Am I A Hypocrite?

I buy a coffee from a cafe almost every single day.

Which I would agree, it seems pretty hypocritical when I’m posting online encouraging people to be smart with their money.

Is buying a coffee every day stupid?

Well… It depends.

It’s hard to make blanket statements when it comes to finances. And when I post a 90-second video about personal finance online, it can’t serve everyone.

The point of this email isn’t to spend 10 minutes reading about coffee. Or to make you feel bad about your spending habits.

In fact, I really hope that this email makes you feel more free.

And helps you enjoy personal finance content more.

I want to talk about how to understand where you are in your financial journey.

That will determine if your spending habits are out of control and help you identify the areas in your life that you can (and should) be improving.

In order to really understand where you are in your journey you have to be 100% honest with yourself. You can lie to me, you can lie to your friends and family, but you can’t lie to yourself.

Well I guess you can if you don’t want to change.

First, let’s walk through ways we can understand where we’re at in our journey.

Understanding Where We Are Today

Where we are in our financial journey is determined by a few factors.

How much we make - Our income is our biggest financial tool. That’s the reality. If you don’t make enough money, whatever your version of buying coffee every day is, won’t be possible.

How much debt do we have - No amount of income can out-earn a spending problem. If you’re spending 1/3 of your income on debt every month, you’re also not going to be in a position to buy things you want.

Our current net worth/ savings - We don’t need to make the same sacrifices our entire life. If we’ve made the sacrifices already to get our savings and investments to a point where we’re ahead of our goals, it’s ok to take our foot off the gas.

How much are we investing each month - If we have no debt, plenty of savings and we invest 20-30% of our income. We should focus on being generous and enjoying our money. There’s no need to be Mr (or Mrs) Scrooge with our money.

What our financial goals are - If you’re goal is to have $10m by the time you’re 40 you’re going to have to focus on different objectives than if your goal is to have $600k by the time you’re 65. Neither is the right or wrong goal, it’s up to you to decide what that goal is.

Now let’s start putting all of this together.

Stages of Wealth Building

Let’s start with income.

Now this is going to be highly dependent on where you live, if you have kids, if you’re married, etc.

This calculator can help you understand how much you need to be making to afford a living wage where you are. Calculator

If you’re making below this number, you need to be tight with your budget. You need to reduce spending on whatever your version of buying a coffee every day is. And you probably need to be focusing on increasing your income.

If you make at or above this number, income might not be your main problem.

Let’s talk about debt

If you only have mortgage debt, move on, that’s not the debt we’re talking about.

A lot of you reading this probably have student loan debt and a car payment. Some of you probably also have credit card or other types of consumer debt.

Whatever it is, you need to be focusing all of your energy on getting rid of that debt.

And you may think, but should I still be investing while I get out of this debt? No.

But does that mean I’m going to fall behind when it comes to investing? Maybe! Let that fear of falling behind force you to get aggressive about paying off your debt.

When you go to make silly purchases, challenge yourself. Should I be using this money to pay off my debt?

Make a budget and look at silly purchases you make. Calculate the cost of doing that every month on your ability to pay off debt. Calculate the cost of using that money from silly purchases and minimum payments to invest for retirement.

The best way to get rid of debt is to build a mental fire for paying it down.

Let’s talk about savings/ net worth

Ok, so you have no debt. First off, congrats!

Now is the time to start figuring out where your net worth should be based on your age (how much time you have till you retire) and your lifestyle (usually your current income is a good proxy for lifestyle).

This calculation is a good proxy for if you’re on track. It’s pretty aggressive so take it for what it is.

If you don’t like this calculation - which comes from the book Millionaire Next Door - then you could also try this:

Multiply your income by 25 - this is going to be your target net worth.

Then calculate your net worth (everything you own subtract everything you owe which should now be nothing).

Then use this compound interest calculator to determine where you’ll be at retirement based on how much you have today and how much you’re currently investing.

If you’re on track to hit your target net worth, you should feel confident in the spending decisions you’re making. If you’re off track, maybe tighten it up a little.

Let’s talk about investing

A good rule of thumb is to just invest 20-30%. Even if you’re playing catch up, investing more than that is aggressive.

If you’re currently investing more, love that, you’re a beast!

But if you invest 20-30%, you can feel good about that. And you can feel good about spending money on things that you love.

Conclusion

The reality is that even if we are slightly off track, the last thing we want to do is create a lifestyle that is unmanageable.

There are points in time where we need to be making more sacrifices - like when we have a low income and when we have a lot of debt.

But the good news is that we don’t have to make those sacrifices forever.

So even if you are behind in your goals. If you’re investing 20-30% you should feel good and make sure that you’re allocating some money to enjoying life and enjoying the people in your life.

We’re all in different stages of our journey to financial stability. Spend some time figuring out where you are and whether you need to be better with your finances or if you can be more generous with your spending.