Tag Archives: 401k

Tracking Your Net Worth

Super Millennial LogoToday’s guest post is from a fellow superhero. Michael is the creator of Super Millennial. He teaches people how to evaluate their financial situation, simplify money management & automate their investments to reach their financial goals. Subscribe for his personal finance “Keys To Success” and blog updates here. Make sure to follow him on Twitter as well.

Note from FinanceSuperhero: This post greatly influenced me to begin tracking my own net worth in earnest. Ironically, when I started tracking my net worth for the first time in earnest rather than simply maintaining awareness of a ballpark figure, I was pleasantly surprised to find out that it was much higher than I had previously thought.

 

Headline image
Everyone wants to be a millionaire or billionaire, but to most people it’s just a dream and will stay that way forever…UNLESS you decide to make your dream a GOAL & work hard to achieve it.

If you’ve read “Think & Grow Rich” or Millionaire Next Door it should be evident how important goal setting is in all aspects of life, including finances. Wanting something is one thing, planning & going after it is another…one way to start focusing on becoming a millionaire (so you can ball out like DJ Khaled in any of his 80 music videos) is tracking your net worth. Even though I don’t think he has mentioned/screamed it yet, it’s a major key to financial success (trust me).

Do you know or track your net worth? I’d be pretty surprised/impressed if you are. Whenever I ask someone if they are I tend to hear the same few excuses:

  • “Why should I track it? Seems time consuming & doubt it’ll matter ”
  • “But I don’t have that much money…”
  • “What’s the point of tracking a few thousand dollars?”
  • “I’m way too in debt to want to see exactly how much”


It doesn’t matter if you have $1,000 or $1 million dollars, it’s amazing how helpful it is to track your overall net worth…and it takes five minutes a month!

I started tracking my net worth after reading J Money’s “Budgets Are Sexy” …. over the past eight years he’s been able to go from 50K to now 500K and shows exactly how. Needless to say I was very inspired to start…

I REALLY wish I would have started this earlier in life, I’ll be honest and admit I just started in late 2015 (around 9 months now) and within a few pay periods I was amazed at how much it factors into my financial decisions (& how good I was at saving). Don’t worry I’m not asking you to track every single penny you spend, because I know you won’t (nor would I), let Mint automatically do that for you.

I’m only asking that you do this once a month, not daily or weekly to really see your progression and how easy it become to get “richer” by paying attention to your finances.

Here are the top benefits of tracking:

Main Benefits:

  • Financial Progress: We all want to evolve & progress in anything in life, its human nature. It’s even better when you grow your $$$ & can look back to the month or year previous and see how far you’ve come. Progress is impossible without change! 
  • Confidence Builder: For example if you saved an extra $1,000 in your emergency fund or watch your 401K increase due to a bigger contribution. It will make you feel proud of what you’ve been able to accomplish (and want to do more)…..do you think millionaires just got there by luck? No they made a conscious effort to earn, save & repeat! 
  • Avoids focusing on just assets: If you have 200K in assets but 100K in debt you’re just lying to yourself, it’s important to factor both into the calculation.
  • Loans: Your net worth can be a factor if you plan on applying for a loan in the near future (i.e. banks feel more comfortable giving you a loan when you have good credit & money in the bank).


How should you track it? There isn’t one specific way but here’s how I do it and takes up 5-10 minutes each month. I pull up my Personal Capital account for most of my accounts and then add to a google doc (not all of my accounts sync w/PC). 

It doesn’t matter if you use it or a different version, it’s just important to get in the habit of tracking your progress. Make sure to include all accounts and a comments section so you can notate when there are major +/- changes (i.e. 401K increase, stock market drop 5%, tax refund, inheritance, etc).

Picture


You’ll spend 5-10 minutes a month entering the information for assets & liabilities and it will caclulate your net worth.
Here’s what you should include:Assets

  • 401K – You have a 401K and contribute AT LEAST to your employer match right?
  • IRA – Roth IRA’s are amazing, if you need to learn more check this out.
  • Checking Account:  I personally use Chase, but where’ve you bank make sure you don’t have a monthly “convenience” fee and low ATM fees if you bank at another ATM. 
  • Savings Account: I love Ally bank – no fees & 1% interest is better than nothing
  • Brokerage Account: If you have one…
  • Additional Accounts: Any other investment, CD, money market, etc….

 

Liabilities

  • Auto Loans: This is an asset and a liability, if your car is valued at 25K and you have 15K left on the loan add the 25K to assets & 15K to liabilities.
  • Student Debt: Yes they suck but you gotta include them too…..
  • House: Same as the car example…this is an asset and a liability, if your house is valued at 250K and you have 150K left on the loan add the 250K to assets & 150K to liabilities.


Regardless of where you are financially, knowing your net worth can help you evaluate where you are and plan for your financial future. Once you understand your situation you become more aware of your spending/budgeting and can achieve both your short and long term goals.  

On top of planning and reaching goals it will also help you stay motivated and can be a huge confidence booster. It can also make you aware of your current investments and how they are fit for different market conditions. For example in February the stock market dropped but my net worth barely moved, I had such good asset allocation that the loss was minor in comparison to the market.

If you are not watching your personal net worth on a regular basis, you are skipping an important step in preparing for retirement (or EARLY retirement if you do it right). As always save early so you can thank yourself later. Once you have your tracking system setup hold yourself accountable to spend five to ten minutes to update monthly (use a calendar reminder or choose a specific day of the month).


Readers, don’t forget to head over to SuperMillennial to check out more of Michael’s superhero advice and follow him on Twitter.

Do you track your net worth? Have you found a better way? Let us know in the comments section below.

20 Budgeting Tips for Singles – A Bachelor’s (or Bachelorette’s) Guide

Last week, the state of Illinois finally passed what I would describe as a “Band-Aid” budget. While politicians largely celebrated this move and patted themselves on the back, their budget does very little to solve the gaping wound that is the state of financial chaos in which Illinois currently finds itself.

As I read the headlines and a few articles, I marveled at the difficulty the legislature faced in passing a budget. As you may or may not know, Illinois recently went an entire fiscal year without a budget. This standoff made previous budget delays (18 days in 1991, multiple delays of several weeks in the 2000s, and the bitter standoffs of recent years) look like small blips on the radar.

While Governor Rauner and Speaker Madigan set aside partisan gridlock long enough to pass a budget, public schools, state universities, and social service agencies are from celebrating. To the detriment of the citizens of Illinois, the finger pointing between Republicans and Democrats will surely resume and intensify in the next months.

Right around the time that Governor Rauner was delivering his press conference regarding the new budget, I sat down to review my planned budget for July 2016. Since September 2009, I have created a unique monthly budget using Gazelle Budget, the online software platform created Dave Ramsey’s team at Ramsey Solutions. That makes 71 unique budgets. It felt good to add yet another accomplishment to the mental list of ways in which I put the state of Illinois to shame.

MY FIRST BUDGET

As I often do when completing a budget, I took a look through the archives to see how Mrs. Superhero and I have come. My trek brought me back to September 2009, the month in which I created my very first budget.

In September 2009, I was a newly-employed, engaged bachelor, living independently for the first time in my life. Less than one week before the new public school year started, I accepted a job offer to teach music about 25 miles away from my university campus. With a week to prepare, I scrambled to locate housing, sign my contract, and prepare for a radical life change.

At the time, I had barely a tiny inkling of how to responsibly manage my money. I had recently read The Total Money Makeover in record speed, but I didn’t know the first thing about budgeting an “adult” paycheck. This was going to be the first time I had ever earned a paycheck which included a comma in the amount field!

After reading about Gazelle Budget (which is being replaced soon by EveryDollar), I purchased an 18 month membership, which included access to all three hours (ad free) of the Dave Ramsey Show podcast, for $89.95. Moments later, I created my first budget.

In all its glory, my very first monthly budget, from September 2009
In all its glory, my very first monthly budget, from September 2009

I began by projecting my total net income for the month, $2,357.29 in total. In that moment, I recall feeling pretty wealthy. I continued by inputting my desired charitable giving ($236 – 10%), rent ($400 – I rented a room in a two-bedroom condo from a friend-of-a-friend), food ($305 – for groceries and restaurants), and my debt obligations ($50 car payment and $200 credit card bill). From that point, I filled out the budget with an estimate of utilities, transportation (gas, car insurance, and routine maintenance), clothing (new work clothes and change for laundry), personal spending (spending money blow money Starbucks fund, books, gifts, hair cut, toiletries, and the Gazelle Budget subscription), and savings (emergency fund and honeymoon fund).

As you can see above, my projections for spending (middle column) were not entirely accurate when compared with my actual spending (leftmost column) at the end of the month. In fact, despite projecting a zero-based budget, I spent more money than I earned in September 2009.

This was hardly a Superhero effort.

On the other hand, the percentages of my categorical spending mimicked responsible spending.

Budget Percentages 1

Budget percentages 8-11
Categorical budgeted spending as a percentage of net income, September 2009

THE TROUBLE WITH PROJECTIONS

For the first full month of living on my own, I updated my budget on a daily basis. I kept a stack of receipts for all cash purchases and utilized internet banking to reconcile all other transactions. Yet despite my diligence, I was still brand-new to the process of budgeting.

As you can see below, I overspent considerably on food and personal spending; I had budgeted a combined $572.29, approximately 24% of my net income, but at the end of the month, I had spent a combined $761.58, approximately 32% of net income.

When I broke these spending figures down further, I discovered that I had spent $156.50 at restaurants and $80.77 at Starbucks.

Ouch.

My First Budget - Spending
20 TIPS FOR THE BACHELOR’S OR BACHELORETTE’S BUDGET

I chose to present the above figures for two primary reasons. First, I wanted to prove that it is possible to build and maintain a monthly budget as a single person. Second, I wanted to be fully transparent about my early mistakes.

Yes, creating a budget is not always easy. It isn’t the cool thing to do, especially as a young 20-something fresh out of college. Even at age 30, I can still recall the temptation to throw caution to the wind and live it up. Heck, I almost went out and leased a car!

However, I still recall one of the most powerful motivators for a 20-something single: the desire to prove one’s independence. Creating a budget is one of the best ways to set out to accomplish this goal and appear to be an adult. If you don’t manage your money responsibly, you will surely appear to be a child to you parents and extended family.

To win with money as a bachelor or bachelorette, follow these 20 tips.

20 BUDGETING TIPS FOR SINGLES - TW

1. Share costs with a roommate.

In my case, I avoided spending $1,000 per month for a one-bedroom apartment and spent $400 to rent a home in a two-bedroom condo. By sharing costs in this manner, I avoided spending 40% of my net income on housing costs.

Housing is by far the biggest budget buster for the average bachelor or bachelorette. Spending within this category can be a difference-maker.

2. Gather an accurate picture of your monthly debt obligations.

When you are just starting out, you will feel the temptation to delay examining your debts, particularly if your student loans are still in deferment. Avoiding your debts will not make them go away, so gather this information, including total principal, interest rates, minimum payments, and loan terms for each debt. If you’re unsure or unclear about any debts, contact the appropriate customer service department right away. Also, you should check your credit report; remember, this can be done free of charge once per year with each of the major credit reporting bureaus.

3. Prepare your own meals and cook at home as much as possible.

As a single young adult, preparing your own meals will accomplish two goals: you will save money, and you will not gain weight eating low nutrition/high calorie fast food. As an added bonus, you will be able to host your dates for dinner and impress them with your fine culinary skills. They’ll expect Ramen, and you’ll blow them away with shrimp creole!

Ladies, don’t forget, the way to a man’s heart is through his stomach.

4. Maintain a college lifestyle, at least in terms of spending.

When your first paycheck rolls in, you will immediately experience the temptation to buy everything in sight. If you establish an unreasonable level of spending out of the gate, you will set yourself up for failure. As much as possible, continue to live a college lifestyle (i.e. behave as if you are poor), within reason, of course.

5. Do not go out and buy a new (or new to you) vehicle.

You need to get used to living on a budget first in order to determine what you can or cannot afford in a new vehicle. Don’t allow pride and vanity to influence your decision-making process. If your current vehicle gets you from point A to B, it’s a keeper – at least for a few months.

6. Invest in a decent coffee maker with a timer function and brew your own coffee at home.

I learned this the hard way when at the end of my first budgeted month I had spent $80.77 on coffee on my way to work. I had a decent Mr. Coffee coffeemaker, but it didn’t have a timer feature. If I happened to be running late to work in the morning, I resorted to a quick Starbucks stop, which cost me significant money without adding any perceived value (neither happiness-wise nor nutritionally speaking).

Nothing beats the sweet aroma of morning coffee, especially when you brew it yourself and save money in the process

Mr. Coffee
Nothing beats the aroma of freshly-brewed coffee in the morning – and it saves you money!

7. Stay in.

Fortunately, I did a good job of this. My wife-to-be and I enjoyed cooking dinner at my condo and watching reruns of The Office. I know that many single people will feel the temptation and be pulled into the expensive night life scene, but do so within reason. Invite friends or your significant other back to your place, where food and drinks are cheap.

8. Find affordable dates with Groupon and Restaurant.com . I’m not even sure if Groupon and Restaurant.com existed back when I was a bachelor, but taking advantage of them today is a key part of our dining out experience. With either platform, you can purchase certificates for what is usually a fraction of the value, which allows you to realize significant savings and still enjoy a night out. The most common Restaurant.com offer is $10 for a $25 gift certificate. Check out the Restaurant.com offerings in your area by following the link and entering your zip code.

9. Build an emergency fund as quickly as possible.

As a young single person, building an emergency fund is the definition of adulting. Without an emergency fund, you will face unexpected expenses and be forced to swipe your credit card. Or worse yet, you may have to beg your parents for a loan or a gift.

10. Begin charitable giving right away.

While I have always given 10% to charity and missions organizations, I know this isn’t for everyone. If you’re not a natural giver, start small. Even $1 or $10 per month will benefit worthwhile organizations. If you’re not into structured giving, pay it forward and purchase the coffee or meal for the driver of the vehicle behind you in the drive-thru.

I strongly believe that regular, consistent giving is a key to winning with money. The act of giving teaches you that money is not an asset to be horded, stockpiled, wasted, or worshipped, but a tool to help yourself and others.

11. Strive to create a zero-based budget every month.

Remember, you will fail at this at first. Over and over and over. However, I found comfort in a Dave Ramsey quote during my initial months of struggle with my budget:

Adults devise a plan and stick to it. Children do what feels good. -Dave Ramsey

12. Accept that your budget projections will rarely be perfect.

On a related note, embrace your budget mistakes as they occur. Be willing to adjust your budget several times during the first several months.

13. Share your budget with a friend who is wise with his or her finances.

Accountability is helpful for everyone. It is part of the reason why I write this blog. A good budget is not inflexible.

14. Tell yourself every day that instant-gratification isn’t all that gratifying.

A few days ago, I read that the average person only waits 5 seconds for a web page to open before becoming irritated and moving on. Clearly, we live in a culture which embraces speed and instant results over patience.

You will need to learn to delay your desires in order to maintain a successful budget. Make a plan and stick to it.

15. Don’t worry about investing money right out of the gate.

In the personal finance blogging community, the suggestion to delay investing for retirement is utter blasphemy! However, I believe that there are better uses for your first months of pay. Make sure your budget is in order, build an emergency fund, and take time to research your investment options. When the time comes to invest, look into low-cost options through Betterment and Motif Investing. You will be glad that you waited.

16. Identify your values and be sure that your budget follows them.

If you’re not sure where to start with values-based budgeting, check out my two part series on budgeting with values in mind:

Values and Budgeting – Part One

Values and Budgeting – Part Two

17. Once you’ve identified your values, create written goals that you wish to accomplish.

Writing V-SMART Goals is the best way to accomplish your goals.

18. Be transparent with your friends and family about your budget.

It is OK to explain that you are striving to manage your spending responsibly. In fact, if you keep your budget goals a secret, it will be more difficult to stick to your budget, as co-workers will invite you out for happy hour drinks and apps every Friday. Just be up front and honest.

You can still have a social life on a budget. But be willing to say "no."
You can still have a social life on a budget. But be willing to say “no.”

19. As follow-up to number 18, be willing to say “no.”

If you want to live on a budget and win with money, you will likely hurt people’s feelings from time to time.

20. Avoid making any purchases on impulse.

If you are considering a sizeable purchase, write it down and check back again in thirty days. See my recent piece, The Thirty Day List, for a step-by-step process on delaying purchases.

Note: This piece contains affiliate links. FinanceSuperhero only recommends products designed to save readers money.


Readers, what budget tips do you have for singles?

The SIMPLE Method to Achieving Financial Independence

Over the past year, I have spent many hours reading about personal finance and investing. The biggest takeaway from this experience:

I have learned just how much I don’t know about money and how it works.

While some financial bloggers might be upset about this, I am excited! Learning new things and sharing that knowledge with others is one of my greatest passions. As an educator, I have carefully cultivated an ability to teach difficult concepts – first in a simplified manner, and then in greater depth.

In this post, I will aim to simplify the complex pursuit of financial independence.

The educator within me developed the following acrostic, which is intended to remind you of the SIMPLE nature of financial independence:

Start as soon as possible
Invest in funds with strong track records and low fees
Manage risk wisely
Practice stealth wealth
Leverage your strengths
Enjoy the process

Achieving financial independence is a challenging and worthwhile goal. If you start investing early, invest in low fee funds, manage risk, practice stealth wealth, and leverage your strengths, you can enjoy every step of the journey!

Start as soon as possible

It is no secret that getting an early start on building your net worth is one of the most basic fundamentals of achieving financial freedom. I have used this illustration in the past, but it is so effective that it warrants repeating here:

Ben and John are both 20 years old. Ben begins investing $250 per month in index funds, and he continues until he is 30 years old, at which time he never invests another cent, allowing compound interest to grow his money until retirement at age 59 ½. John decides to lease a vehicles for $250 per month during this same 10 year window, and wisely snaps out of it when he reaches age 30, at which time he begins investing $250 and continues until age 60. For the sake of argument, let’s assume that both gentlemen invest in similarly-performing index funds, which average a 10% return each year. Surely John must catch up to Ben? Take a look below:

Ben’s Investments John’s Investments
Age Contribution Interest Balance Contribution Interest Balance
20 $3,000.00 $300.00 $3,300.00 $0.00 $0.00 $0.00
21 $3,000.00 $630.00 $6,930.00 $0.00 $0.00 $0.00
22 $3,000.00 $993.00 $10,923.00 $0.00 $0.00 $0.00
23 $3,000.00 $1,392.30 $15,315.30 $0.00 $0.00 $0.00
24 $3,000.00 $1,831.53 $20,146.83 $0.00 $0.00 $0.00
25 $3,000.00 $2,314.68 $25,461.51 $0.00 $0.00 $0.00
26 $3,000.00 $2,846.15 $31,307.66 $0.00 $0.00 $0.00
27 $3,000.00 $3,430.77 $37,738.43 $0.00 $0.00 $0.00
28 $3,000.00 $4,073.84 $44,812.27 $0.00 $0.00 $0.00
29 $3,000.00 $4,781.23 $52,593.50 $0.00 $0.00 $0.00
30 $0.00 $5,259.35 $57,852.85 $3,000.00 $300.00 $3,300.00
31 $0.00 $5,785.29 $63,638.14 $3,000.00 $630.00 $6,930.00
32 $0.00 $6,363.81 $70,001.95 $3,000.00 $993.00 $10,923.00
33 $0.00 $7,000.20 $77,002.15 $3,000.00 $1,392.30 $15,315.30
34 $0.00 $7,700.22 $84,702.37 $3,000.00 $1,831.53 $20,146.83
35 $0.00 $8,470.24 $93,172.61 $3,000.00 $2,314.68 $25,461.51
36 $0.00 $9,317.26 $102,489.87 $3,000.00 $2,846.15 $31,307.66
37 $0.00 $10,248.99 $112,738.86 $3,000.00 $3,430.77 $37,738.43
38 $0.00 $11,273.89 $124,012.75 $3,000.00 $4,073.84 $44,812.27
39 $0.00 $12,401.28 $136,414.03 $3,000.00 $4,781.23 $52,593.50
40 $0.00 $13,641.40 $150,055.43 $3,000.00 $5,559.35 $61,152.85
41 $0.00 $15,005.54 $165,060.97 $3,000.00 $6,415.29 $70,568.14
42 $0.00 $16,506.10 $181,567.07 $3,000.00 $7,356.81 $80,924.95
43 $0.00 $18,156.71 $199,723.78 $3,000.00 $8,392.50 $92,317.45
44 $0.00 $19,972.38 $219,696.16 $3,000.00 $9,531.75 $104,849.20
45 $0.00 $21,969.62 $241,665.78 $3,000.00 $10,784.92 $118,634.12
46 $0.00 $24,166.58 $265,832.36 $3,000.00 $12,163.41 $133,797.53
47 $0.00 $26,583.24 $292,415.60 $3,000.00 $13,679.75 $150,477.28
48 $0.00 $29,241.56 $321,657.16 $3,000.00 $15,347.73 $168,825.01
49 $0.00 $32,165.72 $353,822.88 $3,000.00 $17,182.50 $189,007.51
50 $0.00 $35,382.29 $389,205.17 $3,000.00 $19,200.75 $211,208.26
51 $0.00 $38,920.52 $428,125.69 $3,000.00 $21,420.83 $235,629.09
52 $0.00 $42,812.57 $470,938.26 $3,000.00 $23,862.91 $262,492.00
53 $0.00 $47,093.83 $518,032.09 $3,000.00 $26,549.20 $292,041.20
54 $0.00 $51,803.21 $569,835.30 $3,000.00 $29,504.12 $324,545.32
55 $0.00 $56,983.53 $626,818.83 $3,000.00 $32,754.53 $360,299.85
56 $0.00 $62,681.88 $689,500.71 $3,000.00 $36,329.99 $399,629.84
57 $0.00 $68,950.07 $758,450.78 $3,000.00 $40,262.98 $442,892.82
58 $0.00 $75,845.08 $834,295.86 $3,000.00 $44,589.28 $490,482.10
59 $0.00 $83,429.59 $917,725.45 $3,000.00 $49,348.21 $542,830.31

At age 59 and approaching retirement, Ben will have invested a total of $30,000 and hold a portfolio valued at $917,725.45. John will invest $90,000 over 30 years -three times what Ben invested-yet he will only hold a portfolio valued at $542,830.31! John never caught up due to the avalanche of compound interest that worked in Ben’s favor.

What secured Ben’s advantage and prevented John from catching up?

Time.

Invest in Funds with Strong Track Records and Low Fees

Recently, I was talking with Superhero Dad about his 401k. Fortunately, it is doing well, as he and I rebalanced his portfolio a few years ago in order to take advantage of mutual funds with more successful track records and lower fees. Simple awareness and diligence saved Superhero Dad money.

This, however, isn’t the norm. According to a 2010 AARP study, a staggering 70 percent of surveyed 401k participants were not even aware that they paid fees to maintain their accounts. More specifically,

When plan participants were asked whether they pay fees for their 401(k) plan, seven in ten (71%) reported that they did not pay any fees while less than a quarter (23%) said that they do pay fees.  Less than one in ten (6%) stated that they did not know whether or not they pay any fees.

Why are 401k participants so unaware of fees paid? It turns out, according to Kipplinger, that it isn’t entirely their fault.

Mutual fund returns in 401(k) plans are normally reported as net returns, meaning that fees for managing your investments are subtracted from your gains or added to your losses before calculating the annual return. Other costs, such as administrative and record-keeping fees, are often divvied up among plan participants but are not explicitly listed on individual investment statements.

My recommendation: Do not invest in anything unless you fully understand every component of the individual investment, including the structure of fees. When evaluating your options, seek funds with a strong track record and low fees. Most people should consider investing within an automated portfolio service, such as Betterment, which minimizes fees, improves diversification, performs automated re-balancing, and provides greater returns.

Open an IRA with Betterment today!

Manage Risk Wisely

Of all the recommendations contained in the above acrostic, this one is perhaps the most difficult to act upon. To manage investment risk requires many steps: an understanding of what risk truly is and is not, an understanding of personal risk tolerance, and methods to evaluate risk.

In practical terms, risk is a phenomenon that most humans naturally seek to avoid. It is the reason that I personally do not drive 20 miles per hour beyond the established speed limit in inclement weather or eat fried foods at every meal of my day. I associate risk with a consequence which is to be avoided at all costs.

When it comes to investing, however, a certain degree of risk is necessary. As Investopedia notes, investment risk is commonly defined as “deviation from an expected outcome.” In the broadest possible terms, an investor expects to profit from her investments; of course, the risk is that the opposite –loss– may happen.

Generally speaking, while personal risk tolerance varies from investor to investor, the Prospect Theory asserts that most investors experience greater pain with investment loss than euphoria associated with gains. In other words, losses are far more emotionally scarring than ego-boosting gains.

As a result, risk tolerance is often dependent upon an investor’s past experience. For example, a relative who shall remain nameless recently shared that she and her husband are keeping all of their non-pension assets in low-interest bearing CDs because they cannot bear the risk of loss associated with mutual funds and individual stocks. As she explained it, they had been burned in the past decade and wanted to avoid a repeat occurrence at all costs.

Among many methods to evaluate risk, one of the most commonly utilized methods is standard deviation. As described by Morningstar, “Standard deviation simply quantifies how much a series of numbers, such as fund returns, varies around its mean, or average.” Based upon this information, an investor can examine a particular fund and weigh the risks of an investment by observing the fund’s performance highs and lows over a set period of time. The more a fund’s returns change over time, the greater its standard deviation. At the same, an investor who is armed with standard deviation data is hardly guaranteed to make money, as even funds with low standard deviation can still lose money, theoretically speaking.

For most investors, understanding risk, evaluating personal risk tolerance, and ultimately seeking to minimize risk will be vital to achieving financial freedom.

Practice Stealth Wealth

While the past steps outlined within the above acrostic have been on the heavier-side, the recommendation to practice stealth wealth is less critical, even optional.

However, I recommend it for a variety of reasons. First, while many of your friends and family will be happy and desire to celebrate your financial successes, you will certainly have to deal with critics. Second, many people will seek you out for hand outs and contributions. Third, publicly-recognized wealth will make it difficult for you to evaluate the intentions of new friends who suddenly enter the picture.

For more on this topic, I advise you to check out Financial Samurai’s fantastic article on this subject, “The Rise of Stealth Wealth: Ways to Stay Invisible From Society If You Have Money.”

Leverage Your Strengths

While most people would prefer to reach financial independence early, few are willing to put in the effort and practice the self-discipline necessary to do so. An overlooked key to achieving financial independence is leveraging your strengths to maximize the likelihood of your success.

As a culture, Americans tend to strive to improve upon their weaknesses as a primary means of self-improvement. In graduate school, I read StrengthsFinder 2.0 and my paradigm was forever changed. Recent theory suggests that you should strive to improve upon your strengths rather than minimize your weaknesses because you are more likely to significantly build upon your strengths than you are your weaknesses. While marginal improvement in areas of weakness is possible and even beneficial, the overall impact of these improvements pales in comparison to building upon your strengths.

Related: Forget About Working On Your Weakness, Play to Your Strengths: Your (Overwhelming) Reaction To The Idea by Paul B. Brown

Enjoy the Process

Lastly, while the pursuit of financial independence is marked with challenges, do not forget to enjoy the process. Perhaps the greatest example of this principle which comes to mind is ultramarathon Dean Karnazes, who launched his running career on his 30th birthday. As a runner who has run a 50k ultramarathon and aspires to soon run a 50 mile ultramarathon, I idolize Karnazes and remain in awe of his accomplishments.

When reading Karnazes’s book Ultramarathon Man: Confessions of an All-Night Runner, one  piece of advice given to the author by a friend stuck with me:

Life is not a journey to the grave with the intent to arrive safely in a pretty and well-preserved body, but rather to skin in broadside, thoroughly used up, totally worn out, and loudly proclaiming: Wow!! What a ride!

While I note the extremism of this quote, particularly in its application to athletic pursuits, I have found that the underlying enthusiasm of this philosophy makes it applicable to all pursuits, even those which are financial. Pursuing financial independence may leave us with our fair share of scrapes and leave us worn out, but we would be wise to enjoy the process every step of the way.


Readers, in your experience, what are the keys to achieving financial independence?

7 Deadly Financial Sins to Avoid At All Costs

This post, “7 Deadly Financial Sins to Avoid At All Costs,” was last updated on February 21, 2017.

As a high school student, I was a bit of a nerd (I still am today!). Though I was well-rounded – a decent athlete and very active in music and student government – I rarely went anywhere without a book in hand. I read a wide variety of authors, including Rand, Twain, Chaucer, Dante, and Steinbeck, among dozens of others. In hindsight, I enjoyed reading so much because of the fascinating characters and moral dilemmas contained in each book. After learning about the Seven Deadly Sins – hubristic pride, greed, lust, malicious envy, gluttony, wrath, and sloth –  in ninth grade honors English, I began to take greater notice of character development and general character flaws. I also began to notice how these flaws manifested themselves in my friends and even my own life.

Everyone wants to be financially secure, but millions of people unwittingly commit financial sins and sabotage their efforts. Dodge these 7 financial sins!

7 DEADLY FINANCIAL SINS

As a financially-conscious adult, I now see that these sins are ever present in the day-to-day financial decisions of the average person. Rather than attempt to isolate direct correlations between the aforementioned Seven Deadly Sins and common financial mistakes, I wish to present seven of the top financial sins which have been on my mind in recent weeks.

1. Payday loans

I grew up in an area of the Midwest which painted an accurate picture of the lives of the “haves” and “have nots.” My family fell somewhere in the middle as an average middle class family. However, the occasional trip through the seedy parts of town provided shocking glimpses of life on the other side: low income housing, gang violence, pawn shops, and payday loan centers.

I am optimistic that predatory payday loans may soon be a thing of the past, given Google’s crackdown on payday loan advertisements. Finally, awareness is growing about this criminal cycle of debt and the outrageous interest rates charged by payday lenders. You can read more about this problem here.

2. Spending more than you earn on a long-term basis

This needs little explanation, as the math is quite simple. Unless you are poised to receive a large inheritance or other similar windfall, a negative savings rate is a sure-fire to place yourself in financial peril.

3. Borrowing money from a retirement account

Unless you are facing bankruptcy or foreclosure, borrowing money from your 401k or other retirement accounts can be disastrous. In doing so, you are failing to make financial progress, continuing to overspend, and weakening one of the greatest partnerships of all: time and compound interest.

4. Failure to have a will in place

I dislike being the bearer of bad news, so I will make this very brief: There is a 100% chance that you will die, and getting a will in place won’t change these odds in any way. Given this undeniable fact, it is borderline inexcusable for anyone with typical assets and liabilities not to have a will.

5. Buying or leasing brand-new vehicles

Unless you are a millionaire or otherwise financially-independent (FI), purchasing a brand-new vehicle represents a significant and immediate loss the moment you drive off the lot. Most new vehicle purchases are motivated by pride or jealousy. There is nothing wrong with purchasing a nice, well-maintained used vehicle.

Related: The Car Lease: A Formidable Villain

6. Whole life insurance

In my opinion, whole life insurance is a scam. On the surface, a slick salesperson can make it sound like a great deal by dropping words and phrases like “cash value” and “guaranteed to remain in force.” However, term life insurance is a much greater value. For most healthy adults, a sizable 20 year term policy is available for little more than the cost of a meal at Applebee’s.

The best part: low monthly premiums will allow you to invest the money you save and become self-insured by the time your term ends.

7. Lack of a financial plan

In many ways, I am an open book when it comes to discussing my finances. Mrs. Superhero and I are believers in stealth wealth, which means you won’t find us disclosing our incomes our value of assets any time soon. However, I am always willing to discuss our financial game plan with others. By being transparent in this way, we have learned a lot from other people, made changes to our plan after careful consideration, and hopefully helped a handful of people be more intentional with their finances.

At the same time, I am continually amazed by the number of people I speak with who do not have a defined financial plan. To make matters worse, these people are typically unaware that this is a problem. With automated tools like Mint and Personal Capital, among countless others, there is no excuse for the failure to have a financial plan in place.


Readers, what other financial sins should be added to this list? Which one do you think is the worst?

A Detailed Guide to the Zero-Based Budget

In this post, we will take a detailed look at how to create a zero-based budget.

 A zero-based budget is a budget in which all income is allocated to a budget category with no remaining unused funds.

At this point, you should realize that you can’t afford to go another month without a budget. It could be the difference between one day reaching financial freedom and remaining in bondage to debt. It could leave you trapped working a job you hate just to pay the bills. It could diminish your happiness. If you don’t feel urgency and understand the importance of a budget, thus requiring more convincing , start here.

Methods of Budgeting

Depending on your personality and degree of tech-savviness, you may wish to create a budget the old-fashioned paper-and-pencil way. You may prefer using Excel, or even an automated program, such as Mint, YNAB, EveryDollar, or PersonalCapital.

If you are a budget rookie, I cannot understate the importance of creating a budget and crunching the numbers yourself without the benefits of an automated program, at least for your first few budgets. I highly recommend the pencil-and-paper or Excel methods for your first few budgets simply because these methods will force you to pay attention and be precise.

Budget Basics

Before we get into the specifics of your budget, let’s review some pertinent basics.

  • You need to create a new, unique budget at the beginning of the month, every month. Why? Some expenses occur on a bi-monthly or quarterly basis, and you will want to capture this within each unique budget you create. Remember, some expenses are fixed, while others vary from month to month.
  • Your budget should be based upon your net income (after state and federal taxes, employer deductions, and insurance premiums). Whether you are paid bi-weekly or weekly, this figure, too, will vary from month to month.
  • You should create a budget which utilizes categories. I personally use the following categories, which are recommended by Dave Ramsey. You should use the categories that represent areas of significant expense in your budget, delete those which do not, and add any pertinent categories which may be missing.

Giving/Charity

Saving

Housing

Utilities

Food

Transportation

Clothing

Health/Medical

Personal

Recreation

Debt

  • Within each category, your expenses should fall within the following typical ranges.

 

Category Recommended Percentages
Giving/Charity 0-10%
Saving 5-15%
Housing 25-35%
Utilities 5-10%
Food 5-15%
Transportation 5-15%
Clothing 2-7%
Personal 5-10%
Health/Medical 5-10%
Recreation 5-10%
Debt 0%

Sample Expenses Within Each Category

Giving/Charity: Tithes and offerings to church/religious organization, charitable donations

Saving: Emergency fund savings, retirement savings (401k, 403b, Roth IRA, Traditional IRA), college savings (ESA, 529), vacation savings fund, sinking funds

Housing: Rent, mortgage (including property taxes and insurance in escrow), home maintenance

Utilities: Electric, Gas, Water, Trash, Home/Mobile Phone, Cable/Internet, Home Security

Food: Grocery, restaurants, fast food, coffee and drinks

Transportation: Fuel, auto insurance, auto maintenance, bus passes, train tickets, Uber fares, tolls, miscellaneous transportation costs

Clothing: Includes shoes, outerwear, work wear, accessories
Personal: Discretionary spending, disability/life/identity theft insurance premiums, miscellaneous spending

Health/Medical: Insurance co-pays, prescription co-pays, miscellaneous medicine, gym memberships

Recreation: Movie tickets, concert tickets, sporting events, local/regional travel, miscellaneous recreation

Debt: Student loans, car loans, home equity loans, credit cards

The Specifics of a Budget

Before we proceed, it is important to note that your figures may or may not fall squarely within the categorical ranges previously mentioned. For example, if your Housing costs represent 24% or 36% of your monthly budget, this is not a serious problem. Please view the percentages above as suggestions for a healthy budget. Clearly, room exists for give and take, particularly if you are a very low or very high income earner, as long as your percentages add up to 100%.

Some of the categories above cover fixed expenses, such as Housing, Debt, and Utilities. Others address what we will call variable fixed expenses; you will spend money in each of these categories during a typical month, but the amounts may vary slightly from month to month. Variable fixed categories include Food, Transportation, Clothing, and Personal. Finally, the remaining categories, including Giving, Saving, and Recreation, are what we will refer to as discretionary expenses. You may choose to allocate money within these categories, but it is not mandatory for your family’s survival.

Note: Mrs. Superhero and I strongly believe that Giving is important, and we choose to include it as a fixed expense within our budget. Your values will dictate how you choose to handle this category in your budget.

Here is a sample budget based upon a $5,000 monthly income:

Category Dollar Amount Allocated Allocations as Percentage of Budget Recommended Percentages
Giving/Charity $500 10.00% 0-10%
Saving $250 5.00% 5-15%
Housing $1,500 30.00% 25-35%
Utilities $500 10.00% 5-10%
Food $700 14.00% 5-15%
Transportation $400 8.00% 5-15%
Clothing $150 3.00% 2-7%
Personal $500 10.00% 5-10%
Health/Medical $200 4.00% 5-10%
Recreation $150 3.00% 5-10%
Debt $150 3.00% 0%
Totals $5,000 100.00%

As you can see above, the total of all categories combines equals $5,000. This budget adheres closely to the recommended percentages, and it even manages to stay below the recommended percentage ranges in the Health/Medical and Recreation categories.

Creating Your Detailed Monthly Budget

In the previous section, we allocated targeted spending amounts based on our categories. Now, we will explore how to reconcile our actual monthly spending with these estimated allocations.

In order to utilize accurate expense figures, it is advisable to download copies of your monthly checking, savings, and credit card statements from your financial institutions. If you are doing a paper pencil-and-pencil budget, I recommend adding expenses by category using columns.

Once you have calculated categorical totals for the entire month, the final step is to add all categorical totals and compare the final sum to your allocated final sum. Again, in order to have a zero-based budget, these figures should be identical.

Possible Problems and Trends

As you are doing your first few monthly budgets, you are likely to encounter the following problems or trends:

  • Spending more than the allocated targets in one or more categories
  • Spending less than the allocated targets in one or more categories

Why? A budget is a rough prediction. Think of it as a rough draft of an essay. You will return to it and refine any errors at the end of the month. The previous mistakes you made will influence and impact your thought process as you create later budgets.

Two Serious Warning Signs and Solutions

The following are two warning signs that your budget is not working:

  • Warning Sign: You consistently spend more than the allocated targets in specific categories.
    Solution: Increase allocated funds for the category if you are within recommended ranges. If you are exceeding recommended ranges, implement measures to reduce spending.
  • Warning Sign: Your spending exceeds your income.
    Solution: Forgive me for shouting, but STOP OVERSPENDING! Stay out of restaurants, learn to like your old clothes, and ride your bike to save on gas. Alternatively, seek alternative streams of income.

Next Steps

Now that you understand the nuances of a zero-based budget, get started on yours today. A budget only takes a few minutes to assemble, but the rewards are potentially without limit. Getting on the right path, understanding your money, and controlling your money are keys to being a Finance Superhero. A budget doesn’t require sophistication, manipulation, or secret wisdom. It requires patience, intentionality, and a desire to be in control of your money.


Readers, how do you plan your monthly budget? Do you use automated software? Excel? Paper and pencil? How much time do you spend on your budget each month? Share your thoughts and burning questions in the comments section below.

The Car Lease – A Formidable Villain

Yesterday, while driving around town to complete errands in my fuel-efficient, three-year-old Hyundai Sonata, I found myself waiting at a lengthy stop light. Naturally, the wait annoyed me to some degree, as I was the only car in sight. However, Moonlight (my wife’s affectionate name for our Hyundai) and I weren’t alone for long, as we were soon joined by a sleek, shiny 2016 Audi A8 Sedan.

2016 Audi A8, courtesy of www.audiofdesmoines.com
2016 Audi A8, photo credit to www.audiofdesmoines.com

While I am admittedly a car lover, I must admit that my interest was divided equally between the A8 and its driver. Why? The driver could not have been a day older than 25, by my observation, and naturally, the Finance Superhero in me could not compute many scenarios in which this young man could afford such a fine vehicle.

I know what many of you are thinking:

  • Good for him! This fellow has clearly done well for himself.
  • Did you strike up a newfound friendship with Mr. A8?
  • Age is hard to predict; maybe this hot shot is older than he looks.
  • Weren’t you jealous?

My thoughts:

  • Maybe.
  • No.
  • Maybe.
  • No.

Jealous? While others may have felt envy, I only felt pity.

Yes, it is quite possible that this driver was closer to 35 than 25. It is possible that he is a new partner at a leading law or accounting firm. However, statistics dictate that it is more likely that he is a 20-something who earns slightly above the median US adjusted gross income ($36,841 in tax year 2013, according to IRS.gov). Regardless, I assert that the driver’s income is a variable that pales in comparison to the opportunity cost in driving such a fine vehicle.

I Hope He Likes the Car

Except in cases of significant wealth, the luxury vehicle represents one of the largest financial boat anchors in the lives of Americans. It is a formidable villain capable of derailing one’s budget, dreams of financial independence, and even hopes for a modest retirement.

Let us assume, for the purposes of illustration, that Mr. A8 is leasing his vehicle. The current manufacturer lease offer for this vehicle is $899 per month for 36 months with $4,644 cash due at the time of signing. This represents a total cost of $37,008 over three years, or $12,336 per year! Should I don my cape and rescue this fellow from his foolishness?

What’s that? You’re still not convinced that Mr. A8 isn’t getting a fine deal?

Let’s assume that Mr. A8 utilized the $4,644 cash due at signing on the Audi and instead purchased a much more affordable yet attractive vehicle. For example, suppose he found a deal on a 2004 Honda Accord and stretches his budget to $5,000. In this scenario, he would not have any monthly auto expenses, aside from gasoline and regular repairs. This would free up $899 per month!

How might a Finance Superhero manage these additional funds? Here’s a suggested monthly breakdown (rounding up to $900 for the sake of simplicity):


$400 placed in a money market account as a sinking fund designated for the purchase of a replacement vehicle when the Accord goes to the junkyard in the sky

$500 invested in a company 401k/403b, up the company match, with remaining funds invested in a Roth IRA


 Again, for the sake of simplicity, let us suppose that our 25 year old driver’s investments earn an average return (after inflation, the generally-accepted return figure for the S&P 500 is approximately 7%) and is compounded monthly. After thirty six months, our developing Superhero would have just over $20,000 combined in his 401k/403b and Roth IRA accounts, not including any company matching. Additionally, he would have $14,402.22 saved in his money market account (assuming a very non-Superhero interest rate of .01%) toward the purchase of a future vehicle. If he continued investing this same amount each month until age 65, he would be poised to retire with investment accounts valued at approximately $1.3 million.

I hope Mr. A8 really likes his fancy car!

Common Objections

Despite the fairly simple math above, which clearly illustrates the disastrous opportunity cost of leasing such an expensive luxury vehicle, some people may still wish to raise objections. As a developing Finance Superhero, it is your duty to gently correct people when the following objections are raised.

I need a luxury vehicle for work purposes.

I understand that for many professionals, the appearance of one’s vehicle is of high importance. However, a 3-4 year old Honda Accord or even 10 year old BMW will get the job done. A Finance Superhero uses his brain, remains persistent, saves money, and like Finance Superhero Grandpa, flashes cash to secure a great deal.

I am not handy when it comes to automotive maintenance, so a lease makes sense for me.

Let me count the reasons that this objection rarely rings true. First, in 2016, very few people are capable of maintaining their own vehicles beyond routine fluid changes, brake replacement, and tire rotations. Leasing a vehicle does not eliminate maintenance costs. And no, maintenance is not free with a lease. You are paying for it, as the costs are built in somewhere.

Second, new vehicles are often subject to repairs that will later be addressed by manufacturer recall. Strategically purchasing used vehicles which have already had these concerns addressed and repaired and have already had their 50-60k mile maintenance performed is a much better way to go.

With a lease, I can drive a new car every two or three years.

Listen. You need to make a decision. We are talking about your vehicle or your retirement! Which do you want more? 65 year-old you will want to kick 25 year-old you in the butt for being stupid and leasing a vehicle when you could follow the simple mathematical plan above and still simultaneously fund your retirement AND drive nice vehicles. And 65 year-old you is likely to get that opportunity, as Apple will probably have invented the iTimeMachine by that point. Don’t screw things up for future you!


What are your thoughts on car leases? Does it ever make sense to lease a vehicle? Have you or someone you know ever been burned by a car lease? Share your thoughts in the comments section.