Financial Resilience Isn’t Just About the Money You Have in the Bank

Your financial resilience is your ability to withstand life events that impact your income or assets. These life events could be the loss of a job, health problems, a divorce, your car breaking down, etc.

With a huge portion of the U.S. population facing unemployment and loss of income due to COVID-19, many folks’ financial resilience is being put to the test.

Financial resiliency is what allows you to “roll with the punches” and keeps an unexpected expense or job loss from being an immediate emergency. Life events that test your financial security usually suck, but by increasing your financial resilience, you’re able to manage life’s curveballs with a little less stress.

In light of current events I wanted to share a few ways to improve your financial resiliency, since it’s not just about the money you have in the bank.

Build an Emergency Fund

Okay, so I know I said it’s not all about the money you have in the bank, and I stand by that! But, having a solid foundation of savings provides you a pretty good baseline of financial resilience.

With the recommended 3 months of living expenses saved, you’re able to cover most of life’s unexpected expenses and you’ll have some breathing room in case of a job loss. You want to make sure your emergency fund is liquid and accessible — high-interest savings accounts are great for this.

Okay now on to the other tips!

Maintain a Flexible or Low Cost of Living

By keeping your cost of living on the lower end, you’re creating more buffer between your income and your regular expenses. This buffer lets you build up the savings mentioned above and also means you need less money to cover your essentials in the event of lost income.

When I say “flexible cost of living” I mean focusing on keeping your monthly bills low. Even if you typically spend your discretionary money on eating out and travel, those are areas you can quickly cut back in in the case of a job loss or needing to cover a major expense. It’s not as easy to cut back on your rent and car payment in a pinch.

Keep a Low Debt-to-Income Ratio

To figure out your debt-to-income ratio, you add up all of your monthly debt payments and divide it by your monthly income. This tells you what percentage of your monthly income is already accounted for by debt payments.

Keeping your debt-to-income ratio low complements the idea of keeping your overall cost of living low. If you have a lot of debt, then you probably have a lot of monthly payments that need to be paid. If you have hundreds of dollars’ worth of minimum payments on credit cards and various loans, it will be hard to cut back expenses when needed.

Purchase the Right Insurance for Your Situation

Life insurance, homeowners’ and renters’ insurance, auto insurance, unemployment insurance, disability insurance — they all provide you with a certain level of financial resilience. You want to make sure you have the appropriate amount of coverage for your situation and that you’re not overpaying.

In some situations, you may opt to self-insure. For example, if you have 6 months of living expenses saved and have a good amount of assets, it may not make sense to pay for private unemployment insurance.

If you commute a long distance to work, you may want a higher level of coverage on your auto insurance and a disability insurance policy as a way of mitigating the financial risk of a car accident.

Ultimately, your insurance needs will depend on your situation, your liabilities, and your current financial resilience.

Have Multiple Sources of Income

Another way to improve your financial resilience is by diversifying your sources of income. A lot of people have a side hustle they work or have ways of earning extra money outside of their 9-to-5 job. Even if it’s just an extra $200 a month, that’s going to improve your financial resiliency because you don’t have all of your monetary eggs in one basket.

Cassie and I have a pretty wide variety of income sources, which helped Cassie make the decision to leave her full-time office job last year. You might not turn your side income into a full-time job, but you might use it to fund your emergency fund or to get closer to paying off credit card debt.

Know and Value Your Skills

Related to having multiple sources of income is knowing what skills you have and understanding their value to others. You probably have one or more skills or hobbies that you could monetize if you needed to in a pinch. 

This might look like photography, resume writing and editing, baking, web design, being good with kids, writing, tutoring, etc. Make a list of everything you’re good at and enjoy!

Maybe you offer 30-minute gardening consults to help your friends stop killing all of their plants. Maybe your sourdough starter is thriving and you sell a few excess loaves each week. Having a few skills that you understand could be monetized if needed can help prepare you for that unexpected loss of income. Plus, it’s nice and validating when someone wants to pay you for that loaf of bread you’ve been perfecting!

Connect with Your Network and Community

Having a varied and close community is also super important to your financial resilience. We all need a little help sometimes, and having someone in your corner who you can lean on when things get rough is important — whether it’s borrowing some money or a car, or crashing on their couch.

Your network is also important because most folks get their jobs through people they know. Your connections will likely lead to your next job if you find yourself suddenly unemployed, and if you’re starting out a new side hustle (yes, even just to get rid of all of those excess sourdough loaves), your connections will likely be your first customers as well.

Reaching out to your network can feel uncomfortable, but most people are going to be more than happy to make a connection or help you out in some way.

Vote to Strengthen Social Welfare Programs

And finally, the social safety net that exists where you live will dramatically affect your financial resilience. The social welfare system in your community, state, and/or country will significantly impact your financial resilience by providing you with a liveable amount of money if you lose your job, ensuring that your food needs are met, and making sure you’re never without access to health care.

There are families in the U.S. who may seem to be doing pretty good, but a badly timed health issue could quickly leave them bankrupt (if Cassie had needed to get her appendix out three days later, she wouldn’t have had insurance, and we would have been on the hook for more than $50,000).

Badly timed health issues don’t threaten people’s financial wellness in many other countries, like our northerly neighbors in Canada.

So, voting in support of strengthening social welfare programs is also something you can do to support your long-term financial resilience — as well as that of your community.

Financial resilience isn’t just one thing. There are tons of small and large shifts you can make to help improve you and your circle’s financial resilience. Financial security is vital to your mental health and incredibly important in supporting a society that doesn’t make reactionary decisions out of fear.

The Thing That Matters More Than Money When It Comes to Doing What You Want

I’m coming up to my busiest season at work. During August, I usually work through the weekends, and my workdays lengthen late into the evenings most days of the month.

As busy as it is, I also love my job in August. My day-to-day work during this time is very different than the rest of the year, but it’s filled with excitement and building new relationships. By the end of the month, I’m exhausted but fulfilled, and somehow reenergized for the rest of the year.

But my house is also usually a wreck, my fridge is empty, and my wife misses me.

It usually takes a couple of weeks to resettle into my home life. I’ve learned to have a pretty healthy work/life balance over the years, but that goes out the window in August.

This year, my August will look different because of the pandemic and various safety-related adjustments. I’m still figuring out how exactly this August will look, but it will still certainly be just as busy.

Each year, whenever my wife or I hit a busy period of work, I’m reminded of an important lesson I learned shortly after we started gaining control of our finances. Once you’re making enough money to sufficiently support yourself, your ability to do the things you want to do is more limited by your time and energy than it is by money.

For example, traveling is one of the pricier things I like to do, but the amount I can travel is more limited by my ability to take time off work than it is by my money. Especially because slow travel is usually a lot cheaper than just visiting someplace for a week.

But even more notably (I think) is the fact that there are TONS of things I enjoy and want to do more of that cost close to nothing — but that I can’t do as much as I’d like because I don’t have time or energy.

Things like:

  • Cooking an elaborate meal
  • Having friends over for dinner and drinks
  • Reading
  • Going to the beach
  • Going hiking
  • Learning how to do things around the house
  • Taking my dog to the dog park
  • Taking mid-day naps
  • Visiting my family
  • Talking and playing cards with Cassie
  • Writing
  • Volunteering
  • Catching up with friends over coffee
  • Playing bocce with my dad
  • Painting
  • Baking
  • Strolling around the library
  • Gardening
  • Going for bike rides
  • Working on various creative projects
  • …and about a million other things I can think of.

I’m not stopped from doing these things because I don’t have enough money — most of them cost nothing and most of them I incorporate regularly into my life.

But I’m still not able to do them all as often as I want because between working, cleaning, grocery shopping, trying to stay on a decent sleep schedule, and other basic tasks of living, I only have a limited amount of free time left to do them.

I already have a ton of low-cost things I love to do that could easily fill my days, but I don’t have enough time for them all. The limiting factor here isn’t money; it’s time and energy.

After I started making a steady income and had paid off my debts, this realization led me to the idea of financial independence and to reading Your Money or Your Life. That book does a good job of tying the concept of money to time and your life energy. It helped put into perspective that even if I love what I do, I don’t necessarily want to do it for 40 years, because there’s a lot of other stuff I love to do, too.  

It showed me that instead of buying things with my money, I could also use my money to buy back some of my finite time, the most valuable resource of all.

In the meantime, I’m preparing for the August marathon (and really looking forward to the autumn slow-down).

6 Tips for Starting Your Home-Buying Process

As I’ve mentioned in a few recent posts, Cassie and I bought a house at the start of April. Since then, a few of our friends have started the house-buying process and reached out to us for tips and recommendations as they start their own search.

Since we also knew very little at the start of our process, I thought it would be a good idea to share some of what we learned.

1. Know your market

If you’re planning on buying a house in the next year, you’ll want to start regularly checking house listings on sites like Zillow and Realtor.

It’s important to begin looking at homes for sale in the area that you are hoping to buy in before you’re necessarily ready to put in an offer. Doing this lets you get to know the market and gives you a good idea about what is a fair price for the size and neighborhoods you’re looking at.

You may have your sights set on a particular neighborhood but quickly realize that the houses there are out of your price range. You may find a neighborhood you haven’t thought of before but has everything you’re looking for.

Most importantly, knowing your market ahead of time helps you identify a good deal when you see one. In competitive markets, homes that are priced well may have multiple offers on them within the first day (yes, that’s as stressful as it sounds). Knowing the market gives you a better chance of being able to jump on your perfect home at the perfect price before someone else does.

The house-buying process can feel strange. You see a few photos on the internet, decide that this house could be The One, schedule a viewing and walk around it for 15 or 20 minutes and after that short little tour, you’re being asked to make a decision of whether or not to spend hundreds of thousands of dollars.

Knowing your market can help you feel more confident in your decision when you get to that point.

The first house that we put an offer in on was 650 square feet and priced at $129,000. It was also being sold in a very strange (to us) way: It was listed on the market and the seller wouldn’t accept offers until the seventh day. At that point, everyone had to submit their offers all at once and the seller picked their favorite (which was not us).

The second house that we put an offer in on was 1,200 square feet and priced at $108,000. It was also basically next door to one of our good friends and in our perfect neighborhood – and a big fixer-upper. This one was another “submit your highest and best offer by [DATE]” listings, and even though we offered well above asking, it went to a cash buyer.

The house we ended up buying was one that we saw online and scheduled a viewing for after work that day. We put in an offer later that same night. We only felt comfortable moving this fast because we knew the house was a really good deal. Even though we moved quickly — we visited the house when it had been on the market for just a day — there was already one offer on it. The seller originally accepted that offer, but then the buyer backed out. That’s how we got our home.

2. Go with a conventional loan when possible

When getting a home loan, most folks are deciding between a conventional or FHA loan.

Conventional loans require a higher credit score (at least 620), a lower debt-to-income ratio, and a higher minimum down payment (most lenders require a minimum of 5%). Comparatively, you can receive an FHA loan with 3.5% down payment if your credit score is above 580. You’ll need at least 10% down if your credit score is below that.

Both types of loans get the job done, but there’s one reason why you’d likely prefer a conventional loan: something called Primary Mortgage Insurance (PMI).

PMI is typically 0.5 – 1% of the loan amount on an annual basis, paid monthly. This means if your mortgage was for $120,000, you would be paying an additional $1,200 each year (or $100 a month).  

With an FHA loan, you’ll be required to pay PMI for the life of the loan if you put down less than 10%, unless you refinance to a conventional mortgage at some point. (If you put down 10% or more, PMI on FHA loans will go away after 11 years).

With a conventional loan, you are only required to pay PMI if your down payment is less than 20%. If you put less than 20% down, your PMI will automatically go away once your outstanding balance drops to 78% of the original value of your home.

By not having to pay PMI for the entire life of your loan, you can save yourself thousands of dollars over the years.

Unfortunately, we ended up having to get an FHA loan because the down payment minimums are different for a conventional loan on a duplex (15%). Because of this, we plan on aggressively paying off the first chunk of the loan and refinancing to a conventional loan once we hit 20% equity in the home. Luckily this shouldn’t take too long since we came in with a good amount of equity after the first appraisal came back.

3. Shop your mortgage

When it’s time to actually get your mortgage for your home you want to make sure to shop around and not just use the broker your realtor told you about. We went through three different mortgage brokers during our house-buying process: One who gave us our very first pre-approval letter, the second who gave us a pre-approval letter for the house we bought, and the one we actually used to get our loan.

By getting a few loan quotes to compare you could save yourself thousands and thousands of dollars over the life of your mortgage.

While the difference between 3 and 3.5% interest might seem insignificant (especially compared to that 24% interest on your credit card) that half of a percent when applied to $200,000 is a big deal! That half of a percent is $1,000 added to your payments just in the first year.

By shopping around for our mortgage, we were able to get an interest rate that was a whole 1% lower than the one originally quoted to us from the company that our realtor recommended.

The whole process of getting a few quotes took probably 2 hours total and saved us over $2,500 in the first year’s payments alone.

4. Shop your inspector

Once you’re under contract on a house, you’ll schedule a home inspection to be done in the first week or two of being under contract. The home inspector will come in and, well, inspect the home. This is your chance to learn more about the place you spent 20 minutes in and decided to drop a significant amount of money on.

The job of the home inspector is to let you know of any problems in the house (the small and the big), and upcoming repairs you could expect to have to pay for.

If the house turns out to be a potential money pit, this is your chance to back out. If there are one or two medium-sized potential problems, now’s your chance to go back and negotiate the selling price, request that repairs be made, or request concessions to be made at closing. If your house is good to go, lucky you and congratulations!

The inspection is a super important part of the home-buying process, so it’s important to also find a home inspector who will be thorough and honest.

Before you select your home inspector, go online, read some reviews, and compare costs. You don’t want to necessarily go with the lowest cost inspector if they aren’t going to do a thorough job. Reading reviews will help you select a home inspector you feel confident in. You can also call and ask how long an inspection will take for the size and type of property that you’re purchasing.

The inspection will cost a few hundred dollars and should take a few hours. We did a separate pest inspection, but some home inspection companies will do both inspections at the same time.

5. Use an independent insurance broker/agent

The other thing you’ll need to have in place before you close on your house is your home insurance. I would recommend using an independent insurance broker or agent for this piece, rather than going directly to the website for whatever home insurance company you can think of at the moment.

You may think that directly shopping for your insurance would save you money by cutting out the middle man, but that may not be the case.

When you work with an independent agent, they are able to gather quotes from many companies for you to compare, and the companies providing the quotes know that. Your insurance agent has specialized knowledge about the industry but isn’t tied to one specific company. This allows them to be able to walk you through the comparisons in price and how that relates to coverage.

This was especially helpful in our case since we were buying a duplex and there are different types of insurance for multifamily homes — it wasn’t until one of our final quotes that someone finally explained what the difference between a DP3 and HO3 policy is. (We got an HO3 policy because we live in one side of the property).

6. When in doubt, ask!

My final piece of advice is that if you have a question or are in doubt, ask!

Buying a house is an exciting time and a huge deal; it’s probably the most money you’ve ever spent on anything ever! It’s totally normal to feel stressed and to have questions or feel unsure during parts of the process, especially if it’s your first time. Try not to let that uncertainty fill you with anxiety and instead, find the answers you’re looking for!

Ask friends who’ve been through the process, ask your realtor, and use Google to your heart’s content! Take some time before you start (and throughout) to educate yourself on the process and the various steps. It will help you feel more confident and let you spend more time feeling excited rather than anxious.

Whether you’re looking into starting the house buying process in the near future, or are dreaming of that perfect home a few years down the line, I hope you found some of this information helpful. If you have any specific questions about our house buying process, feel free to submit them at the link in the menu!

I Was Bad at Budgeting Until I Tried the Zero-Sum Budgeting Method. Here’s How It Works.

A lot of people are on again, off again budgeters. I get it – that used to be me.

I’d start the month off making a list of my bills and spending categories and then I’d assign the categories a random amount that I thought I would be able to stay within. Maybe it would last a month or two, but more often than not, two weeks in I’d have gone over one category and feel defeated, or be surprised by an “unexpected” expense and throw the whole month away. Or, I’d have not followed through consistently with tracking my spending and then feel overwhelmed and lost.

I wasn’t making as much progress as I wanted on my financial goals, so a few months in, I’d give the whole budget thing a go again. I tried using a homegrown excel sheet, Mint, and other random apps, but nothing seemed to stick.

That is, until I found You Need a Budget (YNAB).

YNAB is different from other budgets because it’s based on the concept of zero-sum budgeting and is based around four simple (but powerful) rules.

If you have struggled with budgeting before, I highly encourage you to give zero-sum budgeting a try, whether you use YNAB or do it on your own.

How Zero-Sum Budgeting Works

The premise of zero-sum budgeting is that you budget with the money you already have, not what you’re going to make — and that you “spend” every dollar. Or in YNAB’s words, you give every dollar a job.

So, if you were to put this in practice you’d look at the amount you currently have available in checking, savings, and cash, and then figure out what that money needed to do before you got paid again. You might apply it to upcoming bills, food, gas, debt repayments, gifts — whatever it needs to do.

You give every dollar you have a job — even the ones you don’t plan on spending. Yes, even the dollars you are saving should have a job.

Maybe it’s for a future vacation, building your emergency fund, saving for the upcoming holidays, opening a Roth IRA, or making an extra payment on your student loans. Whatever it is, that dollar needs a purpose; it needs to be put to work creating the life you want.

And then every time you get paid, you do this again with your new dollars. You give them all jobs until you’re down to $0 uncategorized. There’s no such thing as money left over at the end of the month. That’s because dollars without “jobs” tend to get thoughtlessly spent rather than put to work creating the life you want.

Zero-sum budgeting forces you to view money as the tool that it is and make decisions based on both your immediate needs and your priorities.

Because zero-sum budgeting asks you to budget what you already have rather than make a budget on your projected income, it helps budgeters prioritize their spending.

The idea is to eventually get at least a month ahead, meaning that the money you earned last month is what is paying for this month. Once you’ve reached this point, you’ve officially broken the paycheck-to-paycheck cycle and have some breathing room to start thinking about other financial goals you might have.

Between the benefits of zero-sum budgeting, YNAB’s second rule of “Embracing Your True Expenses” (aka creating sinking funds), and the fact that YNAB syncs with your accounts to make tracking your spending a breeze, I attribute a very large portion of my financial success to this company.

YNAB isn’t a free budgeting software, but I think it says a lot that even though I’m someone who is very intentional with their spending, I happily hand over the annual subscription fee. I know that I make back much much more in the savings I’m able to make by using YNAB.  

If You Want to Save More, Focus on Cutting These 3 Categories

If you want to get serious about increasing your savings rate and decreasing the amount of years you’re required to work, you have to focus on cutting down the big three expenses that typically take up the majority of a person’s budget: housing, transportation, and food.

Reducing these three costs in your life will have the biggest impact on your financial future because unlike the occasional splurge, these are ongoing costs that you pay for every month. When you are able to cut these costs, you’re not just saving on a one-time purchase — you’re designing a life that costs less every month. Those savings add up month after month and year after year.

By targeting these three categories alone, you can increase your savings rate significantly.

If you make $3,000 per month after tax, every $100 you’re able to reduce your monthly expenses by is a 3% increase in your savings rate. If you can cut $100 off each category that’s nearly 10% right there.

You might feel that your housing and transportation costs are pretty fixed at the moment, but we’ll discuss ways to save on the big three down below.

1. Housing

The average person in the United States spends 37% of their pre-tax income on housing, and the standard financial advice recommends you spend no more than 30%. I would recommend trying not to spend over 25% of your after-tax income on housing (if possible). Here are a few ways that could help you reduce those housing costs.

Opt for a smaller home

It’s pretty common for folks to buy or rent more house than they really need. In fact, since the 1980s, the average square footage of a home has increased by about 1,000 square feet. That increase alone is 250 square feet more than the last house I rented was.

Our 750 square foot pink cottage was small, but it worked well for the two of us (and the dog and two cats).

By opting for a smaller place you’re likely to spend less on not just your monthly mortgage or rent, but also on cooling and heating costs, furnishings, insurance, property taxes, etc.

Get a roommate

If you’re living in a home that has more space than you really need, you might consider renting out a room and living with a housemate. Splitting the cost of housing and utilities can have a big impact on your ability to save. Some folks are great friends with their roommates and others work on opposite schedules and barely see each other, so regardless, there are lots of ways to make it work for you.

Buy a multifamily home

If you’re looking to buy a house, this is sort of like getting a roommate on a larger scale — but it’s one that you don’t have to share a kitchen with.

I liked the idea of lowering our housing costs by splitting it among more people, but since we had just gotten married, Cassie works from home, and we have animals, the idea of roommates didn’t sound great to us. So, when it came time for us to buy a house I was really interested in buying a duplex, so that’s what we did!

Owning a duplex allowed us to have our own space, while also sharing the cost of housing with more people.

I also am just a big proponent of multifamily housing in general, as they’re more efficient uses of land and building materials. Plus, they support the overall psychological and financial health of a community. You should read Happy City (one of my favorite books I’ve read in the past few years) if you want to learn more!

Move to an area with a lower cost of living

I get it – many places are dealing with affordable housing crises right now (including the city I live in). But there are also plenty of cool areas around the country that are still fairly affordable, even if they don’t have the same level of amenities as living in New York, San Francisco, Los Angeles, or whatever high-cost city you’re living in.

Just ask me about my friend who lives in a cute college town in an apartment walking distance to downtown. There are beautiful nature trails nearby, she doesn’t have any roommates, and her rent is $300 per month…including her water bill.

By moving to an area with a lower cost of living, you’re able to find actually affordable housing, plus you’re reducing the demand in the higher cost of living area. It’s a win-win.

Moving to a lower cost of living area might look like moving to a different neighborhood, a different city, or an entirely different state (or even country). How dramatic of a shift you want will be up to you and your situation. If you’re willing to make a major change, you could save thousands of dollars a year and take on a new adventure.


Buy a used car

Rule number one: Never buy a new car. It loses a significant amount of value the second you drive it off the lot.

Rule number two: Don’t ever lease a car. Just don’t.

I try not to be too prescriptive in my advice, but these are two rules I will fight you on.

Auto loan debt is at an all-time high. The average monthly payment for a new vehicle is $554. The average monthly payment for a used vehicle is $391. So, by buying used, you can already expect to save $163 a month. But you can also do so much better than that.

You can always buy a reliable, fuel-efficient, used car for less than $10,000. And it’s not a stretch to do so for under $7 or $8K. I bought my car for around $9,000 and my monthly car payment was $184. That’s more than $200 less than the average used monthly car payment. I paid it off 2 years early to avoid paying more interest and I don’t plan on ever having another car loan again.

My car is from 2012 and has been great in the almost 4 years I’ve owned it. It hasn’t needed more than its regular oil changes and a new set of wiper blades.

Buy with purpose in mind

The second way to save money on transportation is to buy a car for what you use it for. You don’t need a pickup truck if you only transport things that require an open bed just a few times a year. You’re wasting money and gas every time you drive it to the grocery store or use it to commute to work. Buy a sedan and use the money you save to rent a truck on the few occasions you need it (or borrow from a friend).

If you live in a city where it’s easy for you to use public transportation to get around and you own a car for the occassional trip out of town every other month, ditch the car altogether. Use the savings from your car payment, insurance, registration, and parking to rent a car for those out of town trips and the occasional lyft.

For most of us our vehicles main purpose is to get us from point A to point B. Try to find a car that will get you there the most efficiently, both in fuel consumption and dollar consumption (those tend to go hand in hand).

Live close to where you work

Another way to reduce your transportation costs is by reducing your commute. The closer you live to where you work, the less gas is needed to transport you there and back each day and the less wear and tear on your vehicle.

If you live close enough to work, you may even be able to walk, bike, or use public transportation instead of a personal car.

This is one that I’ve always been a strong advocate for. I value my free time too much to extend my workday 45 minutes each way and not get paid for it. I’ve always lived within 15 minutes of where I work — often times a lot less. When we were buying a house, we had about a 5-mile radius that we were willing to look at houses in, and anything further out wasn’t going to be considered.

Because the houses in this area were more expensive than other areas around our city, we decided to buy a multifamily home in order to live where we wanted to. Now we get the transportation savings and housing savings. 


I’ve already talked about this elsewhere on the blog, so I’ll keep it simple here and link to some of those other articles, but food is the expense that you can see the most immediate large-scale savings on, without having to make any major life changes.

Saving money on food doesn’t require you to eat nothing but rice and beans and packets of ramen. You can eat delicious and varied meals, enjoy quality coffee and adult beverages, and even splurge on high quality ingredients and local craft beer. It just means you have to do most of your cooking at home, plan ahead, and shop smart.

There are lots of other ways to save money in these three categories and the examples I gave are on a larger scale.

The thought of moving cities or selling your car and getting a different one might seem a little intense. You don’t have to make all of these changes in a week, but it’s worth thinking about these things in terms of the big picture. These three categories have a massive impact on your ability to save and the length of your working career.

The point is, you don’t have to make perfect money decisions every day if you get the big decisions right. By lowering these three expenses, you’ll naturally be building in more buffer in your financial life each month.

Just as your past financial decisions have impacted your financial situation today, your decisions today and in the near future will impact your financial situation in the months and years to come.

Don’t get stuck in the habit of the first financial decisions you made. Take in new information, consider things from a few different perspectives, and really think about the life that you want — not just the path so many other folks are on.

When you make smart financial decisions about these three big categories, you can pretty easily spend at least $1,000 less a month than the average U.S. consumer.

This Is How Much Money It Takes to Retire (or Just Be Financially Independent)

Okay, so in my last post I talked about calculating your savings rate and how that can help you determine how many years you’d have to work and save in order to retire or become financially independent.

Hopefully that led you to wonder “Wait, so how much money do I need to reach financial independence?” And the answer to that question is, predictably, that it depends.

It doesn’t depend on how much you currently make, though. It depends on how much you spend.

Understanding that the amount you need to retire is based on your spending and not your income is super important.

Many online “retirement calculators” will calculate your retirement figure based on your income and then add in estimated raises to project your income at the ripe old retirement age of 65. If you’ve ever typed some numbers into one of these retirement calculators before, it may have given you something like $2-$6 million, especially if calculating as a couple.  

The reality is a little brighter and a lot more within reach.

Once you know how much your annual expenses tend to be each year, there’s a quick way to determine a ballpark figure for reaching financial independence. To find that figure, you just multiply your annual expenses by 25 (we’ll talk about why, and the assumptions made in this equation down below).

Calculating for Financial Independence

So, if your life costs $30,000 each year you’d need $750,000.

If your annual expenses are $40,000 each year you’d need one million dollars.

And if you spend $65,000 each year, you’d need a little over $1.6 million.

One million dollars is still a lot of money, but it’s a lot less than $3 million, and actually not a wildly unreasonable amount for a couple each making moderate salaries to save in about 20 years, thanks to compound interest (I know, you think I’m losing it, but stick with me for a few more articles).

Now, you might be wondering…

“Why multiply your expenses by 25? Won’t that mean that amount of money would just last you 25 years? I plan on living to be 107, that’s not going to work. Get out of here with your bologna math!”

Well, it doesn’t work if your money is just sitting in a savings account being annihilated by inflation. But, if that money is primarily invested in low-cost index funds (with a small percentage in bonds), it’s fairly safe to assume that you could withdraw 4% of your investments each year (or your annual expenses) forever, and never run out of money.

You see, the 25 times your annual expenses equation is really the inverse of the 4% rule of thumb.

The 4% rule is based on the Trinity Study. The Trinity Study was a 1998 study that analyzed what percentage of investments a person could withdraw annually, throughout all investing timelines, and not run out of money. It found that 4% was a safe withdrawal rate, with a success rate of over 95%.

That’s because when you have your money invested in low-cost index funds you can fairly reliably expect an average annual return of 7-8% over the long haul. If you then account for a 3% inflation rate each year, that safely leaves you with 4% of gains that you could withdraw without ever touching your principle (the money you originally invested).

So, what this means, is that once you have 25 times your annual expenses invested, you’ve essentially bought a money-making machine. You’re financially independent and no longer are required to work.

Obviously, the exact amount you’d need to save will require a little more number crunching as your post-work expenses might look a little different.

It might go up because you’re paying for health insurance since you won’t have it through your employer. Or, it might go up because you plan on fostering kids. Or, it might go down because you no longer have commuting costs or need to buy professional clothing. Or your kids will be out of the house. Maybe you move to an area with a lower cost of living since your location is no longer dependent on your job. Or maybe you travel full time.

Your number is going to be personalized to you and your ideal situation.

Your safe withdrawal rate will also depend on your asset allocation, your comfort level with risk, your adaptability, and other passive income streams. Some folks who are a bit more conservative in their planning aim for a 2.5% safe withdrawal rate, others 3.5%, while others feel perfectly comfortable with 4%.

The point is to play around with it and get a ball park figure. It’s fun to dream up different scenarios and come up with an actual number. Even if it’s not exact, it will make the prospect of retirement or financial independence more real and tangible. Which in turn might help motivate you to start saving and investing!  

Your Savings Rate: Your Ticket to Financial Independence

Your savings rate is the percent of your income that you save. Simple enough. But knowing your personal savings rate can help you understand how long it will take you to reach financial independence.

General budgeting advice recommends saving 20% of your monthly income. If you invested that 20%, earned the average market return during your working years, and accounted for inflation you could expect to be retired (or financially independent) after 37 years of work. (I plan on writing another post in the next few weeks, going into detail about some of the math behind this).

However, most people don’t hit that 20% mark. In 2019 the U.S. averaged a personal savings rate of 7.6%, which increases the years that one needs to work in order to hit financial independence. At the 7.6% savings rate, you can expect to work a total of 57 years — 20 more than at the recommended 20%.

Interestingly, during April 2020, in the middle of the country’s quarantine and the economy shutting down, the average U.S. personal savings rate hit an all-time high of 33% — shattering the previous record of 17.3% in May of 1975. People couldn’t go anywhere, stimulus checks and tax refunds hit many people’s accounts, and widespread economic uncertainty likely led many people to amp up their savings while they knew they had income.

The magic of understanding your savings rate comes from the fact that bumping up your personal savings rate by a few percentage points can shave years off of your required working years. Drastically increasing your personal savings rate can be life-changing.

Obviously, the amount of money that you make will affect how much you can increase your savings rate. After all, we all need to eat, clothe, and shelter ourselves and there’s only so little these basics can cost. But if you are someone making a decent salary, there are few reasons why you wouldn’t be able to drastically increase your savings rate while still living a really comfortable and fulfilling life.  

That’s why I believe that part of the problem with standard personal finance advice lies in the fact that we use these general percentages to cover folks making vastly different incomes. It seems ridiculous to me that we would recommend the same “save 20% of your income” to someone making $40K a year as someone making $80K a year.

I would argue that a single person can live a pretty comfortable life on $40K per year (if they don’t have children and live in a moderately priced market). If that’s true, then I would also argue that if that same person made $80K a year, they could still live that nice life on $40K and could save the other 50% of their income.

If you’re not making $80k per year, don’t be discouraged — neither do I. I make $43K a year, travel often, eat delicious food, donate regularly, generally want for nothing, and manage to save between 30-50% of my income any given month. How? Keep reading this blog to find out 👀

Saving 50% of your income is life-changing. If you save 50% of your income during your working career, it would only take you 17 years to reach financial independence. That’s 40 years less than the average person in the U.S. saving 7.6%.

This is because every percentage point you increase your savings rate helps you twofold.

First, it’s increasing the amount of money you are saving and investing. Second, you’re reducing your cost of living, which reduces the amount of money you would need to live on in retirement.

The idea is to figure out what your “enough” costs and save the rest. That isn’t a bare bones “enough”, but an enough that accounts for the things you value the most and cuts down on the stuff you don’t care so much about.

Saving even 20% of your income may seem ridiculously far off right now, but any amount you’re able to save is an investment in your future freedom. The time that you have to save is ultimately more important than the amount, so start sooner rather than later, even if that just means $10 a month at first.

Once you are in a place where you’re earning above your “enough”, you might be surprised how easy it is to significantly increase that percentage when you are aware of and intentional with your spending.

With a little creativity and intentionality, you could cut your years of required work in half. Think about that. Buying time ain’t a bad thing to spend money on if you ask me.

How to calculate your savings rate

To calculate your savings rate, you’ll need to find out how much you’re saving.

Take your post-tax income and subtract your expenses to determine the amount you are saving, or not spending. Then divide that number by your income.

As an equation, it would look like this:

[(Income – Expenses) / Income] x 100 = Savings Rate

Here’s a made up example with someone who has a monthly income of $2,800 and spent $2,100 last month:

[($2,800 – $2,100) / $2,800] x 100

($700 / $2,800) x 100

0.25 x 100 = 25%

Savings Rate = 25%

To get the most accurate number you want to make sure you’ve tracked your expenses for the past month (or whatever period of time you’re using) because just using your bills and estimates will probably give you an inaccurate picture of your actual spending.

Figure out your savings rate for this past month, and see if you can increase it by 3% this next month. Let me know how you do in the comments!

PS — The YNAB link is a referral link, which means that if you sign up for a subscription at the end of your free trial, I’ll get a bonus free month. I wouldn’t recommend YNAB if I weren’t enthusiastic about it, and I think you will be, too! You can sign up for your free trial of You Need a Budget here.

How to Calculate Your Net Worth

Your net worth is essentially a measure of your financial wealth.

It’s calculated by adding all of your assets and subtracting your debts (also called your liabilities).

Assets – Liabilities = Net worth

In my post about the racial wealth gap, I touched on the fact that wealth is different from income. Someone may make an average annual salary but have a high net worth thanks to inherited assets or a particularly high savings rate. Conversely, someone might make a six-figure salary but have a negative net worth due to student loans, lifestyle inflation, or other family responsibilities.

Understanding the difference between income and wealth is important and knowing your net worth can give you a good sense of your financial picture, help you make financial decisions, and set concrete financial goals for yourself.

Having a high net worth (or wealth) increases your financial resiliency and provides you more freedom when making big life decisions. Having a negative net worth can mean increased financial stress and less financial resiliency.  

What counts as an asset?

Assets include any cash, checking and savings balances, investment accounts, bonds, your home, and your car.

Some folks will also include furniture, art, jewelry, collections, as well as other personal belongings. Including all of that can get a little tedious, and unless you plan on liquidating the items into cash at some point, I don’t personally see the value in including their worth in your net worth calculation — but hey, I don’t own a Picasso. But feel free to do what makes sense to you!

Personally, when calculating my own net worth, I simply include my cash accounts, investment accounts, and home.

I don’t include my car because it’s a depreciating asset (meaning it loses value over time), I don’t plan on selling it soon, and if I did, I would probably be buying another car after.

You can use sites like Zillow to get a ball park figure of the market value of your home and sites like Kelly Blue Book to get the market value of your car.

Once you’ve listed all of your assets and their worth you’ll total them all up and this will be the first number you need for the net worth equation.  

What counts as a liability?

Liabilities are debts. This includes your mortgage, car loan, student loans, credit card balances, personal loans, etc.

Just as you listed all your assets and their worth, you’ll want to list out all of your debts and what you owe. Once you’ve totaled up this amount you’re all set to calculate your personal net worth.

Sample net worth calculations:

Here are some made up examples to show what I just described.

Person 1:

Checking Account$2,500
Savings Account$8,000
Roth IRA$5,400
Home Market Value$200,000
Total Assets:$238,100
Credit Card Balance($1,800)
Student Loans($6,200)
Total Liabilities($133,000)
Net Worth ($238,100 – $133,000)$105,100

Person #2

Checking Account$750
Savings Account$2,100
Roth IRA$1,550
Total Assets$15,400
Car Loan$4,800
Student Loans$12,000
Total Liabilities$16,800
Net Worth ($15,400 – $16,800)-$1,400

Person #3

Checking Account$2,300
Savings Account$4,200
Total Assets$20,050
Car Loan$1,700
Credit Card Balance$450
Total Liabilities$2,150
Net Worth ($20,050 – $2,150)$17,900

Now it’s time to get out a pen and paper, open up those accounts, brush off your arithmetic skills, and calculate your own net worth.

I know for some that might seem scary, but I challenge you to push past that initial feeling. The scarier it feels, the more important it probably is to do.

The first time I calculated my net worth, I didn’t love what I saw. I was in the red and knew I wanted to be on a better track for my future self and future family.

It might feel overwhelming the first time you calculate your net worth if it’s in the negative — or even if it’s just not as high as you would want it to be after [insert number of years] working and earning an income. But knowing where you are is an important and powerful first step that can give you a sense of control and direction on how to improve your situation.

I calculate my net worth on a monthly basis to make sure that it’s moving in the right direction and to track my progress. Doing this monthly update helps me feel in control and seeing the positive movement each month keeps me motivated. Each time it goes up I feel less stressed and a little freer.

I’ve come a long way since the first time I calculated my net worth, and I know that with a few changes you can to, but it starts with knowing where you’re starting.

Why “Moving the Sock” Is a Simple Yet Powerful Move

Moving the sock is simple but powerful. It can set you up for future success and help you avoid tragedy.

Cassie and I throw around the phrase “just move the sock” probably every other week, if not more. Sometimes we’re telling each other and sometimes we’re just telling ourselves.

At this point, it’s a central tenet of our household philosophy that things tend to go better when we “just move the sock.”

Let me explain.

“Just move the sock” isn’t actually about a sock…but it did start with a sock.

The Incident of the Sock and the Vacuum

One day, early on in our relationship, Cassie was telling me about how she had been vacuuming her house when she noticed a sock in the middle of the floor. Rather than stopping to pick it up off the floor, she thought she’d just vacuum around it, nudging it over little by little with the vacuum.

Except she didn’t.

She ended up vacuuming up the sock and it got stuck in the one part of the vacuum she couldn’t easily access. Not moving the sock resulted in her having to spend the following two hours performing surgery on her vacuum to retrieve the sock.

During those two hours, she tried to get at the sock from every angle. That didn’t work, so then the surgery started. She sliced open the tubing and spent most of the time trying to pull the sock out with scissors. Once she got it out, she had to glue the tubing back up.

The vacuum never did quite work the same again *sad face*.

When she finished her story, I unsympathetically said, “sounds like you shoulda moved the sock.”

Since then “the sock” has come to symbolize the small tasks and to-do items that we avoid — even when doing them requires little effort and would likely make our lives a lot easier and less stressful. You know, like that one phone call you’ve said you’d make every day for the past two months but haven’t? That’s “the sock.”

Here are some recent socks that we’ve encountered:

  • Calling Wayfair to ask them to send one single bolt that was missing from a piece of furniture we bought
  • Unloading the dishwasher (and reloading it with the dirty dishes)
  • Scanning paperwork to send to the life insurance company

The Incident of the Sock and the Vacuum (yes, it’s immortalized in title case now) was such a clear example of how we so often give ourselves massive headaches just because we were too lazy or avoidant to do a small, simple task. The consequences of not moving the sock were so immediate and unnecessary in that situation that it provided a clear and long-lasting lesson.

While Cassie now (almost) always picks up the sock when vacuuming, we’ve also carried that lesson with us to into other realms of our life, with pretty good results.

I’m telling you about it today because there are plenty of “socks” in the personal finance world that could really help you out in the long run and decrease future stress. They are things with a good payoff that are quick and relatively simple things to do, but are also easy to avoid or push off for later.

Things like setting up the 401k with a match that your employer offers, setting up auto-payment on your credit cards, canceling that lingering subscription you don’t use anymore, getting a few new quotes for your car insurance because you know you’re overpaying, returning that thing you bought that you didn’t actually need/want, opening a high-interest savings account, and so many more of those things that tend to live on our to-do lists in perpetuity despite that fact that doing them would give us a pretty immediate payoff.

So, I challenge you to pick something that you’ve been avoiding (that realistically won’t take you longer than 15 minutes) and do it. Move the damn sock. I promise you’ll feel better for it, and that small win might just carry over into motivation to move another, maybe even a bigger, sock tomorrow.

Reader Question: How Do You Start Budgeting with a Partner?

We’re continuing with the theme of money and relationships and today we’re talking about how to budget with a significant other.

Whether you’ve both been long time budgeters, neither of you have ever budgeted before, or one of you is a personal finance nerd while the other doesn’t know what their bank account balance is, starting a shared budget together is different than budgeting alone.

Here’s a flexible guide for what questions you’ll need to discuss when you start budgeting with a partner.

Why do we want to budget?

Before you sit down to start a budget together, you want to make sure you’ve already had a more foundational conversation about money, values, and goals. For a budget to work, you and your partner have to have a strong sense of why you’re budgeting.

The why can be anything – saving for a home, crushing your debt, a much-needed vacation, future kids, starting your own business, a life free of money-related stress.

Knowing that sticking to your budget will help you reach your savings goals as a team will make it easier to eat at home rather than going out that one night, or might help you think twice before making your next impulse purchase. Plus, as you start to see the results of sticking to your budget (like your savings account ticking up and stress level ticking down), you’ll feel motivated to keep it up.

Budgeting shouldn’t feel like deprivation. Making a budget isn’t necessarily about cutting costs, but about realigning your spending with your priorities.

Negotiating priorities as a couple requires some real conversations, so be sure to talk about your financial and life goals as a couple before jumping straight into the budget. If planning out big life goals feels overwhelming, then start on a shorter-term goal like “what would you like to save for this year?

Getting on the same page about that will make setting a budget together a whole lot easier.  

How are we making our budget and tracking spending?

The next question that you’ll have to answer together is what you will use to create your budget and how you’ll be tracking your spending. This is the nitty gritty logistical stuff, but your answer to this question could have a big impact on how successful sticking with your budget is.

You could set up a home-grown Excel sheet, you could use a free online platform such as Mint, or you could try my personal favorite budgeting software You Need A Budget (YNAB) which uses the zero-sum budgeting method. There’s also the envelope method, a cash based budgeting system popular with those just starting out, and good old-fashioned pen and paper.

When starting a budget together, you want your method to be easily understandable and accessibly to both parties. You also want it to be fairly simple. If it takes you two hours every time you sit down to update your budget and you need to manually add every transaction, it might start to seem more like a chore than it should.

Do some research on different budgeting strategies and software and find something that works for you both. If the first thing you pick doesn’t fit right or work out, try something else.

Remember: Y’all’s financial health is too important to give up on after one or two stumbles; that’s just part of the process.

What costs will be shared?

Depending on where you are in your relationship and how much you’ve joined finances, the answer to this will be different for each couple.

If your finances are fully merged then the answer to this question is simple: You’re sharing all of them.

If not, you’ll need to sort through expenses to determine what costs will be shared. Perhaps it’s just rent and utilities. Maybe it’s groceries and the cost of dining out together. Maybe it’s everything except the associated costs of an expensive hobby one of y’all have. What about holiday presents for each other’s family members?

Like I said, this will depend on lots of things unique to your relationship, but it’s worth going through your budgets’ categories and figuring out which ones you both feel should be shared costs.      

Who pays for what?

Again, if you’ve fully merged your finances, the answer to this is easy. But when it comes to dividing costs, this is also unique to different couples.

You may split any shared costs 50/50. If one of you makes significantly more money than the other, then you might choose to split some or all shared costs in a way that’s more proportional to each of your incomes.

You may also decide to split some costs based on differing priorities. If one of you really loves to eat out and the other doesn’t really care, then maybe the one who always wants to go out pays for a little more of your dining out costs. If someone pushed for a slightly more expensive apartment because it was closer to their work, then maybe they cover a bit more rent.

Talk with your partner about what feels fair and why. Remember, budgets should be individualized and flexible. Your situation will change and so will your budget.    

When will we update/revisit our budget?

Budgets take some routine maintenance if you really want them to work in all their glory.

You need to reconcile transactions, move money around from different categories based on any unexpected expenses, understand the progress you’re making on your goals, and make sure the framework of your budget still matches your priorities.

How often this maintenance should happen will partly depend on what method your using to budget.

If you’re manually entering transactions you either want to be entering them in real-time or set aside 5-10 minutes each day to update your budget with any new spending. If you put this off for too long, it can snowball and you won’t remember how to categorize that mystery trip to Target on last month’s statement.

If you’re using a budgeting software that connects to your accounts and auto-imports transactions, you may only need to do a quick check-in once a week to make sure the imported transactions are categorized the way you want them to be and add any cash transactions you made.

If you’re using a cash flow system such as the envelope method, you may just need to regroup every other week.

When budgeting as a team, it’s a good practice to set aside a regular time that you sit down together and go over the budget to make any necessary adjustments. Maybe the last Friday of the month you sit down to make next month’s budget, and then every Sunday you quickly go over any new transactions over coffee to handle the maintenance pieces.

Every six months or so it’s a good idea to do a bit of a deeper dive on your budget together. Check-in with how your spending level feels and if any of your priorities have shifted. Don’t forget to celebrate the progress you’re making towards your financial goals!

What are our boundaries and expectations?

Another piece to the puzzle is being clear about any expectations or “rules” there are about money and communication. Discussing each other’s expectations about your shared budget is important to start off on the right foot.

If your finances are merged, it’s a good idea to determine a threshold price point above which you would expect your partner to check-in with you before making the purchase. The amount will vary from couple to couple depending on income levels and money scripts. For some couples, it may be $100 while another couple might not feel a check-in or discussion is warranted until hitting $500 or $1,000.

Be sure to ask what this number is for each of you and see if you can land around a similar number. No matter what, it’s good practice to discuss larger purchases ahead of time.

If you’re sharing most of your costs and setting a budget together, build in a monthly category of “judgement-free fun” money for each of you. The amount in these categories will vary, but it gives each person some funds they can spend however they want, no questions asked. Some folks might save it up for a big purchase, while others might use it for smaller treats throughout the month.

If you and your partner disagree over certain spending habits, this may be a good way to tackle that — as long as the fun money category isn’t taking too many dollars away from your larger financial goals.

There isn’t a right or wrong way to budget together; the important thing is finding something that works for you as partners and helps you feel like you’re on the same team.

The simple awareness of your spending will do more for cutting costs than any amount of coupon clipping, and the conversations that stem from your budgeting dates will certainly inspire dreams of the future you hope for and clear a path for getting there together.

PS — The YNAB link is a referral link, which means that if you sign up for a subscription at the end of your free trial, I’ll get a bonus free month. I wouldn’t recommend YNAB if I weren’t enthusiastic about it, and I think you will be, too! You can sign up for your free trial of You Need a Budget here.