Sell your extra stuff. If your in credit card debt, sell everything you reasonably can. There are all kinds of cognitive biases (loss aversion, the endowment effect, and post-purchase rationalization) working together to make you want to keep stuff that you wouldn’t buy today, even at the price you could get selling it used.
You’d be happier with the cash than some of the random things you’ve managed to pick up throughout your life. Usually this means, donations, craigslist or E-bay, but sometimes you need to sell something and eBay or craigslist just doesn’t make a lot of sense. In that case you might want to sell it on consignment.
What is consignment?
E-bay is in fact a good way to think about selling something on consignment. Basically, you’ve got something you’d like to sell, and someone who owns a store allows you to use their space to sell the thing. If it sells, you get some of the money but the store gets a cut. You only get paid after the item sells, but you still own the item until it sells.
When to sell something on consignment?
Basically, sell on consignment only when you think you’d end up with more money than your alternatives, a garage sale, eBay, or craigslist. When you do this with eBay they take a cut (10% last I checked), but it is generally smaller than if you wanted to sell the thing at a physical store.
Generally when you sell something on consignment you can only expect to get 50-60% of the sale value of the item. At first glance it might seem that eBay is the better deal, and quite frankly for most things it is; it has a broad reach, it has relatively low fees, and turnover is fast. However, you need to account for shipping costs.
If you have a really big heavy item, it probably doesn’t make sense to sell it on eBay, because shipping costs will eat substantially into what you might have gotten out of the item otherwise. An obvious example is furniture. So that gives us reason #1 to sell something on consignment:
It’s too big to ship economically.
The other major reason is that it is an item that people are reluctant to buy online. Some of these might be collectors items, or other things which have value that can vary wildly based on the condition. For example musical instruments can be tough to sell online because it can be hard to tell the quality of the instrument without actually giving it a test play. So reason #2:
People feel more comfortable buying this item in person.
The last major reason is perhaps especially rare. Any item that needs to be purchased right before it is used. Here you’re looking for normally people think of impulse purchases, but really what you want is emergency items. If you need a some kind of specialized pump for your pool because the last one broke, you probably need it today. You’ll have best luck with tools and some specialized hardware stores are willing to sell tools on consignment. That gives us reason #3:
The time between when you realize you need it, and when you must use it is short.
How to sell something on consignment
After you’ve figured out what to sell you need to find a shop that will sell the item. You have basically two choices for this, specialized consignment and second-hand stores where nearly all the items are sold on consignment, and a store that sells the type of item you’re trying to sell. It’s worth asking around for the commission that the store will take on your item.
Generally I find that commissions are 40 to 50% of the total sale price. All things being equal you probably want to sell the item on commission at a store that specializes in that particular item, not a consignment store. For example, if you have a grand piano you would like to sell, consider having a piano store sell it rather than a consignment store. The clientele at a piano store is looking to pay retail for a piano, the clientele at a consignment store is looking to get a good deal on something. You’ll probably get a higher overall sale price at the retail store.
Major Caveat – Time
Selling items on consignment can take a long time. For expensive items it can sometimes take years. You may also need to keep an eye on the store owner to make sure that they don’t forget that your item was consignment and not part of their regular inventory, so check back every six months or so, and make sure you get some kind of receipt.
This is also one of the major benefits. You don’t need to wait for your item to sell on ebay, you drag it to the store today, and then it’s one less thing cluttering up your life.
So, you own a car.
You’ve heard that sometimes these things don’t run in perfect condition forever. Go figure. So how much should you budget, month-to-month for auto maintenance.
Stuff Everyone Needs
As a rule of thumb you should count on changing your oil one to three times per year. This usually sets me back roughly $40. Every five years or so you should probably replace your tires, this sets me back roughly $500. Buy good tires. They’re worth the cost. Cheap tires just need to get replaced more often. In this case, I recommend Michelin’s. There are more incidentals, like coolant, fuel filters, and so on, but I think it’s often easiest to take a look at your spending on maintenance over the last 5 years and average it. All in all I figure about $50 per month ought to be about right, based on my average spending.
Stuff that depends
Additionally, you’ll need to set aside money for repairs as well as routine maintenance. This is a little trickier, as you don’t know in advance what the repairs will be or what they will cost. There are basically two components to saving for this: possible accidents, which you may have insurance for, and part failure, which generally is not covered by insurance.
You have two options here. Either carry comprehensive insurance, so that if your car is damaged you need only pay the deductible, or self-insure. The rule of thumb that I use is simply, could I cover this unexpected expense without causing a significant financial issue, ie having to take a payday loan, or end up paying interest on credit cards.
This means I don’t carry comprehensive insurance for my car. I have a cheap car, an emergency fund, and a high savings rate. If any of these weren’t true I’d strongly consider comprehensive insurance. If the car isn’t cheap, then replacing it at a moments notice is hard. If you don’t have an emergency fund, you don’t have money to replace it. If you don’t have a high savings rate you don’t have the capability of replenishing that emergency fund.
In order to make sure that I’m setting aside the right amount of money month-to-month in case of an accident I simply get a comprehensive insurance quote and set that money aside rather than purchasing the insurance. Yes, that does mean that month-to-month I don’t come out ahead of owning insurance, but in the long run the expected gross profit will accrue to me rather than the insurance company, for my car this works out to be about $40 per month.
If you have a warranty on your car you might not need to worry too much about much of this for the first few years. That being said, if you have an inexpensive used car you need to count on making the occasional repair. As a rule of thumb I figure that the expected repair cost annually is half of the depreciation. Another rule of thumb is that a car loses 25% of its value annually to depreciation. Therefore, if you have a $6000 car, then the depreciation is about $1200 for this year. Half of that would be $50 per month.
You can get a reasonable guess of the depreciation of your car by going to the Kelly blue book calculator to get the current value of your car. Then use the calculator again, only change the model year and the mileage so that the car is 1 year older. The difference should be a reasonable estimate of your car’s depreciation.
For example, my car from 2008 with 80,000 miles on it is worth $3000. I go ahead and check the blue book value for my model of car from 2007 with 90,000 miles on it. The calculator gives me: $2500. Therefore, I expect to lose $500 to depreciation over the course of the next 12 months. I therefore set aside $20 per month for repairs.
Adding it up
Altogether I budget $110 in maintenance a month for my car. I also budget the amount of depreciation I expect from my car, that way I’ll have already budgeted the replacement car on a month to month basis when it comes time to replace my old car.
For me the total car budget adds up to $250 include gas, insurance, depreciation*, and maintenance. This is the third biggest line item on my budget, and it’s one that it pays to keep a careful eye on, it’s less than 10% of my take home pay.
So how much should you budget? If you make more money you could certainly spend more, but I suggest prioritizing financial independence over bonus cars. Certainly your car budget shouldn’t exceed 15% of your income.
*A rant on depreciation
Many people will ignore depreciation because it’s not a cash expense. This is bonkers. Depreciation is a real cost. You have a net worth, and every month it goes down by an amount equal to depreciation. In order for you to keep your net worth flat, you need to put the same number of dollars into a savings account to keep your net worth flat.
Alternatively, look at it this way. If you don’t budget depreciation, how does the cost of your car get put into your budget? If you pay cash for a car you probably aren’t just taking one months worth of excess cash to pay for a car. (If you can do that, great! But the situation is atypical.) That means that you’re going to blow up the budget for one month (the month you replace your car) in a weird way. This will result in significantly overestimating your savings rate! If you get nothing else out of this article. Budget the depreciation of your car.
An exception to this is that, if you have a car payment you can budget the depreciation plus the interest in the car payment or the car payment! If you budget for both depreciation and the car payment you end up double counting.
If you’ve ever experienced the death of a loved one, you’ll know how difficult it is. Loss is always unexpected, and while my family would be grieving my loss, I don’t want them to worry about the financial burden losing me will make on them. I don’t want to leave them with another worry in an already difficult and stressful time.
As a single, 23 year old woman, I chose to buy life insurance for myself and make my sister the beneficiary. When I told friends and family of my decision, they questioned why. After all, I don’t have a husband or kids who would be impacted by my death. There were 3 main reasons why I chose to take out life insurance now instead of waiting until later.
I don’t want to put any additional burdens on my family.
I’ve heard that funerals in America today cost roughly $10,000. I don’t know about your family, but mine does not have that kind of money sitting around in a bank account. I remember when my Nana passed away listening to my dad and aunts talk about how expensive it was going to be and they had five siblings amongst whom to share the cost. If we were ever in that situation, my family would need some way to fund my burial expenses. This is where life insurance from SelectQuote comes in.
Also, I am planning to buy a house soon, and my family would need some way to make house payments without impacting their own finances (or until they were able to sell it.) I’m currently working to pay off my remaining $15K of debt. Although in my situation, if I were to pass away the debt would be dissolved, that is not always the case. If I had any co-signed loans, the co-signer would be responsible for the full payment of the loan. Additionally, If I were married, the debt would automatically transfer to my husband, who I would not want to burden with my loans either. I do not want to burden anyone with my financial mistakes when I am gone.
I want to help my family members after I am gone.
Although I am not rich by any stretch of the imagination, I try to help my family when I can. If something were to happen to my family after I am gone, they would have the life insurance money to help them out in a tough situation, such as losing their job. I want my family to know how much I loved them, and financially helping them is the only way I can help them after I am gone.
It’s low-cost and high return.
Right now, I can get a life insurance policy for cheaper because I’m young and healthy. Rates generally go up with age, especially as health issues develop. If I were to wait until I have a spouse and children, in say 10 years, to take out a life insurance policy, it would be more expensive, especially if any health issues were to arise between now and then. Hopefully in 20 years, when my life insurance policy term is up, I will be in a position to self-insure. Until then, it gives me peace of mind that my financial expenses will be taken care of after I pass away.
Traditionally, experts recommend buying life insurance with a death benefit that is 7 to 10 times your annual income. However, this could leave you under-insured. When determining how much insurance you’ll need, take into account how much debt you currently have and any future expenses like college or paying off a mortgage.
Consider also how you’d like your loved ones to live after they are gone. For instance, I’ve always wanted to take a trip to Europe, and when I pass away, I want my loved ones to go on that dream trip to Europe in my memory. Do you want to leave a legacy to your nieces and nephews or favorite charity? If so, you may want to consider that when determining your amount of life insurance. For me, a $400,000 life insurance policy is fine, but for someone who is a stay-at-home parent or takes care of aging parents, you’ll most likely want to insure yourself for more.
When I was pricing life insurance policies, I went online to SelectQuote. It took only 5 minutes to fill in the requested information. An agent was then given my information to price the most accurate quotes available, and within 5 minutes he called me with the quotes. SelectQuote also has options to price auto and home insurance, which was so convenient. After receiving quotes for auto insurance, I switched policies and was able to save a fair chunk of money per year!
One of my mentors always said “When you don’t make a plan, you plan to fail.” Regardless of your family situation, if you are not in a position to self-insure, you need some sort of life insurance. They say that two things in life are guaranteed-death and taxes- and I want to be as prepared as possible.
You have to spend less than you earn. If you have $20,000 of student loans you have to spend $20,000 less than you earn plus an additional amount for interest. If you have a high interest rate (anything over 10%) this is an *emergency*. Debt that compounds at 10% or greater will double in seven years or less, left unchecked. Got $20,000 in debt and an interest rate of 15%? That’ll be $80,000 in 10 years.
If your student debt is an emergency you get it under control in three steps. If you have a credit card
- Figure out the exact amount of money you need to pay for food (more than $10 a day is far too much), shelter (more than $500 a month is too much), and only those things which you need to keep your job (I figure a cell phone plan? If you spend more than $40 per month you’re getting robbed.) The rest of the money gets sent as a payment toward your debt the same day.
- Sell everything you no long want. Be tough.
- Sell everything else if you could repurchase it for no more than 2x what you are selling it for, and you don’t need it to survive. Got a couch that you could Craigslist for $400? Could you get a similar used couch for $800? Put it on Craigslist tonight.
This should pay down your high interest debt quickly. Of course *any* debt over 10% is a disaster, not just student loan debt. See if it is possible to refinance the debt at a lower rate as well.
If you don’t have a credit card also make sure that you save two months of expenses before making extra payments on a student loan. If you have to give it to someone trustworthy to hold because you can’t control your spending, do it.
If your student debt is between 4% and 10% you should pay it off as soon as you reasonably can. This isn’t a disaster, you don’t have to sell your couch. Keep your expenses to a minimum but don’t weep over every coffee you spend money on. Make sure that your payments to your student loans are more than the minimum. Preferably as much more as you can handle. This is just about one of the best investments (besides going to college in the first place, college is usually a great decision, even with loans) that you can make. All in all put aside no less than 30% of your income towards this.
If your student debt is less than 4% basically don’t worry about it.
You need to make your payments, but 4% is long run inflation. It’s certainly debatable whether your better off paying off the loan or making some other investment. That other investment probably shouldn’t be sit it in a bank account, but if you aren’t contributing the maximum to your IRA or 401k you could completely reasonably fully fund those before wiping out your student loan.
Perceptive debtors may notice that there is a huge difference between how I think you should treat high interest debt (Sell the furniture, Never eat out, asceticism-good) and low interest debt (who cares?).
That’s simple because of how interest rates work. When someone says that a thing has exponential growth they often just mean it as a stand-in for really fast, and that’s kind of true and kind of false. Exponential growth can start fast or slow, but at some point it can always get out of control. Anything with compounding interest grows exponentially.
To get an idea of how fast a balance will grow, a quick useful estimate is the rule of 72. If you divide 72 by the interest rate you get the number of years it takes for a balance to double for a given interest rate. For example, if you have $2000 and it is growing at 12% interest it will take 6 years to become $4000. This works for any balance. If you have $150,000 growing at 12% it will take 6 years to be $300,000. This is why it is important to start saving for retirement early. Even $10,000 saved at 8% interest doubles every 9 years, after 45 years (5 doublings) you end up with $320,000.
This is also why it’s important to squash high interest rate debts fast. Left unchecked they can get out of control. That’s also why it can be worth it to sell your $400 couch today even if you will have to spend $800 to buy it back later. Of course, how much later matters, as well as how high the interest rate is, but have a graph:
Above the line means it’s worth selling the couch, below the line it’s worth keeping the couch. You’ll notice for low interest rates its basically never worth it. You’ll notice that for 10% interest the graph the turning point is 8 years. If you can your loan paid off faster you don’t have to sell your couch. If it will take longer, start taking pictures of the thing.
Quick tips and tricks
- Always make your student loan payments on the same day, preferably a good amount of time before the due date, and check before the due date that the payment processed. Sometimes if you make multiple payments during, like, October, it’s easy to get confused next month and think that you’ve already paid for November. Most missed payment stories I’ve heard are some version of this. It pays to be organized.
- If you’ve set up automatic payments make sure to check every month that the payment went through. The benefit of automatic payments is that most of the time you will be fine if you forget one month, after all the system makes the payment for you, it isn’t an excuse to check-out from the process entirely.
So what happens when you suddenly come into a large sum of money? Perhaps you were on the receiving end of an inheritance, got lucky in the lottery, or you found a bunch of Aztec gold in your basement. How you got the money doesn’t really matter, but for the purposes of this discussion I’m referring to some sort of one-time lump sum that you received. If you suddenly got a big bonus at work, that qualifies for this discussion, if you suddenly got a big raise it doesn’t.
Don’t shout about it on Facebook
Something like 40% of the population considers themselves to be the world’s foremost expert on how you should spend your money. Almost 100% of the population has a problem they think can be solved by applying more money to it.
If you suddenly come into some money people may overcome their sense of propriety and start bugging you about it. The larger the amount is the worse it will be. The more it appears that you didn’t “work” for the money (inheritances and lotteries for example) the worse it will be. Depending on how you came by the money some people may already know that you came into some money. That’s really too bad. You get permission to tell your CPA, and your spouse. (The rule for spouse’s and CPA’s is that if you can’t trust ’em, replace ’em.)
I know a number of 20 somethings whose own parents don’t know that they are sitting on a six figure net worth. Ultimately, there just isn’t any reason for most people to know about your financial situation.
Additionally, if you haven’t told anyone about the priceless treasures you dug out of the dirt in your basement, I estimate that it lowers the chances that you’ll be visited by the vengeful spirits of the restless dead. How would you like it if people started showing off treasure you hid long ago?
Make sure that you understand the tax implications of your windfall! Gifts generally avoid taxes and the taxes are generally the responsibility of the giver. Inheritance can have a tax associated with it depending on the size of the inheritance. Bonuses are taxable at your regular rate, and could possibly push you into another tax bracket. (Which only matters for the extra money). You want to make sure that you account for the taxes ahead of time and set aside to enough money to pay them. You don’t want to pay off a bunch of debt, or your house, and then realize that you owe the IRS $250,000 in taxes. It can help if you increase your 401K contribution substantially and use the windfall money to eat, rather than your salary.
Even the Aztec gold gets taxed. If you found a lot of it you might even end up giving up roughly half to taxes. You might feel inclined not to report this found gold on your taxes, but I wouldn’t take that risk. The curse of a doomed civilization is enough to worry about, you don’t want to wake up in a cold sweat over the IRS too.
Pay off Debt, Save and Invest
If you have high interest debt paying it off is the top priority for any money that isn’t earmarked for “makin’ sure you don’t die”. Just because this is “found money” doesn’t change anything. If you’ve ever played a real time strategy game you should know this. The first thing you do is get your economy stable.
If you don’t have any debt, great! You should strongly think about investing the windfall? While, you could go ahead and simply stick it all into the index fund of your choice all at once. Instead I recommend parceling the money out into 12-24 equal pieces and only investing one piece per month until you are fully invested. This will average your money into the market and reduce your risk of buying at a market top. This is called dollar cost averaging if you’d like more information on the subject.
If you came into Aztec gold you may want to do this as well. Rather than selling it all as a lump sum, instead sell some every month and transfer it into the market. This way you reduce your risk of selling it all at a particularly low price. Investing your filthy lucre is probably a better idea than sitting on it. The antediluvian ghosts which haunt you now have been around long enough to appreciate the power of compound interest. Investing wisely will make those unearthly horrors far less likely to vent their frustration on you.
The answer here is obvious. It depends, or variously as much as you can.
Alright. Probably what you care about is how much your peers have saved by this point? Well according to the US census bureau the median person between the ages of 25-34 has $6,676, in Net Worth. This is possibly due to a significant amount of student debt overhang. The problem with this is that the number is either too low or too high depending on the context of your individual situation.
Let’s say you graduated with a high school diploma and skipped college going straight to work. That gives you roughly 7 working years by the time you are 25. If you obtain a job making roughly $12 per hour, or ~$24,000 annually you need to save roughly 20% of that (~$4,800). Over 7 years that adds up to $33,600. You don’t have any reason to have student debt, a car payment, etc so that should leave you with a net worth of $33,600. If you’ve been clever with your retirement accounts the way taxes work could have netted you an additional $1,000 per year, putting you at $40,000. If the money has been invested over the last seven years in an S&P 500 index fund then you should have something more like $55,000, so that’s your answer. You should have $55,000.
If you went to college and ended up with the median student debt of $15,500 and the median income of $50,000 you’ll wake up 22 with a net worth of -$15,500 and the interest clock ticking. Fortunately you should be able to pay that off in two years saving about $10,000 per year. The amount of debt interest adds at this point isn’t super significant for small payoff periods (like a few years). You should end up 24 with between $2,000 and $4,000 of net worth and no debt. That just leaves one year to catch up to the high-school diploma, but you won’t, you save only $10,000 this year. You should have $13,000, adjusted by whatever your student debt actually was.
Interesting point, it’s actually a little hard for the dude with the college degree to catch up with the high school degree dude. Assuming that each of your investments earn 10% in the future and you each save 20% of your income, high-school dude saves about $5000 and earns another $5000 from investments for a total of $10,000 being added to his net worth annually. College guy saves about $10,000, but is only earning $1,300 from his investments, adding $11,300 to his net worth annually. Sure, college guy catches high-school dude eventually, but it’s sure harder than you’d think.
If high school dude had saved just a little bit more, or had an extra year of work college guy might never have caught him. Investment earnings matter!
How do you make sure you do all of this saving and investing sensibly? Well, first off you’ll want a Roth IRA (contribution limit currently $5,500). High school dude has been almost maxing his for the last 7 years. College guy just got started, and needs to also be putting the money in a 401k. Now these are generally accepted guidelines to retire at 65 and they also depend on investment returns in the future looking a lot like the investment returns of the past. That may or may not be true, adjust your savings accordingly.