Ever since he filled up his first piggy bank at the age of 3, John Preston has been hooked on personal finances - it's what drove him to his job and education in finance.
The finance manager for a large beverage corporation (John's a pseudonym) loves that finance is all about options - that if you stop a random person on the street, chances are their budget would be different than yours, as would the way that they save and their goals.
"Personal finance is all about pulling the threads of a family's resources together with the family obstacles and planning the right financial course," he says. "It's a giant puzzle, and it's so rewarding to put it all together."
A few years ago, John's family had the opportunity to fit together their own puzzle after his wife decided she wanted to stay at home to raise their two children. Here, the voice behind My Family Finances shares how they've managed going from two incomes to one, his thoughts on the challenges facing Americans today when it comes to money and tips for giving your kids a financial leg up.
Tell us about My Family Finances...when and why did you start your site?
I've been blogging and writing online since 2008. However, when I started My Family Finances in 2012, it was something unique for me and my family. My wife and I had just decided that we would drop down to one income so she could stay home with our two children.
We had no doubts that the decision would be best for our family, but it was a tough decision from a financial standpoint. For years we'd geared our savings, our financial goals and even our budget on having two incomes. We'd decided early on in our marriage that we'd be a double-income family, so suddenly shifting gears after years of planning was a complete obstacle. It didn't even seem feasible for the long term.
My education is in economics and my job is in finance, but I'd never really applied my career wisdom to my family's finances before. My Family Finances was all about bringing my knowledge of economic principles and corporate finance into the basics of personal finance. I think in many ways, I've found that this perspective helped me come up with unique ways in dealing with financial decisions that you don't normally find online.
To date, my wife is still home with the kids two years later.
What are some of the most interesting, innovative or memorable money management ideas your readers have given you?
Working in finance, you get used to spreadsheets, tracking expenses and analyzing. The problem for families is that your time is rarely organized so that you have the bandwidth to do these things. When your budgeting system requires a set amount of attention that you cannot commit to, you make mistakes that cost you money. That was me, and I was very slow to change. I wanted to track every penny, but often that was unreasonable, and it led to mistakes in budgeting.
Many of my fellow readers are parents who have found ways to automate their budgeting, while remaining in control of their family budget. In putting these tips to work, I've saved time and spent less money in missed due dates and overdrafts.
You say you've figured out how to feed your family for about $1 a meal per person - how do you do this?
As I mentioned earlier, when my family decided to switch to one income, we were not prepared to handle the burden to our budget. We needed to find savings, and the grocery bill was the obvious place to look. The grocery bill is the average family's second or third largest expense; usually about $600 to $700 a month, and given the number of stores and food products to choose from, it's the easiest budget item to impact.
My first job in management was at a restaurant. At restaurants, they know how much each dish costs to make, they know how many dishes they plan to make and in some cases, they have contingency recipes for when they've overestimated how much to make. I decided to incorporate these principles into our family grocery bill.
First, we began figuring out the cost of each dish from the major ingredients all the way down to the cost of spices and condiments and divided it by the number of meals we got out of the dish. The results were quite unpredictable. We found out that cheeseburger night was probably one of the most expensive meals we made. Meanwhile, the extravagant, homemade spaghetti sauce complete with meatballs, hot Italian sausage and country ribs was one of the cheaper dishes we made.
We also noticed that there were plenty of recipes that were really tasty and cost effective. We didn't need to eat mac and cheese every day. We just needed to eat more of the less expensive and less of the more expensive. So we created a spaghetti night, but only ate cheeseburgers once a month.
Step two was all about changing the recipes. We began experimenting with portion sizes in the recipes. For example, we usually reduce the amount of meat called for in the recipe and increase the portions of veggies. It means savings on grocery, but it's healthier, too.
Third, we plan out our meals so that we don't waste leftovers. We know that a roast chicken will feed our family of four for dinner and that we have about two portions of chicken leftover. The next day, we'll make chicken stock out of the bones, add in the chicken and some veggies and make a great, homemade chicken soup that will feed us for the next dinner and subsequent lunch. It all costs around $10, but feeds us for three meals and tastes great.
What are some of the biggest financial mistakes you've made that have ultimately changed the way you view and handle your money for the better?
I didn't start out my adult life as financially savvy. In my teens, I was obsessed with earning, saving and investing. I had no skills in spending, and this led me into serious financial trouble.
For example, I bought my first car on a credit card. I started eating out too frequently and purchased college textbooks all on credit. Within about 18 months, I'd racked up about $10,000 in credit card debt. One year later, I came to the realization that after over two years of payments, I hadn't even moved the dial on the balances owed.
I spent the next two years working full time and going to college full time to climb out of the hole I'd created. However, I learned a great deal in those years. I know what it feels like to have more bills than income. I know how to use credit cards to your advantage and avoid overspending. I learned to avoid unnecessary purchases and that spending too much as a consumer feels a lot worse that avoiding consumer purchases altogether.
What do you think are the biggest challenges facing Americans today when it comes to money?
I think concerns tend to be generational, and of all current living generations Millennials are in a unique predicament in American history. In many ways, Millennials are in complete personal finance upheaval.
On one hand, Millennials are dealing with structural economic issues. Most Millennials are starting their adult life older. They are saddled with large amounts of debt younger. Worse still, many start out their professional careers under-employed. It's also a real challenge for the Boomer parents, since parents have largely been subsidizing young adults, often until their 30s.
However, another interesting factor for young families is the overarching philosophy embraced by Millennials. Young adults are extremely distrusting of the "ways" of their Boomer parents. In some cases, it's hard to nail down the financial logic, except that it is the opposite of the Boomer mentality.
For example, older generations have always been focused on retirement, with early retirement as the pinnacle of personal finance achievement. Today, most Millennials are planning on working for life. This has very troubling implications for retirement savings. It also has risk considerations, as Millennials may not be accumulating needed assets to weather financial storms.
Millennials are less interested in owning a home and more interested in renting. They are foregoing vehicle purchases. Instead of real assets, they are spending a great deal on consumer electronics.
Put it altogether and there is very serious concern that Millenials may not put together gains in net worth as in previous generations. They may actually end up worse off than their parents and grandparents.
What do you think are the smartest financial decisions parents can make to help their children?
Opening a 529 Plan and starting an emergency fund for your child.
Whether or not parents help with college is really starting to be a dividing line between the haves and have-nots in the Millennial generation. When I first became a parent, I worried that my children might choose not to go to college or that I would over-save and 529 saving would be a waste of money. I've since learned that simply having college savings of even $1 nearly guarantees a child will go to college, and due to the rising costs of tuition, it's nearly impossible to over-save.
Personally, my wife and I put about half the kid's birthday/holiday money into a 529 plan. Then we match it. That's not going to be enough to pay all of college, but they will at least have some resources to help them. In the end, I know they will appreciate it, too.
An emergency fund is the first hurdle any new young adult faces. You need to have three to six months of expenses in a safe, easy-to-access financial instrument like a savings account.
The funds are hard to build. It's a financial decision that is usually overlooked. However, having one gives you the flexibility to take advantage of a whole range of financial options. My wife would not have been able to resign from her job if we did not have a fully funded emergency fund. We would not have had the assets to purchase our first house without our emergency fund. As a society, this ought to be a financial rite of passage and there is no reason parents can't help build one for their child.
Trust me. It will make all the difference.
What about the smartest financial decisions we can make to prepare for retirement?
Retirement is really a matter of time and starting as early as possible. The more time you have between the time you start saving and the time you retire, the less money you need to pull out of your paycheck to reach retirement.
Parents should start saving as young as possible. They need to teach and encourage their children to start saving as young as possible. In fact, the moment a child files an income tax return, they can open a Roth IRA. 401(k) accounts can be opened at the age of 21.
The mistake most people make is putting off retirement saving until their 30s and 40s. At that point, it's too late and you'll likely need to be saving until full retirement age.
What are your favorite types of investments for families?
Most families really don't need to think past 401(k), 403(b) and IRA accounts. I've already mentioned 529 plans for college savings.
Despite the bad financial press and some personal finance experts, I've argued that purchasing a house is still a great family investment. So long as would-be homeowners are aware of the maintenance costs, avoid purchasing more than they need and stay in the home long-term, there are tremendous benefits.
Home equity provides families the best access to cheap borrowing. It's great for your credit rating.
Those with homes are able to fix some of their housing costs. Housing is the largest expense in the family budget. No other line item on your budget has the option of a fixed cost! Not only that, you can avoid housing inflation altogether. Finally, it's forced savings for the family.
If you manage to max your retirement accounts, ETF funds are looking really exciting these days. ETFs are stocks that act like mutual funds. They pool investor resources to provide a diversified investment. However, unlike mutual funds, you don't need thousands of dollars to enter - just enough money to purchase a share of stock ($50-$100). Many online trading companies even offer ETFs that you can trade for free.
What kinds do you try to steer clear of (or at least proceed with caution)?
Thanks to poor interest rates on savings, there is a lot of money chasing money on Wall Street. The market is starting to see funds set up specifically based on enticing investors over social marketing. For example, green funds, socially responsible funds and even funds based on religious beliefs.
There are also a lot of niche funds set up to entice investors for specific industries, commodities, locations or philosophies.
I'm not saying that every example of one of these funds is a bad investment or that social beliefs shouldn't play a role in our investment decisions. Whenever you detach your investing from fully diversified portfolios, you take considerable risk to your nest egg. You need to be sure you understand the risks and have the financial education before putting your family money into one of these funds.
You should definitely proceed with extreme caution.