Visa card example of why budgeting doesn't work

Why Budgeting Doesn’t Work For Most People (And How To Make It Work For You!)

Summary

When most people think about trying to improve the state of their finances, “budgeting” tends to be one of the first words that comes up.

And that’s a shame.  Really.

I’m not sure I’ve ever met anyone who actually likes budgeting.  And there are a few good reasons for not liking traditional budgeting:

  1. Most of us think that “budgeting” means at best, being cheap, and at worst, cutting our spending on things that we like to spend money on.
  2. Budgeting isn’t easy. In fact, the way most of us try to make budgets for ourselves, it takes effort to consistently make it work.

What happens when we make something that isn’t fun difficult as well?  We don’t actually do it.

Which is why I like to approach budgeting with a very different mindset.  In this video, I discuss how to approach budgeting in a way that will make you more aware of where your money is going each month. We also discuss ways to align your budget with what’s actually important to you, in a way that’s easy to maintain.

Most people make it easy to spend a lot of money, and hard to save.  In the video below, I’m going to show you how to make it hard not to save money.

To download a FREE copy of the Newlywed Money Checklist that we discuss in this piece, click here to grab it!

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 29, 2018. If you want to participate in our next Facebook Live session, which are normally held every Monday at 8 PM Eastern, head to our Facebook page, hit “like”, and you’ll get the announcement the next time we go live.  Most of the content comes from questions submitted by my readers and viewers, so if you have a topic you’d like to hear more about, send a message to our Facebook page and we will get back to you as soon as we can!)

Introduction:  How Can I Make My Budget Stick?

Welcome, everyone! Welcome to our weekly Facebook Live chat. We broadcast this at 8:00 PM Eastern time every Monday.  Today, we’re doing a little bit earlier because I’m going to be in a meeting with a client at 8:00 PM.

Today, I want to talk a little bit about budgeting.  And specifically, why I think budgeting tends to not work for people.  And we’ll share some strategies to get around this.

I got a question from someone today who follows the page- let’s call him Eric. (I typically don’t use people’s real names because I know money is a sensitive subject for people. And so, I try to respect everybody’s anonymity for these questions.)

Anyway, I got a question from “Eric”.  It says, “Hi Bill, I’m a big fan of the new video series and have a question that I’d like your opinion on. I recently downloaded your Newlywed Money Checklist and I’m currently working through it with my wife.  We got to the section that discusses creating a budget and we got stuck with it. We’ve tried a few things in the past related to budgeting and they never seem to really work for us. How do we make a budget for our family that actually sticks?”

Amen, Eric! That’s a great question.  One that I get quite a bit actually.  First off, congrats on not only your recent marriage, but taking a step forward and downloading the Newlywed Money Checklist.  And not only just downloading it, but actually working through it. That’s awesome. It’s a big step.  If anyone wants to grab this checklist and follow along as we go, click here to download it.

Most Budgeting Strategies Are Difficult to Maintain

So let’s get to the heart of the question. Budgeting really and truly doesn’t work for a lot of people. And the reason for this is that we make it so difficult for ourselves to actually do it and stick to it.

I’ve seen a lot of different strategies that people have used over the years to try to manage their budget.  Everything from creating spreadsheets- literally typing in all different ways that they spend their money.  Or, using a tracking site like Mint.com, where you sync your credit cards and they pull in your transactions for you.  Sometimes, people try a strategy where they literally only spend cash as a way to really try to prevent yourself from overspending.  And even a derivative of this, which I actually like a lot, called the Dollar Bill Savings Method. I’ll probably talk a little bit about that strategy on another Facebook Live because I do think it’s kind of an interesting strategy for people who are struggling with trying to save.

But ultimately for most people, however you do it, budgeting means keeping track in detail of where your money is going each and every month.

There’s a reason why that doesn’t work and why I don’t like to think about budgeting in this way. It’s really two-fold.

Budgeting Highlights our Weaknesses

First and foremost, I think we tend to overlook it, but most people I talk to have some sort of anxiety, or shame, or even guilt about how they handle their money. It’s not something we’ve ever been taught, and it’s not something we’re inherently good at. We need to practice how to handle our money over time. Most of us are far from perfect in this regard, and we tend to not like to pay close attention to things we’re not perfect at.  As a species, this is something that all of us struggle with.

Here’s the thing- paying close attention to our budget tends to emphasize these weaknesses, or are these things that we’re unhappy with.  And as a result, people just don’t like to pay attention to their budget, which I think is perfectly understandable. But ultimately, it doesn’t help solve the problem

Traditional Budgeting Methods Are Hard

And secondly and probably most importantly, it’s a lot of work. We make it really, really hard for ourselves to actually track our budget.

If we’re using spreadsheets, we need to update them manually.  If you’re using Mint, you actually have to remember to log on to see how you’re doing.  And then once you get there, a bunch of your transactions are categorized incorrectly, so you need to go in and fix those. And finally, they don’t track your cash spending at all on these platforms. So, you have to actually manually input all the different ways you spend your cash.

Budgeting sucks. Plain and simple. It’s not easy. It’s not fun. And if you make it hard on yourself to do something that’s not fun, guess what?  It’s not going to happen. Like most New Year’s resolutions, you start budgeting, you’re excited about it at the beginning, it lasts a couple of weeks, but as soon as things get busy, it’s the first thing that we tend to drop because it’s something that we don’t enjoy and it’s hard.

Introducing… Two New Ways to Think About Budgeting

Which is why I like to think about budgeting in a completely different state of mind. To me, budgeting isn’t about only spending $20 at Starbucks this month. (And if you spend $21, that’s BAD, and Mint’s going to send you a nasty email calling you out on it!  Give me a break.) That’s not healthy. I don’t think that’s the way we should be doing budgeting.

Instead, budgeting is about two “A” words. Awareness of where your money is going (and awareness is never a bad thing, right?)  And aligning your money with what’s actually important to you.

So let’s walk through these one by one, starting with awareness.

Budgeting = Awareness

If you want to start budgeting, this is what I recommend, particularly for people who want to be saving more and find that they’re having a hard time doing it. I want you to do this:  before you start breaking out the spreadsheets or syncing all of your accounts to Mint, walk through this exercise.

This is something that, full disclosure, is not something that I’ve developed myself. For those of you who have followed the page for a while, you’ll know that I consider myself to be a “disciple” of Carl Richards. Carl is a two-time New York Times bestselling author of books about how to manage money.  (If you are serious about making improvements to the way you handle your finances, they are must-reads.  You can find them here and here.) He also writes a weekly column in the New York Times about money that I highly recommend. This is an exercise that he does and I think it’s really instructive here.

If you’re having a hard time budgeting and want to get started, do this for me over the next two weeks. Whenever you go to spend money, no matter what it is, no matter where it is, no matter what you’re spending it on, whether it’s necessary or whether it’s just for fun, do the following.  Whenever you spend money from today until two weeks from now, stop for a minute. And just think about it.

Actively try to think about how you’re spending money. Say to yourself, “Hmmm. I just went to the store and bought $125 worth of clothes. Isn’t that interesting?”

“I just spent $45 a bar… Isn’t that interesting?”  Just stop to think about it for a minute. Literally think about it. There’s no judgment, but whenever you spend money, just stop and be mindful about it for a second before you start rushing to the next thing.

You might be surprised, if you actually stop for a couple of seconds to pay attention, about the trends that you start to notice with where your money goes. You know, I frequently hear from people who do this who didn’t realize how much they were spending in particular categories of expenses that they didn’t actually really care about.

They spend money on whatever it is, they just do it, and it’s habitual. But when they actually stopped to think about it, they started to catch on to some of these trends.  So before you start putting yourself through a ton of work to track your transactions manually, stop and reflect on what you spend money on.  And see what you notice.

If it doesn’t work for you, then move on to the second piece that we’re to talk about, but give it a shot.

Budgeting is about bringing alignment between what your say is important to you financially and where your money actually goes.
Aligning Your Money With What’s Actually Important To You

The second strategy, the other way I want you to try to think about budgeting has to do with aligning where your money goes with what’s actually important to you.  Putting your money toward the things that are important to you, FIRST. This is my preferred method because I think it probably is the easiest one and it’s the fastest way to get results when it comes to your budget. There are a few steps involved.

First and foremost, I want you to figure out how much money is coming in every month, and I’m not talking about your annual salary divided by twelve. I’m talking about how much money actually gets deposited into your bank account every month.  After taxes are taken out, after your 401(k) contributions- how much money is coming in every month?

How Much Do You Actually Need To Save?

The second piece is a little bit harder. And it involves figuring out how much money you actually need to be saving to make sure you’re able to do the things that are important to you.

Never mind what you should be saving. What do you actually need to save?

Look, this is a complicated step.  It’s not easy to calculate how much you need to be saving to retire when you want to 30 or 40 years from now. It’s not easy to figure out how much you need to be saving to pay for a child’s college several years in the future. But you need to actually sit down and do this, first and foremost.

If you need help with that, reach out. I’ll help you figure out what those numbers are for you- but however you do it, you need to figure them out.

To recap this budgeting method so far: step one, how much money is coming in? Step two is how much do you actually need to save?

Automate, Automate, Automate

And then once you have that, I want you to login to your bank and schedule an automatic transfer coming out of your checking account every month to either a savings or an investment account for that dollar amount.

If you go through step two and find that you need to save $2,000 every month, I want you, tonight, to go ahead and set up a $2,000 transfer from your checking to your savings account every month.

And that really is the key here. We make it hard on ourselves to save.  For most people, when money comes into the checking account, we spend it and then whatever’s left over, we save it… if we actually remember to log in and transfer it to your savings account.

I want you to set this transfer up automatically. Make it hard for yourself not to save.

Remember, this isn’t permanent. If there are some months where you have higher expenses – if a car breaks down, if you just want to spend a little bit more money that month – that’s OK. You can always go to your savings account and transfer money back to your checking account.

But make that the hard step.  Pay yourself first, and then, if you actually need a little bit more money, you can pull a little bit out of savings. I’m giving you permission to do that.

But don’t make it easy for yourself to just spend that money. Actually put it away and make it so you actively have to think about taking it out. And if you do that, you’re going to be much, much more likely to actually make your budget work for you.

Spend the Rest, Guilt-Free!

And once you do that, once you set up the transfer for how much you need to save every month, spend the rest however you want. I don’t care.

If you’re able to save as much as you need to in order to accomplish the things that are important to you, I really don’t care where the rest of your money goes. And frankly, neither should you.

As long as you’re actively putting money toward the things that are most important to you, do whatever you want with the rest. Don’t worry about it, and don’t feel guilty about it. You’re saving as much as you need to. It’s really that easy.

It’s Not Always That Simple

Now, there’s one caveat. If you tend to actually spend more than you have left after putting money into savings, that’s when this strategy can get a little bit more difficult. And then, and only then, is when I want you to just start thinking through budgeting in the “traditional” sense. At this point, you’ll need to look to cut spending from particular places.

If we’re able to save as much as we need to save and you have a little bit of money left over, you don’t need to worry about it. But if you find that you’re having a hard time saving what you want to be saving, this is when we’re going to start trying to find ways to cut back.

And from there, here’s what I would do, in order, if you’re looking to solve this problem.

There Are Two Components to Budgeting.  Start with the One that Nobody Ever Talks About

First and foremost, when we talk about budgeting, there’s two components to it. There’s the income side and the spending side.

Most people tend to only focus on the expenses, but if you really are having a hard time saving as much as you need to every month, I want you to actually start by looking at the income side. Are there ways you could grow your income? From putting your money into investments that actually pay you income that could help potentially close that gap, to negotiating a higher salary at work if you think you’re underpaid and can back that up, to even starting some sort of side hustle. You might not actually need to cut your spending at all.

When we think about budgeting traditionally, we tend to only focus on the spending piece. But we really should be taking a look at the income side as well. So first and foremost, let’s start there.

Find the Easiest and Most Impactful Ways to Trim Spending

If that’s not enough, or if growing your income isn’t an option for you for whatever reason, the next step is not to start nickel and diming on your coffee every month.  That’s the hardest way to actually do this.  Instead, what are your top three or four categories of expenses every month? Where does most of your money actually go?

Now, for most people, this is some sort of combination of your rent or mortgage payments, student loan payments, transportation costs, food or even clothing. Pull all that stuff together in those big categories and ask yourself, what’s the easiest and least impactful cut that you can make to your biggest areas of expense?

In other words, if the goal is to cut your spending by a certain dollar amount every month, what’s the easiest way to actually do that? For most people, that’s not going to be coffee, right? Start with the biggest areas of expenses.

So maybe it means that it might make sense for you to move to a cheaper apartment the next time your lease is up. Or taking the bus or subway a little bit more rather than taking Ubers. Or if you have student loans, trying to switch your student loan repayment plan might be a good idea (if you have federal loans).  If you have private student loans, maybe trying to refinance them is a good idea. Or trying to cook a little bit more at home might be a good idea if you spend a lot on food.

The point is, there’s a lot of different ways to do this.  And each one is different, depending on what you actually need to be doing.

Make That Your Goal.  Not Just Budgeting

But only if you need to, write and make that your New Year’s Resolution. Don’t just make budgeting your resolution, but actually find the easiest and most impactful areas to cut if you need to. And when you do that, you’re going to find your budget tends to just come in order.

Make it as easy as you can on yourself. Make it hard not to save for yourself and from there, only if you need to cut spending, cut the pieces that are the easiest and most impactful for you to cut.

But ultimately, if you take anything away from this video here today, recognize that if you’re struggling with traditional budgeting and you feel like it doesn’t work for you, you are not alone.

Make Budgeting As Easy As It Can Be

The best thing you can do to make your budget work is to figure out how much you need to save every month and set it up to save that amount automatically. Move it from your checking to your savings account without thinking about it, without actually going in and doing it every month, and make the rest of your spending revolve around that. If you need to pull some of that money out of savings for whatever reason, you always can do that, but make that the hard part.

It doesn’t take a lot of time to do this. But you should be making it easy for yourself to save rather than the other way around.

Anyway, I hope this was helpful. Thanks so much to “Eric” for sending in this great question and working through our Newlywed Money Guide.  You can download that guide here if you’d like to learn more.

And again, if you have any questions about figuring out how much exactly you need to be saving every month, reach out and I’d be glad to help you out however I can. Thanks so much for joining us, and I hope you have a great day.

 

 

How Will the Tax Cuts and Jobs Act Affect You?

How Will the Tax Cuts and Jobs Act Affect You?

Like just about everything these days, most of the coverage around the “Tax Cuts and Jobs Act” has been viewed with an overwhelmingly partisan lens.  Most of this has to do with the nature of the corporate tax cuts in the law, perhaps justifiably so.  But in my opinion, there’s been far too little discussion about the actual impact the law will have on individuals and families in our generation.

Now that the political bickering is over (at least on this issue…) and the tax proposal has been finalized, let’s take a look at exactly how this tax overhaul will affect you.  This is a mammoth piece of legislation, so I won’t be able to cover every detail, but we will cover the major pieces.

One note: all of these changes apply to the 2018 tax year, with two major exceptions.  Your 2017 taxes, due April 15, 2018, will be unaffected unless you are itemizing medical expense deductions.  And, the Individual Mandate repeal doesn’t kick in until 2019.

That being said, the change in tax law has created some unique opportunities to save on taxes, both in 2017 and beyond.  I’ve compiled a list of twelve tax hacks to save you money on taxes based on the new law.  Download the list today!

 

[Note:  the day after Congress passed the Tax Cuts and Jobs Act in December 2017, I hosted a Facebook Live chat summarizing the provisions of the bill.  The video is available below.]

What’s NOT in the Law?

Before we dive into exactly what the new tax code says, we need to quickly talk about what it doesn’t say.  There were several controversial elements inside the draft bill that got a lot of media attention.  Several of these were stripped out of the final version- you no longer have to worry about any of these rumored changes.  These include:

  • The provision that would have treated graduate student tuition waivers as taxable income is gone from the final version of the law. This would have increased taxes on graduate students by as much as 400%, but it was removed from the final law.

 

  • At one time, there was a proposal to remove the ability to deduct student loan interest payments from your taxable income. This provision was removed as well.  You can still deduct the amount you pay in interest toward your student loans, up to $2,500 in interest per year.

 

  • There was also a provision that would have caused tuition payments made by your employer to be fully taxable to you. This was also removed- your employer can give you $5,250 tax-free for tuition, which is unchanged from the old tax law.
Tax Rate Changes

Now, let’s talk through the major changes that have been introduced, starting with tax rates themselves.

  • For most Americans, your marginal tax rates will be going down (albeit temporarily- these cuts expire in 2025, although Congress may extend them). Find your income level in the tables below to see how your tax rates compare in the old and new tax code.

  • A few key items to note:
    • While most people will see a decrease in their tax rate, there’s one group of people who will see an increase: unmarried people who have a yearly taxable income roughly between $157,000 and $416,000.  The logic behind drawing the boundaries of the tax rates in this way is unclear.
    • There are also some income ranges, both for individual and married taxpayers, where there is no change in the marginal rate. For example, a married couple with $450,000 in annual income is in the 35% tax bracket in the old tax code, and the 35% tax bracket in the new tax code.  (Although, it is worth noting that even though the marginal tax brackets are unchanged, the total taxes owed is less due to the decreased marginal brackets below the 35% bracket.)
    • There’s a distortion in the tax code if you are married and both you and your spouse make a high income, frequently called the “Marriage Penalty”. For example, let’s say you and your spouse make $400,000 each.  If you were filing individually, you each would fall in the 35% tax bracket.  However, if you’re married filing jointly, you have $800,000 in taxable income as a household, which puts you in the 37% tax bracket.

 

  • Taxes on investment income (dividends and long-term capital gains) have not changed under the new tax law. Depending on your income, you’ll either pay 0%, 15%, or 20% in taxes on dividends or capital gains.
Personal Income Tax Reductions and Pass Through Businesses
  • There’s one other change in how income is taxed, and it’s a big one. The change relates to “pass through” businesses, which are businesses that don’t pay corporate income taxes, but instead “pass through” their earnings to individuals who pay the tax at their individual tax rates. Under the new law, these “pass through” businesses are allowed to deduct 20% of their income (or 50% of the wages they pay, whichever is less) from their total taxable income.  In plain English, if a pass through business makes $100,000 in income, they are allowed to reduce their taxable income by 20%- meaning that the individual who gets the pass through income only pays taxes on $80,000 worth of income.

 

  • This is a bigger deal for you than you may realize. A pass through business doesn’t have to be a big company; in fact, more often than not these businesses are really just individuals who are self-employed.  For example, independent contractors and sole proprietors are typically set up as pass through businesses.  Which means that if you and a friend do the same exact job, but you are an employee of a big firm and your friend is an independent contractor, your friend will pay taxes on 20% less income than you.  This likely to accelerate the growing trend of workers becoming independent contractors rather than full-time employees– there’s now a clear tax benefit to doing so.

 

  • But, there’s a catch. Pass through businesses that engage in a “service-based” business have some restrictions on how much you can make to qualify for the 20% deduction.  If your pass through business income is more than $157,500 for individuals (or $315,000 for married couples), your ability to deduct 20% of your taxable income starts to phase out.

 

  • What counts as a “service-based business”? Most occupations that involve selling a service to another person, including accounting, health, law, financial services, and consulting.  Oddly enough, two services were specifically excluded from the income phaseouts:  engineers and architects.  If you work in either of these fields, your income can grow as much as you’d like without losing the ability to deduct 20%.
Standard Deductions and Personal Exemptions

The income-component to the tax code change is relatively straightforward:  most people will have a reduction in their overall tax rate, except for the specific groups I outlined about.  However, this only tells part of the story.

Note: It’s a little bit more complicated to tell if these changes will be a net benefit or net loss for you, as they tend to offset each other.  I’m going to lay out the changes and give you the tools you need to get an idea whether this will have a net positive or net negative impact on you, but it’s always a good idea to talk to a CPA about your unique circumstances.

  • Once you calculate how much you have in taxable income, you are allowed to either deduct a variety of expenditures from your taxable income (we’ll get to that in a minute), or take what’s called a Standard Deduction. The standard deduction directly reduces your taxable income.  Under the old law, individuals could claim a $6,350 standard deduction, and married couples could claim a $12,700 standard deduction.  Under the new law, the standard deductions have nearly doubled.  Now, individuals can reduce $12,000 and couples can reduce $24,000 in taxable income under the new standard deduction.

Clearly, this is a net benefit, right?   Sort of.

  • Under the old tax code, you also had the ability to claim a personal exemption of $4,050 for yourself ($8,100 for a married couple), and another $4,050 exemption for each child that you have. These exemptions, like the standard deduction, reduce your taxable income.  Under the new tax law, these exemptions have been eliminated

It’s critical to note that the amount of the personal exemption being removed ($4,050) is less than the increase in the standard deduction (a $5,650 increase for individuals and a $11,300 increase for couples).  So, for people without children, this is a net win.  But, particularly for large families who claimed the $4,050 exemption for each child, your taxable income is going up considerably.  However…

  • There are two changes to the Child Tax Credit under the new law that likely will more than make up for the loss of the exemptions for families with children:
    • The amount of the tax credit has doubled, from $1,000 to $2,000 per child, per year. Note that, unlike the discussion around exemptions and deductions (that referred to taxable income), the $2,000 tax credit is literally a $2,000 reduction in the taxes that you owe. Which makes it a considerably better benefit than a $4,050 reduction in taxable income.  One other note:  if your final tax calculation comes out that you don’t owe any money in taxes, $1,400 of the $2,000 credit is refundable to you.
    • There are income restrictions for who is eligible for the Child Tax Credit, but these have been greatly expanded under the new law to make the credits more accessible to more families. Now, individuals who make less than $200,000 per year or married couples who make less than $400,000 per year can claim this credit.

As an example, let’s look at a household that consists of a husband, wife, and three children.  Both the husband and wife make $175,000 each.

Even though they have a greater taxable income under the old tax code, they save over $18,000 in taxes, both because of the decrease in marginal tax rate and the substantial Child Tax Credit.

To summarize:  your standard deduction has gotten better, your ability to claim exemptions has been removed/gotten worse (particularly for large families), and the expansion of the Child Tax Credit has gotten significantly better for families with children under certain income thresholds.

LOTS of Changes in Itemized Deductions

As I mentioned above, everyone can claim the standard deduction.  But, if you can list a set of qualified expenses that exceed the amount of the standard deduction, you are still allowed to use the itemized deduction process.  It wasn’t common to itemize deductions before, and now that the standard deduction has been doubled, it will be even less common now (since you need to have nearly double the amount of expenditures in order to be better off itemizing).  But, if you do itemize, here’s what you need to know about the changes to the types of expenses that qualify for itemization:

  • Charitable Contributions- There were a lot of rumors that we would be losing the ability to deduct charitable contributions under this law. That fear proved to be unfounded:  the amount you can itemize for charitable contributions has actually increased (from 50% to 60%).  But, of course, fewer people will take advantage of this now that the threshold to exceed the standard deduction has nearly doubled.

 

  • Mortgage Interest– There are two big changes here:
    • You are still able to deduct the amount of interest paid on a mortgage, but the amount of interest that qualifies has been reduced. Before, you could deduct interest paid on the first $1,000,000 of mortgage principal; this has now been reduced to $750,000.  But, it’s critical to note that all mortgages in existence before December 15, 2017 have been grandfathered in and are not subject to the new rules.
    • Interest paid on Home Equity Loans or Home Equity Lines of Credit is no longer deductible.

 

  • State and Local Taxes– this one has gotten a lot of press coverage. Before, you were able to deduct the amount you pay in state taxes and local taxes on your federal tax return.  There was a lot of talk about removing this provision entirely, but in the end, the final tax law merely put restrictions on this ability rather than eliminating it altogether.  You are now able to deduct a maximum of $10,000 in state and local taxes, rather than unlimited amount.  This particularly hurts high-income individuals in states and cities with high tax rates.

 

  • Your ability to deduct medical expenses has temporarily expanded, even though this was another item that Congress nearly eliminated. If you have medical expenses that exceed 7.5% of your income, you can deduct these expenses in 2017 and 2018, which is down from a 10% of income threshold.  But, in 2019, the ability to deduct medical expenses goes back to 10% of income.  One other note:  this is, I believe, the only change that applies to your 2017 income taxes (that are due April 15, 2018).

 

  • The IRS had a long list of Miscellaneous Expenses that could be deducted if they exceed 2% of your taxable income. Most commonly, the ability to deduct expenses relating to tax preparation fell under this category.  The ability to make these deductions has now been eliminated.

 

  • You are no longer allowed to deduct moving expenses. (With one exception:  you are still allowed to deduct moving expenses if you’re in the military and you are required to move for a military job).

 

  • Finally, alimony payments are no longer treated as a taxable transfer. Under the old rules, the person who pays alimony to an ex-spouse was allowed to deduct the alimony amount, and the person who received the alimony payment needed to count it as taxable income.  This is no longer the case, but similar to the grandfathering under the mortgage interest deduction, the new rules only apply to new or modified alimony agreements in 2018 and beyond.
Other Big Changes

There are a few other big changes to the tax code that don’t relate to the tax rates or various deductions available:

  • The Individual Mandate that requires you to pay taxes if you don’t have health insurance under the Affordable Care Act (“Obamacare”) hasn’t technically been repealed…. But the taxable penalty for not having health insurance is $0, starting in 2019. This doesn’t mean that you shouldn’t have health insurance (you should), but it does mean that you won’t be taxed if you don’t have health coverage.  But again, note that this provision starts in 2019.  If you don’t have health insurance in 2017 or 2018, you’ll still need to pay the tax.

 

  • There are several changes to the use of 529 Accounts. Historically, these accounts have been one of the most tax-advantaged accounts to save for college- contributions are tax free at the federal level and can be tax free at the state level as well, and withdrawals are tax free if used for qualified higher education expenses.  Under the new code, they now can also be used to fund K-12 education expenses- they’re not just for college savings anymore. Under the new rules, you’re allowed to withdraw $10,000, per child, per year, for qualifying K-12 education expenses (including private school tuition).  There was a provision in the bill that would have extended these accounts to be able to be used for homeschooling education expenses, but this was removed from the final version of the law.  529’s can now be used for college expenses and K-12 expenses, but not homeschooling.

 

  • There are two other huge changes that are much less likely to affect younger people, so I’m going to gloss over them. But you should be aware that they exist:
    • The Alternative Minimum Tax (AMT) is still around, but it’s now much harder to actually qualify to pay the AMT. The AMT is a method of making sure that very rich people can’t use too many loopholes to avoid paying taxes. Essentially, under the AMT, you need to calculate the amount of taxes you owe twice– once under the standard tax rules, and once under the AMT rules.  If you owe more in AMT taxes, you need to pay the AMT.  This is still in existence, but it’s going to be much harder for people to actually need to pay the AMT.  If you have a very high income, this is something to keep on your radar, but most people don’t need to worry about this at this time.
    • The Estate Tax, like the AMT, is still around, but almost nobody will qualify for it anymore. The estate tax is a vehicle used to tax the amount of wealth someone has after they die, before the wealth is inherited by the next generation.  The estate tax still exists, but your estate needs to be double the size it used to be in order to be subject to the estate tax.  Until you have $11.2 million dollars saved up (or $22.4 million for couples), you don’t need to worry about it!
Conclusion

When they began the tax reform process in early 2017, Republican leaders in Congress claimed that they wanted to make it so easy to file your taxes that most Americans would be able to file taxes on a postcard.  As you can probably tell from the summary above, they fell… just a little short of that goal.

That being said, the fact remains that for most taxpayers, the filing process will be somewhat expedited, primarily by doubling the standard deduction.  For many people, you’ll just need to calculate your taxable income, take your standard deduction (and, potentially, your Child Tax Credit), and you’ll be good to go.

What do you think?  How will the new tax law affect the amount of taxes you pay?  And if you want some ideas on how to use the change in the tax code to save some money on your taxes, click here to download my twelve #taxhacks based on the new law.

How to Take Control of Your Finances after Graduation

[Don’t miss the two free giveaways in this post!  Click here to access our new retirement calculator, and click here to download our comprehensive student loan guide!]

Congratulations to everyone graduating this semester! If you are finishing your undergraduate career this month, welcome to the working world!  If you are finishing a masters or professional degree program, congratulations on finally (probably?) being done with school!  And if you didn’t graduate this year, stick around anyway- I have some information here for you, too.

As the excitement of your graduation weekend ends and you begin to take the next steps on your journey, whatever they may be, I recommend that you take a step back and take an assessment of your current financial landscape.  Your life is changing (for the better!), and as such, you should take some time to reflect and take action to set yourself up for financial success in your new endeavors.

There’s a lot to take in here – if you have any challenges in any of these areas, I recommend that you reach out to schedule a free consultation.

Congratulations again, and let me know how you are doing as you progress through this list!

Negotiate Your Salary

If you’re still working on lining up your first job out of school, make sure you prepare yourself to negotiate your salary before you accept a job.  If you already have a job lined up, file this one away for your next performance review.

I’ve discussed this in much more detail before, but it’s absolutely critical that you negotiate your salary when starting a new job.

Over 60% of millennials aren’t negotiating with employers at all regarding their salary.  And the worst part?  Three out of four employers have room to negotiate salary by as much as 10%- but only if you ask for it.  And, truthfully, hiring managers and HR are expecting you ask for it.

I know it’s uncomfortable, but you have to do it.

Set a Student Loan Paydown Plan

The bad news? T-minus six months until your first student loan payment is due.

The worse news? The vast majority of millennials are told by their loan servicer how much they owe and automatically start paying the bill, without double checking to make sure they’re paying down their loans in the smartest way possible.

The good news?  You have the power in your hands to make sure you’re handling your student loans with the care they deserve.

I highly recommend downloading my free guide on managing student loan payments. In it, you will learn:

  • How to review each of your student loans and determine what payment plans each is eligible for.
  • How to know if you are eligible for a loan forgiveness program, and what you need to do to qualify for the program under current law.
  • When you should refinance your student loans, and when you absolutely should NOT refinance your loans.
  • How to set goals around your student loan payment strategy (i.e., should you try to pay down your loans as fast as possible, or should you try to minimize your monthly payment?)
  • … and much, much more!

Go ahead and grab your free copy of “13 Steps to Take Before You Make Your Next Student Loan Payment” today.  It will be worth your while to work through the guide in order to set you up for success with your student loans.

Set Financial Goals for the Next Five Years

I remember graduating college like it was yesterday.  The last thing I wanted to do was to try to imagine what the future was going to be like.  I just had the best four years of my life, and was scared to face all of the responsibilities that I knew would fall on my shoulders in the real world.  If you had told me back then to spend some time setting goals for my first few years in the working world, I probably would have laughed at you.

But, I wish I had taken that advice.  I’ve improved my own personal financial situation significantly after I started setting financial goals for myself. (Not too long after I started my first job, luckily!)  And I recommend you do the same.

Take some time and imagine what you want your life to be like in one, three, and five years from now.  Will you be going back to school to get a graduate or professional degree?  Do you want to buy a new car or, a little while down the line, a new house? Are you gunning for a quick promotion at work, or maybe even thinking about launching a business or side hustle someday?

All of these things are great, and they are much more likely to happen if you (literally) put pen to paper to clearly articulate what you want your life to look like.  And, once you have done this, you can manage your finances accordingly to begin to make progress against these goals.

Set Up Your 401(k)

It can be easy, in the flurry of paperwork that accompanies a new job, to accidentally forget or neglect to set up contributions to your 401(k).  Don’t forget, it’s critically important.  At a minimum, you should contribute at least to your firm’s matching point.

So, if your firm matches up to 3% of your salary, you should contribute, at a bare minimum, 3% to your 401(k).  Not contributing up to your firm’s matching point is, quite literally, turning down free money.

And unfortunately, it’s not enough just to set up how much you want to contribute to your 401(k).  You need to choose how you’d like to invest the money you put into your retirement plan, too.

Unfortunately, firms usually give very little guidance to their employees on how to do this.  Which is why I’ve written about how to choose investments in your 401(k) in more detail on this blog.

…And If You Can, Save Beyond The Minimum for Retirement

Retirement might be a long way away (spoiler alert: it is a long way away), but that doesn’t mean you shouldn’t start saving aggressively for it now.  In fact, due to the beautiful thing that is compound interest, the more you save for retirement in your early working years, the much better your retirement picture will be.

There are other things you should be saving for as well (we’ll get to that in a bit), but if you have some discretionary income, I can’t recommend highly enough that you put some of that into a retirement account.  What type of retirement account – either increasing contributions to your 401(k), opening a Traditional IRA, opening a Roth IRA, or even a nonretirement investment account – can vary significantly depending on your circumstances. This is probably something we should talk one on one about, if you have questions.

If you’re wondering how much you should be saving for retirement, I recommend inputting your data into the free retirement calculator I have right here on my website.  And, particularly, if there’s a big gap between the yellow and blue lines or if you portfolio is projected to run out in the early stages of your retirement, we should talk about ways to close the gap.

Build an Emergency Fund

Like I said, retirement isn’t the only thing you should be saving for.  It’s critical that you gradually build an emergency fund so that if you were to lose your job, you have a way to support yourself during the transition.

The rule of thumb is that you should have enough saved to support yourself for six months (living on reduced expenses, of course – you probably won’t spend as much as you are today if you don’t have an income, after all).  But, when you’re first getting started, I think it’s silly to dwell on six months of savings.  That’s a pretty big and intimidating number for most people.

So instead, start by trying to save up to cover one month of your minimum living expenses.  Once you’ve saved that much, make your next goal to be to save an additional month of living expenses.  And so on, until you’ve hit that six-month goal.  By breaking it up into pieces like this, it gives you a very clear way to take small steps, starting now, to work your way up to this major goal in the future.

Keep Your Living Expenses at College-Level For As Long As You Can

If you’re like me, there’s a good part of you that’s sad to be leaving college.  College is hard, sure, but it’s fun!

Do you have that same bittersweet feeling I did about leaving school behind as you enter the real world?  Good!  Hold on to it.  Embrace it.  And channel it into how you manage your finances.

Simply put, if you had a blast in college living on a minimal income, there’s no reason to change that up now that you have a salary.

Sure, you can have some peace of mind that you have some discretionary money at your disposal if you ever were to need it. And there’s certainly nothing wrong with splurging every now and then.

But, since you’re used to keeping your living expenses low, you should continue to do that as much as possible.  Have friends in your new hometown?  Try to get them to sign on as roommates!   Have some more free time on the weekends now that you’re not constantly writing papers and completing homework?  Spend a little of that time learning how to cook so you don’t need to order takeout seven or eight times a week.

Simply put, it’s much easier to maintain your current standard of living today than it is to increase your standard of living, realize you’re overspending, and then try to cut spending back.  You’re better off keeping your monthly spending where it is today, and saving the rest, rather than allowing your lifestyle costs to rise with your income.

And Speaking of Spending…

Yes, you need a budget for yourself.

I’m not the type of person to go through my clients (or my own) spending with a fine-toothed comb, analyzing every little expense here and there.  It’s not fun; it’s not productive; and it’s not an effective, long term, healthy way to manage your finances.

Instead, you should set budget parameters for yourself to make sure you know where your money is going, and track against those.  A free tool like www.mint.com is great for this.

You don’t need to worry if you go a dollar or two over any particular budget category each month.  But, you should pay close attention to your biggest spending areas, and try to find ways to cut back on these highest impact spending areas first, if you’re having a hard time finding the money to save for retirement and build your emergency fund.

Budgeting should be a common-sense driven exercise.  Don’t drive yourself crazy with it, but know your budget numbers and stick to them as best you can.

Increase Your Available Credit (But Don’t Use It)

It can be hard to build your credit score while you’re in college.  After all, most financial institutions aren’t in the business of giving huge lines of credit to college students who have a minimal, if any, income.

But now that you’re out of school, that changes in a big way.  As soon as you have documentable proof of income, you should open up a credit card and use it wisely to start to build your credit score.

Whatever the bank gives you for a credit limit, always keep your credit card balance below 30% of this limit.  Always pay off your bill every month.  In other words, don’t rely on your credit card to bail you out if you don’t have the cash available to make a purchase.  Instead, use it as a tool to begin to build your credit history as an excellent manager of credit.  When you’re ready to buy a house several years down the line, you’ll be happy you did.

An even better way to do this?  Find a credit card that offers some great perks. If you like to travel, find a card that gives good points toward airfare or hotel stays.  If you’d rather just have the cash, find a card that pays you cash back bonuses when you use the card.  There are a lot of options out there, and some of them are fantastic.  If you want to get some more ideas on great credit cards to use, give me a call.

This Isn’t a One-Time Thing

As you can tell, there’s a LOT here.  As you transition in the workforce, it’s ultimately on you to set yourself up for financial success.

Start today by downloading my free student loan guide and plugging your numbers into my retirement calculator.  Create a budget, open a credit card, and manage your cash flow (both income and spending) wisely.

But ultimately, most of these things aren’t just for when you make the transition from school to a job.  You should periodically review each of these items to make sure you’re still on track.  Set up a free call with me to talk through how we can implement a system to address each of these items, and more.

What Millennials Need to Learn from the ESPN Layoffs

Well, this is a bummer.

The big news this week is that ESPN, once considered the fastest growing and most stable news organization in sports, is laying off numerous reporters and on-air personalities.

Layoffs are a cruel reality of the world we live in.  Unfortunately, reports of companies cutting jobs pop up in the news far more frequently than they should.  And there’s something about how public ESPN’s move was that makes it hit home all the more.

But there are a few important lessons in this story for all of us, particularly for millennials who are relatively new to the workforce.

There’s No Such Thing As 100% Job Security

No matter how quickly your company is growing, no matter how good your last performance review was- in today’s day and age, job security flat out isn’t something that we can count on.

Sure, there are a limited number of exceptions.  Tenure can help if you work in higher education.  Unions can, too.  But for the most part, it’s a mistake to treat a job as completely stable.

Some best practices to help deal with this unfortunate reality:

  • Talk to that recruiter who just hit you up on LinkedIn. Even if you aren’t looking for a new job right now, it never hurts to have the conversation and build a relationship with someone who has the capability to make hiring decisions. If you’re ever out of a job on short notice, you’ll be happy to have these connections!
  • Update your resume. If you’re anything like me, your resume hasn’t been updated since your last job interview.  A best practice is to update your resume – and LinkedIn bio – once a year.  That way, it’s ready to go whenever you need it.
  • Network, Network, Network. There’s many ways to do this one, but you absolutely have to be networking in your industry.  Attend a conference that caters to professionals with your particular area of expertise.  Use a site like Meetup or Eventbrite to find local networking events in your city.  Building relationships is the name of the game.
  • Mind your finances. Of course, there are huge financial concerns with the risk of job loss too.  Which brings us to our next major point…
You Absolutely Must Have an Emergency Fund (In Cash)

As a financial planner, I help people meet a wide variety of financial goals.  From retirement, to paying down student loans, to buying a home– there are a ton of different ways to allocate your money to improve your financial future.

But none of those things happen until you have an emergency fund.

You read that right.  Of course, you need to meet you minimum financial obligations.  Pay the minimum on your student loans each month, don’t miss credit card payments, contribute to your 401(k) until the match point.  You know the drill.  But, before you start looking to invest any “extra” money, you need to work to build an emergency fund.

The golden rule is to (eventually) build up to the point where you could support yourself for six months, without holding a job, just from your emergency fund.  But I wouldn’t focus on that right away- that’s a pretty intimidating goal for most people to reach.

Instead, calculate your average spending for one month, and focus on accumulating that much money in your emergency fund.  Once you have that much, focus on doubling it.  And so on, until you get to six months.

In other words, being so far away from reaching your emergency fund savings goal isn’t an excuse to not try to reach it in the first place.  Start small, and focus on saving a month’s worth of expenses at a time.

And one more thing- I don’t care how low savings rates are, you need to keep your emergency fund in cash.  If you invest your emergency fund and you were to immediately lose your job just as the stock market crashes, it won’t do you much good.  Set a goal for your emergency fund, and keep it in cash.  Preferably, in a separate savings account from the rest of your savings, so you won’t be tempted to spend it.

What’s More Secure: A “Side Hustle”, or a Full Time Desk Job?

If you were to ask 100 people whether it’s safer to have a full time job with an employer, or to work for yourself, I’m guessing that over 95% would say that it’s safer to have a full time desk job.

That may well be true.  It takes a lot of work to build your own revenue streams from the ground up.

But if you start your own business as a “side hustle”, and slowly grow it over time to the point where it could become a full time endeavor for you, I’m not so sure that this type of model is less secure than working for a “real” company.

Let’s put it like this.  Pretend that you have experience designing websites and writing code.  Would it be more secure for you to A) work for a company that does web design and be paid a salary, or B) to work as a freelancer part time and (over time) build up to 50 web design clients, enough that you could quit your full time job?

In Scenario B, if a client were to “fire” you, you would lose a total of 1/50 of your income, or 2%.  In Scenario A, if your employer were to lay you off, you’d lose 100% of your income.

The point of this isn’t to try to convince you to quit your full time salaried jobs.  Rather, I’d encourage you to revisit the way you think about your income and job security.  Finding a side hustle that you are passionate about and can sell to other people is a great way to diversify your income streams.  Just as you wouldn’t invest all of your money into one stock, it’s a best practice to diversify your income sources as well.

Hopefully, This is Never Relevant to You

Obviously, I hope you’re never in a situation where you’ve been laid off for a job.  But just in case, following the steps I outlined above will leave you more prepared to handle this situation.

The Why, When, and How of Combining Finances With Your Spouse

The Why, When, and How of Combining Your Finances With Your Spouse

“Now that we’re getting married, how should my partner and I manage our money together?”

It’s one of the most common questions I get from my engaged and newlywed clients. It can be hard enough for us to manage our own money. Adding a second person to the mix makes things all the more complicated.

First and foremost, there’s the challenge of how to manage your money together with your spouse. Which accounts to use, how to monitor your finances together- there are a lot of questions here. Enough that I created a FREE guide to walk you through my methodology for combining accounts.

But before we get into the how of managing your money together with your spouse, we need to take a step back.

Start with Why

Whenever I discuss combining money with your spouse, the very first question I typically ask is- why do you want to combine your accounts together?

Is it a matter of convenience? It’s certainly easier for you to keep track of your family finances if everything is in one place. Or is a philosophical matter? You’re one family, after all, and many people want to manage their finances as such.

Do you and your partner want financial autonomy in your day to day lives? Or, do you view your financial future as being completely intertwined with each other. Or maybe somewhere in between?

There’s no right or wrong answer here. But the approach you should take is largely dictated by your answers to these questions.

 

One Important Note

When you start to combine your money with your spouse, there could be legal complications if you ended up separating down the line.  It’s never a bad idea to speak with an attorney up front to decide how best to handle these risks.  But even if you decide not to completely combine accounts, you can certainly still use my framework for managing money in sync with each other

If you do decide to keep your accounts separate, you should add your spouse as a beneficiary to your accounts as soon as possible. This way, if something were to happen to you, your spouse will inherit the assets without legal complications.  Notably, this step is particularly relevant for retirement accounts like your 401(k) or IRA, where you actually can’t combine accounts with your partner at all!

Another thing to keep in mind:  there’s no rule that says you either need to combine all of your bank accounts or none of them.  There’s nothing wrong with combining some money in a joint checking or savings account, while keeping a portion of your income in separate places.  In fact, for couples who tend to fight about money, this is one of my favorite strategies!  I’ve seen couples have amazing success by depositing 80% of their paychecks into a joint account to use for family expenses, and keep the remaining money separate to save or spend as they choose.

That being said, my personal philosophy is that if you’re getting married, you should be “all in”. So, I don’t have a problem if couples want to completely integrate their accounts- as long as they want to for the right reasons, as discussed above.

The Next Question- When Should You Combine Finances

You shouldn’t actually combine your financial accounts with your partner until you’re married. Period.

Couples in our generation operate differently than our parents and grandparents. These days, it seems like the norm is to take big steps, like moving in together, before you are engaged. I know and I get it- I lived with my wife for over a year before we got married.

But just because some societal norms are changing, doesn’t mean that everything should change. Particularly when it comes to legal issues.

You might view yourself as “basically married” to your boyfriend or girlfriend, and there’s absolutely nothing wrong with that. But, your bank won’t view you as married until you’re actually legally married. Nor with the courts, if you were to break up. These situations become much more complicated if you have shared financial assets that you’re trying to split between two non-married people.

There’s nothing wrong whatsoever with jointly managing your finances with your boyfriend or girlfriend if you are living together. In fact, I usually encourage it. My guide on managing your finances with your partner will show you how. But managing your finances together doesn’t mean you have to actually combine your accounts. One more time for good measure: don’t do that until you actually get married.

Hopefully, it just means you’ll have separate accounts for a few more months or years. But in the worst case scenario, it can save you a ton of trouble by waiting.

How Do We Go About Merging our Finances?

You’ve talked about why you want to combine finances with your spouse. You are, in fact, spouses, so it’s an appropriate time to merge your money. Now, how do you do it?

I have a three-tiered framework for how to combine finances with your spouse. You’ll get a step by step walkthrough of this in my free guide. In this guide, you’ll learn how to:

1. Identify your shared financial goals with your spouse, and why these are so critical to keep in mind when you set up your joint financial accounts

2. Inventory each of your current financial accounts, and create an account map that shows you exactly where your money is today and how it’s being used.

3. Choose which accounts to use and confirm you have enough accounts in line with your goals.

There are a lot of steps to combine your money the correct way, and it’s critical that you take the time to make sure that nothing falls through the cracks. Download this free guide on combining your finances today, and you and your spouse will have a roadmap to make sure you’re set up for success.

How to Allocate Your Money Effectively

[Click here to register for my webinar, “How To Organize Your Finances and Create a Roadmap Toward Financial Freedom”!]

Ever since I founded Pacesetter Planning, I’ve worked with my clients on a wide range of financial topics.  I’ve gotten a variety of questions from clients and potential clients, and while everyone’s situation is a little different, generally they fall into the following categories:

  • How do I manage my finances with my husband/wife/fiance/significant other?
  • How much do I need to buy a house?
  • How much should I be saving for retirement?
  • How do I select investments?
  • Should I put extra money toward my student loans or should I direct that money elsewhere?

As you may have noticed, I’ve addressed a good number of these topics at a high level on this blog already (and will continue to do so).  But, you may have picked up on something else.

All of these Questions are Interconnected

It’s hard to make financial decisions in a vacuum.  Often times, the hard part isn’t answering these individual questions, but finding the right answer to them all at the same time.  It often isn’t practical to increase your saving for retirement and buy a house and pay extra on your student loans all at once.  These decisions need to be made together, and there’s usually not a clear right or wrong answer.

That, of course, is where I come in.  I help my clients develop plans to manage their finances, prioritize their goals, and help them allocate their money accordingly.  We set targets and track progress against these goals, updating as needed.

You Need a Framework to Make these Decisions

While everyone’s circumstances are a little bit different, I use a strict framework and process to help clients make these decisions.

And I’d like to share it with all of you.

On Tuesday, March 7 at 8 PM EST, I’ll be hosting a free webinar called “How to Organize Your Finances and Create A Roadmap Toward Financial Freedom”. You can register for the webinar here.

On this webinar, we’ll discuss:

  • How I recommend clients structure their accounts to keep track of their finances
  • How to implement a system to manage your income month to month to pay yourself first
  • How much money you’ll need to retire, and what it will take to get there
  • How to balance your everyday spending with your short and long term financial goals
We Face Greater Financial Challenges than our Parents and Grandparents.  Plan Accordingly.

Sometimes I get pushback when I say this, but I truly believe that millennials face much greater challenges than previous generations.  Think about it for a minute.

Most of our grandparents worked 40 years at the same job, retired and received a pension from their company to fund their retirement.  They have Social Security.  When they were our age and looking to buy a home, housing prices were about twice the average annual salary.

Many of our parents may have had multiple jobs over the course of their careers, but most of them only had one job at a time.  Some of them may still have a pension, but all will (barring some sort of catastrophe) receive Social Security.  And again, the average home price when they were in their twenties was around twice the average annual salary.

Now?  The average millennial changes jobs four times before turning 32. More than 1/3 of millennials have a side job.  The average price for a home has jumped to about 3.5x the average annual salary. Most of us have some type of student loans.

Pensions? Social Security?   ¯\_(ツ)_/¯

We have some big challenges ahead of us.  The good news is that these challenges can be beaten.  But, you need a method and a plan to get you there.  I’ve got it for you.

I Want to Teach You Everything I Know

I didn’t get into financial planning to only work with rich clients.  My goal is to help make all of my clients wealthy someday.  The more people I can help, the better.

Sign up for my upcoming webinar, and let me know if you have any questions you think I should address.  I look forward to sharing my methodology with you all.

Why It's Critical to Negotiate Your Salary

Why It’s Critical to Negotiate Your Salary

Just about anyone I’ve ever spoken with remembers the feeling they had when they accepted their first job.

I certainly do.  Getting ready to graduate college, signing on the dotted line to join a great and growing firm.  It was a wonderful feeling.

But before you accept the contract, there’s a critical step that many of us miss.  And it can come back to haunt you if you aren’t careful.

I started Pacesetter Planning as a firm dedicated exclusively for millennials for many reasons, but one of the biggest was that nobody ever taught us about financial topics in school.  Certainly, nobody ever taught me about this critical step to accepting your first (or second, or third…) job.

You absolutely have to have a strategy in place to negotiate your starting salary.

I’m not just talking about going in and blindly making demands.  No, there’s a lot of strategy involved.  I can help you develop and implement a negotiation plan.

But, it’s so important that you actually do it.  If you don’t, you could be literally costing yourself hundreds of thousands of dollars.

Don’t believe me?  Read on.

Millennials are Good at Many Things.  Negotiating Salaries Isn’t One of Them.

The good news is that we can fix this negotiating problem that we collectively have. The bad news is that most of us just aren’t doing it.

A study conducted by NerdWallet last year indicates that only 38% of millennials negotiate salary with their employers upon receiving a job offer.  Over 60% of millennials aren’t negotiating at all, even when they are told that the employer expects negotiating as part of the application process.

The most heartbreaking part?  According to the study, three out of four employers have room to negotiate salary by as much as 10%, if the new employee asks for it.

I get it, it feels uncomfortable.  But, the odds are high that your employer is expecting you to negotiate.  Develop a strategy, do you homework, and practice before you ask.  But you absolutely need to try – there’s too much on the table to avoid it.

It’s About Way More Than Just Your Current Salary

Negotiating an increase in your salary when you start a new job, or even in a job your currently hold, is about way more than just increasing your income right now.  That’s a nice benefit, don’t get me wrong, but that only scratches the surface as to why it’s such an important concept.

The key is that your future income is, in most cases, directly based on your current income.  Meaning, that the raise you get next year isn’t completely random.  It’s based on your current salary.  So, if you increase your salary now, your raise next year is going to be for a higher dollar amount than it would be if you hadn’t negotiated.  The year after that, your income is going to go up by an even higher number, assuming you get annual raises at your job of course.  Thus, if you negotiate your salary upwards as early as possible, your income will grow at an exponentially faster rate in the future than it would otherwise.

How Negotiating a 5% Raise Could Make You $220,000

Hypothetically, let’s say a company makes a job offer to two seniors in college, Max and Jess.  Each of them have the same amount of experience, and both are offered a starting salary of $50,000.  They are each 22 years old.

Max, happy with the offer, accepts a starting salary of $50,000.  Jess, however, decides to negotiate, and is able to earn a salary of $52,500 – 5% higher than the initial offer.

Let’s say that they then each get a 3% raise each year.  How do their salaries compare as they get older?

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Jess started her career making $2,500 per year more than Max, but by the time they reach retirement age at 65, she’s making over $9,000 a year more.  This difference is only because she negotiated a raise before she took the job offer – there are no other differences in their compensation paths.  And, of course, this doesn’t take into account that Jess is probably more likely than Max to negotiate future raises, further increasing the difference.

At first glance, this might not seem like a huge deal.  Why am I making such a big deal about $9,000?  Because it’s about much more than that.  If you add up all of the earnings that Jess and Max would take home throughout their career, Jess cumulatively earns over $222,000 more than Max:

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Seriously.  By making a quick phone call before accepting the job, Jess can earn nearly a quarter million dollars more than she would have if she hadn’t made that call.

If I told you that you could schedule a meeting this week that could earn you a quarter million dollars, would you do it?

Negotiating Isn’t Just for New Hires

Negotiating salaries isn’t just for new job offers.  Depending on your situation, it can be appropriate to negotiate a raise in your current job as well.

Again, there’s a right and wrong way to do it.  Do your homework and be able to back up your request with specifics about your job performance and industry trends.

And if you get pushback, or still aren’t comfortable with going to your boss to talk about a raise?  I’m about to share a secret about how employers base salaries.  It’s not a hard and fast rule, but it applies to many firms who work in competitive industries.

Here it is: most companies pay higher salaries to individuals who they hire away from their competitors.  Think about it – in order to attract the best workers, it makes sense that the company would want to offer “premium” salaries to employees that they recruit from other firms.  If you’re already working in the industry, why else would you consider jumping to a competitor?

Of course, there are plenty of other reasons you might not want to start looking for a new job.  Your company’s people, location, training, benefits, culture… the list goes on and on.  It might not be a good idea to jump around in the industry just to bump your pay.

But, your salary certainly is a factor.  What I’m trying to say is this: if you can see yourself making a change, keep in mind that doing so often comes with an increase in pay.  And if you’re a super savvy negotiator, having another job offer in your pocket could be a great way to get your current HR team to consider giving you a raise to stay!

Plan. Prep. Negotiate.

There are lots of different strategies here, but above all, it’s important to negotiate.  It’s about more than your current salary – any increase in pay today will have exponential effects for you down the road.

But, it absolutely needs to be done in the right way to give yourself the best chance of success.  If you want to learn more, schedule a fee, no obligation consultation to talk about how to do this the right way!