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Overcome FOMO (Fear of Missing Out) in 7 Steps

When I was 14, the band Styx came to town. I didn’t even know who they were until two weeks before the concert, but I quickly fell for their music and its driving rhythms, synthesized sounds, and meaningful lyrics. You might think that you’re not familiar with the band, but you probably are, as almost everyone knows and loves the song “Mr. Roboto.”

But I have a different favorite Styx song, “The Grand Illusion.” It begins:

Welcome to the Grand Illusion
Come on in and see what’s happening
Pay the price, get your tickets for the show
The stage is set, the band starts playing
Suddenly your heart is pounding
Wishing secretly you were a star. 

But don’t be fooled by the radio
The TV or the magazines
They show you photographs of how your life should be
But they’re just someone else’s fantasy

So if you think your life is complete confusion
Because you never win the game
Just remember that it’s a Grand Illusion
And deep inside we’re all the same.
We’re all the same…

Who knew that Styx wrote the book on FOMO?

Overcome FOMO (Fear Of Missing Out)In 7 Steps


WHAT IS FOMO?

FOMO, or “the fear of missing out,” was added to the Oxford dictionary in 2013. However, as a phenomenon, it has been a fixture in our culture for far longer than that.

Consider the following examples of FOMO:

  • You invite a friend to a party at your apartment. She says she “might” drop by if time allows. The real reason for her non-committal response? She wants to make sure she doesn’t commit when there might be a better option that evening.
  • You’re scanning through your feed of Instagram photos of your friend’s vacation; everyone appears to be enjoying themselves in the photos, and you start wishing you had gone along. In order to make yourself feel better, you post a picture from your average weekend and use your favorite filter to make it appear glamorous, spreading the FOMO to other unsuspecting friends.
  • While driving home from work, your iPhone buzzes in your pocket. You can’t stand not knowing what your friends are up to, and you begin texting while driving.
  • You and your significant other are enjoying a romantic dinner in celebration of your anniversary. While this is undoubtedly a special time, you cannot stop your compulsion to check your lock screen for new push notifications.
  • After a long week at the office, you feel lucky to have survived and plan to celebrate by ordering takeout and watching Netflix at home. Then your best friend calls and begs you to go out. You ignore your body’s urge to rest because you don’t want to miss out on the fun. Consequently, you get sick.

You certainly can think of countless other examples of FOMO. After all, we live in a wide world of opportunity, so in a sense, you are always missing out on something at any given moment.

The fear of missing out is powerful.
The fear of missing out is powerful.

THE PSYCHOLOGY BEHIND FOMO

Undoubtedly, the fear of missing out causes us to act, often against our inner desires. Yet, this is ironic, as it is human nature to always be missing out on something!

Research by Tversky and Kahneman reveals that FOMO is deeply rooted in people’s strong tendency to want to avoid any losses, a theory referred to as loss aversion. In fact, they discovered that loss aversion is so powerful that it makes losses twice as psychologically-impactful as gains.

Another possible explanation for FOMO is The Paradox of Choice, a theory propagated by Barry Schwartz in The Paradox of Choice: Why More is Less. At a basic level, Schwartz’ theory states that an increased number of choices generally contributes to decreased happiness with our choices. As Schwartz says in the TED Talk video below at the 7:45 time mark, this increased choice has two possible outcomes:

One effect, paradoxically, is that it produces paralysis rather than liberation. With so many options to choose from, people find it very hard to choose at all. . .

The second effect is that even if we manage to overcome the paralysis and make a choice, we end up less satisfied with the choice than we would be if we had fewer options to choose from.

If you haven’t viewed this TED Talk, I highly recommend you view it now, even in lieu of finishing this piece.


FOMO SUSCEPTIBILITY

At a person’s core, susceptibility to the fear of missing out may be traced back to mindset. For example, while innovators and trend setters naturally do not entertain the fear of missing out, followers are prone to dwell on these types of thoughts.

Schwartz theorizes that two prominent mindsets exist: “satisficers,” who settle for “good enough” and are generally happy, and “maximizers,” who focus upon always choosing the “best option.” Generally speaking, maximizers are more likely to experience FOMO and related indecision, both of which can lead to unhappiness and even depression.

On a personal level, I am a maximizer who suffers from an intense desire to always seek the highest and best use of my time. As I’ve written extensively about in the past, I constantly ask myself the question, “What is it time for now?”

When I can quickly ascertain an answer, this question guides my productivity and happiness. On the other hand, when analysis paralysis sets in, I often find myself in a deep funk. Typically, Mrs. Superhero kicks me out of the house and tells me to go for a run when this happens.

FOMO and social media are inextricably connected.
FOMO and social media are inextricably connected.

SOCIAL MEDIA CONNECTION

For many people today, social media is “the new smoking.” Rather than lighting up a cigarette upon waking up, after meals, and right before bed, we check Facebook, Twitter, Instagram, or Snap Chat compulsively. A very non-scientific poll conducted via my personal Facebook account revealed that this compulsion is real; I believe the results speak for themselves.

The results of a non-scientific Facebook poll on social media use.
The results of a non-scientific Facebook poll on social media use.

The connections between social media and the fear of missing out are obvious. A quick scroll through your Facebook News Feed is all that is necessary to stimulate FOMO and related emotions. We see our friends going on vacations, buying huge houses, leasing Audis, and adding to their designer wardrobes.

Seeing it is one thing, and being happy for your friends is another; yet when envy, jealousy, and disbelief set in, it is a problem.


FOMO AND FINANCES

For the person attempting to live frugally or simply adhere to a set of financial goals, the inundation of pictures, statuses, and tweets serve as constant reminders of a lifestyle gap. Over time, they can be too much to bear.

Eventually, enough is enough, and we splurge a little in order to discover whether we really are missing out.

Perhaps the most notable and obvious manner in which FOMO impacts the average person’s finances lies in its impact upon spending. Research conducted by Eventbrite, in conjunction with Harris, shows that approximately 69% of millennials experience FOMO. This phenomenon has led millennials to value experiences more so than the milestones and rites of passage of previous generations. Yet the trend cannot be fully-attributed to this generation; since 1987, consumer spending on experiential events, such as concerts, performing arts, and athletic events, has risen by 70% relative to total United States spending.

American spending on experiences as a percentage of total consumer spending (Credit to Eventbrite and U.S. Department of Commerce, Bureau of Economic Analysis)
American spending on experiences as a percentage of total consumer spending (Credit to Eventbrite and U.S. Department of Commerce, Bureau of Economic Analysis)

FOMO also rears its ugly head among investors. According to Peter DeMarzo, Financial Group Professor of Finance at The Stanford Graduate School of Business, “Investors fear being poor when everyone around them is rich.” DeMarzo and his colleagues conducted research which showed that investors tend to flock toward high-tech investments which promise vast growth potential. “These are typically high-risk stocks that, in seven out of eight cases, are likely to go bust. But people are willing to invest in them in the hopes that they’ll hit that one-in-eight jackpot,” according to DeMarzo.


FIGHT BACK AGAINST FOMO IN 7 STEPS

By now, I hope I have adequately stated my case: the fear of missing out can impact all of us in many ways. However, I believe that self-understanding, accountability, and decisive action can help anyone fight back against FOMO.

Ironically, the fear of missing out can cause you to miss out on what is most important to you if you allow it to control your actions. But if you strive to live with a purpose and seek to do what you value most, you can be confident in all of your decisions, financial or otherwise.

Don’t give up on the thing you want most to get what you want right now; in the heat of the moment, remind yourself that temporary sacrifice for long-term gain is worthwhile.

7 ACTION STEPS TO OVERCOME THE FEAR OF MISSING OUT

1. Maintain a budget. I know that many people are in favor of tracking savings rate instead, which is a practice I respect. But a budget is a great safeguard against FOMO purchases because it equips you to say “no.”

2. Surround yourself with like-minded people. Admittedly, this can be dangerous sometimes, but it is helpful when you’re trying to break away from FOMO tendencies.

You wouldn’t hang around alcoholics when trying to quit drinking yourself, would you? Stay away from those who enable and encourage your FOMO tendencies.

3. Implement a social media fast. Facebook and Instagram, in particular, have a way of making experiences appear much more exciting than they are, especially when filters are used.

4.Don’t deprive yourself to unreasonable levels. Keep enough fun in your life and be genuinely grateful for blessings and fun opportunities. Gratitude is a formidable power against FOMO.

5. Identify your values to minimize the power of the fear of missing out. When you know what is truly important to you, FOMO will lose its power In your life.

Related:  Values and Budgeting – Part One and Values and Budgeting – Part Two

6. Intentionally disconnect from technology several times throughout the day. As previously mentioned, this could include abstaining or fasting from social media. Fellow bloggers might find it hard to stop the stream of networking, supporting others, and self promotion, but this can be a healthy practice, even if just for a few hours.

This afternoon, I escaped from the rest of the world for two hours while mowing my lawn, tending to my rose garden, and watering my potted plants. A mere two hours helped me to refresh my mind and focus on what is most important to me.

7. When you are with others, put away your phone. Use FOMO to your advantage and don’t let yourself miss out on human interaction. After all, real communication and interaction with others is a central human need; to be loved and understood serves as a bridge between the Love/Belonging and Esteem levels on Maslow’s Hierarchy of Needs. If you have trouble enforcing this, play the Cell Phone Stacking Game: stack your phones in the middle of the table during dinner or happy hour, and whomever checks their phone first pays for dinner or the first round of drinks.

Maslow's Hierarchy Of Needs (Credit: Wikipedia)
Maslow’s Hierarchy Of Needs (Credit: Wikipedia)

Fighting back against FOMO requires dilligence, self-awareness, accountability, and decisive action. However, effort in these areas can contribute to increased happiness, productivity, self-esteem, success, and eventual financial independence.

In closing, I offer more wise words from Styx:

America spells competition, join us in our blind ambition
Get yourself a brand new motor car
Someday soon we’ll stop to ponder what on Earth’s this spell we’re under
We made the grade and still we wonder who the hell we are


Do you struggle with the fear of missing out? Does it cause you to act in ways which do not align with your values? Does it impact your spending habits? What steps have you taken to lessen the impact of FOMO in your life?

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?

My Biggest Financial Mistakes

With a pseudonym like FinanceSuperhero, you might think I have always had my finances in order, or even that I do in the present. In truth, Mrs. Superhero and I are on a long and winding journey with money, just like each and every other person we know. That journey has seen its share of triumphs and more than its fair share of blunders. Worse yet, some of these errors are ongoing, waiting to be corrected.

In today’s post, I am aiming to be transparent about my past and present financial mistakes. I hope that in doing so others will be spared from making similar mistakes and that greater accountability (and maybe even some self-embarrassment) will drive me to corrective action.

A $650 Meal in Europe

As a college freshman, I was fortunate to have the opportunity to tour Germany, Austria, and Hungary as a member of my university concert band. While I was not terribly excited about the tour at the time, I look back on the experience today and recall fond memories of staying with host families, experiencing the true culture of three unique countries, sharing the gift of music, and performing service projects.

Playing my trombone in downtown Halle, Germany
Playing my trombone in downtown Halle, Germany

When I embarked upon the tour, I felt secure that I had planned ahead and accounted for all of my needs for the roughly three week adventure. For necessary purchases, I planned to utilize a balance of cash, my debit card, and my credit card. Like most college students, I was poor and on a limited budget, so keeping close tabs on all purchases was of paramount importance.

On my last afternoon of the tour, while waiting for my return flight to Chicago, I made an innocent yet costly mistake: I purchased dinner at the airport Burger King using my debit card.

Fast forward two months later. I had just arrived home after working a long shift at the local movie theater back home in Michigan, when it occurred to me that I had not received a checking statement in the mail in quite some time. Keep in mind, internet banking was in its infancy at this time, so I had not yet enrolled via my financial institution. After a filling out a few online forms, I registered my account online and logged in.

Though I was a working-poor college student, I prided myself on always maintaining a small buffer in my checking account. When I clicked on my account details, I was horrified to discover that my account was overdrawn by nearly $1,000! As you can imagine, I frantically called my bank to inquire as to how this could be possible, as I hadn’t used my debit card since my dinner at the airport Burger King.

BK
A delicious meal, but not worth $650

The bank representative with whom I spoke gently informed me that my most recent transaction –again, Burger King– and the accompanying international transaction fee caused an overdraft on my checking account of roughly $2. Naturally, I was irate: at myself for my carelessness, but also at the bank, as I had not received a statement or a phone call regarding the overdraft.

The kind gentleman, who had already taken a verbal lashing from me at this point, explained that my statements had been mailed twice, along with multiple First Class letters informing me of the overdraft. The problem? The statements and letters had been sent to my university mailbox, over 200 miles from home.

My focus of my ire quickly shifted from the bank to the university mailroom. After calming myself, I made a phone call to the mailroom to question why I hadn’t been receiving forwarded mail. The clerk I spoke to promptly checked my records and revealed that I had made an error: in the midst of my haste and eagerness to check out for the summer and prepare for the European tour, I had checked the box associated with the prompt to leave my mailbox open during the summer instead of the box associated with mail forwarding. I sheepishly thanked the clerk for her help and phoned the bank an additional time in a list ditch effort to recoup some of my losses.

To make a long story short, I placed a long series of phone calls and was able to sweet talk my way out of approximately $350 in overdraft fees, leaving me with a $650 bill. Much of my summer earnings had already been committed to purchasing textbooks, so I spent my work study earnings during the first two months of the subsequent fall semester repaying the fees and penalties.

To date, this fateful meal at Burger King remains the most expensive meal of my life, and a small part of me still cries when I smell a flame-grilled Whopper.

Current Mistakes

Fortunately, I have come a long way with regard to handling my finances since college. As a junior, I began meticulously tracking my transactions and maintaining a rough budget. Shortly after graduating from college and before securing my first job, I was introduced to the teachings of Dave Ramsey and became a Dave super fan overnight; I read The Total Money Makeover in one day, began listening to The Dave Ramsey show podcasts during workouts, and even bought a Dave Ramsey show t-shirt. I was drinking the koolaid!

Prior to marrying Mrs. Superhero, I made some wise financial decisions. Rather than buying a new car like many of my friends, I continued to drive my 2000 Ford Taurus. While many friends rented their own apartments, I rented a room from a friend-of-a-friend for $400 per month. I lived on a tight budget, to say the least.

Mrs. Superhero and I have now been married for six years, and life is good. Don’t let me fool you, however; I have made some careless financial mistakes!

  1. Mrs. Superhero and I do not have wills at this time. Granted, we do not yet have children at this time, but with the prevalence of online will services, I really have no valid excuse for this.
  2. Two years ago, Mrs. Superhero and I got the itch to pursue quotes for finishing our basement. Despite receiving an alarmingly-high end quote from an unnamed company, we submitted a deposit and signed a contract to have a portion of the basement finished. That night, I awoke at 2AM in a cold sweat and realized our mistake. I called the next morning and cancelled, and because we did so within a specified window, our deposit was returned in full. While there was no harm done, this was a potentially-dangerous, stupid decision.
  3. When purchasing our home, Mrs. Superhero and I took out a 30 year mortgage. At this point, many of you are surely thinking, “So? What’s the big deal?” While our mortgage is well within an affordable range (less than 25% of our monthly income), we would obviously be much better served by saving significant interest with a 15 year mortgage. Fortunately, we have a fine interest rate, which makes refinancing unnecessary as long as we begin paying the mortgage at an accelerated payoff rate in the near future.
  4. My kryptonite is food, but you already knew that from the aforementioned Burger King fiasco. I enjoy dining out at restaurants more than the average person, which often leads to inflated restaurant spending. Worse yet, I don’t even feel bad about it some months!

There you have it, readers. If you didn’t realize it before, now you know: FinanceSuperhero is a mere personal finance mortal after all.


Readers, what has been your biggest financial mistake? How much did it cost you?

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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?

Protect Your Future With Sinking Funds

My earliest job as a child was mowing the lawn. One hot Michigan summer afternoon, Superhero Dad decided it was about time for me to contribute to yard work beyond raking leaves in the fall. After a few minutes of coaching on how to prime the gas line, start the engine, empty the mulch bag, and operate the self-propelling mechanism, Dad headed inside and left me to get to work.

Our lawn was average for our neighborhood: one-third acre in size, trees and other obstacles galore, and dusty. I quickly learned to hold my breath when emptying the bag into the backyard compost pile.

After approximately two hours of navigating countless twists, turns, and bumps, and contemplating the treasures I could purchase with my new income, my work was complete. Like any self-respecting nine-year old, I marched up to Dad, who was reading the newspaper in his recliner.

“I’m done,” I said, extending my open hand in anticipation of a rich payment.

“OK. Let’s go take a look,” Dad replied.

After touring the yard and noting the deficiencies in my work, the long-awaited moment finally arrived. Dad reached into his pocket and presented me with a crisp $5 bill.

I don’t recall experiencing any exuberant emotion at the time, though in hindsight, $5 was probably a fair lawn-mowing rate for a nine-year-old boy in the mid-1990s. But I do remember walking to my bedroom, closing the door, and slipping Mr. Lincoln into a manila envelope in my night stand.

Envelopes Everywhere

Like many of my earliest financial lessons, I learned the practice of safe-guarding my money in envelopes from Superhero Grandpa. Grandpa had envelopes for everything, each with a hand-written label, secured behind the solid walls of his safe.

I didn’t know it at the time, but several of Grandpa’s envelopes were intended to save for future purposes. Among the purchases made from one of Grandpa’s envelopes was one of the last vehicles Grandpa purchased: a brand-new 2008 Honda Accord EX-L. The story of how Grandpa walked into the showroom with a brown bag full of cash one day after test driving an Accord is one of my all-time favorites.

My 2008 Honda Accord EX-L
My 2008 Honda Accord EX-L

One year after Mrs. Superhero and I were married, Grandpa approached me and asked if she and I would be interested in buying the Accord; he had already gotten the itch to purchase a new vehicle. We were desperately in need of a fuel-efficient vehicle and had been saving money for months.; yet, at the time, purchasing the vehicle would have been a bit of a stretch.

After a few months passed, we finally had enough money saved to purchase the car. My hand trembled a bit as I sat down to write Grandpa the largest check I had ever written (at that time).

“Can you take me out for a ride in your new car?” Grandpa asked me.

“Of course,” I said. “Where are we going?”

“The bank,” he replied.

Moments later, we arrived at the bank. What I anticipated would be a short, unremarkable trip turned out to be lengthy and memorable.

“I want to cash this check,” Grandpa informed the teller.

The teller examined the check and flashed a stunned look, first at Grandpa, then at me.

“Sir, I have to recommend against keeping this much cash on hand. Would you like to make a deposit into your savings account?” she asked.

“No. I want the money,” Grandpa retorted.

After the teller’s acquiescence and subsequent counting of many $100 bills, Grandpa and I exited the bank. I was terrified that we would be jumped, robbed, and left for dead in the parking lot. Luckily, my worries were unfounded, and Grandpa and I arrived safely back at the house.

True to form, Grandpa immediately removed his new stack of cash from the teller envelope, placed it in a manila envelope, and locked it in his safe, but not before counting it once more, just to be sure it was all there.

The Sinking Fund: An Update to Envelopes

I did not know it at the time, but Grandpa had just added to his always-growing portfolio of sinking funds.

For readers who may be unfamiliar with the term and its application in personal finance, a sinking fund is an account designed to save for specific future purchases. A sinking fund is different from an emergency fund, as its contents are earmarked with an anticipated purpose, while an emergency fund exists to cover unanticipated expenses.

While Grandpa’s approach was commendable, it is advisable to maintain sinking funds in a savings or money market account which is separate from your emergency fund. If you are able to meet minimum balance requirements, it may even be wise to open separate accounts for each sinking fund. You do, however, want to be sure that your money is not eaten away due to senseless fees.

As an alternative, provided you have a sufficiently-funded emergency fund, you could invest your sinking fund money in CDs if you know you’re not likely to need it during the term of the CD. You should be certain that investing the money and losing access to it for the duration of the term will not cause undue hardship.

The Sinking Fund Test: Do I Need a Fund For _____?

The number and type of sinking funds you maintain should be tailored to suit your individual circumstances. The following guidelines and questions are intended to spark careful thought and consideration.

What items are nearing the end of their anticipated utility? (In other words, what items are likely to breakdown or require repair in the next six months to five years?)

What degree of difficulty would be posed if you were expected to live without these items for a set time period?

What upcoming purchases and expenses can you reasonably anticipate and begin saving for with a sinking fund? (Hint: Christmas is in December this year!)

In summary: If an item is likely to soon need replacement or repair, you need a sinking fund for it. If you can’t live long without this item, you need a sinking fund for it. If an expense is anticipated to be due within the next six months to five years, then you need a sinking fund for it.

FinanceSuperhero recommends that you organize your sinking funds based upon priority (Ask: What is likely to break first?) and fund them according to your ability to do so each month. Develop a rough calculation of the projected cost for the item in question and divide that total by the number of months remaining until the expense is anticipated; this is the amount you should budget to save within the sinking fund each month.  Again, place funds in a simple money market account or high interest bearing online savings account, depending upon the amounts in question.

Among many other possibilities, the following items deserve your consideration when developing a list of necessary sinking funds:

  • Vehicle replacement
  • Christmas and birthday gifts
  • Vacations
  • Home repairs (roof, HVAC, sump pump)
  • Home renovations (basement renovation, kitchen and bathroom remodeling, sizeable landscaping or the addition of a deck or patio)

Readers, do you utilize the sinking fund approach? For what types of purchases do you maintain sinking funds? Where you do maintain your sinking funds?

The Superhero Guide to Maximizing Your Tax Refund

Tax refund: Next to the words “pay day” and “debt free,” these are my two favorite finance-related words. Whether my annual tax refund is a modest sum or a mid-size windfall, I am always happy to see my refund directly-deposited into my checking account.

I will not debate the merits of adjusting withholding to maximize your monthly income in lieu of a refund in this space. I have my reasons for continuing to maintain my withholding at its present rate to receive a refund, which I will share at a later date. Many of you will have equally valid reasons to adopt the opposite approach.

Assuming you have a tax refund coming your way, you are on the precipice of a great opportunity.  As a Superhero, you must know that with great opportunity comes great responsibility! In accordance with the Superhero values of Order, Precision, and Maximization, the following flowchart will help you to answer navigate the waters of a tax refund and make significant progress on your financial journey. I recommend following the steps in numerical order.

Superhero Steps to Maximizing Your Tax Refund

1. Give a Portion of Your Tax Refund to a Charitable Organization

It should not come as a surprise to you that I am suggesting giving as the first step. As previously mentioned, Mrs. Superhero and I have placed Giving at the top of our monthly budget. Giving aligns with our values, and helping others provides us with much more satisfaction and enjoyment than buying more stuff or eating delicious food.

Mrs. Superhero and I strongly believe that giving 10% is the best way that we can make a societal contribution prior to reaching financial independence (at which time we will significantly increase our giving). We have always done this, dating back to the time when we faced a mountain of debt, and we continue to do so today, even though we are mere months away from carrying no debt other than our mortgage.

Why?

As I mentioned, we believe helping others is the most satisfying use of our money. Giving is also a strong reminder that money is not something to be hoarded out of greed. We want to value money and practice good Stewardship, but we also want to remain far removed from the love of money.

Many people reject giving in favor of keeping their money strictly to themselves. Ironically, it is usually these same people who senselessly give their money to big banks and other financiers in the form of outlandish interest payments on cars, boats, and other stuff. Personally, I would rather give in a meaningful way.

Even if you give 1% of your tax refund, you will help others and begin to change the way you view money.

2. Increase Your Savings

After supporting societal progress by giving, use your tax refund proceeds to improve your liquid savings. Unless you are an extremely high income earner or have a stable passive income stream, you absolutely must have an Emergency Fund. If you do not have one, consider this a full-blown, alarm-sounding crisis that must be addressed immediately! Statistically-speaking, there is close to a 100% chance that you will experience some form of an emergency within the next decade, so be ready!

While I recommend maintaining an Emergency Fund of at least 3-6 months of minimum living expenses, you may also wish to establish an Opportunity Fund. I do not specifically recommend amounts or figures for this fund, and you may wish to skip it entirely in favor of moving onto Step 3. However, an Opportunity Fund could allow you to make a fun, somewhat impulsive decision without any accompanying feelings of guilt or regret.

3. Defeat Your Debt Once and For All

After you have given and increased your security via your Emergency Fund, you are fully-prepared to take on the primary villain standing in the way of Financial Independence: Debt.

The sooner you eliminate your non-mortgage debts, the sooner you free a significant portion of your monthly income and simultaneously gain the freedom to invest in tax-advantaged retirement accounts. Both the Snowball and Avalanche methods are valid means to achieve debt freedom. For the purposes of this post, I am less-concerned with the method you implement to eliminate your debt; just get it done. Your tax refund may be just the push you need.

4. Invest in Tax-Advantaged Vehicles

Upon donning your Debt-Free cape, the real fun can begin. If you are free from the shackles of debt, the next optimal use for your tax refund is to maximize your retirement contributions. For the purposes of this limited space, ensure you are maximizing employer-offered plans, specifically if they offer a match, and then move onto your Roth IRA and Traditional IRA.

5. Contribute to Your Children’s College Funds

If you do not have children, skip ahead to Step 6. If you have children, you need to learn the nuances of the Coverdell ESA (Education Savings Account, also nicknamed the Education IRA) and 429 plan. The ESA has income and contribution limits (currently $2,000 per year), but I recommend you start with the ESA in most circumstances, if eligible. The important thing to understand is that minimal contributions to these vehicles will place you in a position to send your children to college without the burden of student loans if you begin early.

6. Destroy Your Mortgage Debt

Pause with me for a moment and imagine a life without a mortgage payment. What could you do with an extra $1,000 per month? $2,500? $5,000. I just felt an overwhelming sense of peace typing these words. The next time I visit my doctor and have my blood-pressure checked, I am going to visualize the wonders of a mortgage-free life to improve my numbers.

For the average family, mortgage interest represents the second-largest expense that they will pay in their entire lifetime. In some cases, total mortgage interest paid on a 30 year mortgage can be approximately 75-80% of total principal, even at today’s advantageous interest rates! The peace I felt moments ago has now been replaced by an angry adrenaline rush. I want to crush my mortgage as soon as possible! Using tax return funds to accomplish progress on an annual basis could shave several years off your mortgage, especially if you are already paying extra on principal on a monthly basis.

7. Invest in Non-Retirement Funds and/or Real Estate

If you have made it to Step 7, please allow me to offer my congratulations. With no debt whatsoever, healthy savings, and kids’ college covered, you are poised to generate significant wealth. At this stage, you may have achieved Financial Independence, depending upon your lifestyle.

I recommend using tax refund money to invest in simple index funds at this stage. A modest tax refund sum is enough to get you started with many index funds. Adopt a long-term approach, relax, and watch your money grow.

Similarly, this is the time to invest in real estate, if interested. Becoming a landlord isn’t for everyone, and paying a property manager could eat into your net profit from owning a rental property. However, a rental property can yield some of the highest annual investment returns if managed well and purchased at prices below market value.

8. Maximize the Principles of Contribution to Improve Your Home

At this stage, true fun begins. When you are financially well-poised for the future, a tax refund represents an opportunity to both invest and add joy to your life simultaneously. This is the time to make improvements around your home which increase your happiness and feature a high return on investment.

Good examples: new front door, landscaping, kitchen or bath remodel, walkway lighting

Bad examples: swimming pools, basement refinishing, utility sheds

9. Build Sinking Funds for Bucket List Items

Last, but not least, comes additional saving for specific purchases. If you make it down to Step 9 when determining how to implement your tax refund, you are an authentic Superhero. I recommend establishing separate sinking funds for a variety of priorities, such as vacations, new car purchases, secondary homes, or major home additions.

The purpose of a sinking fund is to plan for future purchases which are far off in the future. At this stage, you do not want to be fooled into getting back into debt or be caught off guard by large, necessary expenses. With a sinking fund, you won’t be financially caught off guard when your house needs a new roof, your furnace fails, or your vehicle sputters and dies.

Final Thoughts

Again, I established the Superhero Steps to Maximizing Your Tax Refund with the Superhero values of Order, Precision, and Maximization in mind. I am confident that you will not fail to cover all of your bases by following these steps. Depending upon where you are in your journey toward Restoring Order to Your World of Finances, you may wish to skip steps or modify the order. For example, renters may wish to place saving for a home down payment in the Steps. As always, let your values guide your decisions at every step of your journey.


Readers, did you receive a tax refund this year? Are you currently awaiting a refund? How did you allocate the funds?

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.

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.