Investing Archives - Page 2 of 6 - The Broke Professional

4 Books New Grads Should Have Read BEFORE Finishing School

Students in undergraduate and professional school usually have one thing on their minds: sleep!  The next thing is usually studying to do your best (or to just stay afloat) in your respective program.  Many times this requires a laser like focus where nothing else matters except the next test or practical.

But on the other side of that diploma or degree, real life is going to be waiting.  Which means you are going to have to make a lot of financial decisions which could potentially affect the rest of your life.  I would advise students to take a few minutes a week (that’s really all it takes) to read some good books and form some type of financial plan.

I’ve recommended four books for students to read while they’re in school.  Like I said, it just takes a few minutes a week and I know every student can find a few minutes between ping pong tournaments (and studying of course!)

These are light reads that are packed with great information to get you started on the right financial footing.

Good grades are important, but you’re only in school for a small part of your life.  Taking some time to plan the rest of your life is essential.

Here are the recommended books:

I Will Teach You to Be Rich by Ramit Sethi

This is the first book i read after graduating optometry school.  And I’m glad I did.  It touches on some theory when it comes to investing, but it is ultimately a very practical book and this is what I appreciated about it.  Ramit talks about what specific bank accounts he recommends, how to invest and even how to negotiate when buying a car.  The overarching theme from this book is to DO SOMETHING rather than not acting.  Getting 80% of the way there is a whole lot better than getting 0%.

The Millionaire Next Door by Thomas Stanley and William Danko

If there ever was a book out there that tells you what REAL wealth looks like, this is it.  MND is a light read that talks about the characteristics of real life millionaires.  Despite what society and the media tells us, millionaires don’t usually drive around in luxury cars and have gigantic houses.  More often than not they are hard working people who spend their money very wisely for a long time.  This book is especially important for those new grads looking to get a new car and/or house right away.  If you want to be a millionaire, this book will show you that’s just not the way to go.

Richest Man in Babylon by George Clason

I was fortunate to read this book while I was in optometry school, and I’m really glad I did.  It is a light and short read that can help establish a solid financial foundation.  The book consists of Biblical sounding parables that contain financial wisdom.  The main theme I got from this book is the biggest financial lesson of all: you will never get ahead unless you spend less than you earn.  Constantly spending 100% of your earnings is no life at all.

The White Coat Investor by James Dahle MD

This is a great book geared mainly to MD’s and other health professionals, but has some great advice for everyone.  The White Coat Investor is a fantastic blog that teaches professionals about student loans, investing and keeping more of your money.  Honestly, it is one of the blogs that inspired me to start blogging and trying to help my fellow broke professionals.  Great book for investors and a must have for anyone graduating from professional school.


How to Get an Amazing Return on your Savings Account

Savings accounts will save your life.

The financial services industry is enormous.  There are countless magazines, commercials, shows and blogs that talk about financial products and services (I do that also, but only with products I use and trust.  Like Digit.)

Companies like Fidelity , Vanguard and Charles Schwab will talk about their mutual fund options all day long.  Life insurance companies will be happy to show you their complex whole life insurance and annuity plans.  If you turn on any business news channel, you’ll start believing that the world is going to end and you need to entrust your financial life to a specific company.

All of this marketing is designed to separate you from your money, and will ultimately enrich the companies in the form of fees and commissions, regardless of your own personal performance.  Marketing is a powerful tool and the odds are stacked against the average consumer.

But what if I told you there is a financial product available that is virtually risk free and will give you great returns throughout your entire life?  This product is not heavily advertised in the financial world and will only get a cursory mention by financial advisers.

That product is the humble emergency savings account.

Savings account?  Really?

Yes really.  And it has nothing to do with the interest rate.

Most people have savings accounts and don’t even know it.  Many banks sign you up for one when you get their checking account, although most people don’t give it a second thought. But they can be a powerful wealth building tool.  How can that be when the interest rates are so low?

A savings account with Bank of America will get you a maximum interest rate of .03%  That’s right, 3 hundreths of a percent.  Almost nothing.

An online savings account with Ally, which I currently use, gives a 1% interest rate.  A LOT higher compared to a Bank of America account, but still not too high in the grand scheme of things.

(By the way, sign up for an online savings account if you don’t have one.  You’re just leaving money on the table if you don’t)

The beauty of a savings account doesn’t lie in the interest rate.  Savings accounts are awesome because they can enhance your financial life by providing positive returns in so many ways.  Here are some examples:

Higher deductibles:  Insurance is a game of risk.  This is true for any type of insurance, including health, auto and homeowners.  If you take on more risk, you pay less in premiums to the insurance company.  If you take on less risk, you pay more in premiums.

Assuming coverage remains the same, the best way to take on more risk, and thus decrease your premiums, is by increasing your deductible.  This will be how much you pay out of pocket before the insurance company starts paying.  The higher deductible you pay, the lower premiums you pay.

What a large savings account does is that it allows you to set a higher deductible because you will be able to cover that deductible payment if need be.  I believe the role of insurance is to help you out in catastrophic cases, such as a car accident or major illness.  In the case of a car accident, having a low $100 deductible is not really a big benefit since the cost of replacing a car can run well into the tens of thousands.

For example, I have car insurance with Geico.  If I choose a $1,000 deductible on one of my cars, which is an amount any decent savings account should have, my 6 month premium is $285.  Not bad at all.  If I leave the coverage the same and change the deductible amount to $100, the 6 month premium jumps to $395.

An extra $110 for 6 months is not bad, but if you have a large savings account, there is no need to spend that extra money.  Apply this principle to all your cars and all of your various insurances (especially your health plan), and you can easily save hundreds of dollars per month just for having money in a savings account to cover those deductible payments.

Bulk Purchases:  This is an easy one.  Buying in bulk is almost always cheaper than not, especially with groceries.  And having money in the bank allows you to do this anytime you want.

If you see something you regularly purchase on sale at the grocery store for half off, you can save a lot of money by buying enough of that item to last you for the month instead of coming back every week and paying the regular price again.

Your savings account just helped you slash your grocery bill.

Pay in cash:  With things like cars, home repairs, remodeling and appliances, most people just assume you have to take out a loan.  That’s just how things are done.  But not if you have cash in your savings account.

We recently got an estimate for a painting job from a number of contractors.  All the estimates were for about $1,000.  Since I will be paying in cash, this will be an easy transaction.  Just transfer from my savings account and pay the contractor.

Most people go would go the loan route.  A good rate for a personal loan would be 6%.  If I could get a 6% loan with a 5 year term, the monthly payment would be $19.33.  What a steal!

Actually, not a steal at all.  The extra interest you would pay over the 5 years would be $159.97.  So having a savings account that could cover that amount right off the bat will save me $160 compared to having to take out a loan.

Leave investments alone:  This is where having a savings account can potentially help you keep a whole lot of your money.  Everyone needs to invest whatever they can as early as they can.  Compounding interest early in life produces great returns later.  This has been proven extensively.

But what if you have been investing so much that you totally neglect your savings account and now you owe someone $5,000?  You’re going to have to tap your investments which is going to cost you in 2 ways:  Transaction costs and diminished investment returns.

If you have to withdraw from a retirement account, add a penalty payment and extra income tax on top of that.  And all the while you are missing out on returns your $5,000 could have been getting if it remained invested.  Not a good situation.

So even if you’re the most gung-ho investor and you’re super excited to get in the game, make sure to set aside some cash just in case.  It will actually help you keep more of your money.

With all the savings to be had from higher deductibles, bulk purchases, not having to get a personal loan or withdraw from your investments, I hope you’re convinced that having cash set aside in a savings account is a good idea.

I hear many people rail against savings accounts because of the low interest rates and how the “opportunity cost” is too high since you could be getting a higher rate of return elsewhere.  But no other account allows you to withdraw money as needed and gives you the peace of mind found in all the previous examples.

So help keep your financial house in order and open an online savings account.  Make sure to keep replenishing it because it is not a matter of if you’ll need it, but when you’ll need it.


Wealth Savings Account

Another Health Savings Account post?  Yes.  Another one.

HSA post. Another one.

HSA post. Another one.  Another one.

I’ve written about HSA’s previously here and here.  But it seems some people still don’t get it.Since HSA’s are a fairly new concept, I thought I would give one more post at explaining its benefits.

Many people I’ve spoken with who are hesitant about HSA’s are not really hesitant about HSA’s.  There is no reason to be scared of HSA’s because they provide tax free money for healthcare services AND you can keep the money forever.  People love signing up for Flexible Spending Accounts, and you can only use those funds within a year, so those are a little more scary.

No, people don’t have problems with HSA’s themselves, but have second thoughts about signing up for High Deductible Health Plans (HDHP’s), which you have to be enrolled in to be eligible for an HSA.

And they should have second thoughts.  HDHP’s are a big difference from the traditional health plans we’re used to.  You’ll have to pay out of pocket and in full for a lot of things you never had to pay directly for.

A visit to the local urgent care place?  Full price.  Have to pick up some medications?  No coverage yet.  A $1,000 visit to the ER?  Pay the full $1,000.  It’s almost like not having health insurance at all!  (It really isn’t though just keep reading.)

For a family plan in 2016, the minimum deductible needed to be considered an HDHP is $2,600.  That means that insurance will not cover anything until you have spent $2,600 on healthcare expenses for the year.  That sounds preposterous for some people, but it just requires you to plan a little better.

Are HDHP’s for you?

There are two questions you have to ask yourself to see if a HDHP is right for you.

First, are you pretty healthy?  That is, do you or any family member need to go to the doctor often or take a lot of medications.  If the answer is yes, then a HDHP is probably not for you.

But it still may be.  You just have to run the numbers.  It’s almost impossible to predict what your healthcare costs will be in the upcoming year, but looking at how much you spent in previous years can give you a good idea.

HDHP’s have lower monthly premiums than traditional health plans.  That’s one of their big selling points.  If you think you will end up spending enough on healthcare that it will negate those lower premiums, then you should probably go with a traditional plan.

The second question to ask yourself is do you plan to have a surgery or major procedure anytime soon?  If you do and you can do it early in the year, then an HDHP will DEFINITELY be the right choice as you will meet the deductible requirement early in the year and will have almost everything covered for the remainder of the year.

Not all companies accept will let certain elective procedures, like LASIK, be applied to the deductible so make sure to verify what will apply and what won’t.  If it can apply towards the deductible, an HDHP is a no-brainer.

Based on these two questions, I think most people will benefit from going with an HDHP.  So you get much lower premiums, great coverage once you meet the deductible and the biggest benefit of them all…the HSA!

Healthy, Wealthy and Wise

The minimum deductible for an HDHP family plan is $2,600.  The maximum amount you can contribute to an HSA  for 2016 is $6,750.  That means if you max out your HSA contributions for the year (which you should most definitely try to do) and get the pre tax contributions out of your paycheck, you will be able to fully cover the deductible in a little less than 5 months.  Doesn’t get much easier than that.

Remember HSA’s have a triple tax advantage: they are taken out pre tax, they grow tax deferred, and they can be withdrawn tax free for healthcare expenses.  After age 65, you can withdraw funds for any reason and you’ll owe income tax but no penalty.  Since HDHP’s cost much less for employers, many will sweeten the deal by contributing a certain amount into your HSA.

There is just too much good stuff going on here.

And let’s not forget arguably the biggest benefit: the ability for the account to grow tax free.  The default setting for most accounts is to have your HSA money in some type of money market account that earns 1% or less of interest.

That’s cute, but it’s not for me.  Nearly all HSA plans have investment options, and some of them have very good ones.  HSA’s stay with you for life, so if you can invest your funds appropriately you can stand to make a lot of money down the road.

Many would say that’s risky since the money is for healthcare expenses and not necessarily for retirement.  Fine.  What you can do (and this is what I do), is to find out what the out of pocket maximum of your health plan is.  This is the max amount you would have to pay for the year until all of your healthcare expenses are completely covered.

For most HDHP’s, this  number is around $6,500 or $7,000.  Whatever the exact amount is, put that much in the interest bearing portion of your HSA.  Put the rest into investments.  That way, even if everything goes to hell, you will have enough to cover your health care expenses for the year while still having some great tax advantaged growth in the background.

Bottom line, if you’re healthy and single, you have absolutely no reason NOT to be in a HDHP.  If you have a family there is more to consider, but an HDHP will most likely work.  If you have a family and multiple members see doctors and take medications regularly, it may not be right for you.

I don’t know what more I can say about the topic, but I’m sure I’ll revisit it again soon.  In the meantime, max out that HSA contribution!


Find Your New Financial Normal

Make a few adjustments, and create a new financial normal.

Make a few adjustments, and create a new financial normal.

One thing I’ve noticed over time is that humans are very adaptable creatures.  We conform to our surroundings and can make almost any environment feel routine to us after a while.  Animals do this, as cold weather creatures develop features that can increase survival in even the most harsh of environments.

Call it evolution, adaptation or just the way God made us.  The fact is that we can adapt to most situations and environments given enough time and motivation.  Knowing this, we should theoretically be able to improve our financial situation by changing our environment.

We can get by on less

I was accepted into optometry school fairly late into the process, so I had to scramble to find an apartment near the school.  I asked a couple of people I knew if they needed roommates.  No one did.  I started looking for one bedroom apartments in the area but they were way out of my student salary (aka no money).  I was at a loss.

But then I had an idea.  I called back one of my classmates and asked if I could stay in their living room.  He wasn’t planning on bringing any furniture in the living room and neither was his roommate, so he said that would work.  I just got an air mattress and set up shop.  So I had a place to eat and sleep and paid very little rent since we split it 3 ways (I got to pay even less since I didn’t have my own room).

It was tough the first few days.  One bathroom for three guys.  Not much privacy being in the wide open living room.  Not an ideal living situation.

But I made some adjustments to make things easier.  I spent most of my time studying in the library.  Since studying is what I did almost all the time anyway, I just brought some food from home and ate during study breaks.  It became very doable and I made a couple of good friends in the process.  All for hundreds of dollars less per month than if I got my own apartment.

What this experience showed me is that you can get by on less, even if you don’t think you can.  Sometimes we are forced to get by on less because of a job loss or illness.  Those aren’t fun times.  The time to experiment is while you’re healthy and making money.

Cut your cable and see how things go.  Look at some smaller fuel efficient cars when it’s time for a new one.  Try to eat out a little less every week.  Doing things like this will create a new baseline of spending and you may not even notice the difference after a while.

And if you do start feeling the pinch, then you know that particular thing is something you value and can’t live without.  Simply go back to it and try to cut something else.  Not much to lose there.  This process will save you some money for sure but will also simplify your life just a little more.

Create a New Normal

Cutting expenses is all well and good, but how can we use our adaptability to actually save money and supercharge our finances?

The most recent numbers put the US personal savings rate at 5.2%.  The savings rate for the Millennial generation is actually negative!  These are abysmal numbers and unless the average American is making millions of dollars a year, a 5% savings rate is just not going to cut it!  Your working career could end prematurely because of health issues or job loss, so making sure you have enough savings (and insurance) is key.

So what’s the answer?  Move to a cheaper area?  Cut your cable?  Stop drinking lattes?  All of these are viable solutions to keep more of your money, but probably are not the answer for most people.  The answer?

Create a new normal.

If you’ve only been saving 3% of your salary into your 401(k), log into your account and increase it to 6% and try to live on your new slightly less monthly earnings.  You will make less money than before obviously, but through our awesome ability of adaptation, you will most likely get used to it after a few weeks.

You just doubled your savings rate.

After a while, consider increasing your 401(k) deferral again, especially if you get a raise.  You might find increasing it too much is making things a little tight.

That’s okay.  You can back it down a little bit and increase it later when you’re ready.  More than likely you will end up at a much higher savings rate than you started with.

You can apply this to any almost any financial goal.  Want to pay off your student loans quicker?  Increase your payment to principal by $200 every month and see if you can handle it.  Want a larger emergency fund?  Try to set an automatic contribution to take $100 out of your checking account.

After getting used to your new financial reality, you can try to see if you can save some more.  Make it into a game.  And just like a game, you can push reset if things don’t seem to be going so well.

Most of us underestimate our ability to adapt to new and possibly harsh situations.  Try to create a new financial normal for yourself by cutting a service you don’t need or increasing your savings rate.  You’ll be surprised at how easily you can adapt.


Keeping Up to Date Can Cost You

Don't end up shaped like the number 7

Don’t end up shaped like the number 7

Most of us will not admit it, but we know what FOMO means (Fear Of Missing Out).  Not only do most of us know what it means, we probably fall prey to it from time to time, especially in our current era of social media hyper consumption.

There was actually a time when we had to call someone to find out when a plane would leave.  That just sounds barbaric.  Now we can get up to the minute (second? millisecond?) flight information, sports scores and weather reports.  There is nothing the world can hide from us!

This constant state of connection also translates into the financial world.  We can get up to the second stocks reports on any company, and trades are performed almost continuously.  While this can seem exciting and adrenaline pumping, it can also lead you to unwittingly destroy your finances.

Get Off Your Phone Dad

Smartphones come preloaded with a “stocks” app that gives you up to the second numbers on the major indices and any individual stocks you choose. The problem is that humans are emotional beings, and seeing that line go lower than it was earlier in the day can produce feelings of anxiety that make us want to reach for the panic button and sell.

If we’re investing for things that are decades away, daily fluctuations in the market shouldn’t faze us in the least bit.  But they do.  So removing ourselves from constantly having to look at prices is the only way to go.

It’s also important to remember that stocks appreciate an average of 8% per year, but if you focus on daily fluctuations and react to news of the latest downturn, you will miss those great returns.

This is not to say we should be totally oblivious to our investment performance.  I personally like to take a look every 3 months to readjust my allocation back to where it should be and just check up on the numbers.

Notice I said every 3 months and not every 3 minutes. That’s because daily fluctuations tell you next to nothing, and are only giving you one piece of a thousand piece puzzle. Figuring out where all these pieces of the puzzle go and formulating your long term investment plan is something you need to do.

The other important thing to remember is that the markets will go up and they will go down. That’s just what they do.  So a sudden downturn should not surprise you.  In some cases a downturn could be just what the doctor ordered because you can buy shares for less than you could before.  That will get you on the rocket ship to big returns once the next upswing occurs.

Not only are equities cheaper during a downturn, but dividends can get a little better in some cases as well.  That should help lessen the impact of any negative returns.  Just remember to re-invest those dividends right away for maximum compounding.

While having all the information the markets have to offer available at your fingertips seems like a technological breakthrough, just looking at it for the sake of consuming information can be very detrimental to your returns.

Keep a cool head and do whatever it takes to stop you from pulling the trigger.  If that means turning off the computer for a bit or chatting with your financial advisor, then that’s what you’ll have to do.  Taking advantage of the ups as well as the downs is an essential characteristic for any successful investor.


How I Increased My Net Worth by $70K with One Click!

Where have you been all my life??!!

Where have you been all my life??!!

It has been a long time since I wrote about net worth (2 years!!).

Looking back at that awkwardly written article, my views on net worth have changed a little since then and I started doing something big when it comes to my own net worth: actually tracking it!

Automatic or Manual?

Tracking your net worth is important because it gives you a look at how you’re doing with your finances over the long term.  Just like any business wants to see that profits chart trending upward over time, you want to see your net worth trending up too.

I’ve checked in on my net worth from time to time, but never as a regular exercise where I could actually gain some useful information from.  I started tracking it regularly a year or so ago.

Many bloggers recommend using websites like Mint and Personal Capital to track their expenses and net worth.  With these sites you link your accounts (checking, savings, loans etc) and they will give you one handy place to look at your income, expenses net worth.

While both of these websites are good in their own ways, they ultimately didn’t do it for me when it came to tracking net worth.

I gave up Mint a few years ago because it was becoming a chore to properly categorize all my transactions and it wouldn’t automatically update some of my student loan accounts.

I then switched to Personal Capital and have actually been using it for a couple of years to track my net worth and it worked great.  But again there was an issue with some accounts not updating and it wasn’t able to link to one of my student loan accounts.

So then I took the (relatively) drastic step of figuring out my net worth by hand.  Or by keyboard.  And it has made all the difference in the world.  While logging into my various accounts and noting down the net worth is more time consuming than just having a robot do it, I do find some advantages from manually calculating my net worth:

  • It gives me a better overall impression of my financial situation.
  • I can pick up any mistakes.  Since doing manual entry 3 months ago, I have found a checking to savings transfer I forgot to make and a transfer issue with my 401(k).
  • I don’t feel compelled to check my net worth often.  Because it takes some time to do this, I simply dedicate one day per month to figuring out my net worth, which I feel gives me a good picture of my finances.  When I was doing my net worth with Personal Capital, I would find myself wanting to check it every week or so, which is an exercise in futility.
  • It just feels satisfying typing numbers in a spreadsheet and seeing where you stand.  You should try it sometimes.

Another Change

So now that I have extolled the virtues of manually calculating my net worth, what’s all this about increasing my net worth by $70K with one click?  It’s pretty simple.

My definition of net worth changed.

For the longest time, I never really considered home equity as part of a net worth calculation.  I strictly thought of net worth as the difference between money you have in any type of account and any outstanding debts.

I’m not really sure why I never factored in home equity.  I guess I thought because a home can be difficult to sell and equity is so illiquid, it doesn’t need to be part of my calculation.

But you could say my time as a homeowner has “matured” me.  I’ve been a homeowner for 3 years now, but only recently did I start including my home value and mortgage as part of my net worth.  To be honest, a home is more liquid than my 401(k), since I can’t really touch my retirement money until about age 60.

And once I included my home value as an asset and my outstanding mortgage as a debt, my net worth shot up by about $70,000 and finally brought it into the positive range.  Take that student loans!


-Tracking my net worth manually once a month has been a very enlightening and fulfilling task compared to having a computer calculate it.  I will keep up this practice for as long as I can to get a better idea of where my finances are going (hopefully up!!)

-Net worth is your assets minus liabilities.  I’ve decided to include my home value and outstanding mortgage in that equation, but you might not want to.

I’ve seen people include their cars and furniture in their net worth, but I don’t think I’d ever do that.  Technically, you can sell your body (and your soul) for a lot of money, so should you include that as well?  I’m satisfied with just including my house and mortgage at the moment.

-There are tons of great net worth programs and spreadsheets out there.  I got mine from a finance blog which I can’t remember for the life of me, but just search around and find a method that works for you.

-Net worth is an important number, but it’s not as important as making sure it’s trending up over time instead of down.


Where to Stick Your Bonus Paycheck


What if I told you that if you’re an employee, you most likely get a bonus twice a year?

What if I told you that you get this bonus without doing any extra work?

And what if I told you, that you can use this bonus to take a nice bite out of any debt you may have or just give a little extra padding to your savings?

You would think that I’m crazy to promise such a thing, but all you have to do is look at the calendar.

There are 52 weeks in the year, which means that people who get paid bi weekly will receive 26 checks throughout the year. But if you divide 26 checks by 12 months, you get 2.167, not 2.

So what this all means is that during 10 months of the year, you get paid twice.  But during the other two months, you get paid thrice!  That’s right, you get an extra paycheck twice a year.

Why is this important?

MINDSET.  When determining their budget or deciding to see if they can afford a service, most people assume they get paid twice a month and calculate from there.  This is just how people are wired nowadays.  This can be a good thing or bad thing depending on how it’s used.

But the purpose of this post is not to discuss the pros and cons of being in a monthly payment mindset.  The point is that if you are in that mindset, you get an extra paycheck twice a year without fail.  But the important thing is to actively decide to DO something with that extra money.

The worst possible thing you can do with that extra paycheck is to just let it sit in your checking account and have absolutely no plan on how to use it.  I’m assuming this is what most people do, because most people have very little awareness of their money is going.

If you just let it sit in your checking account, it will most likely get spent on something you don’t need.  Best case scenario, the money just sits there and doesn’t do anything to further your financial well being.

So what SHOULD you do with this money?  This is something to really think about because this can potentially be a life changing decision.

Here is a little cheat sheet to get you started.  Everyone has different goals and life situations so this may not apply to you word for word, but I feel this is a good way to figure out where to put that extra money:

1.  Pay off family and friends.  Owing people money feels really bad.  But owing family or friends money should feel even worse.  If you borrowed money from a family member and there was no mention of you paying it back, pay them back anyway.  Resentment can build if these debts linger for too long.  These relationships are too valuable to lose and can be difficult to repair.  Use that extra paycheck and take care of that debt once and for all.

2.  Pay off any high interest debt.  No matter what your goals are, keeping around any high interest debt will ensure that you reach those goals as slowly as possible.  Some people don’t feel comfortable with having any debt at all, but I’m okay with having some lower interest debts that don’t stretch you financially.

I classify “high interest debt” as anything with an interest rate above 6%.  So this definitely includes credit card debt and any other type of consumer debt.  It can also include auto loans and student loans depending on your situation.  Make sure the payment goes entirely towards the principal amount.  I’ve dealt with sneaky companies that will apply the payment towards any interest owed first, which does nothing in paying off the balance.

3.  Pad your emergency fund.  I firmly believe that having a healthy emergency fund will help you avoid almost any financial catastrophe.  Some recommend having 3 months of expenses, while others recommend having up to a year’s worth of expenses.  Everyone has different life circumstances and dispositions, but if your emergency fund is not where you would like it to be, just stick your bonus paycheck in your savings account.

While savings accounts don’t generate a whole lot of income, that’s not their purpose anyway.  That money is there in case of an unexpected expense that you can’t cover with your normal cash flow.  Keeping your emergency fund healthy is as important a financial goal as any other.

4.  Increase retirement contributions.  If you don’t have any financial “fires” to put out, it’s time to focus on retirement savings.  Retirement can seem worlds away for most young professionals and millennials, but it is imperative to keep contributing to your retirement accounts because you have time on your side.

Time allows your retirement accounts to grow exponentially, and contributing consistently early on in your career will help provide the foundation for massive growth.  So when you get that extra paycheck, consider increasing your 401(k) contribution or just transfer the money right away to an IRA or brokerage account.  Needless to say, your future self will thank you.

5.  Invest in yourself.  Making an investment in yourself can mean many things.  It could mean taking time out of your day to read or practice a skill.  It could mean networking with influential people in your field.  It can also mean spending some money to buy a product or education that will increase your long term earnings.

Daily improvement should be a a constant goal for everybody, but if that nice little bonus check can cover the cost of tuition or help you buy a product or service that will make you lots of money potentially, then that’s where the money should go.  This is where creativity and consistent hard work come into play in determining how lucrative this investment could be for you.

There aren’t many times you can get “free” money.  But during 2 months out of the year, you can get pretty close by getting an extra bi weekly paycheck.  As with any type of new earnings, try to stretch those dollars are far as they can go in meeting your financial goals.


The ONE Decision that Will Ensure Financial Success

How’s that for some clickbait??

But in this case, it’s actually true.  And I have a study to back it up.

Fidelity conducted their annual Couples Study, which asked around 1,000 couples various questions regarding their finances.  And they concluded that there is indeed one thing that will give couples the best chance of financial success.

But before I make the big reveal, here are some interesting findings from the study:

  • You make HOW much?!  Fidelity asked couples if they feel they communicate very well with each other when it comes to finances.  72% said they did.  But when asked the simple question of how much they think their partner actually makes, four in ten didn’t get it right.  And a good portion of them were way off.  It’s kind of like how everyone thinks they are an above average driver, which is literally impossible.
  • Almost half of the couples questioned didn’t know how much money they would need to save in order to maintain their current lifestyle during retirement.  While this isn’t too surprising given that most people are clueless when it comes to their personal finances, what surprised me is that the majority of this uninformed group consists of Baby Boomers, many who are going to retire in a few years!  Now that’s dangerously ignorant.
  • Worrywarts.  It seems we are a very anxious and worried populace.  About 75% of the respondents said they were worried about health care costs in retirement (did anybody say HSA?).  And over half said that they are worried about outliving their money.  So half of the people in the country are worried that they will die penniless.  That’s a problem.

That’s a lot of bad news.  But there is hope.  There ONE thing that can ensure a successful transition into retirement and produce less anxiety about the whole thing:

Drumroll please…….

Have a plan.

The study showed that those who had a plan for their retirement were way ahead of their counterparts with no plan, and felt a lot better about the whole idea of retirement.

Now while having a plan is indeed just one thing, it has a lot of different components.  Having a good plan will give you and your family the best chance to earn and grow money while keeping it safe along the way.  This requires a lot of moving parts.

Fidelity lists a few things to help get started with your plan, such as goal setting, starting your emergency fund and setting up an estate plan.  These are all great things, but here are what I think are the most important things to do when forming the financial roadmap for the rest of your life:

Make a debt repayment plan.  To me, this means getting rid of all high interest debt (anything over a 10% interest rate) like credit cards ASAP, and then prioritize paying off your debt with the next highest interest rate.  This doesn’t mean focus on getting rid of all debt before you do anything else.  That would be a short sighted decision that will possibly cost you money at the end of the day.  Student loans and mortgage debt, for example, can have low interest rates along with potential tax deductions, so it may not be a priority to pay those off right away.

The fact is, being stuck in high interest debt will hamper all of your other financial goals.  So it’s important to get rid of those debts first and make a plan to pay off the rest.

Get your spending in order.  I don’t currently use a formal budget, but I did before and it was very helpful in finding out where our money was exactly going.  It’s surprising when you see the transactions staring you right in the face.  We decided to cut down or get rid of the things we were spending our money on that we really didn’t want to, and that freed up a lot of money for investing and paying down debt.

There is always extra money to be found by using a budget.  This money can then be used to supercharge your other financial goals.  But it will never be found unless you track your spending, so it’s a good exercise to do every so often.

Find ways to increase income.  Once your debt repayment and spending are in place, focus on finding ways to increase income.  Cutting expenses is important but it doesn’t require much imagination and can only go so far.  The main ways to increase your income are getting a raise at your current job, start some side jobs/businesses or work hard to grow a full time business.  Within these three methods, however, you can get very creative.

Creating new streams of income takes some work building a foundation which won’t make you much money initially, but hopefully will provide solid income in the future.

Finding new avenues of income also serves as a form of financial protection.  If someone just relied on their primary job for their income and happened to lose that job, they would be in a very tough spot.  But if you lose your job while having other streams of income, you can just ramp up work on those streams and maybe even eclipse your previous income.

I agree 100% that having a plan is the path to financial success for couples and everybody else.  It will allow you to optimize your financial goals by making sure money is going where it needs to be.  How you get that plan is different for everybody.

Fidelity is obviously looking for customers to sign up for a plan with them, and many people would feel more comfortable working with a financial adviser to set up a blueprint.  But I believe anyone can do some research and figure out most of their plan and talk to an adviser to fill in some gaps if needed.

The vital thing is to set up a plan, because if you don’t, you’ll likely end up somewhere you don’t want to be.

Fidelity Couples Study


Death by a Thousand Swipes


Surprised it’s not made in China.

Humans are incredibly adaptable creatures, especially when it comes to money.  If we only have a little bit, we can make do and find ways to survive.  The median household income in the United States is about $51,000.  For those in the upper class, it is almost unimaginable to be able to live on that type of income.  But it is being done by thousands of families all over the country, even if they may be living on the edge financially (paycheck to paycheck).

On the other end of the spectrum, you have athletes and celebrities who make millions upon millions of dollars and still manage to lose it all when the money stops rolling in.  While most people won’t weep at someone who blew millions of dollars, they can have the same condition as a family living on median household income: putting themselves on the financial edge by living a paycheck to paycheck lifestyle.

 Self Inflicted Wounds

So what does death by a thousand swipes have to do with anything?  Death by a thousand cuts refers to a particularly gruesome form of capital punishment practiced in ancient China.  The convicted criminal would be tied to a wooden stake and would have numerous small cuts inflicted upon them until they died.  It was a form of torture/execution that was eventually banned.

Death by a thousand swipes then is when someone slowly and methodically destroys their finances by making many little purchases that add up to their financial demise.  Making one or two purchases doesn’t result in anything serious, but they build up and can eventually kill your financial life.

(Tangent:  With all this new financial technology coming out, what if there was an app that would shock a person every time they swiped their credit card?  I think a cut for each swipe may be a little too much.  But that would definitely keep people from overspending!)

While not as sadistic as the literal from of torture, death by a thousand swipes is equally deadly on your finances.  And it can afflict everybody from the average family of four to the million dollar athlete (Vin Baker for instance).  It can be something as simple as eating out way too much or having one too many Ferraris in the driveway.

The Cure

Financial death by a thousand swipes has a pretty easy fix.  It’s a 2 step process that sounds easy but takes discipline and some life hacking to pull off.

First step is to let the cuts you already have heal up.  This means that you acknowledge that you made some possibly dumb purchases, but you’re not going to make them anymore.  And you might have to trick yourself into doing this.  If your major vice is grabbing coffee twice a day from the local coffee shop on your way to work, take a different route to work.  Overspending is literally an addiction, and after a few days of withdrawal, you should be able to control it.  Whatever it takes to keep you from making those unnecessary purchases and dying a slow and painful financial death.

After you wean yourself off of the mindless spending, the second step is easy.  And that is to pay yourself first and always.  Notice I didn’t say start a budget.  I have nothing against starting a budget, but if you automatically skim 10% of your take home pay off the top and put it in a savings or money market account, budgeting doesn’t become a big deal.  And since you hopefully ended your spending addiction in step 1, there is little chance you will spend more than you need to.

With these two steps, conquering the sources of your unnecessary spending and paying yourself off the top, you can dig yourself out of the paycheck to paycheck lifestyle in no time.  This will open up opportunities to do things that can super charge your journey to financial independence such as paying off debt quickly or increasing your investment contributions.


When Lifestyle Inflation is A-Okay

Don’t spend it all in one place.

What to do when your business revenue is going up or you finally get that promotion you’ve been angling for?  Most people will use that newfound money to go on a nice trip or take the family out to dinner.  Others will stick the extra money into a savings account or pay off some outstanding debts they may have.  And there are those who will use that new high income to inflate their lifestyle (appropriately called lifestyle inflation) by buying houses which are bigger than they can afford or cars that are just a step above their pay grade.

Ask any financial expert about lifestyle inflation and they will tell you where you can stick your inflated lifestyle.  It is generally looked down upon in the financial community (including my own little community here).  If you tell me you just got a 10% raise, I will most likely ask you to increase your debt payments by 10%, increase your investment contributions by 10%, or some combination of the two.  This is usually awesome financial advice that will get you a lot closer to financial freedom.

But financial advice is usually not so black and white (or shouldn’t be anyway).  This got me thinking, what are some things to spend new money on that can bring value to your life beyond  paying off your debts and investing your money?  Here is a list of things I thought of:

Vacation:  As I mentioned before many people will use a raise as an excuse to go on a vacation.  I’m actually fine with that as long as it doesn’t become an excuse to go on an expensive vacation year after year.  We need a little break now and then, and a one time vacation splurge can help us recharge and refocus.

House Cleaning:  Okay, just hear me out.  Maid service is usually the first thing to hit the chopping block when expenses are being cut, but there can be some value in it for some.  It’s all about opportunity cost and peace of mind.  Most people love coming home to a clean house.  If things are dirty or out of place, it can be a distraction.  But if outsourcing that job to a cleaning service will provide peace of mind AND give you time to do something of personal value, then I think it can be justified.

Improve your skills:  Skills can be improved to increase money and/or time.  Taking some classes to improve your skills could be well worth it in terms of return on investment.

Network:  Conferences can be expensive, but they can be extremely motivating and lucrative.  They usually have great speakers and influential leaders in attendance, so there are lots of opportunities to get ahead.  But it’s important to get the most out of a conference and not be the guy sitting by himself all weekend eating from the buffet every chance he gets.  The Muse wrote a great article on things to remember when attending a conference.

On a personal note, one short conversation I had at a conference allowed me to get a promotion at work.  I had expressed some interest in the position and provided some ideas.  A few months later the position unexpectedly opened up, and my name was the first one on the list as a potential replacement.  All because of one little conversation.  So use your time at conferences and networking events as efficiently as you can.

Gym membership:  When January 1st rolls around, gym parking lots are full and and clubs are filled with lots of people lifting things and running in place.  After a couple of months, most of those new people aren’t there anymore.  If you’re one of those people that signs up for a gym and doesn’t show up, don’t bother spending money on a membership.  But if you are self motivated enough to incorporate a cardio or weight training program into your life, a gym membership can be a good value.  Monthly prices vary, but most good gyms have rates around $40-50/month, which can be valuable if going to the gym is helpful to your health and sanity.

I typically wouldn’t recommend doing anything other than investing or debt payoff with any type of raise.  But there is no one size fits all rule, and if you can create time or money by spending your raise on one of these things, then that may be the best use of your extra money.

What are some things you spend money on that bring extra value to your life?