5 Unconventional Choices for an Unconventional Life

5 Unconventional Choices for an Unconventional Life

The majority of Americans are in debt (about 80% according to a recent survey).  Many live paycheck to paycheck, worrying about the next unexpected expense.  Do you want to live like everyone else, in debt and on the verge of a financial crisis?  Neither do I.  So If you want to live an unconventional life, you need to make unconventional choices.  You can’t do the same things that everyone else around you is doing and expect a different result.  

Here are 5 unconventional choices that I believe are key to living a financially unconventional life and will bring you closer to financial independence.  

1. Pay Yourself First

The first unconventional choice is to pay yourself first.  I first learned this concept from the classic book The Richest Man in Babylon by Georse S. Clason.  I remember my father reading this book when I was just a kid.  Many years later my brother gave me the audio version on a CD as a gift.  Since then I have gone through the book multiple times and it has left a very strong impression on me.  It is a collection of parables set in ancient Babylon that teach basic lessons about money and investing.  One of the first lessons in the book is to pay yourself first (start thy purse to fattening).  When we receive money, it is so easy to spend a little here, buy something there, pay the mortgage, make car payments, pay for utilities, pay the cell phone bill, buy food, etc. until the money has almost run out.  Only then do we ask ourselves is there anything left for savings or retirement, and at this point more often than not, the money is gone.  

The concept of “pay yourself first” is the reverse of our natural tendency.  Rather than taking yourmoney and giving it to everyone else right away, you first save some of that hard earned money for yourself.  By paying yourself first, you are guaranteed to save a consistent amount of money which can then grow over time.  I believe that this simple concept is the key to how wealth is built.  If everyone could take away this one simple lesson from my blog, they would be well on their way to financial independence.  

This concept prompts two questions:  1) How do I pay myself first? and 2) How much should I pay myself?  Let’s start with the first question.  I think the easiest way to pay yourself first is to make it automatic.  First, you can determine what percentage of your paycheck is automatically contributed to your 401(k) or other retirement account.  Next, you can create a recurring automatic transfer from your checking account into a savings account, or better yet an investing account.  By setting up automatic transfers every time you get paid, you ALWAYS pay yourself first and never have to think twice about it.  This is what I do.  I have determined the percentage I want withheld from my paychecks to contribute to my retirement accounts, and I also have an automatic transfer set up from my checking account to my online brokerage account for investing.  It doesn’t have to be much; what is important is putting yourself first and developing this pattern of financial behavior.  

The second question will take some more thought, is more individualized to your situation, and the amount will likely change with time.  This really gets into what is known as your savings rate, the percentage of your income you save and invest.  I will write an entire post on your savings rate in the future, but for now my primary recommendation is that you just save something and make sure you pay it to yourself FIRST. As a rule of thumb the minimum you should be saving is 5-15% of your income, and if you want to achieve financial independence, you should ultimately aim to save 25-50% or more of your net income.  But don’t stress about that yet, just start by saving something.

2. Track Your Income & Expenses

The second unconventional choice is to track your income and expenses.  So few people do this that it baffles me.  Money influences so many aspects of our lives.  If something is that important and can affect so many things that matter (marriages, relationships, peace of mind, security, vacations, retirement, educational opportunities, the list goes on), then why would you not track how money comes into your life and how how it leaves you?  When you understand these patterns, you can begin to make optimizations.  Before you can really do anything meaningful in your financial life in a responsible manner, like buy a home, pay for your kids’ college, save for retirement, or become financially independent, you need to have a firm understanding of your income and expenses.  

I wrote an entire post on this in my FI Step by Step series of posts: Step 3: How Didi I Get Here? Tracking Your Income and Expenses, so I won’t rehash everything here.  But my primary recommendation is to make this as automatic as possible so you can sustain it long term.  I recommend using a personal finance app such as Mint or Personal Capital to do this.  See my reviews of Mint and Personal Capital for more information.

3. Wait 72 Hours Before Making a Significant Purchase

The third unconventional choice is to wait for at least 72 hours before you buy something that costs a significant amount of money.  I first learned about this idea when listening to a Choose FI podcast featuring Liz, better known as Mrs. Frugalwoods, from the popular personal finance blog Frugalwoods.  Her recommendation is to write an item down on a list before you purchase it and then to wait 72 hours before making a final decision.  If, after 72 hours, you decide you still want that item then go ahead and buy it.  However, she has found that more often than not, she ended up not buying the item.  I love this idea and I am trying to implement this concept in my own life for a number of reasons.  First, it limits impulsive spending.  Second, it helps to insure that you only purchase items that truly bring value to your life.  Third, this simple pattern of behavior will decrease your overall expenses and can also increase your savings rate.  

Oftentimes we impulsively purchase things because we see a good deal or it’s on sale, or we are feeling down and need a little dopamine hit, or we see someone else have something that we want.   This is a destructive behavior when continued over time.  When we impulsively spend money, we don’t take the time to really think about what we are doing and ask ourselves some key questions.  Is this purchase something that will really bring value to my life?  What is the opportunity cost of buying this item?  Will this contribute to my happiness or will it contribute to overall stress because I now own one more thing that I need to maintain?  There is great value in learning self restraint and an increased sense of gratification when you’ve exercised discipline before buying something.

How you choose to implement this concept in your life is a personal decision.  I don’t think you need to do this for every item you purchase, but I believe it is a good idea for items over a certain monetary threshold.  For you that may be $50, $100, or $1000.  I don’t think making a physical list or the arbitrary choice of 72 hours are mandatory components either.  I think the concept is that you stop before making an impulse purchase over a certain threshold and put it on the back burner.  You should ask yourselves some of the key questions listed above.  Research the item and other comparable items.  Discuss it with your significant other.  Wait for at least a night, or a week, or a month before making a decision.  This process will help you to become more intentional in your spending and help you live an unconventional life on the path to FI, as opposed to most of America that buys whatever they want whenever they want, often going into debt in the process.  

4. Pay Cash for Your Cars

The fourth unconventional choice for an unconventional life is to pay cash for your cars.  This admittedly may seem impossible to some people, but it really is not.  Also, this is not an area that I have been perfect in. I have purchased 6 cars in my life.  Three were purchased for cash and three were financed.  So I have some experience on both sides of the fence on this issue.  I have never leased a car.  Currently, all of my vehicles are paid off and I have promised myself I will only pay cash for any future vehicles.  

Why pay cash for a car?  The cost of transportation and its associated expenses is the second largest category of expenses for most Americans, second only to our housing expenses.  If you want to progress down the road to FI, you need make changes in these major expense categories.  One of the primary ways we can reduce our expenses is by changing what we drive and how we pay for it.  

Most Americans believe a monthly car payment is just a part of life.  According to a USA Today article, the average American pays $551 per month for 69 months for their current vehicle.  When you finance or lease a vehicle, you lock yourself into a fixed monthly payment, tying up a significant portion of your income.  You are also paying interest on that purchase (which means someone else is making money off of you).  And to make matters worse, most people finance another vehicle shortly after the current vehicle is paid off locking themselves into another new monthly payment, and the cycle repeats.  A monthly car payment increases your expenses, decreases your savings rate, and comes at a significant opportunity cost.  Let’s say you took the average American monthly car payment of $551 and invested it over the course of your adult life from age 20 to 65 at a conservative rate of return of 7%.  After 45 years you would have $1,961,013!!!  In the words of Dave Ramsey, “HOPE YOU LIKE THE CAR!”

When you pay cash for a car, you are forced to purchase a vehicle that you can actually afford.  You don’t have the monthly payments (plus interest) associated with financing or leasing a vehicle.  If we are being brutally financially honest, a vehicle is something that really should never be financed or leased.  Again, I have not been perfect here in the past, but if I am honest with myself, there is really no good rationalization for financing or leasing a vehicle if you are trying to be as financially responsible as possible.  I don’t care what your financial situation is, you CAN find a way to pay cash for a car.  If you don’t have the cash to pay for the vehicle you want, then you really can’t afford it yet.  But you might argue, “I have to get to school or work, and I don’t have the cash right now so I have to finance a vehicle.”  When I was in medical school I took the city bus for 2 years because we didn’t have a vehicle for me to use.  When I was a resident, I oftentimes rode my bike to work.  You can also get rides from a friend or coworker.  You can even walk if you have to.  The bottom line is if you really want to, you can find a way to get to where you need to go, at least temporarily, without your own car.  And in the meantime, you can save up enough cash to buy a used car for a few thousand dollars that will get you from A to B.  Once you have that car, you can continue save up more money until you have enough money to trade in the old car and purchase a nicer used vehicle. You can continue to do this until you have the type of car that you are satisfied with.  This may not be convenient, but I believe it is one of the choices that will lead to an unconventional life and ultimately to FI.  

5. Spend Less than 20% of Your Gross Income on Housing

The last unconventional choice is to spend less than 20% of your gross income on housing.  If you do a google search on how much you should spend on housing to see what kind of advice is out there, you will consistently see the recommendation to spend 30% or less of your gross income.  I think 30% is higher than should be recommended and for many people places them under considerable financial strain.  Do most Americans follow this advice?  Unfortunately, more and more people spend in excess of 30% and get themselves into significant financial trouble.  

But for arguments sake, let’s look at an example that follows this 30% rule and see its impact.  If your annual salary is $60,000 per year (about the average in America), that would be $5,000 per month (remember this is gross income, so no taxes or other expenses yet).  30% of $5,000 would be $1,500.  That should include your rent or mortgage, utilities, insurance, maintenance, property taxes, etc.  Too many people think this is only their mortgage.  Now, let’s see how this really plays out.  Let’s say you had an effective tax rate of 25% (if we combined Social Security, Medicare, Federal Income Tax, State Income Tax).  So your actual paycheck would be $3,750, since we will subtract $1,250 or 25% for taxes from your monthly pay of $5,000.  If you were responsible and followed the advice to keep housing costs to 30% or $1500 in this example, you would only have $2,250 left for everything else.  If we had to subtract any car payments, student loans, or credit card debt in addition to other expenses like food, health insurance, auto insurance, etc., the money really starts to run out quickly, not even considering adding to an emergency fund or saving for retirement.  From this example we can see the profound impact of spending a large percentage of your income on housing and the trickle down effect to all other expenses.  

As discussed above, for most Americans housing is their single largest expense category.  Decreasing expenses here can have the largest impact on your finances.  Just because “experts” say you can spend up to 30%, doesn’t mean that you HAVE to.  If you could limit your housing expenses to 20% or less, that extra money could be used to pay off debt, pay for college, go on a vacation, or propel you down the path to financial independence.  For those already in a home that costs more than 20% of your income, I understand this may not be possible, or at least not easy.  But for those considering buying or building a new home or renting a new apartment, the overall cost is extremely important to consider before making changes.  

I have had some recent experience with these decisions myself.  Two years ago, our family built and moved into a new home.  After 15 years of hard work and training, I was blessed with a job that paid a much higher salary than I received as a resident.  This allowed us to build a very nice home.  But we tried to do so very responsibly.  No matter how much money you make, you can still spend more and get into trouble.  So, rather than moving into a new home right away with my new, larger salary and stretching ourselves financially, our family of six rented a small townhouse for 3 years while we saved all that we could to pay for our new home.  We still have a mortgage on our new home, but because we exercised some discipline and saved so much money those first 3 years BEFORE moving in, I am able to keep our total housing costs to less than 10% of my gross income.  This has prevented our house and its associated costs from being a constant stress in my life and allowed me to more rapidly progress down the path to FI.  

Conclusion

So ask yourself again, do you want to live an unconventional life? If so, then review these five things and honestly ask yourself where you could make some changes. Changes in any one of these areas could yield incredible life changing results. Imagine what would happen if you were to do all five of these things and how much it could accelerate your journey on the path to FI.

Let me know what you think. Would these choices make a difference in your life? Is there any unconventional choice you have made that has positively impacted your finances? Leave a comment below. Also, if you enjoyed this post, please go to the side menu or footer menu and subscribe to the blog. Thanks!