What’s in it for me? Learn how to make money work for you.
There’s a lot of bad advice out there when it comes to money. The problem isn’t just that a lot of what we’re told about personal finance relies on bad data, though.
Often, that advice relies on sweeping assumptions about what’s “good” and “bad” for everyone. But decisions around finance, are usually context-dependent.
Credit card debt, for example, can actually be a useful tool for some people. And seemingly frivolous expenses, like buying a daily coffee, can be a waste of money in some cases – in others, though, those spending decisions can contribute to a fulfilling life. It’s the same with saving. How much money should you hold onto? It really depends on how much you’re making.
As we’ll see in this paragraph, you can only make informed calls on these issues when you know more about the individual people involved. It’s a simple message, but it’s one that’s worth hearing. The thing about all that bad advice is that it doesn’t just fail to help you manage your finances – it’s also often the source of guilt, stress, and anxiety.
So let’s take a different approach. One that’s grounded in life’s messy realities, not some wishful idea of how things should be. One that actually helps you.
In this paragraph, you’ll also learn:
- what an Alaskan fish can teach you about saving;
- why it's worth investing in sluggish markets; and
- how to spend money without feeling guilty.
Take stock of your money to get a realistic savings target.
Let’s recap. money doesn’t follow moral laws. It’s mathematical. And it bluntly says you can’t save what you don’t have.
So let’s forget about Google’s questionable insights into what you should be doing and reformulate the question more pragmatically. Where are you financially? What can you save, right now?
To find out, you’ll need to open the books and take a closer look at your money.
Accounting is a famously double-sided thing. One column records money in. The other records money out. Add up everything in the first column, and then subtract the amount in the second. There’s your answer. Savings, in other words, equals income minus spending.
The first column is easy – it’s the number on your paycheck. Outgoings are a bit trickier. The standard advice is to keep track of every cent you spend. If you’ve tried, and failed, to do that, you’re in good company. Fixed expenses, like rent or mortgage payments and monthly utility bills are easy – they don’t change much. But keeping track of fluctuating expenses is harder.
So here’s how to simplify things: determine your fixed costs, and estimate the rest. Take groceries. You know how often you go shopping and how much you usually spend, so average it out. Say you do a weekly grocery run that usually comes in at around $100. Some weeks, it’s closer to $90. Other weeks, you may need to replace something relatively expensive, like a bottle of nice olive oil. Then it’s nearer to $110. All in all, though, you’re spending about $400 a month.
Now apply that to all your expenses. What, on average, do you spend on going out? On coffee before work? On drinks after work? On fuel or train tickets? On books, or movies, or your hobby? Once it’s down on paper, complete the equation. Say you’re taking home $4,000 after taxes and spend $3,000 on bills and variable expenses. That leaves $1,000. That’s how much you can save.
Is the number you’re left with enough, though? Again, it depends. The general rule of thumb is that you’ll need 25 times your annual expenditure to retire, which is what most of your savings are for. But how that looks in practice comes down to lifestyle. If you’re used to regular foreign travel and a busy social life in an affluent area with high prices, you probably won’t want to give those things up. That means you’ll need more than someone who doesn’t do or have those things.
But let’s say it’s not enough – what then? There are two answers. The first, which happens to be the right one, is the blunt mathematical answer: you need to grow your income, to earn more. That’s a painful realization, which is probably why so much mainstream financial advice focuses on the second answer – gutting your quality of life to save more right now. But that’s a recipe for misery.
Want to grow your income? Just keep investing.
The reason you can’t save yourself rich is simple: you run out of things to cut back on fairly quickly. Put differently, there are hard limits to saving. What about growing your income, though?
There are limits here, but they’re a long way off. If you’re earning $10,000 an hour, it might not make sense to grow your income any further. You’re already set financially, and you might value free time more than the extra money you could be earning if you worked more. Similarly, high earners might forgo raises if that extra money is taxed at a very high rate.
In most cases and for most people, though, growing your income is the way to go. The question is how? The techCrack answer is in the article's title. But before we get to that, let’s talk horses.
More specifically, racing horses. One of the horse racing world’s greatest stars is a man called Jeff Seder. For years, Seder looked at all sorts of criteria before buying horses. He’d check their pedigree and measure their nostril size, or the weight of their excrement, or the density of their muscle fiber. But nothing correlated with racing performance. So Seder tried something different. He measured the horses’ heart size – specifically, the size of their left ventricles. Bingo. Finally, he’d found a reliable predictor of a racing success. He bought more horses with larger left ventricles and won more races.
Sometimes a single piece of accurate information can help us understand a complex system, like the relationship between a horse’s biology and its ability to win races. Or the best way to grow your income in volatile financial markets.
Here’s how Warren Buffett summarizes that single piece of information: most stock markets go up most of the time. He has a point. During the twentieth century, the United States went through two world wars, the Depression, a dozen recessions, an oil shock, and a flu epidemic. But the Dow Jones, a measurement of the value of stocks, rose by 160,000 percent! That’s after inflation, by the way. So what’s the takeaway? Here’s the techcrack's view: the only investment advice worth following is to just keep buying stocks. Averaged out over decades, it’s much harder to lose than it is to win.
Even famously sluggish markets, like the Japanese stock market, reward this philosophy. Japanese stocks hit their peak in ’89 and still haven’t recovered that level. If you’d made a one-off investment of $1,000 back then, you’d have $690 today. But if you’d invested $1,000 every year between 1989 and 2022, your $33,000 investment would have grown to $59,000. That’s not a great return, but it’s more than you’d have if you’d let inflation eat away at your cash savings.
Of course, you don’t have to wed yourself to a single market. As we said, most markets go up. What you really want to do is spread your investments, for example by buying into an index of global companies operating in multiple markets. We’re not going to get into the technicalities of how to do that here – that’s something you’re better off discussing with your financial advisor. What’s worth remembering, though, is that, historically, the line trends upwards. Hitch your money to that line and you’ll grow your income.
Debt isn’t as simple as it’s made out to be.
In the world’s deserts, there are two kinds of flowering plants – annuals and perennials. Annuals grow, reproduce, and die over a single season, while perennials live for any number of years.
Desert-dwelling annuals do something strange, though. Each year, a portion of their seeds fails to germinate. That’s true even when the conditions are perfect for sprouting.
At first glance, that doesn’t make a lot of sense. This is a harsh environment in which the survival of a species is anything but a given, after all. Why would a plant pass up an opportunity to reproduce?
It comes down to water – or the lack of it. Growing plants need water, but there’s not a lot of rain in the desert. Worse, what little rain there is falls at highly irregular intervals. If every seed sprouted simultaneously, a single drought would kill a plant’s entire offspring and wipe out its lineage. So here’s the evolutionary play: some seeds are held back to sprout later, increasing the chance that the plants’ early growth will coincide with a rare rainstorm.
In finance, there’s a name for this kind of strategy – the kind that’s designed to prevent catastrophic wipeouts in case the future turns out badly. It’s called bet-hedging. Often, it involves a trade-off. For our annuals, keeping seeds back means giving up territory to competitors. But forgoing the short-term reward of territorial expansion isn’t as valuable as the long-term reward of reproduction.
Like those Alaska charr we encountered earlier, the desert plants can teach us something valuable about money. Their lesson for us isn’t about saving, however – it’s about debt.
Common sense says that debt is bad. Period. Even the Bible warns that “the borrower is slave to the lender.” But it’s not as simple as that. In fact, debt can be pretty paradoxical.
Take credit cards. We all know that credit card interest rates are extortionate. That once you start digging with that shovel, it’s easy to end up in a hole that’s hard to get out of. That’s not necessarily wrong, but it’s not the full picture, either. It’s fascinating – credit cards can actually help low-income earners. Economists call it the credit card debt puzzle.
Imagine someone has $1,500 in their checking account and $1,000 in credit card debt. The best play is to pay off the debt and make do with $500, right?
Let’s return to our annuals. At first, their behavior seems irrational. Look more closely, though, and that “irrationality” actually makes a lot of sense. So no – that’s not necessarily the best play.
When you don’t have a lot of money, the future looks pretty daunting: one drought, one spot of bad luck, and you’ll be wiped out financially. Your paycheck can’t handle emergencies. If the car that gets you to work breaks down, you won’t have enough cash on hand to get it fixed. Disaster. You also know that your credit rating isn’t great, so finding a loan isn’t going to be easy either. So what do you do? Well, you keep paying those extortionate interest rates to preserve your future access to credit. You keep some seeds back. You hedge your bets. You ensure financial survival.
That goes to show that debt isn’t really “good” or “bad” – it’s a tool that can be used or abused. It all comes down to context. The real question, then, is this: Does debt help you achieve your goals?
You can’t save all your money, so learn to enjoy spending it.
The cool, calculating rational agents of economics textbooks are a myth. Real humans are messy. Impulsive. More likely to follow the crowd, or the hidden logic of the subconscious, than reason. That means we can’t really talk about money in the abstract. We also have to look at its psychological impact. At how it makes us feel. Which, often enough, is miserable.
Take it from the American Psychological Association, which since 2007 has run an annual survey that identifies the main stressors in Americans’ lives. The topic that tops the list each year? Money. A 2018 study by Northwestern Mutual, meanwhile, found that half of all Americans experience high levels of anxiety around savings. And that anxiety appears to affect everyone, regardless of income. Another survey found that 20 percent of investors worth between $5 and $25 million were also worried about not saving enough!
What explains this epidemic of stress around savings? In a word, guilt.
We’re bombarded with financial advice that makes us second-guess ourselves. Buying a daily coffee? Crazy – you’re literally peeing hundreds of thousands of dollars down the drain. New sneakers? Not if you want to get on the property ladder. Organic peanut butter? If you wanted to retire, you’d buy regular. The underlying message couldn’t have been better designed to trigger guilt. Every cent you spend, it says, could’ve been saved, and if you actually took responsibility that’s exactly what you’d do.
But you can’t save every cent, and trying only makes us sick. When researchers at the Brookings Institute looked at Gallup survey data on savings and mental health, for example, they found that stress around not saving enough outweighs the positive effects of saving. Their conclusion: saving is only beneficial if you can do it in a stress-free way.
Saving, in short, is important – but so is quality of life. So how can you strike the right balance – how do you take care of your finances while preserving your health? Here’s the techcrack’s take: focus on purchases that maximize long-term fulfillment.
A good place to start thinking about fulfillment is the American author Daniel Pink’s book Drive, which looks at human motivation. Pink argues that there are three things which fulfill us – autonomy, mastery, and purpose. In other words, being self-directed, improving our skills, and being part of something bigger than ourselves. Those are great filters to apply to spending decisions.
Take that bugbear of so many financial experts – that latte you pick up from the coffee shop before work. It looks like a frivolous purchase, but maybe that latte allows you to perform at your best at work. In that case, it’s enhancing your occupational mastery. That’s a deeply fulfilling long-term project, which means it’s money well spent. Other frivolous-looking purchases might, on closer inspection, turn out to contribute to your sense of autonomy or purpose.
In the end, money is a tool – it’s what allows you to create a life you want to live. What’s really difficult, then, isn’t spending it – it’s figuring out what you want in life. What do you care about? What would you like to avoid? What kind of values do you want to promote in the world? Once you figure that out, spending money will be both easier and more enjoyable.
Conclusion
the important thing to remember from all this is:
How much should you be saving? Spending? Investing? Borrowing? techCrack is a realist, not an idealist, which is why we argues that it all comes down to context. How much can you save, or invest? Does debt help you achieve your goals in life, or is it an emergency stopgap? Does spending fulfill you? It’s only when you dig into those questions that you’ll find a viable financial plan that works for you.
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