One of the most popular and widely-shared things we do on this blog are Reader Cases, and we totally get why. It’s hard to get unbiased advice on your finances. If you try to walk into a bank to talk to someone about money, all you’re going to get is an hour-long sales pitch on why you should put all your money in that bank’s mutual funds, or turn over your money to their advisors so they can just churn your account to generate commissions.
We, on the other hand, don’t want anything from you. We don’t charge people for analyzing their situation, because we don’t care about making money from you. We just want you to be free and happy.
As a result, our inbox is constantly exploding with people writing in and asking us to look at their finances. It’s actually a pretty strange situation that people are so willing to share their most intimate details of their lives with a stranger over the Internet, yet can’t talk about this stuff in real life. Money is a deeply emotional topic, so maybe the fact that we’ll likely never meet them in real life makes it easier to discuss this over email than over a dinner table.
By now, we’ve done dozens of reader cases, from people all over the world and all across the socio-economic spectrum. And generally, I’m happy to say that we managed to come up with a way for most of them to retire, usually with a few tweaks to their situation. Very rarely have I ever thrown up my hands and gone “Welp, you’re super-screwed. Sorry.”
So I thought it’d be interesting to write about the trends I’ve noticed analyzing so many people’s finances, the most common problems people face, and what they do to solve it.
Summarizing Your Finances is the Hardest Part
Regular readers will know that one of the things we love to do is yell MATH SHIT UP before we, you know, math shit up. And that’s given a bit of a misconception that math is the magical key to making sense of money. As if people show up at our door with a shoebox full of receipts, we wave a magical math wand and then BOOM. Money problems fixed!
The math is easy. You’ve seen us do it over and over again. First, we take the person’s total annual expenses and multiply it by 25 to figure out how much money they need to retire. Then, we figure out how much money they save every year. Finally, we throw those two numbers into a spreadsheet and generate those projection tables that predict how long it will take to get there.
That’s pretty much it. Sometimes the time-to-retirement number comes out pretty good, and we call it a day. Other times, it comes out kinda sucky, at which point we’ll see if there are any unreasonably high expenses, unused tax shelters, or obvious low-hanging fruit line items that we can optimize away. Then we’ll re-generate the projection table and see the impact that would have on their time-to-retirement.
It’s not hard. But what’s actually hard is the process of even writing into us in the first place.
When people write into us to do a reader case, we ask that they follow a general format given here. I need to know your income, your annual expenses, any debts you have, and any assets/savings. Once I have that, I just plug it into the math and I know when you can retire.
And here’s the secret of the reader cases: By the time someone’s gathered all that information and written it all down into an email, they’ve already done 80% of the work.
The biggest problem people have with their finances is that they don’t know where any of it’s going. “I’m working really hard, I’m not getting ahead, and I have no idea why,” is the #1 problem people face when it comes to money. But by digging through all your tax returns, and adding up your monthly expenses, and chasing down all your bank statements and writing all that stuff down onto a single piece of paper, it’s actually really easy to see what the problem is. The problem is that most people never do that.
So even if we never get around to doing your reader case (at this point, our backlog easily extends to over a year), simply by writing out an email in the format we ask for, you’ve already gotten most of the benefit. At that point, you can probably read over your own email and see yourself what the problem is.
Most People Who Own Real Estate Are Doing It Wrong
People seem to think we’re biased against real estate, and as a result keep telling people who invest in real estate that they’re idiots. The truth is actually in the opposite order. Most people who write in and own real estate don’t know what they’re doing. Seriously. Easily I’d estimate 80%-90% of reader cases who own real estate are doing something horrendously stupid, and when we spot someone doing something stupid we call them out on it. That’s not because we’re biased. On the rare occasion that someone’s doing it right, I congratulate them and say “good job.” But that happens so rarely that it appears that we’re biased.
If you own a house, and you think that just because your mortgage payment is the same as what rent would be, you’re doing it wrong. If you’ve bought and sold three houses by the time you’re 35, you’re doing it wrong. If you’ve ever used the phrase “owning a home is not a financial decision,” Holy Shit are you doing it wrong.
Houses are not necessarily a bad investment. Housing can be a very very good investment. But you have to know how to distinguish between a good housing purchase and a bad one.
The thing about investments is that normally, if people don’t understand something (like the stock market) they don’t invest in it. Housing is the opposite. People who don’t understand how to evaluate a house as an investment are often the ones most desperate to buy. It’s the most dangerous and insidious thing about this asset class. Housing is actually pretty dangerous, yet it “feels” safe, and that’s why housing tends to screw up so many people’s finances.
Most People Can’t Tell When an Expense is “Reasonable”
This may not be terribly obvious, but one of the most valuable thing about doing these reader cases is the ridicule in the comments section.
Let me explain.
Because most people don’t talk about finances in real life with their friends, they often don’t have any way to compare their expenses with anyone else. And even if they do, their friends may have similar spending patterns so they can’t tell when they’re vastly over-spending on a certain category. So they blindly continue over-spending thinking “Oh, it’s normal to spend $1000 a month on a gym membership I never use.”
But when people write in and we feature them on the blog, these discrepancies become super obvious, because people in the comments start making fun of them.
“These idiots spent how much on private school? That’s insane!”
The natural response to being ridiculed in the comments is to close your laptop and run away, but these are actually one of the most valuable pieces of feedback you get when we feature a reader case. If you can read beyond the insults and name-calling, those howls of indignation are the community noticing and calling out spending that’s way above what the average person spends on that line item. This usually means that there are far, far better deals to be had in this category, and likely means that this is an area where an easy low-hanging-fruit optimization can be found.
Don’t run away from criticism, people. Lean in!
People Can Make Massive Changes if They Have a Good Reason
I’ve mentioned that we can usually find a solution for people to retire way earlier than they thought if they made X, Y, and Z changes. And after we publish the reader case, our expectation is that it’ll make an interesting read and that’ll be the end of it.
What continues to surprise us is that months later, one of the people who we featured will write in and say “OK, I actually did those things you suggested and now I’m much happier and less stressed.” These aren’t small changes either. People have switched jobs, sold their houses, and relocated to other countries because of an analysis we did.
It’s always surprising and humbling when this happens, because nothing makes us happier than when people finally understand their finances, actually does something with that information, and it actually fixes their problem. So many problems (especially in North America) are self-created, and much of it comes down to a fundamental lack of understanding when it comes to money. And while we first created this site mostly as a vehicle for FIRECracker to yell at Boomers, it’s since morphed into a vehicle for us to help people understand their money. And that’s a great thing.
If you understand money, life is incredibly easy. If you don’t, life is incredibly hard.
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