never buying things I do not have the cash for. I have never owned a credit card in my life, and I am not in any rush to get one in the near future either. This is because I do not buy things if I do not have the money for them. Whenever there have been things I really wanted but couldn’t afford, I rolled up my sleeves and did it the old-fashioned way — I saved up for them. Doing it that way has a huge benefit. It protects me from impulsively buying things I might not actually need and potentially regretting the money spent from such silly activities later on. Also, our emergency fund covers unexpected expenses like sudden car problems and repairs. Sticking to this habit definitely protects Kubo Queen and me from suddenly falling into debt.
Pay yourself first
So you’ve landed a pretty nice job with a pretty nice salary. You’ve also been avoiding debt and only buying things you can actually afford with cash. Great! You’re doing pretty well. Now what you have to do, every time your paycheck comes in, is pay yourself first. What do I mean by this? How do you pay yourself first? It’s simple. Every time you get paid you set aside a chunk of it, and you put that chunk of money in your savings or investments. You are paying yourself first. Then the rest of the money is used to pay for things you need to live on. Things like rent (or mortgage), utility bills, insurances, groceries, transportation costs, etc. If there is still some money left after paying for those essential things, then you are free to do what you want with it. Use it to go out to a nice dinner once a week. Go out to the movies with friends. Or use it to save for something luxurious you want to do in the future, like traveling to a foreign country.
Here at the Kubo, we take about 50% of our household income and pay ourselves first with it by maxing out our investment accounts (our 401k, HSA, and IRA accounts) and building up our savings account (which acts as our emergency fund and home down payment fund). I know that putting 50% of our household income towards savings and investments may sound a little extreme for a lot of people, but it works well for us. Like I mentioned earlier, we don’t live an inflated lifestyle and we don’t have debts we need to pay back. This frees up a lot of money to save and invest for our future. And after our bills are paid for, we still have some money left to treat ourselves. We usually treat ourselves by going out for a nice dinner or buying delicious ingredients to cook a delicious meal at home. We are able to splurge from time to time as well. For example, we’ll be traveling to the Philippines this year!
So there you go. Those are the principles I follow. Maximize your earning potential and always seek the highest paying job you can get. Trying to do what I do would be difficult when you’re only making $25,000 a year or less. You can still live a nice life and even save a bit of money with that kind of salary, but you probably will not be able to max out a 401k, an HSA, and an IRA as well. Once you do land a pretty nice job with a pretty nice salary, then make sure to minimize lifestyle inflation. Do not live beyond your means. And avoid unnecessary debt at all cost. Finally, pay yourself first. Set aside a percentage of your income to max out your retirement accounts and to build up an emergency fund (about 6 months worth) in a savings account. Doing all of this will set you apart from your peers. They’ll be spending all of their money on things they don’t really need without even realizing it, while you go on to build some real wealth.
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