Tag Archives: compound interest

Investing is a Marathon – A Personal Training Guide to Win

Investing is a marathon, not a sprint.

Aesop’s parable of the tortoise and the hare is a timeless, yet somewhat ambiguous tale. It chronicles a race between the slow-and-steady tortoise and the overconfident-and-lazy hare. The tortoise paces himself appropriately, while the hare opts to enjoy a mid-race nap. When the hare awakens, he discovers that his competitor has already won the race.

Investing is a marathon, not a sprint.

I appreciate this wise lesson, but an alternative version of Aesop’s tale provides deeper wisdom.

In this iteration, the hare decides to provide the tortoise a head start. Throughout the race, the tortoise grows stronger and faster, a development which was unforeseen by the hare. Despite the hare’s eventual efforts to work harder and run at much faster speeds than the tortoise could ever imagine, the tortoise wins the race handily. In fact, the result is far from a photo finish.

As investors, many people are like the hare. They are always waiting and preparing for tomorrow. Others are like the tortoise. They invest slowly and boringly over time and maintain remarkable consistency.

When it comes to investing, the average investor would be wise to learn from both the slow-and-steady approach of the tortoise and the speed and intensity of the hare.

Investing is a marathon, not a sprint.

Investing is a marathon, not a sprint. Unlike running, you only get one chance to live and save. Will you be more like the tortoise or the hare?

Marathon Training

Following my first half marathon in 2010, I began training for my first full marathon in January 2011. The days are cold and nights even colder during Illinois winters, which made the beginning of my training extremely brutal, both physically and mentally. To make matters worse, I was still trying to master the fundamentals of distance running: proper form, hydration, nutrition, and the all-important techniques to avoid chafing.

However, I established a regimented schedule for both training and rest, learned to listen to the signs and signals of my body, and improved as a runner. Despite many mistakes and a few minor aches and pains, I pressed onward and completed my training.

Exploring the Parallels – Investing IS a Marathon!

Race day arrived much faster than I ever thought possible. Though I had prepared as well as I could have expected, as I stood at the start line with hundreds of other people, a thought played over and over in mind:

What did you just get yourself into?!

Getting Started is Hard

The race director fired his gun, and we were off and running.  The first mile was absolutely awful. I dodged slower runners left and right, expounding a lot of wasted energy in the process, and experienced my first doubts. I’m so far from the finish line, I thought.

Many people have these same doubts when they begin investing. They know they are beginning a long journey which requires patience and diligence, yet it is not uncommon for many beginning investors to experience waves of discouragement and doubt. So they work harder, save more, do more research, and re-read investment prospectuses. At first, their efforts barely move the needle.

As I approached the first aid station near mile 4, I felt satisfied. My body had finally warmed up, my doubts had dissipated, and my confidence was restored.

Achieving a positive net worth is much like a marathon’s first aid station. It is a milestone worth celebrating. This checkpoint is not achieved without hard work and sacrifice, yet it is only the beginning of a long journey.

Setting the Pace, Focusing on Your Goals

I settled down even more after the first aid station and found a comfortable pace. At times, running felt effortless during this stretch. Around mile 10, I passed by family and friends who were out to support me. They cheered me on and said I looked “very fresh.”

Investing is a marathon, not a sprint. Unlike running, you only get one chance to live and save. Will you be more like the tortoise or the hare?
Feeling great at Mile 10 of the 2011 Wisconsin Marathon

As I approached the midway point of the race, I noticed that many other runners were picking up their pace. I joined them for a moment, but wisely pulled back after a few minutes, as the pace felt unsustainable.

Moments later, I witnessed the jubilation of those same runners as they crossed the half marathon finish line. Unbeknownst to me, they had selected a different goal and adjusted their pace accordingly. As they crossed their finish line and celebrated the fruits of their labor, I began to feel sorry for myself. I still had 13.1 miles to go.

It is tempting for an investor to lose sight of the plan and pace and adopt someone else’s approach. However, their pace and goals don’t matter! Your pace and goals are important. Investing is a marathon, so be sure to run the race at your pace and aim for your goals.

Stay Strong, Finish Well

During the long stretch from mile 13 to mile 20, I found myself running alone much of the time. I was fatigued, yet I felt OK. I had experienced my fair share of emotional ups and downs by this point, but I trusted myself. I trusted my training. I continued to take one step at a time.

At the same time, I felt oddly apathetic. I didn’t feel much like drinking or eating gels, so I skipped an aid station. Instinctively, I knew this was a bad idea, but I just didn’t care anymore. I stopped thinking about the successful things I had done to get to this point.

The average investor is similarly susceptible to ups and downs, doubts, and apathy. When you have made sizeable progress toward achieving your goals yet still remain far from your nest egg target figure, it can be tempting to stop caring. It can be easy to rely on feelings and allow them to guide your choices and actions. You must remain consistent and continue to take the steps which helped your investments grow to this point! Investing is a marathon!

My experience from miles 20-26 was in direct contrast to the earlier stretches of the marathon. Up until this point, I was on pace to finish the race in 3 hours and 30 minutes. Everything changed at mile 20. While others whom I had passed earlier seemed to grow stronger, I was battling crippling nausea. I shouldn’t have skipped that aid station, I ruminated.

While this stretch was a slow crawl toward the finish line, it was a victory lap for one elderly gentleman. As this man who was old enough to be my grandfather passed me, he shared some sagely advice:

Just keep going. Keep your eyes on the finish line. Don’t give up.

For many investors, we experience the true ramifications of our mistakes during the home stretch. We wish we had started saving early, experienced more years of the wonder that is compound interest, and maintained greater consistency over the years. Yet the finish line of retirement is visible on the horizon.

As I passed the 26th mile marker and rounded a bend in the road, I saw the finish line for the first time in nearly two hours. I forgot about my nausea and soreness and began sprinting. I’m quite certain I must have looked like a geriatric patient gallivanting down the road, but I felt as quick as Usain Bolt as I crossed the finish line and received my medal.

Like an idiot, I awoke early the morning after the race and crawled out of bed to go for a short run. As I lumbered along under the light of the morning sun, I reflected on my training and race mistakes. Naturally, I was grateful to have learned many lessons. I was also eager to do better next time.

Recommendations to Win the Investment Marathon

However, there is no next time for investors. We all have only a single life to live, so it is important to act with wisdom the first time if we are to achieve the retirement of our dreams. Win the investment marathon by following these four recommendations.

  1. Start early! If you foolishly begin later, as did the hare, and think you can catch up, you are mistaken. Compound interest functions at its finest over long periods of time. Remember, as Warren Buffet said, “You can’t produce a baby in one month by getting nine different women pregnant.”
  2. Follow a plan. Remember, if you fail to plan, you should plan to fail.
  3. Keep it SIMPLE.
  4. Invest based upon your goals and desires, not those of anyone else. Your keys to happiness are not the same as those of others.

If you are looking to begin your investment race toward retirement, a number of routes can help you get started.

Disclosure: FinanceSuperhero recommends the following services and maintains an affiliate relationship with each. However, we only recommend services which we have reviewed and deemed helpful to readers.

I recommend opening an IRA (Roth, if eligible) with Betterment. At the time of publication of this article, over 175,000 investors have contributed more than $5 billion into their Betterment accounts and taken advantage of tax-efficient investing in low-cost index funds. You can even roll over an existing 401k. Open an IRA with Betterment today!

 

If you’re just getting started and desire a method to keep better track of your finances and investments in general, I recommend opening a free Personal Capital account. I trust Personal Capital to monitor all of my financial accounts in a central location, which allows me to see the big picture with a few simple clicks. Their instant calculations help me to ensure that I am on pace to meet my goals. If you desire, Personal Capital also offers advisory services should you wish to adopt a hands-off approach toward investing.


Do you believe that investing is a marathon? On a lighter note, have you ever ran a half marathon, marathon, or ultra-marathon? What other parallels do you see?

 

 

 

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

sunrise

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 rebalancing, and provides greater returns. Open a Betterment account now.

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

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.

Money 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.

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.

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.

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.

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.

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

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 sizeable 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.

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?

What Are You Teaching Your Kids About Money?

Recently, in an effort to force myself to slow down a bit and actually relax, I started watching a few episodes of the hit-show The Goldbergs, which is set in 1980s Pennsylvania. Mrs. Superhero claims that I am really half-watching and half-working on my laptop, but that is a subject for another article.

In an episode I watched last week, Murray, the family patriarch, is sitting in his recliner, sans pants, and his wife, Beverly, is in the kitchen, when his oldest son, Barry, approaches and asks for money. Here is their conversation:

Barry:  What if I told you one day there’d be a piece of technology that can guarantee I play professional basketball? Well, that day has come. The Reebok Pump. A cushion of air around the foot that literally allows you to defy the laws of gravity. And the amazing part? It’s only $175. Don’t say no.

Murray: No.

Beverly: Honey, I’ve got a pair of Reeboks upstairs you can have.

Barry: Oh, really? Can I please borrow your beige mom sneakers? Listen! My dream is to be a basketball superstar, not a nurse!

Murray: Well, here’s the thing about your dream. It’s stupid.

Barry: You have the money. Just get your pants and give it to me.

Beverly: Barry, your father’s pants are not a bank.

Murray: Money comes from hard work, you moron. You really want those shoes, come down to the store and work for ‘em.

Barry: Fine! But when I get to the NBA, and you want my autograph, I’m signing it, “Worst wishes, Barry.”

As I watched this episode, all I could do was laugh–a lot. An hour later, as I lay in bed, my stupid brain could not stop thinking about this conversation and the events which followed.

Barry Goldberg begins working with his father at the local furniture store. Ironically, he is a natural salesman and does very well, but his success comes after some early struggles. When his first payday arrives, Barry is astonished to receive a paycheck for $33.

Barry: Is this some sick joke? Oh. You’re just busting balls, huh? This is a joke paycheck.

Murray: I wish I was busting balls. Welcome to the real world.

Barry: I know I made more than this. Why is it so low?

Murray: Taxes! You got federal, state, social security, F.I.C.A..

Barry: What are you talking about? Those aren’t real things.

Murray: Did you ever go to school? Taxes? Those are totally real things.

Goldbergs

 

 

 

 

 

 

 

 

 


Tough Love and Tough Lessons

In these two brief scenes, Barry Goldberg’s words and behavior provide a glimpse into the American entitlement culture and the interconnected role of money.

-Barry is easily swayed by the power of advertising.

-Barry expects money to be given to him rather than earned.

-When Barry begins to work, he overvalues his contributions and expects unrealistic earnings.

-Barry is oblivious to the basics of federal and state taxes.

Fortunately, Murray Goldberg, while unconventional, is a good dad at heart and teaches Barry key lessons in a very short time.

-Money is easy to spend but difficult to earn.

-Money comes from hard work, moron!

-Taxes are a painful reality.

Early Money Lessons

Fortunately, Superhero Dad wasn’t too much like Murray Goldberg when I was growing up. He wore pants, most of the time, and didn’t call me and my siblings morons.

Like Murray, Dad worked hard to provide for our family, and he made sure that we did not go without anything which was truly a need.

On the other hand, we experienced our fair share of tough love, and I am grateful for that today.

Like Barry Goldberg, I used to ask Superhero Dad for money for many unnecessary things, like going to the movies with friends or baseball cards. I quickly learned a simple lesson:

Work and get paid; don’t work – don’t get paid.

When Dad opened up his wallet, I could be sure that I would soon be raking leaves, mowing the lawn, or climbing up on the roof to clean out the rain gutters in order to earn the money bestowed upon me.

The Finance Superhero Plan for Raising Financially-Literate Children

Mrs. Superhero and I do not yet have children of our own. However, between the two of us, we know a thing or two about teaching children as a result of our professional backgrounds. When we do have our own children, we will carefully implement the following techniques and teach  financial lessons:

We will let our children see how we manage our finances. We will be appropriately transparent, within obvious reason, so our kids learn the value of money.

We will implement commission rather than allowance. Our children will learn that those who work get paid and those who do not work do not get paid.

While the importance of work and the natural compensation which follows will be emphasized, we will teach our kids that not all work is for the purposes of getting paid. Sometimes, we will roll up sleeves and work to serve other people and support the community. Sometimes, we will work to care for our own household or personal belongings. Pay is not to be expected for all work.

We will guide our children to give, save, spend, and invest. Dave Ramsey touts the “give, save, and spend” mantra, in that order, and I don’t have a problem with it. We want our children to experience first-hand that that money is not meant for hoarding; rather, it is a tool to take care of both oneself and others, too.

As a result, some of our children’s savings will be in a liquid money market or savings account. This won’t be about earning interest, which will be low, but it will show our children the value of having money remaining and to teach them not to spend all they earn. When they want to spend all of their money and deplete their savings, we will let them from time to time (this will be SO painful for me!) and allow them to learn from their mistakes at an early age.

In addition to learning about spending and proper decision making, we will teach our children about the power of investing when their limited earnings permit it. We believe that children can learn the power of compound interest at an early age. If their earnings won’t support investing, we will involve them in the process of funding their ESA and 529 accounts when they are mature enough to understand.

Likewise, we will emphasize the importance of investing to instill a long-term mindset. We will start them early on this so they think investing is “just normal” and “what everyone else does.” They will be astonished when they look up as adults and see that their once small investment has grown due to time and compound interest.

Leaving a Legacy

As Mrs. Superhero and I get closer and closer to starting a family of our own, I have thought increasingly about the legacy we will leave behind. I have thought about all I have learned from my elders, including Superhero Grandpa (and Grandma) and Superhero Dad (and Mom). I know I will be like most parents and rarely have all the right answers.

In the ancient Book of Proverbs it is written, “A good man leaves an inheritance to his children’s children.” Through education and experience, we hope to leave this kind of inheritance, built upon a foundation of love, wisdom, and stewardship.




Readers with children, what have you taught your children about money? Do you provide an allowance? At what age do you believe children should begin learning about money?

Readers without children, how did your parents teach you about money? What lessons remain vivid in your memories today?

The Staycation: A Cure For Burnout

One month ago, Mrs. Superhero and I were about to embark on a vacation to Nashville, Tennessee. We had our hotel room booked, dinner reservations were made, and our itinerary was packed, with plans to visit the Parthenon, the Grand Ole Opry, and check out the local music scene. When we received word that one of our preferred dog breeders had puppies available, we scrapped the vacation plans in order to stay home with the newest addition to our family.

Our Easter surprise
Our Easter surprise

Give us some credit! At least we tried to take a vacation.

According to Kelly Phillips Erb at Forbes, most Americans utilize only half of their allocated annual vacation time, while seventeen percent (!) use no vacation time at all. This shouldn’t be too surprising. Erb cites a 2013 American Express press release figure stating that the average American vacation costs $1,145 per person, or an astounding $4,580 for a family of four. What was once a summer tradition for nearly all families in previous generations has become an impossibility for many families today.

While our planned vacation would not have cost anywhere near these figures, it would have represented a significant cost. At the top of the list of projected costs, of course, were hotel fees, fuel, and meals.

And while we would have been fortunate to avoid the high costs of flight tickets, Disney World passes, and the uncertainty and stress of international travel, our vacation would have been a busy one. Truth be told, I was exhausted prior to the vacation and was already looking forward to my vacation from the vacation.

Why Americans Overspend on Vacation

Based upon the aforementioned average vacation costs, there is little doubt that the average family is spending obscene percentages -around 10 percent- of their annual income on vacations.  While the reasons for this are varied and plentiful, the opportunity cost is devastating. And the average family does not even realize it.

Imagine spending $2,000 per year on vacation and saving the remaining $2,580 each year for 10 years. I think I could live with that scenario. Factor in compound interest, if you were to invest that money each year. I hope I have your attention.

Excuses, Excuses, Excuses . . .

Over the years, I have most often heard the following rationales excuses for overspending on extravagant vacations:

But my kids deserve a vacation!

I will not debate the fact that your kids likely want to go on a vacation. Whether they deserve one is not my place to determine. However, I can determine this with certainty: Your kids want quality experiences and your undivided attention, neither of which cost $4,580.

My greatest memories of childhood vacations involved inexpensive vacations. My family always had fun staying in average hotels, eating in local diners and mom-and-pop restaurants, and partaking in reasonably-priced attractions.

Years later, your kids won’t remember the vacation more fondly because of the money you spent. They’ll remember the time you spent together!

Everyone else has been to ________.

The Keeping Up With The Joneses mentality is nearly as powerful as the kids-related guilt trip, by my observations. The problem? Keeping up with the Joneses is one of the most anti-Superhero moves you can make. The Jones financed their $4,580 vacation on their American Express card at 25.99% interest. It is OK, they insist, because the monthly payment is “manageable.” The Joneses probably lease a vehicle or two, as well. Don’t even think about following the Joneses. They’re likely broke.

The Solution

When planning a vacation, Mrs. Superhero and I have very different ideals. She would be happy to be parked on the beach for 16 hours per day, while to me, this sounds a lot like a scene from Dante’s Inferno. I am good for a couple hours at the beach, but afterwards, I suffer from insatiable wanderlust. I long to see and do everything a locale has to offer. Yes, the Superhero Principle of Maximization has even followed me into the realms of vacationing. I am sure Mrs. Superhero and I are not the only couple to experience this kind of disagreement.

Despite our differences, Mrs. Superhero and I always have fun on vacation. We both understand that everyone needs to recharge from time to time. Most employers today provide vacation time in order to ensure that their employees avoid burnout and remain productive in their roles. However, the type of vacation we have been reviewing thus far rarely offers the opportunity to recharge.

Ever feel like you need a vacation from your vacation when you return home? Bingo.

The Staycation

Based upon my most recent experience, I believe the staycation is the answer to all of our problems. Compared to a vacation, a staycation allows for several built-in savings:

  • No hotel fees ($100-300 per night, on average)
  • No rental car ($50 per day, on average)
  • No obligation to eat 2-3 restaurant meals per day ($10 per person per meal, on average)

With the realized savings (likely exceeding $1,000) associated with a staycation, you are presented with several opportunities:

  • Go out for one nice meal at a restaurant you would not normally visit
  • Complete a necessary home improvement project (Boost your home’s value by choosing an improvement with a high return on investment and increase your equity at the same time)
  • Get started on a side hustle
  • Visit friends and family
  • Actually rest!

My Staycation

The time away from work turned out to be the perfect cure for the burnout I had been experiencing. During our staycation, Mrs. Superhero and I reaped the benefits of several of the suggestions listed above. In addition to bringing home our new puppy, Coda, we were able to spend time with our newborn niece, experience quality time with my in-laws, host friends for dinner, and complete many items on our spring cleaning list. I took a nap every afternoon, read several quality books, and took Mrs. Superhero to a couple restaurants we had been waiting to visit.

Coda, our adorable teddy bear
Coda, our teddy bear

Perhaps most importantly, I launched FinanceSuperhero after several months of contemplation and poking and prodding from Mrs. Superhero. I had an incredible amount of fun and began work on a project that will hopefully help thousands (eventually) of people Restore Order to their World of Finance.

Further Benefits of the Staycation

Obviously, the opportunity for savings associated with a staycation are sizeable. Depending upon your circumstances, you might invest your realized savings, build your emergency fund, or use them to reduce or eliminate debt. You can be responsible while having fun!

Staycation Pitfalls and How to Avoid Them

When planning a staycation, follow the Know Thyself Superhero Principle. You have inherent weaknesses which threaten to derail your staycation, and it is up to you to know yourself well enough to neutralize the threats posed by your weaknesses.

If you have a tendency to work too much, even when you are on vacation, take concrete action to prevent this. Unplug your devices, set an auto response to your e-mail, and let clients and associates know in advance that you will be unavailable for the duration of your staycation. Provide an alternate contact who can handle matters and contact you in case of emergency or crisis.

If you have are in the habit of wasting time off completely by mindlessly watching TV or sleeping in until noon, you need to anticipate these problems and build in structure to your staycation. While you need to rest, this should be planned to some extent. Develop a loose, non-restrictive itinerary with your spouse/family so everyone is in the same page. Base the itinerary on designated priorities for your staycation.

If you are likely to spend too much money, be certain that you create a line item for your staycation in your monthly budget. Most Superheros will create a separate budget. Yes, make a separate budget for your staycation, even if you do not plan to spend sizeable sums of money. Without hotel and travel costs, you should be able to afford a few luxuries, such as massages, nice dinners, or shopping trips; your budget will help you understand what opportunities are within your reach.

Plan Your Next Staycation

If the concept of a traditional vacation stresses you out, straps your cash, and leaves you feeling like you need a vacation from your vacation, a staycation may be right for you. A staycation allows for time to rest, revisit and reevaluate your goals, focus on helping others, and declutter your financial life, among the aforementioned possibilities. What are you waiting for?


Have you planned a recent staycation? How did you maximize the realized savings? What are your favorite staycation activities? Share your tips in the comments section.

Five Reasons Why Everyone Should Have a Budget

A few weeks ago, I was lamenting the cost of graduate school with a friend over coffee. I commented that I had no idea why so many people were willing to go back to school for an MA or MBA and happily load up on debt that would have to be factored into their budget.

Yup, I said the b-word. My friend winced, as if I had just kicked him in the shin under the table.

For reasons I will forever struggle to understand, the word budget is a major taboo in today’s culture. Of course, I have never let that fact deter me in the past, and I wasn’t about to let it in this conversation, either.

“You do have a budget, right?”

“No. . . Budgeting just isn’t my thing. Besides, I’m always going to have debt anyway. What’s the point?”

Sadly, this attitude isn’t all that uncommon today. Chances are, you have also had similar conversations with friends, relatives, co-workers, or maybe even your neighborhood barista.

This, my fellow Superheroes, is a tragedy. With proper budgeting, there is no reason that the average person today cannot retire a millionaire and live a life of financial independence.

Five Reasons to Budget

While there are far more than five reasons everyone should have a budget, today I will present five reasons. My intention is to make you think and simultaneously stir your emotions. After reading this, please do not go another day without having a budget in place for your family.

  1. A Budget is Easy to Create

I am convinced that the average person’s aversion to budgeting stems from the budgetary failures of both federal and state government units. They ask, “If they can’t figure it out, how am I supposed to do it?” In my home state of Illinois, for example, our elected representatives and Governor have consistently demonstrated an inability to play nice and do what is best for their constituents. Ironically, the Illinois General Assembly recently enjoyed a vacation after months of accomplishing nothing.

With a Superhero mindset, you can do much better. Let’s walk through the basics of a simple starter budget:

  • If you have an understanding of addition, subtraction, basic fractions, and can operate a calculator, you can do a budget. Grab a pencil, a legal pad, and get started.
  • List your income from all sources at the top of the page. I recommend using net income, commonly referred to as “take home pay.”
  • Gather information on your fixed necessity expenses: mortgage/rent, utilities, and medications.
  • Gather information on your flexible necessity expenses: food/groceries/toiletries, clothing, and fuel/transportation.
  • Gather information on your discretionary expenses: restaurants, entertainment.
  • Calculate the total of your expenses and subtract this figure from your total net income. If you are spending more than you are earning, something must change.  First of all, aim to reduce unnecessary discretionary spending. Next, explore ways to reduce/eliminate restaurants, save on groceries and toiletries, and formulate a plan to reduce fuel/transportation expenses through well-planned travel. If you have money remaining at the end of your budget, it can be used to build your emergency fund, pay off your debts, and give to organizations/individuals in need.
  • Lastly, examine your fixed expenses and explore all avenues to reduce them. This can be done by paying off debts, thereby reducing your monthly obligations, negotiating rent/refinancing your mortgage (especially if your mortgage is 3-5 years old, you may be missing out on historically low interest rates), and reducing your usage of utilities. Any additional cash you can save is equivalent to receiving a raise.

Note: I realize that this guide to a simple starter budget is basic. We will dive into the nuances of a more detailed budget in a future post. Your starter budget will be approximate. That is OK. The goal is for you to establish a wide lens view of your current income and spending. When assembling future, more detailed budgets, we will use budget software, such as EveryDollar, to add precision to our process. If you prefer, you can jump to this step rather than the old-fashioned paper and pencil method outlined above.

  1. A Budget Puts You in Control of Your Money

Superheroes, you work hard to earn your income. I know I do. Without a budget, it is difficult to keep your income inline. Each dollar you earn in your lifetime is like a tiny employee that is ready to work for you. You wouldn’t hire an employee for your department or business and fail to provide her with a detailed purpose and role. If you did, you would be a poor boss. Employees need guidance and structure to succeed, and your money is no different. Put those dollars to work by assigning them a unique role. That begins and ends with a budget.

  1. A Budget Requires You to Pay Attention to Your Money

With several Mr. Washingtons working for you, suddenly doing exactly what you tell them to do, things begin to change. Suddenly, you notice that your grande non-fat no whip latte costs you $7 each morning. You may even experience a bit of pain upon realizing that this equates to $35 per week and over $1800 per year.

Is this worth $1800 per year?

Noticing details like this is just the beginning when you maintain a monthly budget. And when you start to pay attention, innocent trips to the ATM don’t seem quite so innocent anymore. You begin to think twice before you spend because you understand the ramifications of departing from your plan, a point which segues nicely into the next reason to budget.

  1. Operating Without a Budget is a Missed Opportunity

Though the US government prints money like it is going out of style, you and I know that money is a finite resource. Each of us has a limited number of working years, and logically, our earned income is similarly limited as a result. Do not let any of it go to waste. You must be intentional to be successful.

Today, more and more people strive to out earn their stupid spending. They work long hours to pay for cars, boats, and summer beach homes, yet they are too busy working to enjoy the fruits of their labor. I am not condemning hard work, nor am I saying that you should not have nice things. However, as Chris Hogan puts it, “I don’t want nice things to have you!” If you do not have a budget, your hard-earned money is likely being wasted on buying things you don’t need to impress people you don’t even know. The longer you continue this way, the longer you are missing out on what Albert Einstein dubbed the Eighth Wonder of the World: compound interest. And in this case, being late to the party isn’t fashionable; it’s foolish.

For example, consider the following scenario: 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.

  1. A Budget is Freeing

When my friend claimed that a budget really wasn’t his thing, I immediately realized that he had never experienced the freedom that results from a fine-tuned budget. When you maintain a budget, you have the benefits of:

  • knowing how much money you have at any given moment
  • knowing you do not have to fear a bounced check or overdraft fees
  • no surprises
  • peace of mind that comes from having budgeted for emergencies (a post on the value of the emergency fund and how much you may need is coming later this week)

Surprisingly, the notion that a budget is restrictive is pure nonsense. As a regular listener of The Dave Ramsey Show, I have heard countless “Debt-Free Screams” in which the callers said that planning a budget felt like they had received a raise.  

Lastly, a budget is freeing because it causes you to think.  Thinking leads to reflection, and reflection leads you to consider your values and decide what is most important to you. Value driven budgeting is the key to seeing beyond the numbers and focusing on the why behind the numbers.

What Are You Waiting For?

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 one’s money.


Do you have a monthly budget? How you maintain it? How much time do you spend on budgeting each month? Please share your thoughts on all things budget-related in the comments section below.