This is a question I get all the time. What is financial coaching? I like to explain financial coaching by comparing it to a familiar dynamic of a sports coach. What does a sports coach do?
Let’s start with the mindset. A sports coach wants to win and wants every player he or she coaches to reach their potential. To win, the coach keeps a positive and encouraging mindset while finding ways to challenge each player individually. What does a coach work on with a player? It depends upon that player’s situation and position. In football it would make little sense for a defensive line coach to work on punting or passing with a defensive end. Those are not skills a defensive player needs. Similarly, the quarterback really doesn’t need to spend time kicking field goals. Instead, a quarterback coach will work on drills particular to that position, so passing drills would be part of a workout. A coach also works with a player based on his or her particular needs. A coach might help one quarterback learn how to read a defense while helping another quarterback improve mechanics of his throwing motion. The differences in the plan for each player are tailored to the needs of each player. The coach wants to help the player grow and improve, so the plan is as individual as the person.
Financial coaching follows the same approach. There is not a one size fits all template. For a young couple in their twenties, the coaching might include financial planning for children’s college funds, counsel on paying off student loans, and starting to understand some investing basics. If two couples of the same age have different circumstances – say a single nurse compared to a husband and wife dentist team – then the coaching would be as different as the people, their circumstances, and their goals. Just in the sports world, if a player is new to the sport, it would be appropriate to cover the basic rules and philosophies around the sport.
The same concept carries over to the financial world. If someone is not accustomed to handling money, like a new college grad or a widow whose husband managed their money, a financial coach should lean in to the basics and help these folks understand money management concepts. Budgeting, sinking funds, and planning for bills become important topics.
For those who might be more experienced in handling money, there could still be specific problem areas or hot spots. Take Carl and Ellie for example. The sweet couple from the movie “Up” were always saving for a trip to Paradise Falls when an unexpected expense would arise prompting them to repeatedly break their trip money jar to handle the emergency.
Carl & Ellie needed an emergency fund
A financial coach could work with Carl and Ellie on a strategy for creating a separate and larger emergency fund so their trip fund could stay intact when they have a flat tire or have a medical emergency. A teacher looking to afford a house but concerned that she will never be able to save up for the down payment could benefit from a coach reviewing her budget and providing tips on auto drafting into a house fund account. A family wanting to start a college fund. A thirty-year old trying to figure out how to get rid of student loans. A family tired of living paycheck to paycheck. A widower unsure if his savings will last through his golden years. A 17-year-old wanting to go to college debt-free. Each of these people could benefit from the insight and personal focus a financial coach provides.
My role as a financial coach is to be firmly rooted in principles of personal finance. Sure, I know the math and can walk you through calculations and what if scenarios. The real value I bring is understanding that finances are personal. That means our conversations are confidential and tailored to your needs. That means I pay as much attention to where you are in life and to what your circumstances and goals are as I do to the math. It means one size does not fit all.
Tired of the “One Size Fits All” financial plan?
The foundational money principles that I teach are based in biblical truth and common sense. They are the same principles I have lived by all my life. They are the same values that undergird how I manage my own finances. While those principles are time-tested through countless generations, as a financial coach I help you apply those principles to your season in life and your circumstances. Just as a good sports coach helps a player improve their game so they can win in the end, that’s exactly what I do as a financial coach. I will help you learn to Manage Your Dollars With Common Sense.
To learn more about working with a financial coach, check out my website or blog. Initial consultations are always free to make sure I am a good fit for you as a financial coach before moving forward.
It’s time to buy a car. Or is it? Maybe you should lease a car. How much money should you borrow to finance a car and what are the best terms on a car loan? All good questions. To answer find our answers, we are going to take a look at some statistics about new cars and car buying in 2023. Then I’ll “do the math” with you to calculate what the best financial options are for purchasing a car. Buckle up. Here we go!
Average New Car Cost in 2023
Let’s start with some basic data. According to respected car guide Kelly Blue Book, in April 2023 the average new car price was $48,275. This means a lot of Americans are buying cars north of $50,000! That’s a lot of money. In fact, when you put that up against the average personal income in 2022 of $63,214 and the average household income of $87,864, how are people affording two cars much less one? That’s where car loans come into the picture. Bankrate tells us that theaverage new car loan monthly payment is $716. Here’s our first math: That’s $8,592 per year (per car!). Keep that number in mind for later.
Ok, what else do we know about new cars? You may have heard they go down in value the moment they leave the car lot. It’s a bit of a cruel joke, but it is true whether you are laughing or not. Cars can lose about 20% of their value the first year and roughly 15% a year for the next four years. Math calc #2. If you take the average new car price of $48,275 and slice 20% off of it, one year in your “new” car is worth $38,620. That is a drop of $9,655.
Losing Value Fast
Let’s put the picture in the frame here. Vehicles go down in value, so you paid just over $48,000 for something that is worth $38,600 a year later. Ouch! And you bought it on credit, so while it was dropping $804.58 of value per month, you were paying $716 for a depreciating asset (which is a fancy financial term for “something losing value”). Double ouch! Anything that loses value faster than you can pay for it is not an investment. Yes, a collector’s prized sports car might increase in value, but come on, the cars that people actually drive every day all decrease in value. Don’t be fooled by the pandemic and the crazy increase in used car prices for about a year. Thankfully, pandemics don’t come along every day to constrict the supply of new cars. You can trust that cars drop in value. It is a bad idea to finance something that loses value.
So back to your new car. You have had your car for one year and it is now worth 80% of what you paid for it. You’ll continue paying for your car for another 57 1/2 months on average. Yes, the average new car loan is 69.5 months. We’ll round down and say that making 69 payments of $716 means your payments will total $49,719.04. We know from Progressive that the average loan amount on a new car is $41,445 making the average down payment $6,830. When you add that down payment to your loan repayment, you spent $56,549.40 on a car that drops in value every year. Here is what the average car value looks like for the first four years:
Age of Car (Years)
Approximate Average Value
New
$48,275
1
$38,620
2
$32,827
3
$27,903
4
$23,718
Average drop in car value in the first four years.
That’s maddening! In four years that new car is worth half of what you paid for it. Because you chose to finance the car, you paid a premium above the value of the car that stretch across almost 6 years. Although it varies by car model, most people keep a car for 8.4 years giving you just about 2 1/2 years to drive with no car payment before taking on a car payment (a higher one, of course) again. That sounds like a bad dream to me. Every six years you pay $56,000 for a vehicle that keeps dropping in value.
Okay, a let’s take those numbers and have a little more math fun. If Average Joe does everything average, we will say he goes to college and has an average 42 year career. Assuming that the price of cars never goes up (ha!), our friend Joe will have bought 5.2 cars over this career and paid $306,759.20 for them.
That sounds terrible. So what alternatives are there to buying a car on credit? You can lease a car or pay cash. Let’s examine leasing a car first.
Leasing a Vehicle
Buying a new car is too expensive, so hey, why not just lease it? Put bluntly, leasing is the most expensive way to own a vehicle. There are a few reasons for this. Fees, new car depreciation, and more fees.
When you lease a car, you are paying for a few things up front. There are expenses that are common to buying and leasing like a down payment, taxes, title, license and registration, and often a documentation fee. There are also expenses that are unique to a lease agreement like an acquisition fee and rent fee. Rent charge is essentially the interest you pay rolled into the terms of the lease. Want to know the interest rate on your lease? Good luck. Dealers are not required by law to disclose the rate in the paperwork. There is also the depreciation and amortization payment. Remember how new cars have the largest drop in value in the first few years? Guess who pays for every penny of that in a lease? If you said “you” then you are a fantastic guesser. You pay the upfront costs AND the rent fees AND the depreciation.
But wait! There’s more!
No lease agreement would be complete without fees on the back end of the lease. Most lease agreements have a limit on the miles you can drive during the agreement, so if you live in Texas you might want to think twice about that annual road trip to see Aunt Susie in Washington. Exceeding the mileage means you get to pay the excessive wear fee which might be something like 25 cents per mile.
Math time!
If a lease agreement allows 36,000 miles over three years (which is pretty typical in a lease), anything over that amount turns every road into a toll road at $.25/mile. That limits your driving to 12,000 miles per year without extra charges. The Federal Highway Administration tells us that the average driver puts 13,476 miles on a car each year. If you hit that average exactly each year for three years you would drive your new leased car 40,428 miles before the end of the three-year lease. That’s 4,428 miles of excessive wear costing you another $1,107 in fees when you return the vehicle to the dealer.
And speaking of returning your vehicle, if you choose to return the leased vehicle at the end of the lease term you may pay a disposition fee for the dealer to clean and ready the car for resale. If you choose to keep the car, you have to pay the full residual value of the car, and you can bet the dealer was generous — in their favor — when setting the price. No haggling, take it or leave it.
One of your best wealth-building tools is your income, and one of the hidden costs of financing a car or leasing it is diverting your income from saving and investing to payments. The quicker you can make full use of your income by not having payments, the faster you build wealth. Having a perpetual lease or car payment will rob your retirement to pay for your depreciating car.
What options are left?
Paying Cash for a Vehicle
No one pays cash for a car! Well, that’s not true. Following a simple pattern, you can always pay cash for a vehicle, saving tens of thousands of dollars of interest payments over your lifetime. Here’s how it works:
Start with an affordable used car. Your first car should not be your dream car. Buy a reliable used car that you can afford. Used? Why? Let someone else pay for the steep depreciation for the first 2-4 years. Cars on the whole last longer than those made years ago, so finding a high mileage used car from high-quality car makers like Honda and Toyota will still give you plenty of miles to drive. Our example car that cost $48,275 new was only worth $23,718 four years later which is over 50% off that new car price tag. Dealers are going to mark that up to make a profit, but you can certainly find used Hondas and Toyota’s for less than $23,000 that you can drive for a decade or more after you buy it. If you don’t have the money to pay cash for your first car, either wait and save up or lower your expectations on the type of car you’ll buy. There is no such thing as a “forever car” so look in a price range you can afford. Your patience will pay off for you later.
Pay yourself a car payment. If you took out a loan for your car, pay it back quickly and then go to this step. If you didn’t need a loan, go directly to this step of paying yourself. Set up a monthly transfer from your checking account to a special high-yield savings account. That transfer should be the amount of a monthly car payment. Yes, you are paying a car payment to yourself in advance. Once you pay yourself year after year, you will have cash in your savings account earmarked for your next car purchase. This will allow you to buy your next car with cash.
Upgrade to your next car with cash. When you have enough money to pay cash for your next car, do. Use the cash to upgrade to a nicer car or use it to replace your car when the maintenance on your current car starts to exceed the value of your car.
Repeat. Now that you have your second car and have sold your first car, continue to pay yourself payments. Repeating this method creates a cycle where you never have to finance a car. This will save you tens of thousands of dollars over a 50-60 year span.
How do car dealers make their money? Selling cars, right? Sort of. Car dealerships make more money financing vehicles and servicing vehicles than they do selling vehicles. To put that into perspective, next time you visit a dealer, think of them as a bank and a car repair shop. Essentially, that’s what they are and they sell cars to feed those two lucrative businesses.
PRO TIP
There are two ways to pay your hand when buying a vehicle for cash:
Option 1 – The first approach is to research the value of the car including dealer cost so you know how much they will make on the sale of the car. Consumer Reports offers a service that will provide you that information for a fee. You can then contact multiple dealers and explain the exact vehicle you want and the price you are willing to pay. Give them a deadline to respond and then wait to see what happens. As long as you offer a reasonable price and build in some profit for the dealer, you stand a good chance of getting the car without the haggling.
Option 2 – Go to the dealer and follow the normal process, but don’t disclose that you will be paying cash until you have an agreement in writing on a price. Why? The dealer expects most customers to finance a vehicle, so they may be willing to accept a lower price up front assuming they will make money off the financing. This could secure a lower price for you. If they ask how you are paying for the car before settling on a price, just tell them that you don’t want to talk about payment until you agree on a price.
I have personally used the second approach, but I have seen both used successfully.
Summary
That wraps up this first in a series of Do The Math articles. To recap, cars drop in value, and you should avoid taking out a loan on anything that drops in value. Financing a car will tie up cash that you could be using to invest of build your retirement. Leasing is the most expensive way to drive a vehicle, so avoid it. Using a simple plan of paying yourself payments in advance will let you build a fund to buy a car for cash, saving you thousands of dollars in interest payments.
Armed with this knowledge, I wish you well as you look at buying your next car. For more insights like this or to up your personal financial game, consider working with a financial coach. To set up a free initial consultation, visit KJmoneycoach.com. I’ll be happy to show you how to Manage Your Dollars with Common Sense.
High school is an exciting time of life when lifelong friends can be made and when children start to branch out on their own. They have their own schedules, often a boatload of activities, and they start looking ahead to what is next. Trade school? College? Work? For those looking at education after high school, the question often arises about how to pay for that next step. It is never too late to start, but let’s put ourselves in the shoes of a high school Sophomore about to wrap up the year looking at college as the next step. Half of high school is in the rearview mirror and half lies ahead.
Now what?
If your goal is to make it through college with no debt, here are some tips to make that debt-free college experience possible.
Select an Affordable College. It may seem really obvious, but it is easy to overlook this very important selection. If Aunt Sue went to GottaGoHere University, and you’d be a disappointment if you didn’t go there, too, it is easy to get caught up in the hoopla surrounding where you go to school. Selecting a college you can afford is the number one way to save money on a good education. Just like you shouldn’t go Ferrari shopping on a Toyota budget, the difference between college tuition at different institutions is astounding.
Using numbers from 2020-2021 provided by the US Department of Education, let’s walk through a few options to illustrate the importance of school choice. Dallas, Richardson, and Plano are three towns in North Texas that border each other and provide us with a nice tale of three colleges. SMU in Dallas has an annual tuition price tag of $60,236. That’s more than Harvard and Yale by the way. University of Texas at Dallas is 13 miles away and has an annual tuition of $14,564, a figure that shaves about 76% of the cost off that tuition bill. But wait, there’s more (or in this case, less). Another 9 miles from UT-Dallas there sits the Plano campus of Collin College with an annual tuition cost of $3,094. Collin College is almost 80% off the UT-Dallas cost and 95% off the SMU price. You could pay for four-year degrees for five people at Collin College for about the same price as one year of SMU for one person. You could live in Dallas, Plano, or Richardson and easily attend any of these three colleges, and assuming no increases in the cost of tuition (yeah, right!), you would pay a four-year total of $240,944 at SMU, $58,256 for UT-Dallas, and $12,376 for Collin College. That’s the difference between buying a house, a fully-loaded new car, or a decent used car. All three of them can get you a diploma, but at least one of these options might also leave you broke.
I know it is hard to convince a high school student that college choice should factor in what is affordable, not just how pretty the campus is, how good the football team is, or where friends are headed. I’m telling you, making sure the college fits your budget – just like every other expense in life – will save you a big financial headache later in life. Don’t believe me? When was the last time you asked a doctor where he or she went to school? I care about a doctor’s experience and expertise, but I have never once rejected a doctor because of an alma mater. High school students are sold the idea that your school choice defines your future. I went to college with motivated folks who did well, and unmotivated folks who flunked. Success is far more about the individual than the school, so choose an option you can afford.
Save Early, Save Often. 529 Plans are a great way to save for college. Prepaid plans are another path to college savings. Typically, they lag behind returns from good 529 Plans, but we used a prepaid plan for one of our daughters and the returns exactly mirrored the S&P 500 over that 18-year span. 529 Plans grow your investment tax-free if the money is used for qualified educational expenses. You can also invest in mutual funds or exchange traded funds (ETFs) in a brokerage account on your own, but your gains will not be tax-free. Whatever route you choose, to maximize your growth, follow a few guidelines. First, look at the track record of the investments when selecting a 529 Plan. Avoid age-based plans which tend to provide lower returns. Plans with multiple options are best so you can move the money if returns get sluggish in the investment you choose. Second, you are not confined to investing in your home state’s plan. You can invest in any state plan. Utah has one of the better plans historically because of some good options and relatively low fees. This does not mean the money has to be used in the state of Utah or at Utah schools, but read the details of each plan you are considering to make sure the funds can be flexibly used. Third, invest as early as you can. The power of compound interest will grow the money more over a longer time, so the sooner you start investing the more potential growth you have. Finally, as you approach college age, you may want to move a portion of your funds to a more conservative investment to preserve the money you have. At age 8 a 25% decrease in the account is ugly, but you still have time to recover. At age 18, that same drop could mean you just lost a year of tuition payments with little time to rebound. As the high school sophomore in our example, I recommend parking any money in a high yield savings account to not risk losing money that is needed two years from now.
Scholarships, scholarships, scholarships! There are millions of scholarship dollars that go unclaimed each year simply because students didn’t know about the scholarships or didn’t take time to apply for them. Scholarships – even small ones – can add up and help move you toward the goal of a debt-free education. While submitting applications and writing essays may not seem like a fun way to spend time, applying for scholarships can provide a great hourly return on investment. For example, if a student took 2 hours applying for 20 different scholarships and was awarded one scholarship for $1,000 as a result, that is a $25/hr. return on investment. Most high school and college students won’t work in summer jobs paying that kind of hourly rate. Beware of scholarship scams, but if you stick with the reputable sites like Scholly you can find a number of scholarships that you qualify for without ever leaving your house. Your high school guidance counsellor should stay current on the latest scholarship opportunities, so seek out your counsellor for scholarships that might be closing their application process soon and ones with low application rates to increase your chances of getting the award. While a $10,000 scholarship may draw your attention, it will also typically have more applications than a $500 scholarship, but your odds of being awarded multiple smaller scholarships might be higher. There are also sites like RaiseMe that begin to offer college discounts in the form of “microscholarships” starting in 9th grade. Be careful not be get suckered in to a college you can’t afford based on scholarship money. Students who make completing scholarship applications their favorite hobby during their senior year may walk away with a lot more money toward college than the average fast-food worker could earn in an entire summer. Pro tip: There is nothing to restricting you from applying for scholarships and find other sources of income!
Get a Job! Dad and Sha-Na-Na will tell you to go find some gainful employment. You can work before you go off to school, you can work over winter and summer breaks, and you can work while at school. All of these will generate money to pay for tuition, fees, and other living expenses. Almost all colleges employee students on campus in jobs in computer labs, cafeterias, and as resident hall advisors. Some of these positions may come with reduced tuition or the ability to register for classes early on top of the paycheck. For example, for those students who land a resident advisor position, many universities provide free housing or free room and board which can save you thousands of dollars a semester. Campus jobs tend to have more flexible hours to work around the needs of students. Having income while working can actually help with life skills like time management and the need to focus. While you might be concerned that having a job in college will be detrimental, there are studies citing that quite the opposite is true. A Rutgers study of 160,000 students showed that students with jobs their first year of college make higher incomes after college, even when they don’t get a degree. A study from Georgetown University showed that students working up to 15 hours a week have better grades that their counterparts with no job, but students working more than 15 hours a week did see a drop in grades. Our example high school sophomore can work for two years of high school before heading off to college. Working a $12/hr. job for 15 hours a week for ten months (40 weeks) and 30 hours a week during 10 weeks of summer would earn our high schooler about $10,000 pear year. Over two years, that $20,000 could cover some or all of a college education (see Select An Affordable College).
Intern or Co-op. Getting a college internship or participating in a co-operative education program is a specific subset of getting a job. An internship is typically a semester long full-time job where you do a job that is relevant to your major. A co-op position is the same idea but often comes with a recurring commitment. That recurrence could be every other semester for two years for example which would yield a full year of work experience over a two-year period while still gaining a year of college credit. The advantage of a co-op or intern position is that they tend to pay fairly well, and many jobs are in a relevant field of study compared to job that might have you waiting tables or delivering food. While there is nothing wrong with any of those job options, interns get the added advantage of gaining valuable experience in their field prior to graduation. That experience could be a differentiator when it comes time to interview for full-time jobs. Interning is less likely in high school, but there are programs where high school students get experience in their field as early as high school through a self-directed study program. While these are typically unpaid positions, taking advantage of a work/study program in high school could give you a lag up on in internship or co-op position in college.
Ask Relatives. While you might not have a rich aunt or uncle, it is not uncommon that someone in the family highly values education and is willing to contribute to your learning after high school. Relatives can be a source of funds for your college experience. Be careful to weigh the pros and cons of accepting money from relatives. If that donation to your education comes with unreasonable strings attached aimed to control as much as help you, you may want to pass. Uncle Joe might have gone to Eastern Tech University, and he is willing to give you $1,000 toward college if you go there, too. The problem might be that old ETU costs twice as much as the college you are planning to attend. Don’t let the allure of free money cause you to make a bad financial decision.
JROTC / Future Military Service. Programs like the GI Bill and ROTC Scholarships will pay you to go to school. There are obligations of ROTC and future military service that go with the money, so read carefully to make sure what you are signing up for fits into your expectations at school. Also check on eligibility if a family member served in the military because some restrictions do apply to the GI Bill. JROTC and ROTC scholarships can be a great way to pay for a large portion of your college education. High school Junior ROTC does not come with an expectation of military service, so you can “try before you buy” in high school before making a more serious commitment in college.
The average student can work in high school, potentially get a little help from parents or a relative, apply and receive scholarship money, and select an affordable college. Using a combination of these approaches could get you a college degree debt free. If you are committed to a debt-free education and funding your education takes more than four years, your diploma doesn’t come with any footnote saying how long it took you to complete your degree program. If you need to take a semester off to build up a cash reserve to pay for school, that is a thoughtful way to approach paying for college.
Whatever your approach, know and believe that a debt-free college experience is possible by making intentional choices along the way.
You find yourself needing to stretch your dollars a little further each month to fight inflation, and you wonder where your paycheck has gone (and how it keeps disappearing so quickly!) You decide that maybe you’ll try something different. Maybe you’ll try…a budget! Yes, you are going to give it a go and drive into being more intentional about your spending.
Now what?
Before we get into budgeting mechanics, let’s talk about what a budget is and isn’t. A budget is simply a spending plan. It allows you to plan your spending ahead of time so you can be more deliberate about where your money goes. A budget is not a a set of rigid rules to constrict you, but rather boundaries to serve and protect you. Much the way the boundary for a child might be “don’t chase a ball into the street without first looking both ways” to protect them, a budget provides healthy boundaries to help you get the most out of your money. By working through your budget before a month begins, it allows you the freedom to prioritize your spending instead of emotionally spending as you go. It should be freeing not constricting.
Budget Basics
Here are some good mechanics to follow when building your first budget.
Do a monthly zero-based budget. A zero-based budget means you list your income at the top from all sources and work on your spending plan until you have accounted for every dollar of income for that month. By working on your budget until you have a place for each dollar to go, you will end up with zero dollars to allocate at the end of your budgeting process (thus “zero-based”). Build your budget prior to the start of the month so you are prepared with your spending plan on day one.
Find a method or tool that works for you and stick with it. You can use Excel or Google Sheet, a pencil and pad of paper, or an online tool like Mint or EveryDollar (my favorite). There are a lot of free tools out there. I like EveryDollar for its simple interface, its zero-based budgeting approach, and because it allows you to copy the previous month’s budget as a starter for next month saving a lot of time. Anyone can use the free version to create a monthly budget. There are advanced features that you can access from the paid version, but you can build and track a budget effectively without them. Whatever platform or tool you pick, commit to it for at least three months so you can focus on the budgeting and not on evaluating tools. Once you select a tool, you are ready for the nitty gritty of budgeting.
Budgeting Steps
List your income from all sources. If you are married with two incomes, have a side hustle, a rental property, or a tax refund coming your way, list all of those sources of income for the month at the top of your budget. Add up these sources and you have the limit on the money you can spend for the month.
List your basic expenses first. If you remember Maslow’s Hierarchy of needs from school, that is the basis of your budget. If you don’t remember it or wonder who Maslow is, don’t worry, you don’t need to know to budget well. Abraham Maslow was an American Psychologist said humans work to get their physical needs met first. Following that thinking, budget first for food (groceries, eating out), clothing (new clothes, dry cleaning), shelter (mortgage payment or rent, utilities like electricity, water, natural gas, house maintenance, homeowner’s insurance), and transportation (car payment, gasoline, tolls, car maintenance). With those basics in place first, you’ll make sure you can eat, sleep, keep the lights on, and go to work.
Prioritize the rest of your spending. With the basics covered, you can move on to other spending categories. Do you give money to a charity or your church? Write it down under a “giving” category with a line for each charity. Think through your month and pull up recent bills to see where you spend your money. Do you have kids in activities that require you to pay registration fees or expenses? Write it down under “Kids Expenses.” Do you have travel? Does someone you know have a birthday approaching and you want to buy a gift? Do you want to budget for your morning coffee before work? The great thing about a budget is you control it. If you love to go to the movies, go to sporting events, see plays in a local theatre, load up on your favorite hobby materials at a local craft store — it is all in bounds and up to you. The trick is to remember you are not in Congress, so you can only spend up to the amount of money you make each month, not a penny more. As long as you plan to spend within your income, how you allocate your money is up to you. At the end of this article, I have some suggested categories and a list of resources to help you think through the line items for your first budget. Take a look to help jog thoughts on where you need to allocate money in your budget.
Make adjustments. After you thing you have everything listed and are to zero dollars left for the month (yea!), you are likely to remember something you didn’t add in your budget. Ah, yes, the HOA fees are due. We forgot to budget for that trip to visit Aunt Carol at the end of the month. Or maybe you forgot to list that new streaming service you just signed up for last month. Whatever it is, go ahead and add it with the amount. Now you get to look through the rest of the budget to find enough money to get your bottom line down to zero again. You might decide to take $20 out of your restaurant money and $30 out of your grocery money to get that $50 line you forgot to add in the beginning for you babysitter you need once a month for your guys or girls night out. Whatever it is, expect that you will have a few forgotten items that you need to adjust for once you think you are done.
Follow your budget. You, yes you, put this budget together. It represents your thoughts and your priorities about where you need to spend your money. You took the time and effort to put the budget together, now take the time to make it effective by following it. Your budget is only as good as your ability to let it guide you through your month. If you take your budget and put it on a shelf and never look at it, it’s of no use to you. Do yourself a tremendous favor by looking at your budget on a regular basis, maybe every few days, and tracking your spending against it. Take it with you or check it before you head to the grocery store so you know how much money yo u have for this trip to the store. Use that advanced thinking and planning to spend within your budget for each category. Doing so provides the boundaries to keep you financially safe, which was your intention when you decided to start budgeting in the first place.
Track your spending. To track your spending, pull up your bank account online and record the transactions every few days under the proper spending category. Tools like the premium version of EveryDollar (subscription required which costs $79.99 annually as of this writing), will allow you to connect directly to your bank and pull in your expenses. Some even have a feature where they will “remember” your recurring expenses and know, or example, that your Chick-fil-a expenses go to your “Eating Out” category on your budget. This can be the most tedious part of the budget process. If you don’t have the patience or discipline to track every expense, it may be well worth the money to you to buy the premium version of EveryDollar or find a tool that connects directly to your bank and allows you to pull transactions into your budget.
Tips
If you are new to budgeting, here are a couple of tips that will help you as you get used to the budgeting process.
Access your previous month’s bank statement as you set your first budget. Looking through your online or paper transactions will help prompt you on the ways you spend your money. Using your statement and the categories below will help you make a solid first budget.
You won’t be good at budgeting the first month…or the second month. Most people find that things start to get easier in month three. If you missed a bill in your budget or a whole category, add it, rebalance your budget to get to zero, and move on to next month. You’ll naturally get better as you go.
Ready for some good news? The short-term payoff for all this work is found money. Most people find several hundred dollars of spending they can eliminate once they start budgeting. I recently helped a woman find over $1,000 a month when I guided her through the budget process. That’s real money, folks!
Budget Category List
This is not exhaustive, but it should be helpful in getting you started. There is nothing magic here. How you organize and group your expenses is up to you. I put car payment under debt, but it could also go under transportation. The important thing is to list all expenses and not spend more than you make.
Budget Category
Example Expenses
Housing
Mortgage, rent, HOA fees, property taxes (if not escrowed), home maintenance
You submitted your final payment and you are out of debt. Congratulations! That is truly an accomplishment worthy of celebration. You did it!
Now what?
For many people, paying off debt is a mountain they had to climb. It meant sacrificing current desires to pay for money borrowed in the past. It required learning how to squeeze money out of the budget to pay off debt faster and save on interest payments. When the debt is gone (yes!) there is a sense of newfound freedom. A weight has been lifted and a burden removed. Like a bird whose cage door has been flung open, there are now choices to be made, and determining where to start can be difficult.
Let me first acknowledge that every story is different. A lottery winner paying off a mortgage in one day and a teacher paying off a thirty-year mortgage after twenty years through extra principal payments each month are not the same journey. The first scenario involved a large influx of cash to pay off the house, while the other required a steady discipline of sacrificing monthly to become debt free. While both result in paying off the debt, the discipline built over the long haul established a financial muscle in the teacher that was not developed in the lottery winner. That doesn’t diminish that the lottery winner choosing to retire the debt (good call), but that does explain why we hear stories of lottery winners or people in highly paid professions filing bankruptcy. That hard-fought discipline will continue to serve our example teacher well.
What does any of this have to do with your next move after paying off your debt? Plenty. This article is assumes your journey was that of the teacher. You travelled the second path – paying off your debt through intentional sacrifice. In doing so, you have developed a financial discipline that you can now use to your advantage moving forward.
The temptation when your debts are paid is to letdown your guard and perhaps get a little sloppy financially. However, if you continue to use the financial muscles you have built, they will literally pay you dividends in the future. Consider the following steps:
Build an Emergency Fund. If you don’t already have a buffer between you and the next unexpected financial situation, build that buffer now. Take the money you were paying on your debt including any extra money you carved out of your budget each month and put it in a high-yield savings account. The obvious point of an emergency fund is to have money in case an emergency arises. It is the squirrel stashing away acorns knowing that winter is coming. For Christians, the emergency fund follows a biblical principle of saving and setting some of your provisions aside in case you need them later. Proverbs 21:20 in The Living Bible says “The wise man saves for the future, but the foolish man spends whatever he gets.” Having that financial buffer when life throws you a curve ball can mean the difference between a having a small hiccup and a going into a financial tailspin. A good rule of thumb is to have 3-6 months of expenses in your emergency fund. That tends to be enough money to handle many major expenses like an air conditioner that needs to be replaced or a water heater that broke. This money stash can also buy you some time to find work in the event of a job loss. The amount is up to you, but it’s the first place you should direct your money after you get out of debt.
Save for Retirement. In a recent study of millionaires, the biggest component of wealth building was retirement accounts. 80% of millionaires invested in an employer-sponsored 401(k) or a Roth IRA. These accounts don’t grow overnight, but they do showcase the power of consistent investment in the stock market over a long period of time. Using monthly auto drafts or withholding money from your paycheck to fund retirement investments can be a painless way of investing because it is money that you don’t have to handle in order to invest. Set it and forget it. Taking advantage of an employer match in a 401(k) plan is accepting free money, and who doesn’t want that? Putting away money now for your future allows you take advantage of what Albert Einstein called “the eighth wonder of the world,” compound interest. The more time you have, the greater the compounding effect and the more money your savings will produce.
Save for a House. Home prices rose swiftly during the pandemic years, but homeownership is still a key component to building wealth. Buying a house builds ownership known as equity in a real estate property. As you make mortgage payments, the equity in your home increases which serves as a “forced savings” for you. With each payment you are increasing your savings which you can eventually access when you sell your house. Historically, houses go up in value over time. The 25-year average appreciation for a house is 3.9% per year meaning you gain almost 4% per year in house value. After 20 years, the value of the house would double as your equity in the home increases. As a quick example of the value of home ownership, let’s say you bought a $200,000 home by paying a 20% down payment and taking out a $160,000 mortgage at 7% for 20 years. You would pay $160,000 in principal (the loan value) and $137,715 in interest. Yikes! That means you would pay $297,715 for a $200,000 home. But wait, there is some good news. In that 20 years since you bought the house, the value rose 3.9% per year and is now worth $413,738. Now you feel smart because you paid under $300,000 for a $413,738 asset. What a deal! Yes, there are some nice tax deductions for property taxes and mortgage interest, but the main benefit is the increase in the home value. Five years later if the value continues to rise at the same rate, your house would be worth $500,960! You got a 40% discount on that property and the deal gets better every year.
Save for Kids’ Education. Be it a technical degree, a college degree, trade school, or some other specialized training, it is a good idea to save money towards education beyond high school for your child(ren). If traditional school in not their forte, there are plenty of other options including online learning and trade schools. In case you think trade schools are not a viable option, plumbers make an average wage of $63,350 with no need for a 4-year degree. HVAC Engineers positions average just over $81,000 on ZipRecruiter, a position that is attainable with an Associates degree in many cases. Regardless of the path, saving for education now can help set the stage for a good career and can avoid costly student loan debt later. There are several options including 529 Plans, Coverdell Education Savings Accounts (ESA), prepaid tuition plans, and investing in a brokerage account. While the temptation may be to save for college before retirement out of love for your kids, remember that there are fewer options for retirement income and you’ll likely need a much larger amount than for you educating your children. There are other options to pay for that education – including your children helping pay their own school bills by working part-time – which is why I recommend retirement investing before saving for college.
Give. Giving is often overlooked when setting financial goals. When giving to a reputable charitable organization, that giving has a positive impact on the giver and the recipient. Giving – especially in secret – is one of life’s great pleasures. You get the chance to be a part of helping someone through your generosity. It feels good to give, and when you give money, you are recognizing two things. First, we recognize that life does not revolve around us. Holding what we have been given loosely and sharing it with others allows us to experience empathy and express hope and appreciation towards others. For Christians, giving to others reflects the belief that God owns everything and we are stewards of the resources God gives us. As God has blessed us, so should we use a portion of what we have to bless others. For those not following Christian beliefs, there are several benefits of giving such as happiness from doing good in the world, improved health, making social connections, and sparking giving in others. Giving produces gratitude and a generous heart which are two components of positive mental health. Giving can also help your wallet because there can be tax benefits to charitable giving, but developing a desire to give generously can be a fulfilling endeavor by itself.
Now that you are out of debt, make a pact with yourself to stay out of debt. Building an emergency fund will provide you a financial buffer, and saving for big goals like a house, retirement, and your child(ren)’s education can help you stay focused on making your money work for you. I excel in help people build and execute a financial plan to help you achieve you financial goals. To schedule a free consultation, click below to set up an free consultation.
When you were growing up, you likely spent some time talking with your friends about being a millionaire. Maybe the conversation was around what would do if you had a million dollars. The word “millionaire” for my generation conjures up images of Thurston Howell III, the wealthy tycoon from Gillian’s Island. Or Bill Gates. Or hundreds of other actors, athletes, or business leaders who made it big. The truth about the average millionaire is actually quite different. While the star football player and the A-list actress may be millionaires, the average millionaire in the United States looks shockingly ordinary. But don’t take my word for it. Instead, let’s take a peek at a 2019 study about millionaires and compare the statistics from that study to seven widely-held beliefs about millionaires.
Belief #1 – Wealthy people use debt in their favor to make more money.
Fact Check – Millionaires are less likely to carry debt compared to the general population. In a random sampling of 2,000 millionaires, only 6% carried credit card debt compared to 40% in the general population. Similarly, only 18% of millionaires have a car loan vs almost double that with 35% of the general population. The numbers were more dramatic with student loans (2% vs 22%) and loans from family and friends (1% vs 8%). The only debt percentages that were close between millionaires and the general population are business loans (2% for both groups), home equity loans (10% for millionaires and 9% for general population), and mortgages (30% vs 34%). The study suggests that millionaires engage in debt less often than the general population does. Almost two-thirds of millionaires have ever taken out a car loan compared to almost three-fourths of the general population (65% vs 73%). Millionaires avoid credit card and student loan debt with only 27% ever holding credit card debt (vs 66% of the general population) and 29% ever holding student loan debt (vs 47% of the general population). Those numbers seem to point out a general aversion to debt except for big purchases like a house and car.
For millionaires who go into debt, it appears they pay off their debt and stay out of debt. In the study, 70% of millionaires don’t have a mortgage, and 82% don’t have a car loan. The statistics point to a pattern of millionaires avoiding debt and paying off debt when it is incurred. Instead of using debt as a tool, debt is avoided, debunking the common belief that debt is a wealth-building tool.
Belief #2 – Most wealthy people come from wealthy families.
This belief hinges on our definition of “wealthy,” but let’s look at this in terms of income class. Millionaires in the study broke down their childhood economics this way:
Income Class
% Millionaires Households in Childhood
Lower Class
4%
Lower-Middle Class
27%
Middle Class
48%
Upper-Middle Class
19%
Upper Class
2%
Income Class of Millionaires’ Household During Childhood
If we define Upper-Middle Class and Upper Class America as “wealthy” then only 21% of current millionaires came from wealthy families. What we actually see is a nice bell curve that skews slightly toward the lower income levels. The stats show that millionaires are more likely to have come from a family below middle class (31%) than to have come from a family above middle class (21%). The majority of American millionaires came from middle class households or below (79%, in fact). Almost 8 out of 10 millionaires were not born or raised with a silver spoon in their mouths. That debunks belief #2.
Belief #3 – To become rich, you have to take big risks with your money.
Investing in and employer-sponsored 401(k) or a Roth IRA is the most commonly used wealth-building vehicle and was used by 80% of the millionaires in the study. While the investments inside of those vehicles could have more or less risk, 401(k) and IRA investments as a form of investing are not super risky. The next most popular vehicles are Exchange Traded Funds (ETFs), single stocks, traditional IRAs, and saving accounts. Again, the specific investments within the 401(k) or IRA would be the greatest measure of risk, but in general, investing in the stock market will yield positive returns. Since 1926 the S&P 500 has returned an average of 12.01% per year. That might seem surprising, especially when you consider the Great Depression and a 37% drop in 2008 are included in that average. Prior to 2022, that S&P 500 lifetime return was 12.33%. While there is risk in the market, it is hard to call IRA and 401(k) investing as “risky” investments. If the unproven cryptocurrency is what folks have in mind, that is not how the millionaires in the study made their money. Old-fashion retirement plans and savings accounts led the way and serve to debunk the high-risk myth about millionaires.
Belief #4 – The majority of millionaires inherited their money.
With a reported 79% of millionaires receiving no inheritance, that statistic alone debunks the belief that most millionaires inherit their money, but let’s dig in a little deeper. Of the 21% who did receive some type of inheritance, the percentages skew a little to the lower end but are split fairly evenly between $1 and over $1 million. 5% received under $100K and 3% received $1 million or more. Another 3% received an inheritance of between $500K – $1M. We can fairly say that the 6% of people inheriting $500K+ had a quicker path to millionaire status, but 6% is a good distance away from a majority of millionaires inheriting their money to become millionaires. To dig one shovelful deeper, 47% of millionaires had neither parent graduate from a trade school or college. Statistically, that means that the lifetime income of those individuals is lower than households where one or both parents graduated from a trade school or college. That would mean there is less potential money to leave as an inheritance. This further supports the idea that by and large, millionaires don’t inherit their wealth.
Belief #5 – You need a six-figure salary to become a millionaire in today’s economy.
A full 33% of millionaires never had a six-figure salary in all their working lives. That alone shows us that it is possible to become a millionaire on a five-figure income. Another related widely-held belief is that you have to be a doctor, lawyer, or company executive to be a millionaire. While the large income that accompanies some professions might be able to create wealth faster, the most common millionaire professions are Engineer, Accountant, Teacher, Manager, and Attorney. There is a decided white collar feel to the list and, yes, lawyer comes in at number five, but it is behind teacher at number three. In 2019 the national average elementary or middle school teacher salary was $53,800 according to the US Census Bureau. With the median household income being $69,021, it should be encouraging to know that an teacher paid on par with the national average can still become a millionaire with good financial discipline.
Belief #6 – Most millionaires have a million-dollar home.
The image of a Versailles garden surrounding a lavish pool on a large secluded plot of land with a mansion is an attractive one, and it is a fantasy image often associated with millionaires. Let’s see what happens when we fact check that against our millionaire study. According to the US Census Bureau, the average new home in the US is 2,660 square feet. The millionaire study showed that the average millionaire house is slightly smaller than that at 2,600 square feet. In the study, 65% of millionaires live in a house 2,999 square feet or less. While a well-constructed house of that size could certainly fetch a million-dollar price tag in some high-rent neighborhoods, 79% of American millionaires live in a neighborhood with the average household income of less than $100K. With the average US household income coming in at $69,021, we see that the majority of millionaires (51%) live in neighborhoods of $75K or less household income. Statistically, these neighborhoods are very average and don’t jump out as a statistic setting millionaire houses apart from the general population. Most millionaires live in areas in stark contrast to more affluent neighborhoods nationally. For the more posh example, Los Altos, CA on the western edge of Silicon Valley has a median household income of over $250,000, and the median household income is $234,427 for Highland Park, Texas. These are not the neighborhoods of the average millionaire. That’s a lot of numbers to read through, but they all point to this truth: most American millionaires live in average-sized houses in average neighborhoods, not high-income gated communities. That debunks the millionaires living in million-dollar mansions myth.
Belief #7 – You have to be lucky to get rich.
This belief is just as hard to debunk as it is to support. Let’s look at a cross-section of statistics about millionaires to see if we uncover any patterns. Most millionaires made good grades in school with 51% being “A students” and 35% being “B students.” That seems to favor being studious over lucky, but let’s press on for a better picture of the average millionaire. In school, 40% were in sports, 17% in band, and 22% were not an any extracurricular activities showing that most folks were active in some form. Education appears to play a role because 36% of millionaires have a 4-year college degree and 38% have a graduate-level degree. First-generation college graduates accounted for 46% of all millionaires. That desire for education shows initiative to get a degree and hard work and determination to see it through, but those qualities may also describe the 13% of millionaires who don’t have a college degree. Saving money is a habit for millionaires as 71% of them save at least 11% of their income every month. That sounds more like financial discipline than luck. For shopping habits, 34% of millionaires have shopped in a thrift store in the last year, 93% use coupons some or all of the time, and 85% of millionaires use a written shopping list and stick to it sometimes or always. The grocery budget of an average millionaire is $412/month which is under the average family grocery budget of $582/month. Restaurants take in only about $200/month of spending from the median millionaire which is $51 less than the average US household spends on eating out each month. These shopping and spending stats paint a picture of a frugal planner. We can’t say conclusively that luck did or did not play a part, but there is a pattern of intentional living that should not be ignored. Seeking opportunity through education, spending less, and saving more are hallmarks of today’s millionaire.
Conclusion
Why take the time to examine characteristics and habits of today’s millionaires? I’m a data nerd, so there is that bit of fun for me, but I also had a simple point in digging into the topic. It is not because we should hold up millionaires as holding some sort of better-than-the-rest-of-us status as people. Quite the opposite. Using the arbitrary standard of a million-dollar net worth as a milestone and looking at the facts, not public perception, it becomes clear that the path to being a millionaire is not as distant as it might seem if you listen to the thoughts of the world around you. Some people might see it as unattainable. That lack of belief then becomes their reality – I can’t succeed with money, so what’s the point of saving, or watching my spending? Why go through the effort to budget if I don’t see a path for moving forward financially?
Succeeding financially – be it a millionaire, a multi-millionaire, or just creating some breathing room in your financial life – is something attainable by everyone. The path looks different for each person, but it is a well-proven path. It starts with understanding some financials principles, working to develop positive habits with money, and controlling the things you can control.
I sincerely believe that armed with solid principles and a desire to change, anyone can forge a better financial future for themselves and their family. Once established, solid consistent financial habits can make a difference to your family for generations to come. I have a passion for walking alongside people who have the desire to improve their financial world. I’m happy to take time to meet with you to understand your current situation and put together a game plan for how to help you move forward. The consultation and game plan are complimentary. If we talk and there is a way I can help, I’ll also show you how I can engage with you as your financial coach to guide and encourage you as you execute on your game plan. With or without my help, the path to a positive financial future is available to you. Who knows, you might be the next millionaire?
You look at your pile of bills and sigh. Relief seems nowhere in sight. No one is riding in on a white horse to make things better. In fact, each month any small step of progress is erased the next month with an unexpected expense that makes the hole deeper. It’s getting depressing.
Now what?
I’m not going to sugar coat it. Getting out of debt takes time, intentional focus, and is hard work. But you already know that. If it was easy, the debt would already be gone. I want to give you some hope and a pattern to follow that will help you catch your breath, get your head above water, and eventually empower you to pay off your debt completely. Take a moment to think ahead to how good it will feel when you don’t owe anyone money. Take some deep breaths and let’s dive into a proven plan you can follow that works.
Save a small emergency fund of $1,000. “No, you don’t understand, I want to pay off my debt, not save money.” I understand. The best way to make sure you can stay on a path to paying off debt is to start by providing some margin between you and the ups and downs of life. An emergency fund is your buffer to make sure the small hiccups don’t derail you. Finances are more about behavior than math, and our behavior is often influenced by our emotions. If you are rolling along paying down debt and a $500 car repair smacks you between the eyes, it can throw you off balance. The panic of seeing your progress slip away as you figure out how to scrape together $500 is why you need that emergency fund. With $1,000 in the bank, you might wobble a bit, but you pull money from your emergency fund and keep on going. Without that money, you may find your progress stalled and your spirit crushed. All that momentum you worked so hard to generate before the repair bill hit is not stopped if you have built the cushion in advance.
Use a debt snowball to pay off your debts. Remember earlier when I stated that finances are more about behavior than math? This next step may offend your calculator, but it is the best option for any humans trying to pay off debt. In a debt snowball, you pay the minimum payment on each debt and put all extra money toward paying off your debts from smallest balance to largest balance regardless of interest rate. Math nerds will tell you to pay off higher interest rate debt first. It will save you a small amount of interest in the long run, but paying off debt is more about behavior than math. If you trade that tiny amount of interest for a heaping dose of success and encouragement, your probability of being debt free skyrockets. Let’s walk through an example to see why good math is not going to help you get out of debt as much as good sense.
Paying off debt is more about behavior than math.
We’ll start with two friends, Chris and Sam who each have identical incomes and the same amount of debt. Incidentally, the amounts here are based on current average US debts and rates for each category. The credit card rate assumes an excellent credit score:
Description
Debt Amount
Rate
Min Payment
Federal student loan
$27,000
6.36%
$248
Private student loan
$10,574
5.8%
$116.33
Car loan
$41,665
7%
$700
Credit card
$5,589
15.16%
$136.78
Example debt list based on current US averages for amount and rate by category
Chris and Sam each have $84,828 of debt which is starting to feel unmanageable. Paying $1,201 in minimum payments each month has not moved the needle for either one of them. Chris and Sam make a pact to get debt free, but they take slightly different approaches.
Sam has heard that you should pick the debt with the highest interest rate first and pay it off because it will save more interest in the long run. Sam decides to throw extra dollars at the credit card first, the car loan second, the federal student loan third, then finally the private student loan.
Chris favors a method called the debt snowball. The principle is to pay off the lowest balance first regardless of interest rate. Chris will attack the credit card first, private student loan second, federal student loan third, and car loan last. We’ll examine the wisdom of these two approaches.
Chris and Sam have tightened their respective budgets and taken part-time jobs leaving each of them an extra $1,200 a month to put towards debt. After five months, Chris and Sam celebrate! They have paid off their credit card. Only three debts to go! Chris takes the payment he was making on the credit card with the extra $1,200 and now pays extra on the next smallest balance, the private student loan. Sam takes the same extra amount and applies it toward the next highest interest rate, the car loan.
Seven months later Chris meets up with Sam to celebrate, but Sam is confused. Chris has paid off the private student loan and has only two debts to go! Sam is a bit puzzled with another 13 months to go until the car loan is paid. Chris is upbeat and feels “halfway there!” This is the critical point where the interest rate approach may fail Sam. Sam feels defeated. The facts are that Sam and Chris have each paid the same amount on their identical debts, but Chris has something extra to celebrate having knocked out a second debt while Sam is wondering if the approach should have been more like Chris’. Chris is beginning to believe while Sam is filling with doubt.
People need encouragement, and math doesn’t supply that, but success does.
If Sam continues the quest to pay off debt despite the discouragement of feeling behind, that debt free day will come at the same time as it will for Chris, forty months into the process. The reality is that people need encouragement, and math doesn’t supply that, but success does. Paying off a debt and having one less bill to pay comes with a sense of accomplishment and relief. It allows for a celebration, a measure of success that the mathematical formula didn’t account for when purely calculating interest. That progress is a positive reinforcement that people need to keep going. The math tells us that Sam and Chris are in the same spot having each paid $28,813 in the first year, but Chris has gotten more of an emotional payoff than Sam. For many people, that visible progress (or lack of it) can make the difference between continuing to pay off debt and giving up discouraged by the lack of progress. Chris is more likely to forge ahead buoyed by success, and Sam is at risk for calling it quits.
If we fast forward and assume that Chris and Sam stay the course, 25 months into the plan Sam pays off the car loan (two debts to go!) and Chris pays off the federal student loan debt in month 27. Chris has one debt left (yea!) and is rounding third heading for home while Sam is still making two payments each month. If they both see their respective plans to a successful conclusion, each will completely pay off all debt in 3 years and 4 months. That’s a big “if.” I’m pulling for Chris and Sam to both make it, but emotionally, Sam is less likely to see it through. If both do make it the full 40 months, Sam will have ridden more of an emotional roller coaster but will have paid $443 less in interest than Chris. Chris traded that .5% of interest savings for faster wins cementing commitment to the plan.
There is much more to cover around the mechanics of budgeting and generating extra money to help get out from under a pile of debt. Those are topics for another time. For now, if you are mired in debt and don’t know which way is up, take the small step of saving a $1,000 to give you a buffer against the emergencies in life, and use the debt snowball to build momentum to pay off your debt. It is an approach used by millions of people. For more details on the debt snowball, check out these links from Ramsey Solutions.
For assistance in assessing where you are in your financial life or to have someone walk alongside you as you work towards freedom from debt, click the button for a complimentary consultation to help you move in the right direction.
The passing of a spouse can be emotionally devastating. In the midst dealing with grief, there are a myriad of financial and legal matters that require action when a spouse passes. With so many things to handle, it can feel overwhelming. This post deals with a few practical considerations after the first few weeks pass. For a helpful checklist of items that may need attention after a spouse passes, check out this article from Ramsey Solutions.
Grief can impair the ability to think clearly, so sometimes the best thing to do is nothing. Don’t make any major financial decisions while going through the grieving process. A decision that sounds good, thoughtful, or convenient at the moment may lead to regret down the road. There may be financial decisions that need to be made like funeral arrangements or submitting documents for an insurance payment, but it is best to put off major decisions until you have time to grieve and fully evaluate the future consequences of any actions you are considering.
Assess what you know and what you don’t know. It is common for one spouse to handle the finances for the household. You might be the one who always dealt with the investments and paid the bills and you feel well versed in handling your finances moving forward. If, instead, your spouse handled the finances, you might feel overwhelmed and lost when it comes to handling your finances. To keep the feelings of doubt and confusion from paralyzing you, start by making a list of the tasks you feel comfortable doing and tasks you are uncomfortable doing. For example, you may be perfectly comfortable paying the bills and managing daily expenses, but when it comes to budgeting or making investment decisions you feel out of your depth. Taking a written inventory of your strengths can help you have confidence in your ability to handle money. It will also clarify where you should seek help.
Once you find areas where you feel the need to get help from others, look for assistance from people with a teacher’s heart. Avoid turning your finances fully over to another person, be it a family member, friend, or a financial professional. Instead, find someone willing to walk with you, teach you, and empower you to make your own choices about how you handle your money. Unless you are no longer capable of making your own financial decisions, you should maintain decision-making control over your finances and seek the guidance of a trusted source as needed.
Beware of scams. I don’t say that to scare you, but be on guard knowing that there are unscrupulous people who prey on those who are hurting. You may get offers to have a company file for your social security benefits for you…for a fee. Contacting the Social Security office, your insurance company, or other financial institutions is something you can do yourself for free. Don’t pay a company to file for benefits for you – it’s just a scam to separate you from your money.
Be sure to get the support you need from family and friends. While there are some financial matters that need your attention now, focus on giving yourself time to grieve. Being with other people you love and trust to get their support is what you need most. Don’t worry about details like what to do with the house or any of your spouse’s accounts or even a vehicle until you are able to get back on our feet emotionally.
Finally, put yourself first. Make sure you take care of your physical needs, Get rest, eat a healthy diet, exercise, and seek out friends and family for support. Many people find comfort in their faith during difficult times, so staying spiritually active can offer a great support system. Questioning with why a loved one is gone and even being angry with God is also a natural response to grief. Allow yourself some emotional and intellectual time to wrestle with what you are feelings in the context of your beliefs. Give yourself permission to feel, cry, share, and start to heal from the loss of a loved one. A healing and cared for you will make much better decisions than a grieving you.
Once you catch your breath from all that has happened, if you would like help walking through your finances after a love one has passed, we are available to walk through this time with you. Our initial consultation is always free and doesn’t commit you to anything. If we feel we can help, we’ll explain how. If we are not the right fit, we’ll tell you that, too. To schedule a complimentary consultation, use the button below this paragraph.
You just worked your way through four (or more) years of studying, testing, learning, and growing with great focus and intensity. You put yourself out there — scary isn’t it? — and you landed your first “real” job out of school. Life is grand as you settle into your new normal.
Now what?
Financially, you are likely to be making and managing more money than you ever have in your life. Your parents may or may not have been good role models for how to handle money. Just like with other aspects of your life, you get to make your own decisions about what you do with the money you are earning. Being wise with your money right out of school will help establish patterns — good or bad — for how well money serves you in the future.
Follow these steps to build a solid financial foundation for yourself:
Assess Where You Are. You may have been living in an apartment or a dorm and living the college life, but now, you have more bills and responsibilities. Understanding the current state of your finances is important. Do you have any debt? Do you have money in savings? Are you good at tracking expenses? Are you comfortable with choices at your new job around insurance, retirement savings, and health care options? Be realistic about what you know and don’t know. Make a list of financial areas or topics you would like to understand more now that you are on your own.
Educate Yourself. Have conversations with co-workers, parents, and friends about how they deal with money. Treat these as inputs, not directives. Remember, your friends likely have as the same degree of experience with money as you do, so listen to what they have to say, but weigh their words against people who have already worked through the financial events that are still in your future. Learning from people a generation or two ahead of you can save you lots of valuable time (and mistakes) when handling your money. For Christians, the Bible has plenty to say about money, so you could benefit in learning biblical principles around money.
Pay Off Your Debt. Based on 2016 statistics from the Institute for College Access & Success, most (over 66%) college graduates finish school with student loan debt. You are statistically average if you graduated with $37,574 of federal student loan debt according to figures compiled by the Education Data Initiative for 2021. When you include data from private lenders, that figure approaches $55,000 per person. That means most graduates are starting life $40-50K in the hole. Letting that debt hang around means blunting your sharpest financial tool, your income. Paying back student loans will take time and deliberate effort. If you are thinking some or all of that debt will be forgiven, think again. Only 2.5% of Public Service Loan Forgiveness (PSLF) applications have been approved since November 2020. Only .65% of federal student loans have been forgiven through PSLF. Just $253.8 million was forgiven as part of the Teacher Loan Forgiveness. Student loan forgiveness can and does happen, but the path is narrow. You have about the same chance of being born with red hair (2%) as you do having your student loans forgiven. Student loan debt is not the only kind of debt, but it is quite common. Car loans, personal loans, and credit card debt can also saddle recent grads with demands on their paychecks. Pay off your debt as quickly as you can. It’s not a pet, and it won’t go away on its own.
Create An Emergency Fund. The best buffer between you and financial trouble is an emergency fund. This is money you set aside for…wait for it…an emergency. That might be a blown tire, and unexpected car repair, or a layoff. Building a cushion between and life’s financial surprises will keep a one-time expense from throwing you off course. Even before you pay off debt, you should build up a small $1,000 emergency fund. After your debts are paid, use the money you were previously using to pay your debts and redirect that into a savings account or money market account. Build this emergency fund up to cover three to six months of expenses (not income, but expenses). If you are in a high-risk position or market, six months may be best. If you are in a low-risk position and could find a job in your field quickly if you lost your current job, you might build just three months of savings. Regardless, putting that buffer in place before investing will help you from being being financially derailed by an emergency.
Start Retirement Saving. Now. After you are out of debt and have a full emergency fund, use 15% of your take home pay to invest in retirement. Depending upon your profession, there are a variety of options that may be available to you. 403(b), 401(K), Roth IRA, traditional IRA, solo 401(K), SEP IRA, and other options like Teacher Retirement System (TRS) or the military’s Thrift Savings Plan (TSP) may be available. I’ll cover retirement options in another post, but regardless of the vehicle, the principle is to invest early and regularly to grow your future retirement nest egg. It may seem like you don’t need to think about retirement when it is several decades away, but outside of your income, your greatest wealth-building tool for the future is compound interest. Saving early and taking advantage of compound interest is one of those rare times when time really is on your side.
Learn To Budget. Your largest wealth-building tool is your income. Most people have a general notion of where they spend their money, but once they do a budget they are surprised to see what amount of money is spent in what places. Doing a budget may sound constricting and limiting, but in reality it provides you full control over where your money goes. When people budget for the first time they typically find several hundred dollars they can redirect towards a goal. That “found money” could be used for your savings, paying off debt, or investing. Budgeting is a learned skill, so be okay with not getting everything right the first month. Stick with it. After three to four months, your skills will grow and your accuracy will improve. Combined with investing at a young age, budgeting is the most powerful tool you have.
Give. This one may sound counterintuitive, but giving money to causes you believe in enhances your quality of life. Whether you give as part of a “pay it forward” cycle, to connect with and support a cause, or because it makes you feel good, generous people tend to live longer healthier lives. Being generous to others also teaches us to be less centered on ourselves and focus on others. Giving money connects you to a purpose bigger than yourself. The mental health benefits of being a giver can start with small regular gifts and expand as your income grows. Giving can have tax benefits, too, but the primary reason to give is to develop generosity.
Those are some great starting points. If that list feels too daunting, take it one step at a time. Commit to taking stock of where you are and determining a single next step. Perhaps you decide to work on generosity and give a small financial gift each month. You could commit to learning about money management or start a budget. Whatever it is, be intentional about learning to make your money work for you.
If you would like help taking stock or where you are or what a good next step is as you spend your first few years in the workplace, we provide a complimentary consultation and can work with you on determining next steps.
You just accomplished a goal you had in front of you for the last six months, year, five years, or lifetime. Obstacles were overcome, challenges were risen to, and the struggle has finally turned into success! You fought the good fight, slayed the dragon, and you have reached the metaphorical mountaintop. You did it. You did it! YOU DID IT! Way to go!
Now what?
Don’t be surprised if it feels a bit different than you expected. Many times when you move from a time of intentional focus on a goal to actually achieving that goal there is a letdown. Author and psychology expert Tal Ben-Shahar calls this feeling arrival fallacy. In essence, as you work towards a goal and are convinced you’ll achieve it, your brain starts to adjust to your new reality before you get there so when you reach the goal, it is often not the peak mountaintop experience you expected.
So how do you move forward and get out of your arrival fallacy mini-funk? Here are some ideas to get you moving in the right direction:
Celebrate success. At times we are so focused on a goal, when we achieve it, especially when experiencing the letdown we just discussed, we are exhausted. Take time to celebrate. It can be private or public, with friends and those who supported you, or simply treating yourself to something. Celebrating success is important. It can wipe out some of those blues and it serves to remind yourself that your goal was worth it.
Take stock of your life. Reflect on the journey to accomplishing your goal, and be grateful for what you learned and how you changed along the way. Dig into some of the following questions:
What was the biggest obstacle you overcame and how did you do it?
Knowing what you know now, what would you have done differently? (Don’t use this to second guess yourself, but to grow from the experience and add to your toolset for your next adventure.)
How have I grown from the experience? It could be skills you gained, principles you have learned, relationships you have formed or distanced from as part of your journey. Even bad experiences can pay you back later if you learn how not to do something.
Examine your purpose. Why was the goal important to you? Is it a step in a larger journey that reflects who you are and what you value? The busy buzz of life keeps us from doing important reflection, and nothing is more beneficial than recalibrating on your purpose. We can all get off course when we are not intentional, so reminding yourself who you are and what you are all about can be key to understanding what is next.
The conventional wisdom will tell you to set a new goal. That’s not a bad idea – goals can certainly be a great tool in motivating us to move forward. In setting a new goal, be careful not to fall into the striving trap. What is that? The striving trap is like a monkey through swinging from tree to tree through the jungle, constantly in motion, but never really getting anywhere of value. It can be tempting — even euphorically intoxicating — to be constantly in motion. However, we were made as human beings, not human doings. That is why knowing your purpose is so important. There is a rhythm of work, rest, and play that should be maintained. Always resting is laziness. Always playing is irresponsible. Always working is missing out on life.
So set goals, sure, but make sure they align with your purpose. You may find that now is a time to rest and rejuvenate for a short season. You may discover that in reaching your most recent goal, some important relationships have been set aside and need to be rekindled. You may find that the intensity it took to accomplish your goal sucked some of the joy out of life, so you need some time to relax and play. Setting a new goal may be best for you, but don’t be a mindless monkey just trying to stay in motion. Crack open a coconut, peel back a banana, hang out in a barrel full of, well, friends and then see what is is next. Staying true to your purpose and being intentional about next steps will help make your life not just successful, but meaningful.
KJ Financial Coaching 