The Three P’s of Money – So Much Pleasure!
Continuing our conversation on the Three P’s of Money, we will now discuss, Pleasure. When we first began, we were talking about how to create a categorical breakdown of the dollar that can help guide our day-to-day decisions on how we use it. I do think that this is the most important category out of the three P’s of money: Personal, Pleasure and Purpose. The pleasure category is where we normally lose our discipline. This is the shiny lure that takes us off track from our goals. I truly don’t think we’re that gluttonous. Maybe we just need a little helping hand to think of the use of money in a different light.
People often view money as the key to freedom because they would be able to relieve so many burdens if they just had more of it. Its why we work so hard to earn it and take so many chances trying to make more of it. In my last article, I pointed out that almost 20% of American’s spend 50-100% of their income towards debt repayment. What led us to getting into a situation of being trapped? My belief is that we just aren’t being guided properly on how to use the “dollar.”
We first went over the Personal side of money which was the absolute necessities. No… Netflix is not a necessity. These are the items that are going to be paid for no matter what. This is how you begin to calculate your discretionary income. Most people have a pretty good idea of what their bills cost them every month. Ask them what they spend on groceries, dining out, and entertainment… That’s where we find all the pleasure, baby! Understanding your discretionary income is one of the most vital parts of creating a sound financial foundation for you and your family. It allows you to address areas that you can cut back expenses, increase savings, pay down debt, purchase life insurance, and fund retirement accounts. Taking small action steps to implement some of these items can be life-changing but they’re boring.
There are three scenarios that I feel Pleasure has a big effect on and are more common than they should be. Scenario one, you hear of someone that is contributing to a 401K through their work while making minimum payments on credit card. Scenario two, there is someone that is looking to purchase their home by taking money out of their retirement account. Scenario three, putting 90 to 100% of available capital to put less than 20% down on a home purchase. All three of these scenarios have horrific effects on the financial future of that person. If you intend to put 5% down on a home, have to take money out of a retirement account to pay for some of that down payment or expenses, and have credit debt, there’s a good chance you didn’t need to go to 6 golf outings, 3 Yankees games, and take a 3 day weekend for Zac Brown concert. That sentence sounds pretentious but let’s apply some numbers and explain what happens here.
Let’s assume this person was in the 24% tax bracket and was looking to purchase a home for $300,000. Well to put 5% down, you’ll need $15,000, and let’s say all other expenses for closing costs and attorney’s fees were another $15,000. Let’s give them $10,000 in savings so they only must take $20,000 out of their IRA. Well, when you take a distribution before age 59 ½ you’ll pay ordinary income taxes PLUS a 10% penalty. That means that $20,000 out of the IRA just cost you $6,800 to get out. Also, since you are only putting 5% down on a home you are going to pay PMI (private mortgage insurance) which can cost as much as 1% of the total loan or in this case $237.50 a month! From these two instances, this household has just thrown away tens of thousands of dollars.
The pleasure side of the dollar is where we reward ourselves and find enjoyment. It’s where we avoid making hard decisions and remove our financial discipline. My goal is to provide sound knowledge that can lead to better decision making for a more secure financial future. Those events I listed could easily cost close to $3,000 all-together. Now imagine how much money that household would have saved over the course of time if they knew that from the get-go.