Q&A with Daniel Bowen on How to be Young and Frugal
Meet Daniel Bowen, a Dallas-based financial professional and founder of youngandfrugal.com, one of the best online resources for financial advice specifically aimed at Gen-Y. Bowen’s blog delves into topics such as salary negotiation, budgeting, and homeownership. At age 23 this financial guru in the making was even featured in Forbes, and now we’re lucky enough to have him on THEPOPFIX, giving you your financial fix in this special question and answer session. Read on for Bowen’s best advice and tips on how to set yourself up for future financial success while you’re in your 20’s…
Q. In a blog post, you talk about the balance between trying to have a social life while trying to save money. Do you create an entertainment budget (for going out to eat, going to the movies, getting a few drinks at a bar) for yourself, and if so, what percent of our monthly and yearly income should go toward entertainment while trying to be frugal?
A. On paper I have an entertainment budget, but in reality I don’t really follow it because I hate budgets. The truth of the matter is that your expenses vary from month to month. One month you may get your car worked on, the next your utility bills may be higher, so you need to have an understanding of much disposable income you have left for the month and budget accordingly. When I go out I make a personal budget for the night and make a conscious effort to play in that range.
Q. You were able to become a homeowner at age 23, what would you advise other young people to do who are considering becoming homeowners?
A. When my friends ask me about homeownership I tell them to talk to as many people as possible because, like everything, it has its ups and downs. It’s been made out to be the “American Dream” but I don’t believe that it is for everyone. It is also a huge commitment that needs to be carefully thought out and not just jumped on for an $8,000 tax credit. Also, just because the bank may be willing to loan you a large amount of money doesn’t mean you should borrow all of it.
Q. What’s the difference between being cheap and frugal? How does one make smart choices without becoming totally financially prudent and annoying?
Being frugal means that you have control your money, where as being cheap means you are letting money control you. I think it’s feasible to be financially prudent and fun, you’ll find that the people who let their money control them are the ones who are constantly annoying other people by being Scrooge-like. Those who have control over their money allow themselves to splurge, and will spend money on the fun stuff like going out. If you don’t make it a point to have fun you’ll drive yourself and others crazy. It’s OK to spend money, just remember to save it too!
Q. A lot of young people have the tendency to want to spend on luxury items once they start making money. What’s your advice to people who are tempted to spend their paychecks on Gucci wallets or a down payment on a new BMW?
A. Life is about priorities, and like I said before it’s OK to spend, just realize how mush you are spending. I made it a priority to buy a nice, new house at a young age, but I drive an 11 year old Acura with 150,000 miles on it and I take my lunch to work.
The key thing is to know yourself. Sure the $600 Gucci wallet may make you happy for a few days but it’s probably just going to stay in one of your designer purses so you won’t even be able to show it off. Then, when the credit card bill comes and you can’t pay it off, are you still going to be excited about the purchase that you are now paying interest on? The BMW means that you will be paying $500 a month for the next X years on something that is going to loose 30% of it’s value the second you drive it off the lot. When it is 3 years old and worth less than you owe on it, will you still be happy paying that monthly payment?
Q. How important is saving and what percentage of the money we make should be saved? When is a good time to start thinking about opening a savings account?
A. Saving is the most important thing you can do with your money. If you don’t have a savings account, go open one now and set it up to automatically transfer money. It doesn’t matter where you do it, whether it’s online or at your local bank, it is stupid easy to do, and by setting up auto-transfer you’ll never have to think about setting money aside again!
Most people agree that you should set a target goal of having at least 3 to 6 months worth of living expenses set aside for an emergency such as loosing your job or having your car break down. As far as percentages go it all depends on what works for you and your prior commitments (rent, car payments, credit card payments…), the most important thing is to set savings goals that you can actively work towards. I try to continually save 20% of my net income. Part of that is for retirement, part is for my emergency fund. I also have separate accounts for a new car and travel.
Q. What are the safest ways to invest in these difficult economic times?
A. While I dabble in stocks, I prefer Index Funds and Target Retirement Funds. Index Funds are essentially like owning one share of each stock on the market, and while the Market is down, right now is one of the best times to be investing because when the market does recover, there are many gains to be made. Target Retirement Funds are based on your own target year for retirement, they start out aggressive (high percentage of stocks to bonds), and as you get closer to retirement they become more conservative in their allocation.
Q. Most of our readers are in their 20’s and may not realize the importance of setting financial goals when they are young. What are some good, attainable financial goals that we should consider for ourselves?
A. The first is to pay yourself first. That means opening a savings account and setting up an automatic transfer from your checking to your savings. Saving is easy when it’s automatic. Company 401(k)s are great for this because they will automatically take the money out of your paycheck and you never have to deal with it.
Build an emergency fund. You shouldn’t have to put emergencies on your credit card, only to spend the next year worrying about how you are going to pay it off, with interest. Build up to have at least 3 to 6 months cushion in case of an emergency.
Save for retirement. The earlier you start, the more money you’ll have when you retire. Even one year can make a substantial difference with compounding interest. Max out your company’s 401(k), and even better, open a Roth IRA and start saving more. You cannot count on any government funded retirement, there won’t be any money left by then.
Q. No matter what our financial situation happens to be, most people spend some time every week at a grocery store. What are some of your tips on how to save at the check out line without resorting to living off Ramen?
A. There are four things my wife and I do to save money on food. We make a list of what we need for one weeks worth of meals (and we stick to it), we use coupons and rewards cards as much as possible, we stick to our food budget, and we don’t overbuy food. The number one thing I see with people is that they overbuy food, we go to the store once a week, and buy the amount of food we will eat in that week. As a result we save money, and rarely see food go bad.
Q. What are some of your favorite financial resources, books or websites where we can get more information on saving money?
A. The holy grail of personal finance blogs is Get Rich Slowly. This blog follows JD Roth from his days as a slave to his own debt, to where he is now as a debt free personal finance extraordinaire.
Next is I Will Teach You To Be Rich and the book by the same name. It sounds gimmicky, and yes, the title is, but it’s actually full of excellent advice and step by step processes to setting up a savings account, auto drafting from your checking account, and even investing. Best of all, this blog and book is aimed entirely at Gen-Y.
And finally for money tracking and budgeting you need to join Mint. Mint will track all of your accounts (loan, credit card, savings, checking…) in one place and automatically sort out your spending habits. You can set your budget online and have it send you text messages when you go over budget on something. It’s a great tool, and completely safe.
Q. Suze Orman advises people to avoid (or at least consolidate) credit card debt like the plague, what’s your take on these beguiling pieces of plastic?
A. Credit cards are like alcohol, there is nothing inherently wrong with either, just with their abuse. Many people can responsibly handle them, while others can’t, and it often takes other people to let you know you have a problem.
If you are currently overwhelmed by credit card debt, there are many tools at your disposal. I would definitely suggest picking up some (used) books by Suze Orman and/or Dave Ramsey. Both of these people specialize in helping others get out of debt and get back to living a balanced life with a balanced budget.
Q. Many recent college students take out loans to pay for tuition and graduate in debt. What’s your advice on how to pay down this debt while still having money left over for pleasure?
A. My best advice is to make it a priority. Most people are content with managing the minimal monthly payments, but think about this: if you borrowed $30k for school at a 5.5% interest rate you will pay about $15,000 in interest alone by the end of the 15 year loan, that is owing 50% more than you borrowed. The faster you pay it off, the less interest you are paying. The best advice is to never pay the minimum payment…on anything. Always add extra to the minimum payment, whether it’s an additional $20 or $200, you will be debt free faster and paying less money in the long run.
Q. If we had to condense this interview into once sentence, what is the most important piece of advice you would give our readers?
A. How about 3? If you aren’t controlling your money, it is controlling you. It is possible to be both frugal and fun. Save early, save often, start now.