Jon Dulin isn't just an experienced financial advisor and expert working in the industry; he's a smart observer of finance both personal and macroeconomics on his blog, Money Smart Guides. Jon took a moment with us to discuss budgeting, debt, and why personal finance is just that: personal.
What first made you interested in finance as a career?
My economics teacher in high school. He made economics and finance in general very interesting with his style of teaching.
From there, it was the economic climate we were in. It was the late 1990s so the dot com bull market was in full swing. I remember being in the library with my best friend comparing our mock portfolios online. At that time, it seemed as though every stock was always moving higher. But then reality set in and I realized that there was much more to learn.
In your experience, what are some common misconceptions people have when it comes to personal finance?
The first misconception is that personal finance is boring. I completely disagree. I think many might find it boring because they don't have a plan. My wife and I have a plan to be financially independent by 50. We want to retire and just enjoy doing the things we love. Because of this, we have a plan, and each month we sit down and go over the finances to see how we are progressing towards our goals. We get excited when we see we are ahead of track on our savings or mortgage payoff goals. That motivates us to keep pushing forward and makes personal finance exciting.
If you want to make personal finance exciting, create a plan. Figure out your goals and dreams, and then work on reaching them from a financial standpoint.
Another misconception with personal finance is with investing. For most, it's being greedy and trying to beat the market. Here is a newsflash to readers: You can't consistently beat the market year in, year out. No one can. Your best option is to keep costs low by investing passively and take what the market gives you. After all, 8% a year, which is what the market averages over the long term, is a nice return and you will see your money double roughly every nine years (when using the Rule of 72).
Another mistake people make is being scared to invest because of the swings in the market and what happened in 2008. You have to understand that over the short term, the market does swing wildly. It's like the ocean. If you see a boat cut through the water, you see the large waves it makes in its wake. But as you watch those waves, they dissipate over time. This is how the stock market works. Volatility over the short term, but a smoother ride long term.
Look at any chart of the stock market and you will see this. In my lifetime, I've experienced three wars, three recessions, two stock market bubbles and the worst trading day in the history of the stock market, and yet here we are, completely recovered from it all. The stock market will recover over the long term. If you can focus on that, you are on your way to being a successful investor.
Just how bad is debt? How much is too much?
Debt can be good and it can be bad, but not in the sense that many experts talk about. They say any debt that helps you - a mortgage, student loans - is good debt. I disagree. Debt is only good if you can actually afford it. Buying a house you can't afford shouldn't be considered good debt, just like going into $100,000 of student loan debt for a career that has a median salary of $35,000 per year is bad.
Even the typical bad debt can be good. Take me, for example. I have a car loan that I took out when I bought a car. Many might think I am bad with money because not only did I buy a new car as opposed to used, but I took out a loan as well. But for me, the loan works. I keep cars 10+ years, so buying a brand-new car isn't a big deal to me. Additionally, the loan I took out is for less than 2%. Since inflation runs at roughly 3%, I am coming out ahead. I leave my money in the stock market to earn 8% and take my time paying off the loan.
With that said, the car loan could be bad if I can't actually afford the car. The goal is to keep debt to as small of a percentage of your income as possible. I say this because the less debt you have, the less stressful your life will be. Think about losing your job. If you have student loans, a mortgage, a car loan and credit card debt, you need to find a job ASAP so you can keep paying those bills. But if you only have a mortgage, the situation isn't as stressful. It's still stressful, but not as much. You could consider a lower-paying job since you have fewer debts to pay. In this case, less debt provides you with more options.
What are some early warning signs you need to adjust your budget?
One sign that many overlook is unhappiness. They set up a budget that is too strict and end up rebelling against it. Take me, for example. There was a point in my life when I was in $10,000 of credit card debt. When I decided to pay it off, I set up my monthly budget. First I made sure all of my monthly obligations - rent, food, insurance, gas, etc. - were covered. Whatever I had left I put towards debt with the exception of $25. That $25 was for entertainment and spending time with my friends.
It should come as no surprise that $25 doesn't get you very far. I began turning down offers to hang out because I wanted the money to last. I started to resent that I couldn't go out and eventually did a 180 and stopped paying off my debt. The point is to account for everything and allow yourself some fun as well.
Another warning sign is realizing many of your purchases are being categorized as miscellaneous. You need to find a category for these items. If you don't, at the end of the month, you are going to have a huge portion of your spending in the miscellaneous category and will be left wondering what you spent your money on. Then you will have to try to research things to find out. This is not a fun task and goes completely against why you set up a budget in the first place.
Finally, related to the two points above, is going too in-depth with your budget. Some people track every single category. For me, I don't bother with tracking my mortgage because it is the same amount every single month. In fact, I really only track my discretionary spending - or variable spending. Anything that is fixed every month isn't as important to me as the variable amounts - eating out, groceries, gas, etc.
What's the one thing people should ask before they take on any debt?
Can I afford the item in question? I'm not talking about whether or not you can afford the monthly payment of the item, but the total cost of the item. In most cases, the answer is no simply because you have to finance it.
Granted, you will have to finance a house or part of your college education, but it is important to look at the overall cost of the item in question. This is the main thing that differentiates those with money and those without. Those with money look at the long term - the overall cost of an item. Those without money look at the short term - if they can afford the monthly payment. This is a recipe for disaster, as any good loan officer can extend the term of the loan so that you can afford the monthly payments. What you don't see is the thousands of additional dollars you pay in interest by affording the monthly payment.
Of course, in order to answer the question "Can I really afford this item?", you have to be completely honest with yourself. This is hard for some people. They think that just because they work hard, they deserve it. This isn't 100% true. You may work hard, but that doesn't mean you can afford everything you want. Just because you can't afford something doesn't mean you can never have it. Set up a savings account and start saving for the item in question. Eventually you will be able to afford it.
What's the one thing you wish everyone knew about finance?
That personal finance is personal. What works for me might not work for you, or vice versa. This is why I love reading many personal finance blogs. Everyone has their own way of dealing with money, and it's interesting to read about their fears, plans and goals.
The key in this is just keep learning about personal finance so that you can find what works for you. I failed a few times with budgeting until I found one that worked for me. Just keep learning until you find a plan or strategy that works for you. If someone disagrees, listen to their point; maybe you'll find an even better way of doing things. If not, you can keep using your method.