One thing we all have in common with COVID-19 is an unprecedented disruption to our normal lives. If you view things as happening for you instead of to you, unprecedented times provide good opportunities to do some unconventional thinking.
This article highlights 6 unconventional financial questions to think about and help you discover more about your epic life in the process.
1. What would I do with $10 million?
What would I want to do, have, and be if I had $10 million in the bank? How much does my dream life – or the life you might be deferring to retirement – really cost if I pay on a monthly basis?
I got this one from Tim Ferriss. The problem people face sometimes is the trap of workaholism by way of insane hours and constant stress. They may be making great money during that time but when they have a chance to step back and reflect, they might wonder what it’s all for. Is the money worth it? Maybe happiness is a better target than financial success after all.
Whether you’re in this place or not, the Target Monthly Income (TMI) exercise is a great way to figure out how much your dream life would really cost.
Chances are that the ultimate TMI figure will be lower than expected, and it will decrease over time as you trade more and more “having” for once-in-a-lifetime “doing.” Check out this exercise on Tim’s blog about lifestyle costing and TMI.
2. How much of my money is going to…?
I believe that if you want to build wealth and become debt-free, you need to know where you’re money is going. Budgeting doesn’t have to be a boring, traditional, gut-wrenching process. I’ve always been adamant about changing the stigma around budgeting and try to inspire myself and others in a way that results in action and commitment.
Instead of tracking every purchase, focus on splitting up your income into three to four main categories: fixed costs (i.e. housing, transportation, insurance, groceries, etc.) guilt-free spending money and debt payments. Start by understanding how much you are spending in the budget categories to get a baseline. This helps you understand your habits and may inspire you to change them. The picture below provides a pretty typical breakdown for Americans.
If your spending categories are much higher than suggested, ask yourself why. The goal here is to identify what is essential and what is not. Its time to learn how to build a budget that doesn’t suck.
3. Am I happy with my tax withholding?
You might have heard financial folks telling you not to give the government an interest-free loan. If so, they are referring to the amount of money that’s withheld from your paycheck to cover your tax liability. Otherwise known as the money you give to the government each month ahead of time that you could get now instead.
Everybody pays taxes and how much depends on your specific situation. Your tax liability factors in your filing status, health insurance, tax bracket, 401k, HSA, etc. If around tax time it’s determined that you owe more than a $1000 to the IRS (under-withheld), you pay that number and usually a penalty. However, more Americans end up over withholding and receiving a significant tax refund come April. But you do have the option of not doing that.
What would you do with that extra money per month that gets pushed off until April? Let’s say you typically receive $2,500 back come April. Assuming you get paid bi-weekly (26 paychecks per year), that would be an extra $96/paycheck or $192/month. If you were to dial in your withholding, you could free that money up for yourself. What would you do with this extra money each month? How would it impact your lifestyle or the life you want to live?
Of course, you could invest it to which it would grow exponentially greater over time than if you got a big check in April. Or, you could fund your hobbies, afford some luxury you’ve been putting off, etc.
When you think about this for your own life, would you rather have a steady source of extra income over a full year or receive a one-time payment? If you do like the big refund option, think about how you’ve spent that big chunk over the years. Did it make you happy or did it pay off the debt you accumulated buying stuff that wasn’t worth it?
Think about what would add more value to your life and adjust your withholding accordingly. You could start by playing with the IRS Tax Withholding calculator to see the impact on your situation.
4. Are there pain points to solve?
A true pain point is one, no matter how small and negligible, that adds up over time and annoys the shit out of you distracting you from being present or making progress. Now that is a situation where you justify spending your money.
A super successful serial entrepreneur once said, “If you’ve got enough money to solve a problem, you don’t have a problem.” It’s often true that early in our lives, we spend most of our time trying to earn money. As life goes on, we start to see time as more valuable because time is nonrenewable.
When we have few funds and many wants, it can be challenging to prioritize what to buy. One trick might be to identify what in your life is causing you inconvenience and throwing money at it to solve it.
5. How much do you need to start and continually support your creative hobby?
I’ve realized over the years how important stoking our creativity is and how flexible creative outlets can be. Years back when I was looking for a new hobby, I decided on learning guitar. I researched reviews, lessons, and the like and figured out how much I would really need to get started. Once I had that, I put money aside to get there. Simple.
Instead of putting off your creative side, put a financial plan into action that enables you to scratch that itch. Having a creative outlet is one of the many facets of a great life. Chase Jarvis has a pretty fantastic book called Creative Calling: Establish a Daily Practice, Infuse Your World with Meaning, and Succeed in Work + Life that you might start with.
7. What do I really need in retirement?
A key part of retirement planning is to answer the question: “How much do I need to retire?” The answer varies by individual, and it depends largely on your income now and the lifestyle you want in retirement.
What you “should have by age X” is total bullshit and it depends on your financial goals in life. You should be responsible for how you plan for retirement but don’t buy into comparing yourself to where you should be. If you live right, a lot of your would-be expenses in retirement won’t be there because your goal is not to be a broke American.
Mr. Money Mustache has many fantastic articles including one called The Shockingly Simple Math Behind Early Retirement and another called the 4% rule. Try starting here. The goal is to figure out a baseline now thinking about the rich life you really want in retirement.
Many people view financial planning as an extremely boring subject. It doesn’t have to be when you ask or research better questions. It’s a lot more fun to seek unconventional ways of thinking and learn more about the people you admire who seem to have it all.
Chances are they went the opposite direction in life by thinking unconventionally. All of the exercises listed above can exist with boring financial spreadsheets and inspire you to take action towards your big life.