Category: Budgeting

How Our Home Is Helping Us Achieve Financial Success

One of the biggest factors in our ability to live below our means is the choices we’ve made when it comes to housing.  Here’s how living little has helped us pay off our student loans and other debt, save for retirement, build an emergency fund, and become self-employed, plus ways you can transform your home from a money pit into a financial asset.

When Ryan and I first met, he had just moved back to Kansas City from San Francisco.  Instead of renting an apartment in one of the new luxury complexes that scatter the suburbs, he leased a one-bedroom unit a mile from his work, built circa 1970.  While it might not have looked like much from the outside, this place was plush.  For a fraction of the price our trendy peers were paying, his apartment was outfitted with all of the appliances and fixtures you would need, plus it had a working fireplace.  We still talk about how much we miss that fireplace!  Saving big bucks on his rent meant that he could buy me this, without going into debt:

Once his lease ended, Ryan moved into the house I bought before we met.  After the stock market crashed in 2008 and the housing bubble burst in many parts of the U.S., the government offered significant credits for first time home-buyers.  I took advantage of the 2009 legislation that entitled new buyers a tax credit totaling 10% of the purchase price of the home or a maximum credit of $8,000.

I’d only been out of school and at my job for two years at that point, and while it was a stretch, I saw opportunity.  I was approved for a staggering $225,000 at 5.25% on a 30-year loan, which I remember people at the time telling me that rate was a steal!  After setting my spending cap well below the amount Wells Fargo told me I could afford, I started house-hunting, targeting a popular suburb in an excellent school district that had charm, character, and most importantly, great resale value.

At a little over 900 square feet of living space, my 1.5 story Cape Cod with three bedrooms and one bath, an unfinished basement and a single-car garage was more than enough space for just me.  In fact, before Ryan moved in, the upstairs bedroom was completely empty.  Even though he left his old futon and hand-me-down mattress in the dumpster at his old apartment complex, we were still a little apprehensive about merging our stuff and the prospect of sharing a single, tiny bathroom.

Turns out, sharing a bathroom was no. big. deal.  In reality, some of our best conversations happen in the morning, while one of us is in the shower and the other one at the vanity.  And while it may be small by today’s standards, when it was new, our post-war tract house built in 1951 likely housed a growing family with children, all of whom shared that single bathroom.

Going from paying for two homes to one, helped us free up money in our budget for other goals.  Since moving in together, we’ve had raises and job changes, refinanced into a 15 year mortgage at a much lower rate, rid ourselves of private mortgage insurance (PMI) and, after paying off our student loans in 2016, are now sending extra money to principal every month.

Living little also means lower utilities.  Even in an area where the climate has us constantly running either the furnace or central air, we pay less than $100 a month for natural gas and electricity, combined.  When you add up our utilities, insurance, mortgage and taxes, we’re spending about 15% of our take home pay on housing expenses.

Here are ways you can cut costs and save money on living expenses:

  • Don’t rent or buy more than you can afford. There’s nothing wrong with a big, stately new home or a loft with urban charm, if that’s your financial priority.  But you can’t have it all.  Build your budget around what matters most to you.  If that’s your home, you’ll need to find cuts in other areas to keep your budget balanced and healthy.
  • Find a roommate. Move back in with mom and dad.  Rent a room, either on Airbnb or by connecting with your local college or medical school to see if they have students in need of short term housing during their practicums, rotations or summer semesters.
  • Regularly look for ways to pay less. Compare renter’s or homeowner’s insurance rates regularly.  We switched and saved an extra $500 by changing companies and paying in full for the year.  If you have the Internet or cable, do the same thing.  Call and see if they’d be willing to lower your cost to keep you as a customer.  Trim your utility costs with a programmable thermostat, by dressing for the season instead of running the furnace or AC, insulating windows, outlets and attics, and by unplugging electronics while not in use.
  • Watch for hidden costs. Our homeowner’s association fees are a whopping $15 a year.  Sure, a community pool, fully-equipped gym, lawn and landscaping services, and other amenities may seem attractive, but you’re paying an inflated price for them.  Consider an apartment complex or a neighborhood without these up-charges.
  • Check on interest rates. Refinancing comes at a cost, both monetary and time, but it could be worth it.  When we refinanced, it not only lowered our interest rate, but the updated appraisal showed that the home had increased in value by nearly 15% in five years.  This increased value meant we were that much closer to having paid down the 20% required to get rid of PMI.
  • Consider location. While we live in a relatively low cost of living city, housing costs decrease the further you live from a major metropolitan area.  While I’m geographically tied to my job, I often think about the benefits of moving back to my hometown, where you can buy a house the same price as a new SUV.  With the rise of telecommuting, if you can find a job that pays big city wages, small town living can offer a financial edge over your downtown-dwelling or suburban HOA paying peers.

While timing has helped us, we’ve also been strategic in the choices we’ve made to rent, buy and now, stay in our current home.  Where you live is one of the biggest financial commitments you will make.  Avoid becoming house-rich and cash-poor by making smart moves.  Literally.

Five Financial Resolutions for the New Year

New Years is my favorite (because, champagne).  But really, I love cleaning out the clutter in my closets and my inbox, and contemplating how I can be and do better in the coming year.  This January, along with renewing your gym membership, join me in becoming more financially fit.

1. Create and follow a budget

Having a budget is foundational to financial success.  It’s important to know how much you spend and on what, balanced against what you earn, in an average month.  By knowing where you’re overspending you can begin to reallocate and regain control of your money, instead of letting it control you.

If you’re new to budgeting, aim for the 50/30/20 rule.  This means spending 50 percent of your income on needs (housing, utilities, groceries and insurance) 30 percent on your wants (eating out, shopping, travel and entertainment), and saving 20 percent.  If you have credit card or other consumer debt, flip-flop the numbers to put 30 percent of your income towards debt and spend only 20 percent on wants.

For more on how to build a budget, check out my Budget Basics series.

2. Pay-off debt

First, get caught-up on any past-due bills.  Harassing calls from creditors and a ding on your credit score that will follow you for seven years, are just some of the consequences of being late on payments.  If you need help getting your bills current, start a side hustle to earn extra cash.

Once you’re making the minimum monthly payments on all your bills, there are a few options for tackling your debt:

Snowball method – This philosophy recommends you list your debts in the order of the amount owed.  Continue to make the minimum payments, except on the debt with the lowest balance, which is the one you will focus on paying off first.  Once you’ve paid off that first debt, you move to the next debt with the lowest balance.  This method assumes you’ll find it easier to stay motivated when you’re rewarded more quickly with the elimination of individual debts.

Avalanche method – Instead of listing debts by amount owed, this philosophy has you prioritizing your debts by interest rate, starting from highest to lowest.  You will end up paying less interest and eliminating your debt-load more quickly by tackling your debts by interest rate, so long as you can remain committed without the psychological boost the snowball method offers.

Tax-advantaged loans last – Depending in your income, if you itemize on your tax return you may be able to deduct the interest paid on student loans, mortgages and other select debts.  If you benefit from these deductions, consider paying off these loans last.

3. Plan for emergencies

Everyone should have an emergency fund, but what that means is different for every situation.  Dual-income families, those who spend far less than they make, and renters may be comfortable with just a $1,000 buffer in their checking account.  Homeowners, single-income families, and those with unstable or commission-based jobs, may want to have more set aside.

Make sure you have adequate renter’s or homeowner’s insurance and expensive items like jewelry, electronics and art are covered. Also make sure your health insurance fits your individual needs. Everyone needs at least a basic policy that will cover catastrophic injury or illness.  Women planning to get pregnant, families with children, and individuals with a family-history of disease or chronic healthcare needs should consider a policy with better benefits.  And if your employer offers them, take advantage of flex spending, health savings or health reimbursement accounts.  My generous employer offers extra HRA dollars for documenting healthy activities, most of which I’m already doing!

If you have dependents who rely on your income, such as a spouse or children, it’s imperative you have term life insurance, ideally for an amount that equals ten times your annual income or more.  If you have kids, consider how you plan to handle their higher education when choosing the term.

Be prepared for weather and safety emergencies.  We keep $100 cash in our safe, along with important documents should we need to evacuate or take cover from a tornado.  This year, I invested in a survival kit fromWise Company (along with peace of mind I also got 8% cash back by buying through

4. Start saving

If you’re in your 20s or 30s and your employer offers a retirement match, contribute the minimum required for the match, even if you’re still working on paying-off high interest credit card debt. With compounding interest, that investment has the potential to double every decade between now and retirement. Plus, free money.

After you’ve eliminated any high interest credit card debt, increase your retirement savings by opening a ROTH IRA.  The benefit of a ROTH is since you’ve already paid taxes on the amount you’re contributing today, withdrawals at retirement will be tax free.  Vanguard and Fidelity are popular low-fee brokerage companies, and accounts are easy to open from the comfort of your couch.

After you’ve started funding your future, you can begin saving for the short term.  Avoid getting back into debt by saving for life events, whether your plan is buying a bungalow, starting a family or spending a week sunning in Santorini.

If buying a house or condo, you can avoid the extra expense of private mortgage insurance (PMI) by putting at least 20 percent down.  Don’t push pause on your retirement savings to achieve your dream of home ownership.  If you do the math, you may find you come out ahead in the long-run by putting that money in the market and paying a little PMI.

5. Commit to learning more about personal finance

Develop your knowledge about and interest in personal finance by reading books, blogs and listening to podcasts about money.  While I disagree with many of his principles and recommendations, the Dave Ramsey podcast is a good source for inspiration and success stories.  I also follow a blogroll that includes Power Over Life, Think Save Retire, and Frugal Woods.

Find a community you can learn from and that will help keep you accountable.  If you’re not comfortable sharing with friends and family IRL, join a forum like those at Mr. Money Mustache or Bogleheads.  Social media is also a great resource for connecting with personal finance bloggers and others with the same money goals as you.

Improving how you manage money in 2017 will change the rest of your life.  Raise a glass and toast to a better financial future.  Cheers!

Budget Basics

Part Three:   Putting it all together on paper.

After reading the first two installments in this series, you should know how much you have to spend on your:

  • Needs – The essentials for survival (food, shelter and utilities), health (cell phone and insurance) and employment (day care and transportation).
  • Savings – To start building an emergency fund and later, to begin building wealth through an employer matched or other tax advantaged retirement account.
  • Goals – Whether your goal is saying sayonara to that stifling student loan, saving for a trendy tiny house, or paying off the charged clothes, shoes and accessories you’ve long since donated.
  • Motivation – One or two small wants to help stay focused and sane.

Finding or developing a budgeting system that works for you is key.  There are existing online tools and apps like Dave Ramsey’s Every Dollar, which I’m sure are perfectly fine, but I use, like and recommend Microsoft Excel.  I do like Mint to track net worth, but the work of manually updating a spreadsheet on the regular keeps me better in tune with how my money is being spent and staying on top of when bills are due.

In addition to the mechanism, you’ll want to determine the best budget cycle for you.  When deciding if you want to budget by the month, by the paycheck, or by the week, consider your largest expense and if it can be covered by a single paycheck or if you’ll need to accumulate cash over the month to pay it.  Also, think about the frequency of your pay days.  Do you get multiple checks every month or just one? Are you paid consistently on the same date every month or in other intervals, like every other Friday?

I’ve always budgeted by the paycheck.  I’m paid every other week on Thursday, and have always been intentionally careful to be able to cover my biggest bill (rent or mortgage) with a single paycheck, plus a little leftover for food and necessities for that two-week period.  The other paycheck I used to pay my utilities, student loan and car payment, and contribute to my ROTH IRA.

When Ryan and I got married, he moved into the house I bought before we met.  So when we created our first budget after tying the knot, it was easy to keep making mini-budgets for every paycheck.  Breaking it down makes our sacrifices more digestible (like for my new husband, no more ESPN!) and when we make mistakes, its easier to forgive ourselves and move-on knowing the next budget cycle isn’t more than a few days away.

Here’s what a month of budgeting might look like broken down:

Bigger budget example

As you get started building your budget, you’ll need to consider:

  • What information you want your budget to capture. I record the date of payment and confirmation or check number.  You could include due dates, or create separate columns for the beginning balance and balance used for line items like food and transportation, which won’t always be spent in a single purchase.
  • If you need one, where to park your sinking fund. Should you keep that in a separate account or your existing checking or savings?
  • How comfortable you are with your checking account being close to a zero balance as a budget cycle comes close to an end. Do you live on the edge, or sleep better knowing you have a buffer should 7-Eleven place a $50 hold on your debit card for $15 worth of gas?
  • You should have a purpose for every dollar you make and ideally, be at zero at the end of every budget cycle. But do make a plan for what to do with any money left over – and what you’ll do if you find yourself short.

Once your budget is down on paper or saved to the cloud – follow it.  Limit your spending to what’s dictated there.  And don’t wait until the end of every budget cycle to track expenses.  Establish a ritual and tie the act of updating your budget to something fun.  Start the morning with a latte and your spreadsheet, or end the week with wine and a review of all your expenses.

If you’re unable to follow your budget, reevaluate it.  It may take more than a few cycles to get your numbers to align or perfect your plan.  And once you’ve gotten into a grove, continue to customize your budget to meet your changing needs.  Create a color coding system.  Learn more about using formulas and other advanced Excel functions.  Start a semi-humorous blog about budgets.

A budget is the first step in taking charge of your money.  I hope you find empowerment in living and spending intentionally.  Celebrate each milestone along the road to achieving your money goals, including this one…  Cheers!

Budget Basics

Part Two:  Needs versus wants, savings, and your sanity.

Commercials follow you throughout the day via literal channels and subliminal ones.  So, when it comes to spending and budgeting, we have to constantly remind ourselves of the difference between needs and wants.  Needs are essential to survival, like shelter and sustenance, health, including insurance and a phone for emergencies, and employment, such as day care and transportation.  Everything else is a want.  Everything.

Here’s a list of typical American wants often confused for needs:

  • Car payments – You don’t need power anything, or even a car built in the last decade to get from point A to point B. A well maintained $2,000 beater will get you to work.  Or, go green and walk, bike or take public transportation.
  • Smart phones – A phone for emergencies is a need. A data plan for Pokemon Go, a want.
  • Cable TV and the internet – Sink a few dollars into an antenna or streaming device and cut the cord on cable.
  • A gym membership – Fitness buff? Take up running or start a CrossFit co-op.
  • Going out and eating out – Cooking at home and drinking at home are cheaper and healthier. And you’ll wake up with less regret the next day.
  • Non-essential self-care – Save by skipping the salon and spa.
  • Vacations – Hopefully this one is obvious. In later posts, we’ll talk travel hacks and how to circle the globe by spending points and miles, instead of money.
  • Recreational shopping – It doesn’t have to be basic, but a basic wardrobe is all you need.

In part one of this series we started building your budget by listing your needs and what you’re spending on them.  And if you’re in the negative or breaking even, we identified ways you can hustle to find more money.  Once you’ve found a little extra green, it’s time to add that into the budget.  But before you create a line item for a weekly mani-pedi or other wants, let’s talk about two things:  debt and savings.

In your twenties and thirties, you should be saving even while you’re paying off debt.  Take advantage of compounding interest by investing as early in your career as possible, even while you’re working to meet other financial goals.  If your employer offers a 401k match, start by contributing the amount needed to get the match.  An employer matched 401k is a straight-up middle class hustle.  Don’t leave that free money on the table.

If you start investing at 25 contributing $250 a month, with compounding interest you’ll end up with roughly the same amount at 65 (around $400,000 considering a modest interest rate compounded quarterly), as you would if you started at 35 contributing $500 a month.  If you delay saving for retirement until 45, you’d have to put in $1,000 a month to end up with $400,000 at 65.  Check out this link to do your own money math.

If you have nothing saved for emergencies, that should be your next priority.  Aim to set aside at least $1,000.  Once you have $1,000, think about your situation.  Are you single or a one-income family?  Is your job unstable or are you in an industry prone to layoffs?  Is your monthly income variable?  If your answer any of these questions is yes, keep building up your emergency fund, to amount equal to three months of essential expenses.

Once you’ve automated your match-qualifying 401k contribution and set aside savings for emergencies, it’s time to address the interest you’re spending instead of making.  I like my money to work as hard as it can, so I recommend the avalanche method – paying off your highest interest rate debt first and saving any tax deductible debt for last.  The faster you can pay off debt, the less interest you will ultimately pay and the quicker you can begin working toward achieving your other financial goals.

Fortunately, we both ditched car payments and credit card debt in our single days.  But when Ryan and I got married three years ago, we had a combined $85,000 in student loans.  Already thriftier than the average Starbucks-consuming suburbanites (no way I’ll pay $5 for my daily cup of Joe), we did the math and discovered the amount of interest we were paying could buy us both the fanciest of lattes and the flakiest of pastry every. single. day.  So we decided to take charge of our debt and dedicating a big chunk of our budget to pay it off as quickly as possible.

Let’s be realistic, you’ll also need to add a few wants to your money-saving, debt-busting budget in order for it to be sustainable.  I promise you can find endless entertainment and a truer sense of satisfaction in things that are free (we like volunteering and going on nightly walks after work).  But a line item for one date-night a month, a gym membership or Birchbox subscription can help keep you motivated and on track.

Next in the series:  Putting it all together on paper.

Budget Basics

Part One:  A hard look at your spending.

Once you’ve identified your goal – debt payoff, amassing wealth or somewhere in between – having a budget is an important starting point in making those dreams a reality.

Gather all your bills, credit card and bank statements, and get ready for a come to Jesus about how you’re spending your money.  Even if you’re going to break your budget down to semi-monthly or other shorter budget cycles, which we’ll talk about later in this series, it’s good to start with a clear picture of your expenses during an average month.

Most things are better with wine.  Budgeting is a rare exception.  The best beverage to have at your desk when creating a budget is a strong, home-brewed French press (because budgeting doesn’t have to stifle sophistication) with an extra shot of moxie.

After you’re sufficiently caffeinated, begin with a blank spread sheet.  Create two columns, the first for essentials and the second for their corresponding average monthly cost.  To help get you going, here’s a list of typical needs:

  • Rent or mortgage
  • Utilities (if you don’t have fixed monthly payments, use your highest bill for the last 12 months)
  • Food (do include groceries, don’t include happy hours, fast food or date nights out)
  • Household items (from toilet paper to toothpaste)
  • Gas or the cost of public transit
  • Day care
  • Insurance (car, health, renter’s and homeowner’s, and if you have kids or others who are dependent on your income, term life insurance is also an absolute necessity)
  • Cell phone
  • Student loan payments
  • Credit card minimums
  • Other debts

In addition to monthly bills, think about any bills you might have annually or semi-annually, like taxes and car registration, and do the math to average the cost of these per month.  Add those items and the average monthly expense to your spreadsheet.

Once you have all essential items listed with the amounts you’re spending on them, tally up the total amount you’re spending on just these things.

Here’s what this might look like:

Budget example

Compare the total against your average monthly income.  If your monthly income is variable, use your lowest earning month of the last year.  In addition to your wages, include reliable* (*key word: reliable) streams of income like child support, alimony, rent payments, etc. in your average monthly income calculation.

If you’re spending more than you make or are just barely breaking even, you have hard choices ahead.  But you’ve already created a Pinterest board with designs for your beachfront cottage (full of swoon-worthy shiplap) where you now plan to retire by 45, so scrapping your dreams and going back to the before of not knowing any better isn’t an option.

So you’re going to have to learn to hustle.  What is hustle?  Hustle is looking for opportunity.  Marketing yourself.  Being hungry.  Being brave.  Being relentless.  Working damn hard.

You can hustle to increase your income, through networking and applying your way a better job, having no shame in getting a second job at the same place you worked in high school, or picking up side gigs by advertising your skills on Fiverr, driving for Uber or using micro job apps like Field Agent, Gigwalk and EasyShift.

You can hustle to decrease your spending, by ride sharing to work or finding free ways to get to around, moving into less expensive housing or rooming with a friend, family member or carefully vetted and background-checked Craig’s List applicant, trimming your food budget by shopping smarter (i.e. Aldi instead of Whole Foods) and changing your diet (think of beans and rice as a trendy new cleanse).

My advice?  Do both.  Hustle to find creative ways to increase your income and decrease your spending.  Work hard for your money, but make your money work hard for you.

Next in the series:  Needs vs. wants, savings, and your sanity.