Personal Finance is More Important than Skill in Software Development
It’s tax season! Tax season is one of my favorite times of year. Weird huh?
I always do my own taxes in TurboTax, and I refuse to hire an accountant. Granted, my life isn’t complicated, so my taxes aren’t that challenging. I just have a W-2, deductions for a house, investments, a health savings account, a side business, and that’s basically it.
So why do I enjoy doing my taxes?
Seeing where all my money went over the past year gives me joy. It makes me aware of exactly how much I’m paying in tax, and where I can save money next year. It let’s me see if the exemptions in my W-2 are correct. If the federal government gives me a huge refund (which can happen when you have a lot of end of year deductions), I should probably raise my exemptions so my paychecks are larger throughout the year.
Maybe I should have been an accountant instead of a software developer because something about moving money around to create more of it is intensely satisfying.
Which brings me to today’s topic: your skills in personal finance are probably more important than your skills in software development.
I recently finished “The Millionaire Next Door.” The premise of the book is that people who you think are wealthy, usually aren’t. The folks with flashy cars, thousand dollar suits or dresses, and houses in gated communities are not as wealthy as you’d think.
Many times, these people are living high consumption lifestyles, and they’ve been doing that their entire careers. Essentially, they’ve always spent their money instead of saving it, so their net worth is nothing.
Usually the wealthy people are the ones living in a modest house driving modest cars, and they look ordinary.
The most interesting part of the book is where it talks about inter-generational wealth. Most millionaires in the U.S. obtained their status during the last generation. Most did not get the money from mom and dad, like I would have thought.
More surprising is what happens to wealth after it’s inherited by children. Usually that wealth is dissipated within a generation or two because the heirs spend all of it.
I’m not going to sit here and tell you to go frugal because I don’t agree with that. Instead of trying to cut out lattes or other small luxuries, I think you should focus on making more money. But you should also be aware of personal finance issues. I continually see my co-workers making financial mistakes. Some examples:
- A friend of mine routinely wracks up thousands of dollars in credit card debt because he can. He has plenty of money to pay everything off, he just doesn’t. Unfortunately, credit card debt is one of the most expensive ways to borrow money. The banks charge 20% or more in interest. Try to never do this.
- Another friend buys a lot of electronics. Sometimes they entice him with “0% financing for 6 months.” When they do, my friend takes the offer. It doesn’t matter that he has an engineer’s salary, and the purchase would only cost a couple of hundred dollars. My friend sees a “good deal” and he jumps on it. You could argue that it’s better to borrow money at 0% and re-invest at 3-10%, but usually these deals are structured so the interest rate skyrockets after the grace period. If you forget to pay it off before then, you’ll wind up paying a bunch of money in interest that you could have avoided completely.
Both of my friends are highly educated software developers who are good at math. But I’ve found that being good at math does not equate with being good with money.
Again I’m not overly frugal, but I love the power of compounding interest. Every $100,000 you have in the bank is a potential 5-10 thousand you get every year for the rest of your life for doing absolutely nothing.
So if you’re a software developer, and you save effectively for 10 years starting in your early 20s, you’ll be making dramatically more than your peers. You could be making 50%-100% more than everyone else. You’re doing the same job, it’s just that most of your income is unrealized.
Every software developer dreams about starting the next Google or Facebook and walking away with billions of dollars. But a much higher probability way to get rich is to slowly accumulate these 100’s of thousands of dollars until you have enough to comfortably support your lifestyle.
Most people in the United States never get there. The statistics for saving rates in this country are appalling, and the statistics for accumulated wealth are even worse.
It makes sense, we’re constantly bombarded with advertising urging us to buy more stuff. Depending on the neighborhood you live in, the pressure to “keep up” with your neighbors can be intense.
But I would urge you to make yourself more aware of the money you spend.
Read a book or two about personal finance, or take a personal finance course at your local college. I took one my senior year from a fiscally conservative adjunct professor, and it was one of the best classes I had during all 4 years.
This is why I do my own taxes. I realize it might be irresponsible. A good tax accountant might be able to save me more money. But I want to be consciously aware of everything in my financial life. When I do my taxes at the beginning of each year, it makes me aware of financial issues during the entire following year. It influences the decisions I make, hopefully in a financially positive direction.
The only other advice I’ll offer is to be aware of what your after-tax dollars are worth when you spend them.
Always remember that each dollar you earn is really worth $1.30 or more, depending on your tax bracket. Even if you’re in the 20% tax bracket, you still have social security, medicare, and state income taxes. When it’s all said and done, each dollar might be worth closer to $1.40 or even $1.50.
So that cool gadget you want to buy for $1000, it’ll take you $1300 or $1400 in earned income to make up for it.
Remember that, and it might change your spending behavior.
Finally, you could argue what’s the point? I have very smart friends who are very good with money, but they consciously choose to spend money instead of saving it. Their attitude is that you should live your life now, while you’re young, instead of waiting for some far off date when you retire.
I respect this view point. I enjoy my job, and I could see myself working until I’m 80, so I “get” the no-retirement attitude. I still try to save a lot because I want that cushion as I get older. I want the stability and peace of mind that comes with knowing you have some money in the bank.
Do you have any personal finance tips for software developers? Leave me a comment below.