Make Me Happy With Money? And 12 Other Money Questions Answered
Why answer 13 of the top finance questions? Because it's supposed to be unlucky. But that's silly. Forget emotion, embrace the logic. 13 is a number that follows 12 and precedes 14. That's it. So lets get the gray matter firing and talk about the most common questions we get here at Humble Buck.
Will More Money Make Me Happy?
More money will make you happy. Sorry, it's true and not according to some random blog, but by a Nobel Prize Winner (Daniel Kahneman).
The short of it is that there are two types of happiness. First, the day to day mood. You get up and your feeling good, or maybe a bit stressed, or just a bit down. That mood peaks at about $75,000 (according to the study in 2008, so a bit higher now with inflation). But if you make more, you wont be jumping out of bed singing a new theme song.
But wait, there's a second kind of happiness. This is the general feeling of how your life is going. Think self help guru stuff. That general sense of "heck yeah, I'm doing it." That happiness keeps going up after $75,0000.
But don't stress too much. Most people (85%) felt happy each day regardless of income, even though 40% of us are stressed. Turns out we can be happy even if we're stressed.
Which Credit Card Should I Get?
If you're interested in travel, get the Bank of America Travel Rewards card. No annual fee. 1.5 points per dollar spent. And it's a Visa, so most people actually take it.
If you want cash back then go with the Chase Freedom Visa. It's highly regarded and gets up to 5% cash back in rotating categories. It has a cash bonus. And there's no annual fee.
In my own personal opinion I prefer cash back cards. Although they come with less travel benefits, they are great for flexibility. In fact, when I booked my most recent trip to Mexico I was kicking myself because I didn't have a travel card. But then the airline card that I would have got, ended up offering the same trip at $1,000 more than what I paid through a different airline. Let me repeat that. Because I was flexible, I saved $1,000 on a trip. Add to that the fact that I had a cash back card that gave me $1,100 back over the year and even though it felt like I paid "full price" for the trip, I ended up way ahead. So if you get a travel card, make sure it's an airline you prefer or has a history of being cheaper. Or just get a cashback card and enjoy all the freedom.
I would like to note though that if you're willing to turn credit cards into a part time job you can go crazy and follow the guru's in the industry. Just search for credit card hacks and be ready to have an excel spreadsheet for all the benefits. But here at Humble Buck we want to make money easy. So get one great credit card and enjoy. Keep it simple!
What Should I Pay Off First?
You should pay off the smallest debt you have first. This is called the snowball method. You simply take all your debts, list them from the smallest to largest (excluding your primary mortgage) and pay off the smallest debt first.
There is a competing method called the stack method where you pay off the highest interest rate first, but a Harvard study found that people stick to their debt repayment plans when they can see small wins. So behavioural finance wins, pay off the smallest debt, close it down and go to the next one.
Should I Rent or Own?
We mean houses. As per Felix Dennis, British publishing tycoon and generally amazing business man said "If it flies, floats or fornicates, always rent it." He was worth hundreds of millions. Listen to him.
Back to houses. If you're going to move in a year or two, you should rent. Transaction costs on houses are ridiculous (business opportunity!) and they're not liquid, it takes time to sell them and someone needs your house at the price you're offering.
But if you're planning to live in one spot for awhile? Buy a place if it makes sense. What makes sense? Great question. Can you afford a place you'll want to stay in longer than five years with a max of 25% of your gross income? Then you're probably in a decent place to purchase. Is everyone talking about making money in real estate and it's a giant stretch to afford anything within an hour from downtown? Probably not the best place to make the giant bet.
A lot of commentary on this topic will just look at the pure financial figures and if you make more investing the difference between the rent and mortgage then you should rent. But I've never run into any renter that religiously invested the difference. More likely you'll be tempted to rent a nicer place. Or go out for a cold pint more often after a hard day at work. So it's not a terrible thing to buy a decent house and be forced to save through a mortgage. Just don't leverage yourself to the hilt. Remember, get the big things right.
How Much House Can I Afford?
Less than you think. Definitely less than your bank will give you. Dave Ramsey thinks you should pay for your house in cash (seriously). Or at least only finance over 15 years.
At most try and keep your total mortgage and property taxes to 25% of your gross income, this will be below what the banks will offer you, but it will give you a bit extra to spend/save.
But if this is your first mortgage, don't stretch yourself. The old advice that you'll make more, need more space is offside. I lived five years in 490 square feet. First, alone, then with a girlfriend (now wife) and finally with a french bulldog in the mix. It's possible and oddly not hard if you start off doing it. So start off cheaper, if you can stay there, you can be free earlier.
Should I Take a Fixed or Variable Rate Mortgage?
If you are tight on cash, take a fixed mortgage, you don't want to lose sleep at night wondering if the next Fed hike is going to put you out of your house. Just lock in for five years (or more if the rates are reasonable), pay off the house and keep working on saving more, making more and learning more about money.
If you need to have flexibility in when you're going to move, have flexibility in your finances and can sleep like a rock, feel free to take a variable mortgage with a lower rate. Some banks will also let you take out a combination of a fixed and a variable rate. If you do it this way you can even have the different terms (ex. three year variable, five year fixed) so you can renew at different times. Time diversification!
Should I Pay Down my Mortgage or Invest?
If you're younger (20's, early 30's, sorry the rest of us) and haven't yet filled up your tax protected savings plans (401k, Roth IRA in the U.S. RRSP, TFSA's in Canada) then you should invest. Mortgages are forced savings and you'll benefit from investing at hopefully a higher rate than your mortgage as you can be invested mostly in equities when you're young. Just remember to invest in low cost, highly diversified index funds.
If you're older and have filled up your tax protected savings accounts, then you can start hacking away at that dreaded mortgage. Paying off a mortgage is basically a guaranteed after tax return equivalent to the rate, so it's not a bad investment. And I hear it feels awesome. I'll let you know how it actually feels when I hang that final notice to my fridge.
How Much Should I Save/Invest?
Assuming you're starting in your 20's, 10% to retire, 15% to retire comfortably, 20% to retire early. If you want to retire really early... 50%+. The extreme early retirement movement is happening. There's lots of people who are saving the majority of their salaries and retiring in 10-15 years. Best thing is, if you start out spending less, it's easier to continue spending less since you haven't bought the 2,500 sq ft house, the Mercedes or the closet full of the latest designer handbags.
I think the combination of minimalism, a good career and basic investing knowledge has created the extreme early retirement movement. I think it's here to stay.
If you're older you'll need to dig in a bit to see what you need to save for your retirement. But in general, if you figure out how much you need per year in retirement and multiply that by 25, you'll have a rough estimate of how much you need to retire. Check out Your Retirement Number.
How Can I Retire Early?
Save over 50% of your income. Invest in index funds. Yup, it's much easier to explain than do. But people are doing it. Mr. Money Moustache. Enough Said.
What Should I Invest In?
Cheap, widely diversified index funds. Check out How to Start Investing.
Best Way to Make More Money?
First, get a degree. Second a better job. Check out the 50 highest paying jobs. Following that, you can try getting a raise in your current role or starting a side gig. But for most people, changing into a higher paying industry or career will be the surest way to increase their earning potential.
When I first started working I was in furniture manufacturing for a large international company. I helped them figure out problems that happened to corporate clients. Installed an entire floor of desktops and half of them were the wrong stain? No problem, I'll figure it out. But I found out my boss had a paper route. That's right, the manager of our group would get up at 4am to deliver papers to make ends meet. Kudos to him, that's not easy. But that's crazy. So I quickly left to a chemicals company. And got paid more than my previous manager. Industry matters. Education matters. Keep looking. Be relentless.
What is the Best Way to Budget?
Now I may be a bit different than most in the personal finance space, but I think budgets don't help people in the long run. Not enough people stick to them. So instead of focusing on the little details, focus on the big things. Then instead of budgeting $45 dollars a month for home repairs and being surprised when that doesn't work, automate your saving and stop buying stuff. Then take a look at your history in mint or personal capital and figure out what you're spending the most on. Then try and reduce every item from the most expensive top to bottom.
Finally, figure out what you have after savings, "fixed" expenses (ex. mortgage, insurance, etc.) and variable (ex. gas, cable, phone, etc.) then allocate a portion to spend on whatever you want. For example, if you have $4,000 per month in after tax income and you're saving $600 per month, your fixed/variable are $3,000 per month then feel free to spend $400 on whatever. In reality if you spend $400 on t-shirts or craft beer it's not going to make a difference at the bank. Just make sure you're saving enough. If you're not saving 15%, you should work on saving more before figuring out what's the best craft beer out of the west.
Do I Need Life Insurance?
If you have dependents and you are the primary breadwinner you should have life insurance. 20 year term life insurance is cheap and will help your family out if the unfortunate happens. If you're healthy and in your early 30's expect to pay around $60-75 per month. Check out TIAA Life, New York Life or State Farm. Or anyone else that will be around in 20 years to pay the policy and is highly regarded. Just get one if you have kids.