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The Psychology of Money

"Success with money relies more on Psychology than Finance,and doing well with money has little to do with how smart you are, and a lot to do with how you behave. And behavior is hard to teach, even to really smart people." --- Morgan Housel (2020)

“The Psychology of Money“ by Morgan Housel is an insightful guide that puts the spotlight of financial success squarely on the shoulders of human behavior. In this world of complexity, how you behave with money is more important than what you know about money.

With a blend of research, anecdotes, and stories of personal experiences, Housel illuminates the significance of better understanding your own behavior, and how that is far more responsible for your financial outcomes than your skill.

The following one-page visual guide has been created by me to help you apply the teachings from Morgan’s book to your life. See below 👇

Downloadable Content – Raw Notes

Ready to dive deeper into Morgan Housel’s work on The Psychology of Money? Download my unfiltered notes below 👇

Notes on Morgan Housel’s Psychology of Money by Brian NwokediDownload
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Everything You Need To Know About Saving For Retirement

“However, I am confident in saying that if you can figure out a way to save 10% to 20% of your income into the financial markets each year, automate your savings and all of your bill payments, increase the amount you save each year by just a little, diversify your investments, and basically leave them alone, you will be better off financially than the vast majority of retirement savers in America. Everything else is gravy.” --- Ben Carlson (2020)

“Everything You Need to Know About Saving for Retirement“ by Ben Carlson is a succinct yet insightful guide that puts the spotlight on a fundamental aspect of retirement planning: your savings rate. In a world of complex investment strategies and ever-changing financial landscapes, Carlson distills his wisdom into a straightforward message – it’s not just about where you invest, but how much you save.

With a clear and approachable style, he emphasizes that building a secure retirement is within reach if you focus on increasing your savings and maintaining a consistent approach. Drawing on his expertise in personal finance, Carlson’s concise and no-nonsense approach empowers readers to take control of their financial destinies, offering a roadmap to achieving financial security during retirement through a smart savings strategy!

The following one-page visual guide has been created by me to help you apply the teachings from Ben’s book to your life. See below 👇

This one-page visual guide by Brian Nwokedi has been created to help you apply the learning from Ben Carlson's book to your life.

Downloadable Content – Raw Notes

Ready to dive deeper into Ben Carlson’s work on Saving for Retirement? Download my unfiltered notes below 👇

Notes on Ben Carlson Saving For Retirement by Brian NwokediDownload
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My Financial Habit: Homemade Clean Juices and Green Smoothies

Purpose of this article: (1) to show the average retail markup on Green Smoothies and Clean Juices, (2) a solution to save money by making these items at home, and (3) the financial decision making concept of payback period.

Overview

About a year and a half ago I go a NutriBullet PRO, and like most gifts like this, I planned to make the “most out of it”. Unfortunately much like my Latte Habit, I continued to buy store made smoothies from the variety of shops we have here in Charlotte.

Fast forward to 2020, and the resulting shutdown due to COVID-19, and store bought smoothies suddenly became obsolete. Life has a funny way of sometimes making and/or forcing you to appreciate the things you have. And the global pandemic did exactly that for my NutriBullet PRO.

Since pretty much the start of lockdown in March of 2020, my wife and I have adopted a daily Green Smoothie habit; brought to us by none other than the same NutriBullet PRO that originally sat in the kitchen pantry gathering dust. What started as a simple trial has now blossomed into a daily enterprise of good health decisions: (1) a daily green smoothie from our NutriBullet followed by (2) a clean juice from our Aicok Juicer:

The following is my attempt to calculate the financial benefits that have accrued to us as a result of switching to home made green smoothies and clean juice.

Estimated Cost of a Homemade Green Smoothie & Juice

Our two go-to recipes for green smoothies and clean juice are as follows:

Using the menu of one of my favorite smoothie and juice establishments here in Charlotte I get an average retail price of $6.75 and $8.25 for smoothies and juices respectively. This represents a markup of +176% to $253% on average!!!

Use the Concept of Payback Period to Evaluate

When deciding whether or not to buy a new machine for our house, analyzing the payback period can be an effective financial decision making tool. Most of the time when considering such investments or purchase decisions, the time value of money should be applied to your analysis. This simply means that you should consider the fact that your money today is worth more than that same sum of money in the future due to the fact that your money today can earn interest or a return.

Sometimes though when the investment decision is simple and involves relatively smaller sums of money, analysis of the payback period can be a suitable alternative. The payback period is the amount of time it takes you to recover the initial cost of an investment or purchase. You calculate this by dividing the amount of the original investment by the annual cash flow or net benefit (in the case of my green smoothie/juice machines) derived from the investment.

Using the concept of payback period, lets analyze my Green Smoothie and Juice Machines:

Besides the obvious health benefits of our daily Green Smoothie and Clean Juice habit, the financial implications are immense. After investing in a NutriBullet Pro, it will take roughly 21 days of Green Smoothies to payback the cost of the machine.

By contrast yet still positive, after investing in an Aicok Juicer, it will take roughly 47 days of Clean Juices to payback the cost of the machine.

There is just no denying how value add both machines have been to our lives both from a health standpoint and a financial standpoint. It’s a no brainer given how quickly both machines payback the original cost when compared to purchasing these items at retail stores.

2b.-Green-Smoothies-and-Juices-paybackDownload
After 21 days of consistent use this bad boy pays for itself.
Targeting 47 days of use to recoup our cost.
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Create and Monitor Your Personal Balance Sheet with Personal Capital

Purpose of this article: to help you quickly create and monitor your personal balance sheet.

Bullet Point Summary

  • Before you can improve your current financial situation you need to figure out where you are. The personal balance sheet is a great tool to help you accomplish this.
  • Personal Capital is my favorite personal finance app and piece of software to show net worth. It will speed up the gathering of your financial information, and will give you an awesome snapshot of your net worth every time you log in.
  • The personal balance sheet gives you a better view of your total finance picture, better than a budget or net cash flow spreadsheet.

Overview

A personal balance sheet provides an overall snapshot of your net worth (or net wealth) at a specific period in time. It is a summary of your assets (what you own), your liabilities (what you owe) and your net worth (assets minus liabilities).  The old business adage “what gets measured, gets managed” rings true in your personal finances as well. Without a personal balance sheet, it becomes very challenging to put forth effective short-term and long-term strategies to improve your finances.

Gathering the Necessary Data

Compiling the necessary financial information to create your personal balance sheet can be an arduous manual process especially if you are not using personal finance software like Mint or Personal Capital. So if you do at least one thing after reading this, start using some personal finance software today! Here is a link to reviews on some of the best personal finance software.

There are a ton of reviews comparing all of the ins and outs of each of the different personal finance apps and software, but my favorite by far is Personal Capital. In short, Personal Capital gives you the best view of your Net Worth, and does this quickly, accurately, and in real-time. Additionally, Personal Capital utilizes Yodlee to sync up to your various financial accounts, and thus has fewer reported sync issues.

It’s not a budgeting tool like YNAB or Mint, and it doesn’t help much with daily cash management (i.e. managing expenses, paying bills, alerts on overspend, etc.). It is though an effective aggregator that can help you manage your short-term and long-term views of your net worth.

Create Your Personal Balance Sheet

Using Personal Capital, the following personal balance sheet was created for Client A in less than 10 minutes:

All of the values for assets and liabilities are from the same day and thus reflect the same, single point in time for my client’s finances.

What Does It Actually Mean?

Now take a closer look at each column. Over the past seven months there has been a +24% increase in net worth as Client A’s net worth has grown from $183K to $227K. Back in December of 2019, the comprehensive financial strategy that was put in place focused on building retirement assets while steadily paying down liabilities owed, and thus far into the year this strategy is working for Client A.

In general, there isn’t really a magical solution that quickly changes one’s net worth position. Consistently executing your financial plan which usually entails some combination of savings, investing, and paying down debt is the tried and true strategy to increasing your net worth.

But before you can improve your financial situation, you need to measure your current starting point. The personal balance sheet is the best tool to help you do just that, and utilizing the financial app, Personal Capital, makes the compiling and tracking of this information seamless.

Personal Capital invite a friend link

You can download the excel file of the balance sheet template here:

Personal-Balance-Sheet-1Download

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My Financial Habit: Coffee Shops and Lattes

Purpose of this article: to show how my afternoon latte habit adds up and give you some thoughts on things to consider if you have a similar financial habit in your life

Overview

I have a financial confession to make… I love afternoon lattes and it’s costing me dearly! And like many of you out there, I know every single time I buy my latte, I am overpaying severely. According to USA Today’s coffee calculator, the markup on my latte can be as high as 300% depending on the coffee shop. But I will not deny that there is something quite special about a hot off the press latte!

How Much Is My Latte Habit Costing Me?

Based on an analysis of my spending over the last 535 days here are my financial stats:

• I have visited my local Charlotte coffee shops 71 different times, and have spent a total of $643 on afternoon lattes. The cost per trip is $9.04 (my goodness!)

• My average monthly spend over the last 18 months is $35.67

• The most I spent in one month was $81.23 in November 2017

• Over this time period, I spent roughly $1.20 a day on my latte habit.

At a 300% markup, my afternoon latte habit should have only costed $215 if I was disciplined enough to brew my own coffee. This is a difference of $428 extra that I have spent over the last 18 months.

What Could I have Done with the $428?

So, what could I have down with this additional $428? Here are a few things I could have done with that money…

• During the time period of 3/1/17 to 8/18/18 the S&P 500 returned an approximate +19.6%. Had I invested my $428 during this time period, I could be roughly $84 richer.

• Based on the Bureau of Transportation, I could have taken a round trip ticket to almost any US city. The average round trip price during the first three months of 2018 was $346.49.

• I could have used that money to pad my emergency savings account. Recent studies show that very few of us Americans have enough savings to cover a $1,000 emergency.

There are countless other more positive money management actions I could have pursued instead of spending this extra money on my afternoon latte habit. The point I am trying to make here isn’t to pass judgement on this money spending habits. It’s to make myself more aware of an area of spending that may not truly be worth it in the long run.

If you are like me, you probably have some areas of money management that you wish you were better at. I hope my financial habit confession was helpful for you to hear. Please let us know what financial habits you have and wish to break.

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Three Apartments … Need to Choose One

Purpose of this article: to help a graduate school student choose between three apartments.

Overview:

Sienna Nelson is on her way to UT Austin College of Pharmacy this coming Fall where she is pursuing her Pharm.D. degree. As mentioned before, the estimated total cost of attendance is $172,886 of which about $88,000 is budgeted for her cost of living (about $22,000 a year).

With a tight living budget, Sienna is trying to decide between three apartments with different monthly costs, levels of amenities, and distance to school.

Below is a quick cash outflow analysis created to help her decide which apartment to go with. Excel file has been attached below and can be sent upon request.

Apartment 1: $945 monthly rent, no laundry or dryer:

Apartment 1 is a 5-minute walk from the bus stop that Sienna will take into school each day. Since she is very close to the bus stop, her plan is to save on fuel costs by walking to the park and ride each morning and taking the bus into school each day. The good thing for UT Students in Austin is that bus transportation is free for all students with an I.D.

Because her apartment under this scenario is a 5-minute walk from the bus, Sienna will walk to the park and ride each morning and not incur any additional travel cost.

Since her apartment under this scenario doesn’t have a laundry or dryer machine in her unit, she will have to use the shared laundry and dryer machines downstairs. We estimate that it will cost her $30 a month. On top of that, every 3 months she will have to spend an additional $26 on detergent and dryer sheets.

Apartment 1, laundry, and travel to school each day is estimated to cost Sienna $11,752 each year. Over the next four years of school, that equates to $47,008.

Please note that these costs do not include utilities like electricity, heat, a/c, cable and internet, as we assume these expenses would be roughly the same in each scenario since the apartments are similar sized.

Apartment 2: $1,033 monthly rent, laundry & dryer:

Apartment 2 is a 1-mile drive from the bus stop that Sienna will take into school each day. Since she is semi-close to the bus stop, her plan is to save on fuel costs by driving a short distance to the park and ride each morning and taking the bus into school each day. The good thing for UT Students in Austin, is that bus transportation is free for all students with an I.D.

Because her apartment under this scenario is 1-mile away from the bus stop, Sienna will need to drive to the park and ride each morning. We estimate that will cost her $6 a month in fuel.

Since her apartment under this scenario does have a laundry and dryer machine in her unit, she will be able to save some. We estimate that it will cost her $8 a month in energy to wash and dry her clothing. On top of that, every 3 months she will have to spend an additional $26 on detergent and dryer sheets.

Apartment 2, laundry, and travel to school each day is estimated to cost Sienna $12,611 each year. Over the next four years of school, that equates to $50,445.

Please note that these costs do not include utilities like electricity, heat, a/c, cable and internet, as we assume these expenses would be roughly the same in each scenario since the apartments are similar sized.

Apartment 3: $940 monthly rent, laundry & dryer:

Apartment 3 is a 3-mile drive from the bus stop that Sienna will take into school each day. Since she is semi-close to the bus stop, her plan is to save on fuel costs by driving a short distance to the park and ride each morning and taking the bus into school each day. The good thing for UT Students in Austin, is that bus transportation is free for all students with an I.D.

Because her apartment under this scenario is 3-miles away from the bus stop, Sienna will need to drive to the park and ride each morning. We estimate that will cost her $18 a month in fuel.

Since her apartment under this scenario does have a laundry and dryer machine in her unit, she will be able to save some. We estimate that it will cost her $8 a month in energy to wash and dry her clothing. On top of that, every 3 months she will have to spend an additional $26 on detergent and dryer sheets.

Apartment 3, laundry, and travel to school each day is estimated to cost Sienna $11,639 each year. Over the next four years of school, that equates to $46,557.

Please note that these costs do not include utilities like electricity, heat, a/c, cable and internet, as we assume these expenses would be roughly the same in each scenario since the apartments are similar sized

Which Apartment Should She Choose?

Based on our pure financial analysis, we recommend that Sienna choose Apartment 3. It is -1.0% and -7.7% cheaper than Apartment 1 and Apartment 2 respectively. The summary table below shows a side by side comparison of the total cost of each apartment:

An argument could be made that Apartment 1 might be worth it holistically to Sienna because the difference in cost is only $113 a year, but it’s much closer to the bus stop and ultimately school. What we can all agree upon is that Apartment 2 is out of the equation and ultimately Sienna now has the tools necessary to make the best decision for herself!

Everyone’s situation is slightly different but please know that we at Blue Elephant Financial Services are here to help you make the best financial decisions possible.

 

Excel Link:  Sienna Nelson – 3 Apartment Choices

 

 

 

 

 

 

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The Five Pillars of Net Worth

While it may be a hassle to create a financial plan, not knowing where you stand now makes it much harder to plan for where you need to be later in life, especially for retirement. At Blue Elephant Financial Services, we start our personal financial plan by taking a snapshot of your current Net Worth.

Your Net Worth is the sum of all of your Assets (i.e bank accounts, investments, car, home, etc.) minus your Liabilities or Outstanding Debts (i.e credit card debt, student loans, mortgage, car note, etc.)

The ultimate goal of the Blue Elephant Financial Services personal financial plan should be to drive towards increasing your Net Worth. The steps outlined below are my approach and strategy that will give you a sense of control, ultimately giving you the tools to drive towards financial stability:

1. Evaluate Your Spending Habits to see where we can trim expenses. The equation is relatively simple: Income – Expenses = Remainder. This remainder is positive when you spend less than you make. My job is to make you aware of how you spend your money, and work with you to cut out the “habitual & mindless” spending that ultimately hurts your long-term financial stability. Regardless of where your spending is, there is always an opportunity to trim and save/invest more.

2. Build an Emergency Savings Account that can sustain 3 to 6 months of expenses. While other financial planners will tell you to pay down your debt first, it is my belief that a lack of emergency funds leads to a perpetual cycle of more debt in the long-term, especially when emergency expenses arise. I always suggest that each of my clients save a minimum of $1,000 before turning their attention to paying off debt. This builds cash which increases your Net Worth. We make sure to automate this by contributing a minimum of $25.00 a month to an online savings account such as Ally. Set it then forget it. This simple step will trick your brain into feeling self-motivated.

3. Pay off all High Interest Credit Card Debt. Any outstanding debt that is above 10% needs to be a primary focus of your financial plan. Paying off your credit will (+) increase your Net Worth, ultimately freeing up more of your funds to do other things with. Once you pay off your credit card debt, you will no longer be held back by principal, interest payments, and finance charges. This then frees up more of your funds to build your emergency savings and/or invest in your retirement account, which leads to better long-term growth in your Net Worth. On an aside, utilization rate of your credit card should never go above 30%.

4. If applicable, you should Pay of Any Outstanding car notes, student loans, and other non-mortgage debts with interest rates below 10%. Once you have eliminated your high interest credit card debt, you will now have a decision to make. I always suggest that extra funds should go towards paying off outstanding non-mortgage debt. The sooner you can get out of debt, the better off your future returns will be, ultimately driving significant gains in your Net Worth.

5. Once you have eliminated mindless spending, built an emergency fund, paid off high interest debt, and eliminated other outstanding non-mortgage debt, you are ready to Rapidly Ramp Up Your Retirement Savings. Your goal should be to save enough money so that you can live at 50% -70% of your current income. If your employer has a matching 401 (k), you should contribute enough from day one to get the match. Keep your investment allocation simple by picking a blended index fund as your retirement vehicle.

Blue Elephant is here to tailor your financial plan to meet your needs. Our plans always focus our efforts on maximizing your Net Worth which helps you ultimately meet your current and ongoing financial obligations.