Many American households are vexed by their financial condition. They feel like they don’t have enough money, carry more debt than they should, are underfunded for retirement or their kids’ college education, and aren’t confident about their futures.
The financial experts – i.e., economists, researchers, and policymakers - will point to behavior flaws, a culture of consumption, financial illiteracy, misguided government policies, globalization, technology, systemic inequalities, the “one-percenters,” and a hundred other external factors as causes of this distress.
But offering hundreds of reasons why things are the way they are doesn’t add up to one solution. If you want to improve your financial standing right now, you might be ready for a conversation with someone who can tell it to you straight, and give you a no-nonsense blueprint for financial progress. It’s time to talk with a financial “Dutch Uncle.”
Who’s the Dutch Uncle?
The dictionary describes a Dutch Uncle as “a person giving firm but benevolent advice.”
Another source adds these details:
A Dutch Uncle is someone who has close enough standing to speak plainly and severely without too fine a regard for the listener’s feelings. However, the admonishment or education is given with sincerity and often with benevolent intent, as though from an elder relative, or “uncle.”
The term originated in the mid-1600s, when England and Holland engaged in several wars, and a “Dutch” adjective was a way for the English to disparage their enemy. Thus, a “Dutch Uncle” was the reverse of the avuncular stereotype; he was not indulgent and permissive. By the time the term became part of the American vernacular in the early 1800s, a Dutch Uncle had evolved into a generally positive connotation for someone who offers straightforward, often uncomfortable, and sometimes unsolicited commentary.
Some ‘Firm but Benevolent Advice’
When it comes to personal finance, the Dutch Uncle isn’t interested in who, or what, is to blame for your past money struggles. Instead, a financial Dutch Uncle cuts through the fluff to offer some “firm but benevolent advice” that can be acted on immediately. Here’s where he begins:
You must structure your personal finances so that you are saving at least 15 percent of your income. If you can’t get the business that is your personal finances to show a 15 percent profit, progress will be difficult, if not impossible.
Is 15 percent arbitrary? Sort of, but the Dutch Uncle doesn’t care. You might make do with a lower percentage, but the Dutch Uncle knows 15 percent works.
The Dutch Uncle also knows that as soon as he establishes a financial benchmark, cynics will dispute its validity. The Dutch Uncle has heard it all before, and he’s not fazed. In fact, he can pre-emptively dismiss these objections. For example…
The Dutch Uncle knows that as soon as he says “save 15 percent of income,” some wise guy will ask, “Well, what income are we talking about? Gross? After-tax? It makes a difference, you know.” This is a smokescreen, obsessing over details to avoid taking action.
Somewhere on your tax return is your “adjusted gross income”. Use that number. And if you’re smart enough to manipulate your taxable income so your AGI understates your real income, you’re smart enough to adjust your income appropriately. Don’t cheat yourself.
Speaking of cheating, the 15 percent can’t be padded by including “savings” that is spent a month or two later. It’s absolutely true that it’s better to save $500 for two months to buy a new kitchen appliance rather than put it on a credit card and pay it off over two years, with interest. But that $1,000 isn’t “saving,” it’s simply intelligent spending. “Saving” is money allocated to long-term financial projects, money that you’re not planning to spend in the next five years.
And no, you can’t count the principal portion of your mortgage payments as savings. That equity is not liquid, and if the housing market goes south (remember 2008?), it won’t be there. Same goes for the principal in your car payments. If you’re driving it, it’s not savings.
But the Dutch Uncle is willing to include your “income insurance” premiums as part of your 15 percent. Life and disability insurance can either preserve or complete your saving plans if something goes awry. The Dutch Uncle is a realist: Plan A’s don’t always work, and you can’t afford to operate without a Plan B.
This is basic stuff. But the Dutch Uncle knows a key element in successful financial management is having funds to manage. Saving 15 percent of income makes financial management possible.
At this point, you concede. “Okay, I get it. Not saving 15 percent of my income probably has a lot to do with my lack of financial progress. So what do I do?”
The Dutch Uncle knows that unless you started your working life with limited obligations and a high income, 15 percent can be a struggle. If you’re just starting a career and a family, owe on student loans, and need an automobile for work, your basic living expenses are going to make it difficult, if not impossible, to save 15 percent immediately.
But the Dutch Uncle also knows it won’t get easier if you wait. Kids get more expensive, not less. Same with your cost of living. If you take on debt to meet today’s needs, saving gets even harder. At some point, you’re going to have to make a decision: Either adopt a plan that eventually makes saving 15 percent doable, or admit that you’re hoping for a miracle, like winning the lottery, having one of your kids play professional sports, or becoming a YouTube sensation.
The Dutch Uncle knows that hoping for a miracle most likely means more financial struggle. And you know it too. If you want to change, the options are straightforward, at least from the Dutch Uncle’s perspective.
Reassess your career path. Sometimes the answer to your financial stress is “earn more money.” This is tough, because changing careers may require going backward (back to school, back to a lower income, maybe even back to living with your parents) before eventually moving forward with more income.
Restructure your debt. In isolation, the choice between a 15- and 30-year mortgage seems simple; the shorter term with less interest is better. But every dollar obligated to someone else is a dollar you don’t control. Even if it means it will take longer to eliminate your current debt, the sooner you gain control over a greater percentage of your cash flow, the better.
Make some hard lifestyle decisions. Every financial decision is a balancing act between immediate and delayed gratification. Some things are immediate and necessary – food, shelter, safety. Some things are immediate and non-essential – a movie, a night out, a vacation – but also worthwhile. A Dutch Uncle might seem like a hard nose, but he appreciates that not all gratification should be delayed. At the same time, the interplay between necessities and luxuries will always exist. Too much indulgence today can make necessities problematic in the future.
Get input from financial professionals. Whatever you’re saving right now, you have income, housing and transportation costs, insurance, and debt. Professional assistance might help you finance a career change, rewrite your mortgage, decide to buy or lease the next car, maximize your insurance benefits, and transfer balances to a lower-interest credit card. You might be surprised how a clean-up of your existing transactions can “find” money that can added to savings.
Some might disagree with the Dutch Uncle’s focus on improving cash flow to save 15 percent of income. But be truthful about your own situation: Would your financial life improve if you were saving 15 percent? Yeah, the Dutch Uncle thought so.
If this advice applies to you, or someone you know, the next step is to schedule time with a few financial professionals to uncover ways you can aim for the 15 percent savings target. Remember, successful financial management starts with something to manage.