Financial planning when you’re broke.
In September, a good friend of mine moved from Wyoming to California in the middle of the pandemic. She left her family and her childhood home with a few hundred dollars in her pocket and is building a life for herself here in Southern California. Watching her skate from paycheck to paycheck, driving her ten-year-old car, while remaining one of the most chipper people I know, has made me think very differently about financial planning. After years of working with millionaires I was confronted with the question, “how do you do financial planning when you’re broke?”
For someone with a steady income, saving and investment planning is straightforward. You receive some number of dollars every two weeks and you stash some of those dollars in a separate account. The challenge comes when you get hit with a surprise expense (or maybe you really want to get drinks this Saturday). These challenges, which financial planners grapple with every day, assume you have money to save. Some people, like my friend, can’t even plan beyond the end of the month. The default response in the financial planning community is, “just don’t work with those people. There is no way they can afford our fees anyways.” This notion has been upheld for years and is, in some ways, responsible for the growing wealth gap in the United States.
I believe people who are struggling would benefit the most from a financial advisor. Rather than helping someone go from “comfortable” to “wealthy”, we can help people become financially secure for the first time ever. Realistically, that’s a much more responsible (and rewarding) business model. The question remains though, “how do you do financial planning when you’re broke?” Here are some steps you can take to get on top of your finances.
Getting to the Green
You’ve reached the “green” if you make more than you spend in a month. The most extreme way to do this is to get a new job; the most painful way is to cut your spending. In most cases you’re already living very cheaply, so cutting down often means cutting out things you enjoy. I like to leave these on the table as nuclear options, but other methods are less intense and just as effective.
When it comes to making more money, you have plenty of options. You can drive for Postmates or Uber, walk dogs using apps like Rover, or freelance on Upwork. Personally, I tutor college students in finance and statistics in my spare time. This part really comes down to calculating how much extra cash you need and then finding the least painful way to get it.
If you can’t fit another hustle into your schedule, I recommend optimizing your current work. The friend I mentioned earlier is a restaurant server, so she reached out to her boss and asked to work busier nights and in busier sections. If you have a job that pays hourly, ask about the opportunities for promotion. In most cases, the money outweighs the extra work you need to do.
If you try these for a month and still can’t catch up to your bills, it’s time to consider cutting back. The first thing to evaluate is your living situation. Are you paying too much in rent? Can you get a roommate? I’ve even heard of people renting out their garages on the app Neighbor. Next, look at your bills. Can you get new, cheaper insurance? The Zebra lets you compare quotes for your car and home insurance, which is a great place to start. You might also try switching phone carriers. They will often give you a promotional rate at the beginning and upgrade your phone for free. When that expires, you can just switch back! The last place to look is the things you enjoy. Changing how often you eat out, where you buy your coffee, or what you do for fun should be the absolute last thing to change.
Pay the Piper
The next step is paying down debt, specifically credit card debt. Until you have a $0 balance on every credit card, the extra pennies you earn should be used to pay it off. There is no benefit to carrying a balance and the interest rates are designed to bury you. If you have more than $25,000 in credit card debt, I recommend refinancing it onto a new card or with a different company. After credit card debt, any personal or car loans should be paid off. You can pay as much as you want toward these, so you should try to pay them down as fast as possible. You can probably move onto the “saving” stage before you pay down all your personal debt, but it should definitely be the first priority. Finally, pay any student loan or mortgage debt. These usually have caps on what you can pay per month, so the goal is to reach that cap. Once you have, you can start thinking about savings.
Start Saving
If you have reached this point, I would describe you as financially confident. You may not feel financially secure yet, but you’re on top of everything and you’re no longer backsliding. Now we can talk about saving, and I like to think of saving in one of two ways.
The first way to think about saving money is the “pay yourself first” method that you hear all the time. You should automatically take money out of your paycheck and put it in your savings before you even see it. You can set this up with your bank by doing scheduled transfers. You go to your banking app (or call them) and ask them to set up a recurring transfer between your checking and saving accounts. Every bank offers this, and it should take about 5 minutes to set up. The other way you can divert savings is by asking your employer to direct deposit your paycheck in multiple accounts. When I worked for a financial services company, I asked my manager to change my direct deposit settings so some money went to my spending account and the rest went to savings. They agreed, had me fill out a direct deposit slip, and I never worried about it again.
The second way I think about savings is the “pay your best self” method. Using this method, you deposit cash in your savings when you make a good decision. I originally learned this technique from my younger brother. He pays himself whenever he chooses not to buy something in a store. When he does it, he takes the cash out of his wallet and puts it back in. I love the habit and it creates a positive feedback loop. When I use it, I use Zelle to “pay” money into my brokerage account.
Personally, I prefer this method and I'll tell you why. One of my friends has a nicotine addiction and buys e-cigarettes weekly. They cost about $13, so every time he chooses not to buy one, he puts that money in his savings account. By paying his best self, he’s growing his savings and kicking his addiction at the same time. I love this method because it doesn’t feel like you’re stealing from your current happiness when you save. Instead you are doubling the benefit of avoiding your vices. Then, you have extra money to spend on the activities you enjoy. If you pay your best self $13 a week, you’ll save $676 in a single year. Combined with your automated savings, you’ll be ready to think about investing in no time.
Start Investing
You graduate from the saving stage to the investing stage when you have built up your “emergency fund”. This fund needs to have enough cash in it to cover your expenses for 3-6 months. Once you have that cash set aside, you can invest the new money you’re saving. When you start to think about investing, you might also start to think about saving for retirement, but these are topics for another blog.
Wrap-Up
Helping people become financially secure is the reason Hoskin Capital exists, and it’s why we do all of our financial planning for free. After all, we’re investors. It just happens that we invest in our clients as well. We only get paid when you make it to the Investing stage, so we have every incentive to raise you up. If you made it this far, thank you, and you can mention that you read our blog to reduce our fee to 0.85% for life.
I wish you all a wonderful holiday season. Stay happy, healthy, and wealthy.
Warm regards,
Nate Hoskin, Co-founder & CIO