Ever wanted to get somewhere really far away? How do you get there? You take an airplane – you fly. Your financial journey is also a long-distance flight. But before you can fly, you have to run. Before you run, you have to stand. This is the framework for the Plenty Plan.
Phase 1: Stand
Wonder why you’re not getting anywhere financially? It may be because you’re lying around in the mud, wallowing. The very first step is to plan to stand up.
Step 1: Make a Budget
How do you plan to stand up? Make a budget. Tell your money what to do before it gets here. Money is powerful. If you don’t steer it in the right direction, it will push you down. If you steer it right, it can pull you up. What’s a budget? It’s just a written list of what you plan to do with your money before it comes in. That way, when it comes in, past you has already made a decision for present you, while thinking about future you. This gets rid of the impulses to spend on whatever you feel like. (Click here to see Bible verses about living on a budget.)
Step 2: Starter Emergency Fund – One Week’s Wages
Your first goal in your budget should be to get a start emergency fund. (Click here to see Bible verses about having an emergency fund.) How big an emergency fund do you need? Enough that if you trip while standing up, you’ll be able to stand back up. A week of wages will typically do the trick just for getting started. (The median household income in the US is about $59,000 as of this writing, so a week of wages is about $1134.) This is not much!
Step 3: End the Mess – Get out of Debt
You can’t start to run if you are chained down. Debt is a chain. Get out of debt! (Click here to see Bible verses about debt.) Desiring to get out of debt is easy. Doing it is hard. The first step is to acknowledge the source of the problem. In most cases, debt is caused by a desire to have something before you have the means to buy it. (There are some exceptions, like medical debt or debt from lawsuit judgements, where it was not an impulse or poor financial that lead you into debt. However, you have to get out of those debts just the same.)
Look around at your debts. How did they get there? That car loan. That student loan. Those credit cards. That HELOC. You wanted things you couldn’t afford. Marketing tricks got to your head. Don’t be shocked that you were taken in. Advertising spending in the US in 2016 was about $194 billion. That’s right around $600 for every man, woman and child in the US. The median US household has 2.5 people, so that means $1500 was spent advertising to the average household. Most advertisers are happy to have you buy their stuff, even if they know you can’t afford it. This stuff works. They used psychological tricks to lead you into debt. You need to use psychological tricks to bust out of debt.
The best psychological trick I’ve seen is the Debt Snowball method. This method was popularized greatly by Dave Ramsey, and written about in an academic article by Moty Amar, Dan Ariely, Shahar Ayal, Cynthia Cryder,and Scott Rick. What is the debt snowball? You create a list of all your debts and list them from smallest payoff balance to largest payoff balance. You make only minimum payments on every debt, except for the debt with the smallest minimum payment, and you apply all your spare income to paying off the debt with the smallest minimum payment. Once that debt is paid in full, move on to the next smallest debt, and attack it in a similar manner, applying every spare dollar to that debt (which will be more than you applied to the first debt, since you’re no longer paying on that debt.)
Why is this a psychological trick? Because mathematically the best approach is to pay the debt with the highest interest rate first, not the one with the lowest payoff balance. That is, if a emotionless accountant were doing the process with a fixed amount of funding, the correct approach would be to pay off the debt with the highest interest rate first. But you’re not an emotionless accountant. If you were, you probably wouldn’t have acquired consumer debt. But since you are human and have emotions, you need to play off those emotions. You know what happens when you pay off that first debt on your list? You do a little victory dance! No more nagging feeling about that irritating credit card bill each month. No more calls from the urgent care center’s collection department. Now you’re excited! Now you decide to sell some of your junk to attack the next debt. Now you decide to buy carrots instead of raspberries and save $30 on your groceries to eliminate the next debt soon. Maybe you decide to sell the car and get a less fancy car. Your emotional high from eliminating the debt can spur on new behaviors that cause the next debt to be eliminated faster. Maybe you even turn off the TV so that the $600 of advertising money that used to be spent on you gets spent on someone else.
Phase 2: Run
Great! You’re standing up now! Now it’s time to run! The two themes of the run phase are: don’t fall down, and don’t become a burden to others.
Step 4: Full Emergency Fund – 4 Months Expenses
You’re not on stable footing and ready to start running. You have no debt holding you down. It’s time for a bigger emergency fund. An emergency fund is not an investment, so don’t go seeking big returns. Put it in a boring savings account. It needs to be accessible if something happens. That’s the point of an emergency fund. If something bad happens, you don’t want to be a burden to others or fall down into debt. How much is enough? About 4 months of expenses should do for most cases. Note that I said expenses, not income. By this point, you should be living well below your means. If you had debt and were paying it off, then all the monthly cash flow that was once applied to debt is now free. So, look at your real living expenses, things like housing costs, food, car repairs and gas, utilities, etc. Leave out things that you could eliminate if an emergency hit, like entertainment subscriptions, monthly savings for vacations, restaurant spending, fun money, etc. Calculate how much you spend on the critical items each month, then save up 4 times that amount. That way, when trouble hits, there will be a cushion so you bounce back up, rather than crashing down.
Step 5: Create a Burden-Buffer
This step is what most people would call saving for retirement. However, I’d encourage you to do some thinking about how retirement is marketed. The sales pitch for retirement is that you work long and hard your life from 22 to 65 doing something you barely tolerate in exchange for finally getting to indulge yourself on your 65th birthday until your death. Of course, the ads put a nicer shine on it than that description. However, I would contend that that is not a healthy view of retirement, nor is it a Biblical view.
First, from the secular standpoint, it’s really not that much fun to dedicate your life to something miserable to maybe finally enjoy something once you reach an old age. I’ve heard this called the differed life plan. Working extra hard to finally escape work.
Now, from the Biblical standpoint, Jesus talks right about this pretty directly in the parable of the rich fool (Luke 12:16-21). A man has a great crop. (and isn’t a lifetime of work in the USA a great crop?) He decides to tear down his old barns and build bigger better barns. Then he says to himself “You have plenty of grain laid up for many years. Take life easy; eat, drink and be merry.” Then God replies “You fool! This very night your life will be demanded from you. Then who will get what you have prepared for yourself?” Saving up treasure for yourself is futile. None of it is coming with you, and you could go any second. It is foolish to save up treasure for yourself.
What then is the view we should take of retirement? Well, there’s an important Biblical concept of not being a burden. See 1 Timothy 5:3-10. Basically, if you can provide for yourself, you should. (If you can’t, then the church should assist.) But a lifetime of mismanagement and self-indulgence is not an excuse to hit old age and become a burden to others. For this reason, you need to start saving up to avoid becoming a burden. In particular, as you become older, the odds of becoming too disabled to work greatly increase. For this reason, you need to “save for retirement.” A good rule of thumb is to put aside about 15% of your income into a high-growth investment. (See this article tracking an imaginary person who put aside 15% of an average income into an S&P500 index fund from age 21 to 65 and had a very generous balance at 65.)
Phase 3: Fly
Now, it’s possible that a lot of you dropped out during the last section, since it seems a bit nutty rejecting the notion of retirement. Congratulations for making it this far. This is where it actually gets interesting. This is where you really take off.
Step 6: Leave a Positive Legacy
In Proverbs 13:22, it says that a good person leaves an inheritance to their children’s children. I don’t think this is saying that you must include your grandchildren in your will – the inheritance was primarily divided among the sons in those days. Rather, with a dose of character, the inheritance is not squandered by the kids, and remains to future generations as well. This speaks of leaving a positive legacy. Leaving a positive legacy is a wide and varied topic, so I’ll give some examples below. However, if you imagine that you have no debt, and aren’t likely to become a financial burden to others, might you have the flexibility to go make a positive mark?
Positive legacy example: paying for a child’s college education. Paying for a kid’s college is not a mandate. However, you’ve probably talked to people who expressed gratitude that their parents or grandparents or rich uncle paid for some or all of the college.
Positive legacy example: giving generously. The Bible speaks often of the goodness and importance of giving. God is a giver and we were made in God’s image, so giving is part of our design. You should be giving all the time, but once you are not held down by debt, and aren’t likely to burden others financially, you have the ability to make truly generous, impactful gifts.
Positive legacy example: spending tons of quality time with your kids and grandchildren. Although I tore apart the self-indulgent retirement dream, a lot of what most people do during their retirement years is truly leaving a positive legacy. You’ve probably heard stories of fantastic grandparents mentoring their grandchildren, passing along a lifetime of learning and experience. Also, if you have children, remember they are only children once. If you’re not chained down by debt, and you’re not about to become a financial burden on others, consider slowing down and putting your attention to your children. Imagine yourself at 85 on your deathbed, looking back on your life. What would your future self say about your decision to work 60 hours per week at something you couldn’t stand so you could spend the last 20 years of your life playing golf in a warm area.
Positive legacy example: live a life of service. Now, if you’re an income earner in your family, you’re already living a life of service (unless you make a dishonest living). Your job is already serving your boss, you co-workers, your customers and clients. However, it’s also the mechanism by which you feed yourself. Imagine you’ve saved up a few extra dollars (or a few hundred thousand extra dollars). Might you have the flexibility to dedicate vast amounts of your time and energy to serving those who cannot reciprocate? This could be now, or in your “retirement years”. But if this is your dream, there’s no need to wait until you’re 65. (Note: there are some people who are called to serve others by gathering financial pledges from others. However, Paul’s example in his ministry showed that he paid for himself, despite having the moral right to demand pay from the churches that he served. Both ways are legitimate. Don’t assume one or the other.)
Those are just a handful of examples. If you don’t have debt tying you down, and you have a little buffer to keep you from getting knocked down when the storm comes, then you have the flexibility to set your own priorities, rather than having lenders and circumstances set them for you.