Chunks of dollar bills

What is Extra Money Worth to You?

The past couple of weeks, I have been putting in a bit of extra work, and it has made me reconsider the value of earning extra money in addition to my ordinary income. It is easy to fall into the trap of thinking that extra money equals more freedom in the future, and is worth grabbing with both hands no matter the sacrifice. I fell into that trap.

A New Offer From an Old Acquaintance

Over the new year, I started a new job. On account of the close relationship between my old and my new employer, I have been able to help the former with their transition after my leaving by dedicating some of my working time there. Not long into the deal, it became evident that my old employer wanted me to contribute a bit more than their agreement my with new company allowed. Their solution was to propose an after-hours consulting deal, which would see me handsomely rewarded for my extra effort.

Given that my spouse and I are expecting our first child come summer I didn’t have to think too long about the offer before I accepted. Financing all that baby equipment, like strollers, car seats and whatnot, without having to touch my savings or interrupt my normal cash flow just seemed like an offer too good to turn down.

The True Cost of More Money

My mistake here was setting my sight firmly on the prize, without giving much thought at all to the sacrifice. At a glance, a few weeks of extra effort doesn’t seem like much when the reward is sizeable. A closer look at the realities, however, reveals that the sacrifices are real and felt. Here are some examples of what putting in the extra hours for a few weeks at the beginning of the year at my old place of employment resulted in:

Cross-country skiing tracks
Would you prefer the blue hue of a computer screen, or the blue open sky?

Missed out on the best skiing weekends of the year

Cross-country skiing is one of my hobbies. There is nothing quite like gliding through the beautiful, white and picturesque winter forest landscape, working out and achieving Zen simultaneously. I missed what will likely be the best couple of weekends of the year for skiing because I had to sit in front of a screen crunching numbers.

Underperformed in my new position

When I say underperformed, I mean in comparison to my very best. I believe I have started adequately, but it would be foolish to dismiss the effect of working additional hours elsewhere. Only superhumans would remain unaffected, and in retrospect, I feel I could have gotten off to an even better start in my new job had I put all my focus into it. The next couple of months I have to put in extra effort just to make sure that the impression I give in my first half year at the company is as good as I know.

Wasted precious “just the two of us”-time

While both my spouse and I are very much looking forward to becoming parents, the day it happens will mark the end of an era. For the next eighteen years, at the very least, someone else will be the primary focus of our lives. There will be much less time for the just the two of us to hang out. Instead of making the most of our final few months as commitment-free young adults, I spent some of those hours in an office.

Those are just three examples of direct sacrifices I made by working extra hours over a period, for a bit of extra cash. Digging deeper, I could list out many more things I would rather have been doing than sitting at a desk. Hanging out with friends, reading books, working out, playing the guitar, and much more. And that’s before even mentioning the lack of energy when I finally got home, and less able to put my remaining free time to good use. My depleted energy levels affected all you Abovare-readers, as I wasn’t able to publish a new post last week, despite my goal of publishing a new post weekly.

Snowy winter landscape
This is where I want to spend my winter days

More Money Is Not Worth Less Living

I have come to the conclusion that extra money is not worth pursuing if it involves trading the free time I have left after already putting in the hours of a full-time job. The obvious exception to that is if the time I put in has added benefits in addition to just earning me extra money. If writing about personal finance online, developing my knowledge of several fields I’m interested in (online marketing and personal finance) will result in another income stream at some point, then great.

With this in mind, the only reasonable conclusion is that I should only pursue money making opportunities that are interesting enough that I would dedicate time to them regardless of the monetary reward. It is important to point out that this is a result of already being financially stable, and having enough resources to finance the needs and the wants that are important for my quality of life.

The point of this post is not to tell you to stop working or to stop putting in the extra effort to maximise your earnings. I want you to be conscious about the assessments you make when it comes to working, money and what is important in life.

It is easy to get caught up in your financial goals and to do whatever it takes to realise them as soon as possible. But don’t forget that today is the only day we are guaranteed to do with as we choose. We have no guarantees for the future. Finding a balance between prioritising your future, and enjoy life now is important. If you are already on track to reach your financial goals within a timeframe you are comfortable with, is it worth sacrificing guaranteed time to spend as you please to reach those goals faster?

I have made my choice, and now I want to hear your opinion. Leave a comment below, or drop me a line on Twitter @Abovare or the Abovare Facebook Page.

Sign at demonstration

Seven Charts to Challenge the Popular Middle Class Money Narrative

The concentration of wealth is a societal problem that society as a whole cannot afford to ignore, and it is not getting better. It recently emerged that the eight richest persons in the world possess as much wealth as the poorest half of the world’s population. Eight men hold as much of the world’s resources as 3.6 billion people.

Unfortunately, traditional media tend to conflate this increase of wealth among the very few at the very top with the demise of the western world’s middle class. The middle class, as the consumer, and product, of traditional media, generally tend to accept such tales of their demise. Doomsday prophecies, particularly those that affect your very own readership, are simply good business.

Here, I will present seven charts based on income, savings and consumption data from the United States over the past thirty years. My hope is that these charts will make you think twice before unconditionally accepting the narrative that the richest few are stealing the wealth of the majority, the middle class. Or at the very least, show you that you have a choice in whether or not you want to give your money to those at the very top.

Americans Save Less Money Than Before

Chart displaying average saving as a percentage of income from 1984 to 2015
Data source: Bureau of Economic Analysis

The average rate of saving as a percentage of income in the United States has dropped from around 11% in 1984 to around 6% in 2015, after bottoming out at less than 3% in 2005. Surely this should be used as an argument for a grand scale deprivation of the middle class, as declining saving rates can only be a result of decreasing real wages for the general population?

Chart showing US Real Median Income from 1984 to 2015
Data source: United States Census Bureau

Average income, as measured by the median, adjusted for inflation dropped since peaking at around $58,000 in 1999. The trend has however reversed in recent years, and for the period measured, from 1984 to 2015, it has increased by around 16%. The average American is, in other words, earning more and saving less.

Servicing Loans Is Not The Problem

One reason often cited for the reduction in saving rates is the increase in housing prices, supposedly far outpacing real wage growth (it is, in some areas, but not by much for the whole country on average) resulting in higher mortgage payments that in turn reduce the average American’s ability to save.

Mortgage debt service as a percentage of average income
Data source: The Federal Reserve Board

That claim does not have a base in reality. As the chart above shows, the average mortgage debt service payments as a percentage of disposable personal income were lower in 2015 than it was in 1984. Unsurprisingly, it did peak at just above 7% in 2006, but the trend for the whole period is more or less flat.

If mortgage payments aren’t to blame for the reduced rates of saving, then surely the increase in student debt and the cost of servicing those debts are the reason? At least, that what you would believe if you drew your conclusions from looking at headlines. The actual numbers, however, tell a different story.

Consumer debt service as a percentage of household income
Data source: The Federal Reserve Board

The trend for consumer debt service payments, which includes student loans, as a percentage of disposable income, is near identical to the one we saw for mortgages. In fact, over the observed thirty year period, the rate has indeed decreased.

The Real Reason Why Americans Save Less

I promised you seven charts. From the first five, we have established that average real income has increased over the past thirty years. We have seen the decrease of average saving rates, but the cost of servicing debt does not offer an explanation. The final two charts make it abundantly clear what is the actual cause behind the average American’s reduced rates of saving is.

Personal Consumption as a Percentage of Income
Data source: Bureau of Economic Analysis

Increased personal consumption is the reason why the average American saves less money than they did 30 years back. And before you jump in with “well, of course, that is because everything is much more expensive than it was back then” remember that we saw above that the average person has more money to spend today than back then. In real terms, after inflation. Logically, the conclusion that follows is that the average American is consuming more than they did 30 years back.

Chart showing Real Median Income development vs Personal Consumption
Data source: Bureau of Economic Analysis

I want you to study the above chart carefully, and observe and take in the point it conveys. It shows two graphs we’ve seen before plotted against each other: The development of the real median wage against the ratio of consumption as a percentage of income, and the trend of these two graphs are nearly identical over the observed period.

What this means is that every increase in real income is being spent entirely on consumption, thus increasing consumption ratio. While saving some of that extra income might sound like a good idea, in principle, the data shows that the average American ends up spending it on personal consumption instead. Thus, the average rate of saving decreases.

Chart comparing Saving Rates vs Personal Consumption Rates
Data source: Bureau of Economic Analysis

Our seventh and final chart shows that the saving rate and the personal consumption rate are near perfectly inversely correlated. And, as we saw above, consumption increases with increases real wages. If the middle class is being robbed, it is of their own accord. Or rather, they are, consciously or subconsciously, willingly spending their increased purchasing power.

Are you looking for a different way? Start with reading How I Learned to Stop Worrying and Love Saving Money because it all begins with taking charge of your personal finances.

Header photo by Tim Pierce.

Football goal covered in snow

Better Goals for A Better Year

It is the season for setting goals, and if you frequent the various corners of the online personal finance community, you should be well aware. While it is important to evaluate your goals, and performance, continually, a new year is a good an opportunity as any to assess and reset your goals. Circumstances or preferences may have changed to the extent that you need to revise all your personal goals.

But, before you finalise your goals, have you thought about whether your goals are good? An often overlooked fact, is that all goals are not equal. Some will help you improve, by motivating you, while others will steal away any inspiration before it even reaches your mind. So, if you haven’t set your goals for the coming year just yet, make sure to read on for some valuable advice. And, if you already formulated goals, well, there is no reason not to refine and improve them.

The Characteristics of Good Goals

There have been quite a few profiled writers, especially within what could be characterised as the “self-help” scene, that have focused on goals in recent years. James Clear famously tells you to ditch goals for what he calls systems. However, if we boil it all down, this is just a roundabout way of saying that you shouldn’t set goals without having a clear idea of how you are going to achieve them. It seems entirely evident on contemplation, yet so many fall into the trap of setting vague goals without any thought to how they will realise the goals.

Consider the following goals, of which I am certain you have seen examples in the recent weeks:

  • “In 2017 I am going to save money.”
  • “Next year I am going to get into shape.”
  • “I will spend more time with my family the coming year.”

All of these are terrible goals for a multitude of reasons, and will in all likelihood serve to make you feel worse about yourself regardless of what you achieve in the coming year. And, as mentioned, goals of this variety are often set without any regard for how they will be realised. Approaching goals without considering the how is particularly destructive because it reduces setting goals to a vague state similar to dreaming. In fact, while goals have other advantages, the planning and contemplation associated with defining the goals are perhaps the most critical values of all goals.

With that in mind, as well as the aspect covered in the previous post, Start With The Why , which is highly relevant to goal-setting, you already have a good framework for setting goals that are helpful. Be clear about why you want to achieve something, and give proper thought to the how. In fact, you should document both of these aspects in written form.

Tagged wall with text
By making sure your goals are SMART, you can optimise your chances of actually realising them

We can use the “SMART” acronym to validate further that the goals we have set for the coming year are good enough. Each letter signifies a property our goal should have:

  • Specific: Our goals should be specific, and describe a particular future state, as opposed to vague depictions that have more in common with dreams than well-formulated goals.
  • Measurable: If you cannot measure whether or not you have reached your goal, and quantify your progress, you need to rephrase it. Instead of saying that you will save money next year, state exactly how much money you want to save.
  • Ambitious: While reaching your goals is good, there is little value in getting there without adversity and sacrifice. Make sure that your goals are ambitious enough that getting there actually contributes to your why. If you wish to reduce mindless consumption and increase your freedom by saving money, setting aside a couple of percentage points of your salary probably won’t contribute.
  • Realistic: Conversely, setting a goal that is beyond your reach is a sure-fire way of making sure that you will lose motivation before long. Aiming to save a million dollars is good and well, but having that as a goal unless you have a real chance of reaching it will only be detrimental with regards to your why.
  • Time-specified: Actually, pretty much everyone can save a million dollars with a conscious approach to how they manage their finances. So if that’s what you want to achieve, consider how you are going to do it, and set a deadline for when you want it done.

My Personal Goals for 2017

The overarching theme of what I want to change in 2017 is to be more conscious about how I spend my time and my money, which can be summed up as read more, write more, play more, and save more. While I am financially far more responsible than I was just a couple of years back, I have yet to reach that same consciousness with regards to how I spend my time. I spend far too much time loitering around on the web without any purpose, and I probably still watch a bit too much TV.

I have decided to split my goals into three categories: Personal, health and fitness, and finances. Before I present my goals, it feels important to throw in an apropos: These goals are set from the perspective of my life as it is today. If all goes as planned, however, a tiny human will be joining our household the coming summer. My experience with tiny humans is very limited currently, but I do have a hunch that the arrival of one might spell some changes in my life. We will see, come the end of the year.

Personal

When it comes to personal goals, it is all about expanding my horizons, acquiring new knowledge, and expressing my goals. I want to live life fully, but on my personal terms. What those terms are, however, should always be questioned, examined and put to the test. I value freedom and the ability to choose how I wish to spend my life, but those things have little meaning at all unless I am exploring the world as well as the insides of my own mind.

Read at least 20 books from cover to cover: I never read as many books as I’d like. While I read a lot, especially online, both long and short form articles, tweets, comments and what not, books offer a coherence and immersion that you simply don’t get from anything else. That is why I want to switch out some of my randomly-surfing-the-web time for reading books and increase my total books read to at least 20 during 2017, up from a measly 12 in 2016.

Write at least 50 new posts for Abovare: If reading takes you inside new and strange worlds, writing is a way of sharing the world inside your head with the other people. It improves communication, language skills and understanding, and writing, sharing and, in turn, teaching is probably the ultimate step in increasing your knowledge of a particular subject. By writing here at Abovare, I hope to make new connections and share my expertise, but, ultimately, it is a learning process for me as well: I want to master the field of personal finance, and everything that surrounds it. And what better way to do that than putting my knowledge to the scariest test of all, that is sharing it?

Practice the guitar four days of the week: Music is an important aspect of my life, and I spend a lot of time listening to music. While I believe we have the ability to express ourselves creatively through everything we do, playing the guitar is perhaps my most important creative outlet. My skill set is just not good enough to do all that I want to do, and that is something I strive to improve. Formulating a decent goal in this regard is difficult, which is part of the problem I suppose, but as it stands the aim is to practice on the guitar at least four days of the week.

Health and Fitness

Knowing what you want, and having the financial means to do it, means nothing if you lack the health to do it. I like to stay in shape by running and, during winters, going cross-country-skiing. There is simply little that compares to pushing your body to your limits, outside and as a part of nature. To properly govern my health, I need to exercise and improve my body strength in addition to doing cardiovascular exercise, so that is something I must look to incorporate into my training program for 2017.

Complete at least 120 workout-sessions: I was right on track to achieve my goal of 100 sessions in 2016, but falling ill for the two final weeks of the year made me come up just short. For the coming year, the goal is to increase the number of sessions slightly, as I will try to incorporate body strength sessions, as mentioned, in addition to the running and skiing.

Run at least 1000 kilometres: The exact distance I ran in 2016 is a bit unclear, as the tracking software I used doesn’t differentiate very well between running and other activities. 1000 kilometres is a reasonable goal, however, as it is both a step up from last year but at the same time entirely achievable within my current workout programme.

Bonus goals: Finish a 10K in less than 40 minutes and finish a half-marathon in less than 1 hour and 40 minutes. These aren’t goals I am working actively towards achieving, but reaching them would be signs that the training I am putting in is yielding results.

Finances

Oddly enough, given that Abovare is a website focused on personal finance, these are the goals that need the least attention. Years of establishing routines, budgeting and tracking incomings and outgoings have given me a reasonable level of control. That said, there are changes on the horizon with a little one on the way, making it more important than ever to maintain control. I have therefore defined goals that I believe will further solidify my financial situation, and increase my freedom and ability to lead the life I want for my family and me.

Increase year-over-year net worth growth with 50%: I am still very much in the accumulation phase when it comes to building wealth, and 2016 was a good year in that regard as I was able to increase my net worth significantly. I hope to expand further that growth in the coming year and have positioned myself to do that by, among other things, starting a new job at the turn of the year. One factor that could affect my ability to reach this goal is the (ridiculous) local real-estate market. As that is entirely outside of my control, and doesn’t change my short to medium term financial outlook, I am excluding the value change of my primary residence when it comes to calculating my performance. (Interjection: Yes, I do include the value of my primary residence when calculating net worth, and I believe it is the only sensible thing to do. I will be writing an article on this subject soon.)

Invest 10% of my take-home pay in the stock market: While 2016 was very much about reaching my minimum liquidity threshold (Unsure what this means, exactly? Just read The Basic Principles of Personal Finance), I need to increase my exposure to the market in 2017. I am not confident enough to direct my entire free cash flow towards investing, but 10% of my take-home for the year should be the absolute minimum.

Establish a concrete plan for building a new source of income: 2017 will be an exciting year, as I am starting a new job, will be sinking some time into Abovare, and am starting a family together with my spouse. Between this, and trying to fulfil my other goals, I don’t foresee having an excess of free time. That is no excuse for not working on one of the staples of financial safety, which is diversifying your cash flow. I am currently painfully dependent on that one job that brings in the money necessary to live the life I have constructed, and that is not a very safe position to be in. It is, therefore, imperative that I start building other streams of income as well, and the goal for 2017 is to lay out a concrete plan for establishing another revenue stream in 2018. Landlording, Amazon affiliate sales through niche websites, or trying to get in near the top of the next MLM-pyramid? That is for me to decide during 2017, and 2018 will be the year of execution.

Those are my goals for the coming year. Have you formulated yours yet, or are you still working on them? Feel free to share your goals in the comments below, or join the discussion by tweeting @Abovare, or leaving a comment on the Facebook page.

Header photo by Thomas Leth-Olsen.

The word why pictured in handwritten text

Start With The Why

I thought it only fitting to open Abovare with an article focusing on what you should be thinking about as you embark on your journey towards better control over your finances and in turn more freedom to lead the life you want. The ability to exert control over your finances and the variables that influence them correlates strongly with your mental strength and overall steadfastness and ability to follow through on your plans. Therefore, it stands to reason that utilising some simple tricks that are shown to improve the chances of follow-through will help you us on our to better financial control.

One of these tricks is ages old and propagated in recent years by authors such as Steven Covey in his book The 7 Habits of Highly Effective People and more recently the high-profile TED-talker Simon Sinek’s aptly titled Start With Why. Following the advice is as simple as having a clear picture of what it is you want to achieve before you start something; what the why? Far too often we start something without a clear end goal in mind, which makes it almost impossible to achieve anything of note.

Consider the anecdote of going on a trip. Sure, travelling is nice, but setting out willy-nilly without any plan of where you want to go, you are likely to abandon travelling before reaching the place you want to go. Instead of going off on a whim, use the planning stages of your expedition to sort out where you want to go, and why you want to go there. Preparation will give purpose to your travels, increase your chances of follow through, and increase the feeling of accomplishment after reaching the end.

When it comes controlling your personal finances, not drawing a clear picture of what it is you want to achieve is simply too big of a risk to assume, regardless of your particular tolerance for risk. Consider the consequences of failing to identify your why, and as a result relaxing a bit and slowly letting go of the control over your finances. You don’t have to be in possession of a particularly vivid imagination to get an accurate idea of what the outcome is likely to be. The Internet is full of stories telling us exactly what happens.

I do have good news for you, however. The mere fact that you are reading this sets you apart and indicates that you are on the right path, away from the ruin of debt. Instead, you are actively looking to educate yourself and through the power of knowledge take control of your finances. To make sure that you build on that momentum, and maximise the chances of success and avoid the pitfalls of losing motivation because of a lack of end goals, it is important to stop and take a moment to reflect.

For many people, money becomes an end in and of itself. If you stick around to read coming content here at Abovare, which you can, for instance, do by subscribing to our mailing list, you will quickly and often notice that my philosophy is that money has no intrinsic value. Money only means something as long as we can use it as leverage to achieve the things that matter in life. And what are those things? The true is the beauty of it is that no one else can tell you what is important to you. Some people work to accumulate money to retire from the rat race, while others want to buy a new car. And if one of those things truly makes you happy, then that is fine, nobody can object.

Part of defining your mission statement, and formulating why handling your finances matters to you, is examining the depths of your psyche and discovering your core values. While nobody can tell you that there is something wrong with wanting to buy a fancy car, as stated above, it is important to be conscious about what you define as your why. Much of what will be written here at Abovare in the future will be about trying to hammer this point home, and in turn dissuade unconscious consumption. So many of the situations where people find themselves between a financial rock and a hard place is avoidable simply by adopting a more conscious approach to what money is spent on, and why.

If you are already familiar with your why, and utilise a conscious approach to what you spend your hard earned money on, that’s great. But do not worry, there is plenty of content coming for you as well here at Abovare. The why behind Abovare is to educate and share actionable tips and tools for improving your personal finances, and that will include in-depth looks at topics such as budgeting, saving and investing, in addition to many other related topics.

And, if you are among the many people who have not yet given careful consideration to their why when it comes to accumulating assets, I suggest that you spend some time with yourself. Reflect on what you wish to achieve in life, and what part money plays in getting you there. When the why is sorted out, you are ready to start your journey, and the place to start is by reading The Basic Principles of Personal Finance. This is the first of Abovare’s Guides to Building Wealth, and it introduces some of the most fundamental concepts of personal finance.

Finally, make sure that you never miss new content from Abovare by either signing up for our mailing list. You can also stay up to date on other interesting articles related to personal finance around the web by following us on Twitter. If you prefer Facebook, we naturally have a profile there as well, so don’t hesitate to hit that like button.

Header photo by Quinn Dombrowski.