Author: inspirationalmoneycoaching

Cars

8 Steps That Helped Me Sell My Car

inspirationalmoneycoaching

It has been a little while since I wrote my last post. Life has been crazy… because Lauren and I are expecting baby #3! Yes, we will be officially outnumbered at some point in the next couple weeks. Yikes!

But in addition to the craziness this new kid threw another curve ball our way: The logistics of transporting 3 kids in car seats is a lot different than just 2.

At first I entered into denial and being the frugal thinker that I am I started looking into how you can fit 3 car seats across in a sedan or small SUV. (It is possible and is absolutely something you can do if needed) But, Lauren is a little more practical in this area and I was told we needed a bigger vehicle.

I slowly came around and agreed with her that we had to get a…… VAN.

A used one of course. (Buying a new car is a crazy bad idea)

But before that, I needed to sell my car.

I really like my car. It’s a 2012 Ford Fusion, so it’s not fancy but it drives nice and is comfortable inside. I have kept it super clean too. Plus, I bought it with cash 2 years ago. So selling it feels like a financial loss to me. But sometimes doing the practical thing in life might not be the perfect thing financially.

That is okay as long as it makes sense and the practical decision does not derail your financial goals.

The point of this post is to share my experience selling my car as a private seller vs trading it to a dealer. Hopefully some of what I learned may help you the next time you are looking to change vehicles.

Everyone knows that trading a car to a dealer is generally a terrible deal. It rarely ever makes sense to do it and yet it happens all the time. I think the biggest reason is that selling a car takes work and in many cases we don’t want to do the work.

But let’s look at some math. A dealer valued my 2012 Ford Fusion at a trade in value of $5,000-$6,000. Private sales for vehicles similar to mine were around $7,500-$8,500.

That is a $2,500 difference!

I don’t know how much you make per hour but selling my car probably took me 10 hours of my time, meaning I saved about $250 per hour in the time I invested. That is a worthwhile investment. I could have traded my car in for a couple grand less but instead I dealt with the hassle of selling for 10 hours and kept that money.

That probably makes sense to most everyone reading this. But the biggest challenge for me, and I imagine for most people, is that I really didn’t know how to sell a car privately. Because of this a lot of the work I put in was simply doing research.

In order to help speed up the process for you here are the steps I followed in successfully selling my used car.

1. Do Your Homework

Search several different car sale sites for cars comparable to yours. Note the listing prices. Also look at sites like Kelley Blue Book to get a range they feel your car may be worth in a private sale.

Remember that list prices are not the final sale price. They are a starting point. If most cars like yours list for $10,000 they likely sell for closer to $9,000.

Also keep in mind that you will likely overvalue your vehicle. You will think that it is cleaner and nicer than the potential buyers will. It’s not your fault. It is human nature to overvalue what we own, but it is important to be aware of that bias when you pick a price to list your car at.

While you do your homework make note of the listings that really stand out in a good way. How are they worded? How do the pictures look? What makes them standout. Keep this in mind for later.

2. Clean Your Car

I spent 2-3 hours detailing the heck out of my car. I removed EVERYTHING and cleaned every square inch.

I invested in a soft drill brush and some upholstery/carpet cleaning spray. Together they cost around $15. The drill brush will save you when cleaning the upholstery and it was well worth the investment.

When cleaning think of every place a prospective buyer might look, inside and out, and make sure it is impeccable. Act like a buyer and go through your car as if you are assessing it for a purchase.

3. Take Awesome Pictures

I cannot stress this point enough. There are so many poorly framed, poorly lit, and poorly angled photos of items that people are trying to sell online.

Bad photos will cost you money and time. Make sure to get your car in good lighting and take pictures that are properly framed. Capture all the critical areas a buyer would want to see.

Refer back to when you did homework on other listings. Think of the best ads. The ones that really caught your eye. Take pictures that are similar to what they used in those ads and make sure that you get one great cover photo of your car.

4. Get A Vehicle History Report

I used Carfax because it seems to be the most trusted and universal history report out there. It cost me $40. Carfax is not the cheapest report out there, but I wanted something reputable that I could show to the buyer.

Every single serious prospect that called me wanted to see a vehicle history report. Most asked for a Carfax report by name.

It’s worth the cost to have it ready. It shows that you are a serious seller and not just a scammer.

Another benefit of having the report is now you have leverage in the negotiation. If your car has a great history and it is well taken care of you can highlight that in your ad and it will help you with determining the list price.

5. List Your Vehicle Online

There are several sites that you can utilize. Some are free and some cost a little. I used craigslist ($5 per listing) and Facebook marketplace. I have heard of people successfully using Offer up as well.

Refer back to your notes and write an awesome description of your vehicle. Make sure to include the make, model, year, mileage and price in the headline. Then in the body of the ad you can include all the details and features.

Don’t leave out any of the great features your car has. You can search for your vehicle and trim level online to get a full list if needed.

Also list things that you like about the car that may be relevant. For me I specifically noted the large trunk and that I can fit 2+ sets of golf clubs in there.

Make sure to note if the car is smoking or non smoking, has had or not had pets in it, and if kids ride in the car. Those things can make a big difference for perspective buyers so it’s important to note them and to price accordingly. If your car has any damage outside of normal wear and tear make sure to note that as well.

My car had a small superficial crack in the front plastic bumper. I had a close up photo of it and noted it in the body of my ad. I didn’t highlight it, but I was open and honest about it. It’s better to be honest up front then to meet someone face to face and have them feeling misled by your ad.

Relist your ad

You will likely not sell your car immediately. It will probably take a few weeks even if it is priced properly. You want your car to show up at the top of search results so relist it every 10 days or so.

I relisted mine 2 times before it sold.

To be fair I originally priced my car at $8500 which was the top of fair value. I knew it was a long shot but I figured why not try?

I gave it 10 days and then relisted it at $7950.

6. Handling Calls & Emails Inquiring About Your Ad

I won’t sugar coat it, this was the worst part of the process. You will get a bunch of spamy messages and maybe even calls. Some are scams.

Most of these came within 48 hours of listing my ad and most were obviously sales pitches or scams.

I simply did not respond to them.

I did have one person who acted interested and even set an appointment, but then they asked me to get a vehicle history report and they sent me a link for where I should get it.

That was a red flag for me, so I did a little research and quickly found that to be a scam.

BUT, if you use some common sense there is nothing to worry about and after a couple days the spam dropped off.

Next came the real calls. Some of them were individuals simply looking for a crazy good deal. They usually asked a few questions and then immediately started asking for me to give them a bargain price.

Honestly if I had been in a desperate spot and needed to sell fast I could have gotten about $1000 more than trade in by selling to one of those prospective buyers. I was not desperate, so I waited and kindly turned them down.

I had other calls where we discussed the car and the list price and it wasn’t the right fit for the possible buyer.

I probably took 6 or so “real” calls before I found the eventual buyer.

7. The Negotiation

In my case the negotiation took place over the phone and not in person. This could go either way, but in most cases a buyer doesn’t want to commit to driving out to see your car unless they know they can get a price that is reasonable.

I went into the call with a plan. (Make sure you have a plan in place before you start getting calls. Know your bottom line price.) I knew my bottom line price was $7500. My car has a crack in the bumper but otherwise it was clean. $7500 was the low end of the range that my car generally sells for, but given the bumper crack I knew I would possibly end up near that price.

The prospective buyer asked about the vehicle history, if anyone had smoked in the car, and why I was selling it. I was prepared for each of those questions. She asked for a Carfax report and I quickly sent it over for her to reference.

She said that they liked the vehicle a lot and wanted to buy it but the price was a little high for them. I told her that I was comfortable coming to an agreement on price.

She offered $7000.

Negotiation tip: Always try to get the other person to give you their price first. This way you know if they are serious, but also it puts you in the driver’s seat of the negotiation.

Many buyers are savvy negotiators and they will ask you for your best price before they tell you what they will offer. They want you to lower the price so that when they put a value on the table they have already worked your price down.

Try not to fall into that trap. When asked for my best price I simply said that based on the vehicle condition and comparable sales I felt that the list price was fair, but that I was comfortable negotiating if they had a different price in mind.

Okay, so she offered $7000 which is much lower than my ask. So I went back to highlighting why the car was a great value at my list price.

I talked about the clean title history, the fact that I owned the car outright so there was no lien to deal with, and the comparable sales research I had done. I highlighted that the car was smoke and pet free and super clean inside.

I didn’t drone on with details, but I succinctly highlighted all of the best things about the car.

I told her that I was happy to reach an agreed price but that she would need to be much closer to the list price.

She countered at $7200 and at that point I said that we were likely too far away in price to reach a deal. I explained that the car was already a great value at the list price and if she changed her mind to let me know.

She was clearly disappointed but she said the list price was too much.

I made sure to highlight that I was happy to work with her on price but it would need to be closer to my list price and we ended the call.

Sometimes its okay to not reach a deal. Sometimes you will never hear from them again. BUT SOMETIMES…

They call back a few hours later.

That is when I knew she really wanted the car.

She then told me the absolute best she could do was $7400. She had a loan for $7000 and she was scraping together the rest and she could pay me in cash. Honestly I don’t know if all of that was true but I think it was.

I said that the lowest I would take is $7600. At this point I knew she was a very serious buyer and I wanted to make sure that we closed on a deal if at all possible.

She said that she couldn’t do it and we almost ended the call again because I held firm. Right before the call ended she said she could find $100 more if it would complete the sale.

I agreed to sell the car for $7500 which was my bottom line price.

I could have held out for more from another buyer but I don’t know for sure if that would have worked out. I could have pushed her for another couple hundred dollars and she might have made it happen. But in the end it felt like a fair deal. Both parties gave up a little.

The big takeaways I want to convey is that before you take any calls: have a plan, be confident in your pricing, always circle back to what makes your car a good buy, and do what you can to let the other party put values on the table before you do.

No negotiation is perfect, but knowing how you want to approach it before hand gives you a big advantage and takes off a lot of the stress.

8. The Sale

This part was probably the most stressful for me. I have never signed over a title to another party or filled out a bill of sale. I did all the research on it to make sure I did it right, but it was still a little intimidating.

One thing I did that I would do differently is that I went to the sale alone.

Having a friend or family member there would be great. If nothing else then to have a second set of eyes and someone for morale support.

In this case the buyer sent her son and a friend to complete the sale. I gave them the address to a local coffee shop where we met.

I was very intent on not meeting at my home. This is a personal preference thing, but from a safety perspective I didn’t want to make a large cash transaction with a stranger in my driveway.

The location worked out great. The buyer was very friendly. He looked over the car, checked the engine, and took it for a spin around the block.

Another personal safety preference, but I did not ride with him while he test drove it.

It might sound crazy but I prefer not to be kidnapped and if the guy stole my car… well insurance would have paid me for it and I was standing next to his friend/car so I would have easily been able to report him to the cops.

Once he was done he was ready to buy. We had both printed out a bill of sale form from our state DMV website. We both filled out the form and a copy and then took pictures of it and validated the other person’s photo id.

That might have been overkill but I wanted to feel 100% confident in the sale.

I then signed the title over to him and he gave me the cash.

My sale was cash which is preferable. Based on what I have read you do not want to accept cashiers checks because so many are fake. Had the deal not been in cash I would have insisted that we do it at a bank. That way they could have assisted in ensuring that the financials were all valid.

Doing the sale at a bank may also be needed if there are liens or loans to work through.

After the sale I reported everything online to my state DMV. They also recommended removing the plates before finalizing the sale, but I forgot to do that. It hasn’t seemed to be an issue at this point.

Conclusion

Hopefully my experience helps you all when you are ready to sell a car. Like I shared it was my first time attempting it and it was a bit intimidating to tackle at first. But I did all the research up front and for about $2500 more than the trade in price it was well worth it.

For me doing the research and feeling confident in my process was key. It took the stress out of a lot of it.

The bottom line is that you can save yourself a few thousand dollars in many cases by selling privately. Those types of values are worth the inconvenience. Take those extra steps and gain the confidence to try it.

I am glad I did it and I would do it again, but hopefully my current cars will run well for a very long time so that I won’t have to.

Time to go enjoy my van. Haha.

Personal Finance

17 Tips To Save On Purchases Or Make Money Utilizing: Garage Sales, Buy Nothing, Offer Up, and MORE!

inspirationalmoneycoaching

My wife Lauren has harnessed the power of Buy Nothing and Offer up over the last few years.

She has scored some amazing deals on furniture, kids clothes, toys, and all sorts of other stuff. Some of it was free and some was a fraction of the retail price.

It has saved us thousands of dollars.

It has also allowed us to move on from items either by giving them away to neighbors who need them or selling them to someone who is willing to get something at a great discount.

Both the purchases and the sales are a huge benefit to our family’s finances and wellbeing.

If you aren’t a pro at this yet here are some strategies to utilize and some thoughts to consider when you decide to jump in:

The most obvious benefit of utilizing garage sales and sites like offer up or buy nothing is the cost savings. You can find items that are lightly used selling for less than half of retail price.

Things like tools, wood furniture, and sports equipment are some of the best bargains. If well cared for, items like that will last a very long time. But they are extremely high mark up items at a retail store.

For example a dining room set can cost thousands of dollars at a furniture store, but Lauren found one on offer up for just a few hundred… in great condition.

She found a china cabinet that was also a crazy great deal and when I went to pick it up at the lady’s house she practically begged us to buy the rest of her furniture for almost nothing.

Seriously! We politely told her we couldn’t fit anything else in the car but she started saying we could come back tomorrow and she would give us a matching piece that she had listed at over $100 for $40.

We still refused and she kept dropping the price!

People selling at a garage sale or an online forum are motivated to sell. In this lady’s case she was moving across the country and had to get rid of stuff quick.

Not everything out there is a bargain though.

My first big tip for making any kind of purchase at a garage sale or on an online forum is to make sure what you are getting is truly worth it to you. Don’t buy it just because it’s a great deal, get it because it will bring you value.

In our case we didn’t have a need for the matching piece. Buying it would have been an awesome deal and maybe we could have resold it, but we really didn’t need it. (Reselling or flipping is another topic for another post but there are people out there making serious money doing it, especially if you know how to restore old furniture.)

Take time to search for what you want if you can. This is especially easy online. When Lauren knew she wanted a dining room set she searched offer up and a couple other sites for months before she found the right one at the right price.

This doesn’t mean you won’t find something perfect at a steal of a price right away, but sometimes it takes a little time.

Once you have found something that you truly value go for it.

Making a purchase at a garage sale or form a private seller requires a face to face transaction. This is where a couple easy mistakes can happen. So…

My next tip is to always negotiate.

As Americans we are generally terrible at negotiating. It’s not part of our culture. We go to a store and pay the price listed.

It’s not our fault, we aren’t trained or taught to negotiate unless we have to for work. Because of that we generally avoid it.

But when you are making a purchase at a garage sale or from a private seller, you should negotiate every time.

It’s not that tough, here are some tips:

First look carefully at the item, if it has any flaws or defects point them out. (Make sure they aren’t a deal breaker for you) By pointing them out you are establishing your ability to begin a negotiation.

(Even if there aren’t any flaws this doesn’t mean you can’t negotiate the price.)

Have a number in mind in advance for what you are willing to pay. Offer to buy the item for just under that price. Allow the seller to counter and if you agree you are done, you have a deal. It doesn’t have to be hard.

In my experience most people just accept your offer unless it is very low or the item is in high demand.

I had a garage sale last Saturday. Several buyers asked for a lower price and I agreed to it in every case but one. Why? Because I was motivated to get rid of stuff that has been laying around a long time.

Most other sellers are as motivated as I was and will accept your offer if it is reasonable.

I dropped another tip in there a few paragraphs back that I don’t want you to miss. Make sure that when you see the item, if you aren’t truly happy with it, be okay with walking away.

In many cases if you are using offer up / facebook marketplace / craigslist you have to drive out to see the item at someone’s home or somewhere nearby. By driving out you can put unnecessary pressure on yourself to make the purchase no matter what simply because you invested time and made the seller show the item.

It’s okay to walk away. Just politely say that the item isn’t exactly what you are looking for and thank the seller for their time. We have done this on several occasions and everyone has always been very polite.

It has never been a big deal and we have walked away several times.

Back at the beginning of this post I noted some items that might be great to get at garage sales and from private parties. What about items to avoid?

Avoid safety items that may be outdated or previously damaged like carseats or other used kids safety items. Upholstered furniture, mattresses, or pillows can be risky too, so stay away.

Sometimes you can find items like these that are brand new and in that case just inspect them thoroughly and maybe it’s a great deal.

One last tip for buying items: Stay safe.

Don’t meet a seller if you feel uneasy about it. If you are looking at a large item at someone’s home bring a friend or two to go with you. You will need help loading the item anyway.

If the item isn’t large, offer to meet at a public location like a coffee shop.

How about the flip side? What if you want to sell some of your unused stuff?

If you are like my family, or really many of the families out there, then you probably have way too much unused stuff at your house.

Nothing feels better than clearing out the clutter so that you can enjoy the things that matter most to you. It reduces stress and by selling items you can make some money to help you save for something fun or to pay off some debt.

Garage sales can be an awesome way to sell items, but they can also be a flop. Here are some tips to make it successful:

Join a neighborhood garage sale if you can. By having lots of sellers you bring in more traffic and more potential buyers.

ADVERTISE! Utilize facebook, craigslist and other sites to advertise your sale. Put out signs on main roads directing buyers to your sale.

Organize your items, make sure they are clean, and stage them to look good for your sale. I have been to many garage sales where the items look dirty or dusty and they are just piled on tables or on the ground.

There is no way I am buying something at a sale like that and neither is almost anyone else. Take the time to make your items look good.  

Clearly price your items and price them low enough to sell. Buyers at a garage sale are looking for a great deal, they won’t bother if the prices are too high.

Garage sales require effort and planning. You won’t be successful if you try to put it together the night before… and don’t forget to have change ready.

How about selling on Offer Up / Craiglist / Facebook?

Similar to a garage sale, clean your items and stage them. Take great pictures with good lighting. This is a very underrated tip. Don’t take pictures of the desk you are trying to sell when it has a bunch of junk on it. Clean it up, turn on all the lights in the room, and get good pictures.

Write a concise description of your item highlighting any special attributes and price it to sell.

One trick Lauren uses is that she lists an item for a little more than she wants. If she doesn’t get a buyer in the first few days she re lists it at a slightly lower price. She does this until she reaches her absolute lowest price.

Sometimes we get surprise by a buyer who takes it for the highest asking price!

Know your bottom line price if you have one. This is especially important for larger items. You don’t want to start negotiating without a plan and end up selling for far lower than you wanted to.

Re-posting the item every few days is important if you can. It keeps the item near the top of the page. After a few days your post starts to get buried behind newly listed items.

One last, but very important way to save money and to declutter are sites like Buy Nothing.

Basically the idea is that you join a local neighborhood Buy Nothing group. The group lists things that they no longer need and you can pick up items that you want for free.

The person who posted the item gets to decide who they will give it to and generally some preference is given to those who also give lots of items to others.

So my tip here is to be generous within your group.

This is such a cool concept because you can get great items that you need for free while giving away things that you no longer need to a neighbor who could use it. It recycles items and builds community.

Lauren has become very active in her buy nothing group and we have received some awesome stuff and have given away lots of great items.

Garage sales, marketplace apps, and buy nothing are powerful forums to achieve several important financial and life goals like:

Making money, saving money, reducing clutter, building community, and recycling.

Those are some awesome benefits and in most cases the process is easy.

If you haven’t utilized any of these tools check them out, just don’t forget the tips and tricks shared above.

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Budgeting

How To Write A Budget In 5 Simple Steps

inspirationalmoneycoaching

Writing a budget might be the most avoided essential personal finance item. Why?

Because it seems hard? Because it seems restricting? Because we don’t know where to start?

I’ll be blunt, all of those reasons are wrong and they are excuses. That’s okay, we all make excuses for things we are avoiding, but deep down we know they will make our lives better.

Budgets aren’t hard, you probably already divide up your money in some fashion otherwise you wouldn’t be paying the rent. An actual written plan for every dollar that you make might be a little different, but it’s still not hard.

Budgets aren’t restricting. You are in control of your budget. You decide where the money goes, a budget just gives you the ability to choose where you want it to go before you get paid.

Virtually every person I have ever coached in writing a budget has said afterward… “I feel like I got a raise”.

Lastly where should you start? Right here:

Step 1: Tally Up Your Expenses

Look at your prior expenses. Online bank statements or credit card statements are perfect for this. If you use lots of cash it might be trickier, but start writing down everything you spend or keep the receipts.

Write down your fixed expenses. Rent/Mortgage, Water, Electricity, Garbage, Phone, Internet, Insurance, Transportation, etc. Anything that is close to the same every month or is a necessity. This is where your budget’s foundation will be built.

Now write down your variable expenses and categorize them. All of your grocery store purchases in one column. All of the restaurant purchases in another and so on with things like clothes, gas, recreation, health, personal expenses, and miscellaneous.

Once you have those written out add them up to get an idea of how much you are spending in each category per month. Write that number down.

This step might be the hardest because it’s the one that requires you to start taking action in the first place. Do it. Making a plan to win with money is one of the best things you can do. It will give you peace because you will know that you have direction in an area of life that can feel unstable.

Step 2: Write Down Your Budget Categories

Write down all of your categories (everything you spend money on) in order of most important to least important.

My biggest piece of advice here is do not over think it.

Do not divide your categories down to things like, “laundry detergent” or “toothpaste”. That is too detailed. Stick with a bigger category like personal expenses.

Lauren and I include those items in our general grocery budget. Anything purchased at the grocery store falls under grocery unless it is something very unique. That keeps it easy.

Also do not stress over what is more important. The key is to get critical items at the top of the list, think: Food, Shelter, Clothing, and Transportation. Then beyond that you can list them how you would like.

Include any debt payments in the list as well.

If you still aren’t sure you have everything I will show you my budget in step 3.

Don’t forget two critical items: Saving and Giving.

Saving is critical to any successful financial plan. Rule of thumb is about 10% of your income. In some instances where you might be facing significant debt it should be less. In most cases 10% should be about right.

Giving is just as critical to financial success. I have yet to meet or work with anyone who is living a fulfilled life that is not giving in some form or fashion. Give to causes you care deeply about. Give an amount that is significant to you. By doing those two things you allow yourself to see beyond yourself and to realize the full impact you can make on something that matters to you.

For Lauren and I saving and giving are our top two budget items.

Step 3: List Your Income And Start Filling Out Your Budget

You now have a list of your budget categories and you have written down the amounts you spent in those areas in the past. Use that as a guide.

Now write your monthly income at the top of the page. This is take home pay. For me, I get paid 2 times per month, I simply take the direct deposit amount and multiply it by two.

Now write a list of your categories just like in step 2. Start writing in the amounts of your fixed expenses next to their respective categories. Again this is your expenses like rent, utilities, and any fixed payments on a car or credit card.

Now write in what you think you need in each category that is left based on your prior spending habits. Groceries, food out, clothing, saving, giving, etc.

Look, you have a budget, almost!

Here is an example of my recent budget and below there is a budget we use for Lauren’s pay that might help you out if you are paid on commission or in irregular amounts:

Budget

Some important notes. I only count my take home pay when I write my budget. Before I see a dollar my paycheck is reduced automatically to cover Health Insurance, Dental Insurance, 401k contributions, and Taxes.

I don’t have line items to cover those because they come out before I really have a choice.

You will also notice that on the items at the bottom starting with “Gas”, I have a per week amount. That per week amount gives us a guide for what we should spend each week so that we don’t go over budget on items that are more frequent purchases.

I don’t have line items for debt payments except our mortgage because we are committed to living without debt. You might have those in your budget and that is okay, just make sure they are in there and aim to pay them off early!

We also have an emergency fund already, so there is no emergency fund saving category. For a long time that was a saving item in our budget. If you don’t have an emergency fund absolutely start building one up.

Alright here is our budget for Lauren’s paychecks:

Lauren Budget

The difference here is that Lauren is paid hourly and she doesn’t work full time. Her work is very seasonal so sometimes she could get just a few hundred every paycheck and other times she might get over $700 or more.

If you are paid commission/irregular pay the best way to approach a budget is to figure out what your potential worst month could be and budget for that. At the bottom of your budget add things that you would like to have money for but aren’t necessities.

If you are paid more than you planned for this month, work your way down the list of added line items at the bottom of your budget and go as far down as you can until every dollar has been assigned a purpose.

In our case Lauren’s check is going to cover Giving, College Funding for the kids, Vacation saving, and a Remodel fund that we have been trying to build up.

There is a running total column in the middle that helps us to see how far her check will go. For example, if she got a check for $300 that would be enough to cover giving, college savings, and vacation saving, but that would be it. Remodel savings would have to wait for next time.

But let’s say she got a $700 check, we could cover everything on the list and more. In that case we usually talk about what we want the extra to go toward. Usually we just add it as an extra saving for that kitchen remodel. But it’s important for us to check with each other to make sure nothing else has come up as an important item for the month.

Step 4: Get The Budget To Zero

This form of budgeting is called zero based. Basically the goal to assign every dollar to a category so that at the end you get to zero.

You will notice that in my budget there is a zero at the bottom. The sheet takes my pay and subtracts all of my categories as I work down.

This step is critical.

You don’t want a negative number at the bottom because that means you are overspending what you earn. If you get a negative number just go back and rework some of the non-essential categories to make up the difference.

You also don’t want a positive number. Why? Because that means you left money unaccounted for. Money that does not have a purpose gets… spent, usually on random junk that you don’t need.

So if you have a positive number at the bottom either add some to your categories above or use the extra to save for something that you have been dreaming about.

Step 5: Stick To Your Budget

This part can be tricky, you have it all on paper but now you have to actually live it.

I won’t sugar coat it, this will be the hard part. The first time you write a budget you will forget things. (Birthday presents, field trips, car tabs…) That is okay, the more you do this the easier it will get.

When you forget something just go back and make an adjustment. The unexpected will happen. But over time you will start to anticipate the unexpected and your budget will account for it.

For Lauren and myself budgeting has become second nature. We have been following a budget for a decade. It took time to dial it in, but at this point budgeting takes us maybe 10 minutes before the month begins and then I spend maybe 15 minutes a week to ensure we are on track.

It took us longer when we first started and it will take a bit to get started for you too. Give yourself some grace and don’t be afraid to make adjustments as you go.

Also a huge help at first is using cash. Give yourself cash to spend on discretionary items like food out, that way you know how much you have left at any time and you cannot exceed your budget by accident.

Conclusion: Every situation is different, but budgets are similar across the board. They aren’t hard but they do take focus. Money is such a critical area in our lives, it deserves extra focus.

That focus will lead to peace, reduced stress, and a feeling of direction.

It will enable you to pursue your dreams vs hope for them.

Life comes with a lot of uncertainty and nothing you can do in any area of life could prepare you for every possibility, but taking control of your finances helps to limit that uncertainty. And it prepares you to easily handle many of the challenges that will come your way.

That security is worth a lot. The positive benefits to your relationships and health are priceless. Take the time to take control in this area. You can do this, it’s worth the effort!

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Personal Finance

3 Ways You Are Probably Treating Your Dollars Differently

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Have you ever received money as a special gift or an inheritance that was for college? Or do you have money saved up for a down payment on a house/big purchase?

That money is sacred right? You would never spend it on something frivolous like a weekend trip to Vegas or a new IPhone.

What if instead of saving up the money or getting it as a special gift for a purpose you got the money suddenly, maybe you won it or got a bonus you weren’t expecting.

Would you possibly spend it on something frivolous? If you are like most people you might.

Why is it that we treat different dollars in our life with more reverence or value than we treat other dollars?

Aren’t all dollars worth the same amount?

They aren’t because we don’t treat them that way. Here is why:

Mental accounting. As humans it’s easy for us to mentally compartmentalize and categorize big things to make them easier to manage. Money is a big thing. It has several purposes in our life and it’s much simpler to divide the money up and designate it to its separate purposes in our minds.

Even if you have never written a budget you are doing this with money that you receive. You have rent money and grocery money and money to go out on Friday.

And you treat each category of money differently. In a sense you give some of those dollars more value than others and this can have big consequences.

Here are 3 ways you are treating your dollars differently and how it might be costing you:

1) Major expenses with add on features

If you have ever bought a house or car this may resonate with you.

You go to the car lot and there are a couple options to choose from. One option is the base model, it has four wheels and gets from point A to point B. It looks basically the same as the next model up but not quite as nice. It’s not a bad car and it costs $15,000.

You budgeted $15,000 for this purchase.

The next model up has a sun roof, an upgraded stereo, and alloy wheels. The wheels look cool and the sound is awesome. And you can imagine yourself using that sunroof all the time. It costs $17,900.

That really isn’t that much more than $15,000 right?

This is a classic marketing strategy. Next to one big number a slightly bigger number doesn’t seem like much more. In your mind 15 and 17 are really close. So 15,000 and 17,900 seem really close.

But hold on a second. Let’s say you currently own the base model car and someone came up to you and said they could put a sunroof in, upgrade your sound system, and put on alloy wheels for just $2,900. Would you do it?

No way. Why? Because first of all who has $2,900 to blow on those items? Second it sounds kind of pricey for what you are getting. Do you really need a better sound system? Yours seems fine. You will hardly use a sunroof. And alloy wheels are great but not for that much money.

Why is it different? Because $2,900 is a lot of money all by itself. But next to $15,000 it seems small. You wouldn’t spend $2,900 frivolously, but we do it all the time when we make major purchases.

We treat dollars differently depending on the situation we are in. So how can you avoid doing this?

Whenever you are about to make a major purchase, especially if you have not done a lot of home work before hand, take a day to step away and think it over. It’s called a cooling off period.

This will give your mind time to process the situation. Big purchases cause all sorts of havoc on our brain and hormones. We need some time to rebalance and make the right decision vs the one in the heat of the moment.

Sales people hate this because they know you will likely not come back or if you do you will go for the more reasonable purchase. They will do everything possible to keep you from leaving. Do it anyway.

Another thing you should do is break each part of the sale up in your mind and think about what each added component costs. Is each component worth the cost on its own? If not don’t get it.

2) Windfalls

I hinted at this in the start of the post. When we get money that we were not expecting we are very likely to spend it frivolously. Especially if it is not a very large amount.

But money that we worked hard for we tend to treat differently. We treat it with more respect, because it was hard to get.

But if you find $100 or work for $100 it shouldn’t matter because in each case you receive $100 and $100 is worth the same either way.

Here is a perfect example of what I mean. Let’s say you need new tires next winter. So you start saving $100 a month so that by the end of the year you will have money to go get new tires.

If your friend came by and said “hey I got a tee time at that super nice golf course and we need a fourth, are you in?” You would weigh the cost… let’s say it costs $100 to play. Your budget is tight this week and the only money you have is that money for new tires that you have been setting aside.

You will probably tell your friend you are sorry but you just don’t have the money this week.

But if you had randomly found $100 on the street the day before… you will likely be playing golf.

The money you saved for tires took work and planning and so it is sacred. The money you found was easy to get and took no planning, so it’s easy to part with.

But should it be? In the first scenario you were strapped for cash and couldn’t go play. You find $100 and suddenly you have money to spend on whatever?

We do this type of spending a lot. Usually it is not with found money but it’s with money that isn’t allocated to anything specific in a windfall like our paychecks.

For someone without a budget it might be that when you get your paycheck you set aside a chunk of it for rent, utilities and groceries, but the rest gets spent in the first weekend that you get paid.

You might not even be sure where it all goes. Food out, drinks, a baseball game with friends, some online shopping. But the rent, utilities and grocery money is sacred.

Your paycheck in this case is the windfall. The money that isn’t allocated gets spent without a plan and causes overspending or wasteful spending.

For me and Lauren, we fall victim to this with our “miscellaneous fund.” We budget a category to catch unexpected expenses and things that don’t fall into a normal budget category. Over time that budget item has grown and the “miscellaneous money” is being used for many random things.

The monthly budget for it is usually gone before half the month is over. That money has no designated purpose and it feels like a windfall, so we just spend it randomly and sometimes it goes to waste in a way. And it’s not a small amount of money each month so it really adds up.

So how can you avoid this?

The first way is to make sure every dollar you receive has a purpose and a plan. The plan could be to spend some of it on dinner out. That’s perfectly fine, but make that plan with a set amount. If you give every dollar you receive a purpose then you will eliminate wasteful spending.

Doing this will make you feel like you got a raise because your money will go toward things you actually want vs random purchases.

The second thing to do is: When you get a windfall or even a paycheck, wait before you spend it. The longer you have the money the more valuable it will become to you. Our brain treats things that we have held onto as more valuable than things that we just received.

Maybe you get paid on Friday. Wait until Monday to spend any of your paycheck. (Unless you have rent/bills, pay the bills)

Maybe you got a bonus at work. Set it aside for a couple of weeks and really think about how that money could go to good use. Then when it comes time to spend it you will feel good about how you used it vs wondering where it went.

3) Using credit instead of Cash & Saving Automatically

I have a whole post devoted to this topic called Cash Is Still King. It’s true.

If you have $100 in your pocket and you go shopping planning to spend that $100 you weigh every purchase. As you hand over the $100 bill and only get say $50 back in change your brain actually activates the pain centers in your brain. You physically experience a loss.

This does not happen when you pay with a credit card or even a debit card. You don’t experience any immediate loss. But when the credit card bill comes… you might feel sick.

So what ends up happening when you go shopping with your card and you plan to spend $100? Studies show you spend quite a bit more. But when you go with cash you spend just the $100 or maybe even less.

Here is the big thing for me though, the extra money spent when I use a card vs cash tends to go toward impulse purchases that I didn’t really need. So it’s just wasted money.

I realize that for some things cash is just not practical, but find ways to use it more. Using it on shopping or dining out or on groceries are all great options.

What about flipping this scenario around? Why don’t we save enough? We established that it’s painful to spend cash. The same thing happens when we try to save. We have to take money that we have and give it to a savings account.

Some of us might enjoy saving because it comes naturally, but for many people saving causes a feeling of loss because they are giving up money that could be spent now.

For anyone that has ever had savings automatically withdrawn from your paycheck you probably understand that by taking the money out before you get it you don’t experience any feeling of loss. It’s like the credit card in reverse.

Because you never “had” the money to begin with you don’t experience the pain that comes with writing a check to fund your IRA. One famous organization uses this tactic to their advantage… the Federal Government.

By taking taxes out before you receive your paycheck it’s almost as if the money was always theirs to begin with. Imagine if it worked differently and you had to go to an IRS branch and hand them cash after every payday. Yikes!

But the point is that you can use this to your advantage. Automate your savings. Utilize your 401k. Use an app like Acorns. I have talked about it a few times but they take all of your expenses and round them up to the next dollar. They take the spare change in those round ups and invest it for you. I saved $50 last month using their app.

Beyond that though I have 3-4 automatic savings withdrawals that happen after every payday to ensure that money is being saved by taking me out of the loop. Because I could get that money and blow it real quick. Haha.

To wrap it all up, even when we don’t know it we are treating dollars differently simply because of human nature. Knowing how and why we do this is powerful because we can protect ourselves, from ourselves.

Here are the strategies we covered:

  • Take a step back and cool off for a day or so when making a major purchase.
  • Break up big purchases into components to make sure each one is worth the cost to you.
  • Plan out where you want your money to go before you get it.
  • If you get money unexpectedly wait before you spend it.
  • Use cash when you can vs using a card.
  • Use automatic savings whenever possible.

None of these are earth shattering, but at the same time I am certain that there are a few that all of us could get better at. Over time using these will add up to big financial wins.

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Saving & Investing

How To Invest For Retirement

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In the blog we have talked a lot about investing for the future, but most people aren’t sure how to actually start investing.

I get it. There are so many options and tons of investing terminology like Roth IRA and Mutual Fund. What does it all mean? And even if you know those basics where should you invest your money? And what should it be invested in?

What if you pick the wrong investment or account type? And getting a broker or financial planner can be pricey. What if you don’t have a lot to invest and don’t want to pay a bunch up front to get started?

If you have ever had any of those questions cross your mind, this post is for you. It’s longer than usual but that is because I don’t want to leave anything out.

I spent my time in college focused on learning to invest. Shortly after leaving college I got my licenses and took on my “dream job”. I thought I wanted to be a stock broker. A couple years later I walked away.

The biggest reasons came down to the fact that I wanted to sell the best products at the cheapest price to my clients. In the world of brokerages and banks that strategy doesn’t put much food on the table for your family. Check out this post if you want to read more on that: Confessions of an Ex Stock Broker.

But the good thing about my time as a broker is that I got to help people achieve their dreams through investing. As an ex stock broker I continue to get to help people do the same, just in a different and more fulfilling way.

Before we dive in, I wouldn’t be a responsible finance blogger if I didn’t remind you how powerful investing is. If you invest $300 a month from 30 to 70 years old and get average historic market returns… You will retire a MILLIONAIRE.

Don’t take that too lightly. $300 a month is not impossible for most people, it is a lot less than the average car payment. Meaning almost anyone who is about 30 years old today has the potential to be a millionaire simply by saving.

Okay, let’s get to it.

What are the retirement account types?

The most common accounts outside of work sponsored plans are IRAs, aka Individual Retirement Accounts.

I’m guessing you have heard the term IRA before. There are a couple very common types of IRAs: Roth and Traditional.

All of the retirement account types can be broken down into basically two categories:

  1. You don’t pay any taxes on the money you put in now, but when you retire and withdraw the money you pay taxes on anything taken out. (Traditional IRA)

OR

  1. You pay the taxes now, but when you retire you don’t have to pay tax on anything taken out. (Roth IRA)

Roth IRAs are one of the greatest retirement investing accounts out there. Here is why.

When you invest, the goal is for the money to grow. By the time you stop investing you should have a lot more money than what you put in.

By paying the taxes up front you avoid having to pay taxes on all of the money you earned. And that could be a lot of money.

There are some cases where a traditional IRA might make sense. Maybe you don’t plan to have the money invested for long because you are close to retirement. In that instance a Roth might not be the best option.

But in most cases, especially for anyone who is younger (Under 50), a Roth IRA is almost always going to be your best option.

Okay so what about all those other account types?

401k, 403b, 457, or SEP IRA.

To make it simple these are just titles for how the IRS will treat your taxes when you invest. All of them are tax favored accounts meaning that you benefit from a tax break/protection of some sort.

401k & 403b are offered by your employer. 401ks are usually through for profit companies and 403bs are through non profits or sometimes government employees like teachers. In these accounts you can save up to $19,000 per year if you are under 50 years old and up to $25,000 if you are over 50. There are no taxes paid up front but you will pay taxes when you withdraw the money, unless you elect to invest through a Roth 401k or 403b.

Many companies offer a Roth option within their 401k plan.

SEP IRAs are for those that are self-employed. They can contribute up to 25% of their income or $56,000, whichever is less. And 457 plans are tax advantaged deferred compensation plans usually provided to government employees. These usually don’t have a roth option.

Okay we made it through. (IF YOU ARE FEELING LOST ALREADY HANG ON. I will make this simple for you in the wrap up.)

The biggest take away should be this: The traditional options allow you to skip the taxes now but pay them later after your money has grown. The Roth options make you pay the taxes now, but you don’t have to pay any taxes on the growth of your money.

In most cases you want to opt for the Roth option.

Next question: Where you should invest?

The easy answer is that if you have a work sponsored plan that matches your contributions at all… ABSOLUTLY START THERE.

Matches on your contributions are free money. Take advantage.

My work plan offers a 4% salary match if I contribute 5% of my salary. Anyone who has a similar plan should take advantage of it if at all possible. And you should likely go with the Roth option if you have one.

If you don’t have a work sponsored plan your best option as said before is most likely to open a Roth IRA. As long as you have earned an income and make less than $120,000 (single) or $189,000 (married) you can contribute up to $5,500 per year. ($6,500 is you are over 50)

If you have a work plan but it’s not that great my preference is to invest enough to get the full match but then put all other retirement investments into my Roth IRA.

Next Question: Where do you open an IRA?

You can open one at almost any financial institution, but some are much better than others.

Many people think of opening one at their local bank. That’s fine but banks aren’t the best when it comes to investing for retirement. The costs can be high to invest in the stock market and most other bank products, like CDs, don’t pay much.

The next place you think of is a broker like Fidelity, Edward Jones, Charles Schwab, or Morgan Stanley. Those places are okay. You will pay a high cost but you will most likely get solid investment advice. If you choose a major broker like this make sure the person you work with does not treat you like a salesman treats someone looking to buy a car. They should take time to explain ALL of your options so that you feel confident in your understanding of exactly what you are buying and what it will cost.

The broker industry is full of great people but just like anywhere else there are some sleazy salesmen just out to profit off of anyone who walks in.

Another good option is to invest on your own. It might seem scary but it’s really not. Investing on your own can be done through some of the brokerages listed above or through brokerages like E-Trade or TD Ameritrade. I personally have an account through TD Ameritrade.

I don’t think they are significantly better than any other option out there, but they worked for me at the time I opened my account.

Opening an account is very easy online. You select the type of account you want and fill out the same information that you would to open a bank account. And once your account is open you are all set to invest.

Next Question: What should you invest your money in?

This is a tricky one for most people, it feels very intimidating. It doesn’t have to be. Here is an easy breakdown of the most common retirement investments.

The stock and bond markets are the most invested in for long term growth.

This is where I will steer you away from investing in things like gold, silver, real estate funds, crypto currency, etc. Those investments have poor long term track records compared to stocks and bonds. That doesn’t mean they won’t be really great for certain periods of time, but in general over the long run they just haven’t measured up.

Sticking to stocks and some bonds when investing for retirement is a sound strategy.

Picking individual stocks or bonds is challenging and even the best of the best cannot consistently pick winners. This is why just about every financial professional out there recommends diversifying your investments.

Diversifying simply means that you own lots of different investments so that you aren’t putting all of your eggs in one basket so to speak. That way if one of your investments goes down it’s not a big deal because you own hundreds of other investments that may have gone up.

How is it possible to own hundreds or even thousands of investments if you are just starting out?

There are products called Mutual Funds and ETFs. They are both a little different but invest your money in a similar fashion. Here is how it works:

Lots of people just like you put money into a fund to “mutually fund” an investment. By pooling their money lots of smaller investors can own a share of whatever the fund invests in.

An example would be a fund like the Vanguard Total Market Index symbol VTI. This fund invests in the entire US stock market. It has investments in every company both big and small, thousands of them. There is no way you could do that on your own, so you and thousands of other people all mutually fund that investment so that you can all own a small piece of that particular fund.

By owning a piece of that fund that has investments in thousands of companies all at once you have now diversified your investments. In many cases buying into a fund like this is very inexpensive which means really anyone can afford to do it.

There are funds just like the one above that invest in all sorts of things like: companies that only operate outside the US or only small companies or only companies in Asia and so on. The possibilities are really endless.

But not all funds are created equal. Some are incredibly expensive and some are actively managed meaning that a portfolio manager is buying and selling within the fund to try to outpace the market.

My advice is to steer clear of the expensive funds and in most cases avoid the actively managed funds and instead go for cost effective funds that simply match the market’s returns.

The reason is, long term, the cost effective index funds tend to beat out all other fund types.

You might want me to make this easy and just tell you what you should invest in. I am not going to do that exactly because I am not your financial advisor and I don’t know your exact situation. But I will tell you what I invest in and what a good portfolio might look like.

If you are young, under 50, you could easily invest in an all stock portfolio and avoid bonds entirely. (I am in my mid 30s and I have an all stock portfolio) If you are over 50 you might want to consider adding some bonds to your portfolio just to start protecting what you have saved up until now.

If you are looking to invest in just stocks my portfolio would include the fund I listed above, the Vanguard Total Market Index (VTI).

That would be my primary holding and it currently is. Not only is it diversified by investing in several thousand companies but it is also only aims to track the index and therefore it is incredibly cheap. 0.04% per year in costs.

That means if you invest $10,000 you will pay only $4 per year. If you have shopped for investments you know that 0.04% is about the best price you will ever find. Some funds out there charge 25 or even 50 times more per year. And in case you weren’t sure, the fee doesn’t come out of your pocket like a bill you have to pay, they simply take it out of the investment you made.

If you just invested in that one fund you would be pretty well diversified. But you could also invest some money in overseas companies. Vanguard has a Total International Stock Fund. (VXUS) It aims to invest in the majority of the companies outside of the US.

It is also crazy inexpensive at just 0.09% per year. If you had an all stock portfolio and it had roughly 75% in the VTI fund and 25% in the VXUS fund you would be virtually set.

Some advisors might recommend adding other fund options and that is fine, but in reality your portfolio can be this simple and you can get as good if not better returns than more complex options.

Lastly if you want to invest in bonds because maybe you are over 50 years old or for whatever reason you really want bonds in your portfolio, Vanguard has great bond funds too, like the Total Bond Market ETF (BND) and the Total International Bond ETF (BNDX). They are both great options.

I don’t want this to come across like a Vanguard ad, but they have great funds for the lowest cost. There are other great investment funds out there by companies like Fidelity and Ishares and others. But in general Vanguard gives you great quality investments at fantastic prices. Low cost is the best predictor of investing success over the long run.

Alright let’s wrap this up.

If you got lost at all or aren’t sure what some of this meant here is a great summary:

If you are under 50 and want to invest for retirement what I personally would do is invest in my 401k, choose the Roth option if possible, and put in enough to get the full match. The investment options will be different than what is in this post but the terminology will be similar so you can use that as a guide in choosing investments.

Beyond that OR if I didn’t have access to a work option: I would open at Roth IRA at an online broker. I would contribute as much as possible via automatic withdrawal each month up to the maximum contribution for the year. 75% of that money would be invested in the VTI fund and 25% in the VXUS fund.

And that would be it. DONE. That easy.

Again, I do not know your exact financial situation so what works great for me might not work great for you. But in general this is a solid long term strategy and would be for many people.

It’s not a guarantee, investments can go down, the world could end and you could lose all of your money… But I’m an optimist and I’m going to bet my retirement savings on 200+ years of investment data.

Investing allows almost anyone the opportunity to make a better life for themselves. Given enough time and a consistent approach to saving you can retire comfortably.

If you have the opportunity to start now. DO IT! The number 1 thing I hear from people that I have coached in their 50s and 60s is: “I wish I had started sooner”.

Listen to that advice. Time is everything when it comes to this stuff.

If you are still too afraid to do it on your own, hire a pro that you trust at a reputable brokerage. They will probably be expensive and cost is a big factor in success but not doing anything because you don’t feel comfortable is way worse.

You can do this. This could be the single most impactful financial decision you make in growing your wealth. My bet is that it will be and 20, 30, or 40 years from now you will have changed your life and the life of your family by doing it.

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Eliminating Debt, Saving & Investing

Should You Invest Or Pay Down Debt?

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This is one of the most common questions I get asked when it comes to money. Which is more important: Paying down debt or Investing?

It’s not an easy one to answer because everyone’s situation is different and there are strong opinions on each side of the argument.

In most cases there is a  somewhat “right” answer though.

If you have read anything on this blog you have likely heard me say that winning with money is more about behavior than it is about math. That holds true here as well but in this case the math can make a huge difference.

We’re talking potentially hundreds of thousands or more dollars in difference.

Before we get to that though a big factor is making sure that you have an adequate emergency fund. If you don’t have one or don’t know what an emergency fund even is check out this post.

If you do have one make sure it’s enough to cover a significant emergency or temporary job loss.

The reason I bring up emergency funds is this: Before we can even start thinking about choosing if you should pay down debt or invest we have to make sure you aren’t on the edge of a financial cliff.

So step one is to stop living on the edge. Get some money saved up for emergencies even if it is just a few thousand dollars.

Let’s say you are already at that point, now we are ready to debate which is better: Saving vs. Investing.

Investing is powerful and nothing is more powerful when it comes to investing than starting early. Time is critical!

If you are 30 years old and you saved $300 per month, (That’s half an average car payment) invested it in the stock market, and left it until you turned 70 you would have: $1,752,000.

In case that didn’t make enough of an impact, that is: ONE MILLION SEVEN HUNDRED FIFTY TWO THOUSAND DOLLARS.

I’m assuming typical market returns over time (10%).

But let’s say instead you waited 10 years to get all your debt paid off. Then once you turn 40 you start putting in the same $300 per month until you turn 70. Now at 70 years old you have $651,000.

Not bad, but you missed out on over one million dollars because you waited 10 years. Crazy right!

Here is a chart to help display the massive difference ten years makes:

Saving

This is why most of what you will find out there from “money experts” is advice telling you to not worry about debt so much but invest early and a lot.

From a math perspective they are not wrong. We just saw why.

But they aren’t necessarily right either. Confusing right?

The reason has less to do with math and more to do with you. Quality of life, security, and reduced financial stress in the present are worth a lot even though we can’t put a dollar figure on them.

You have probably heard that the leading reason for divorce is money related issues. I’m not sure if that’s true still but if not its top 3 for sure. Money is personal. It causes crazy amounts of stress and anxiety.

And what makes money more stressful than anything else? DEBT and debt payments.

Debt can be scary. If you have ever been laid off and if you have fallen behind on payments you know what I mean. Creditors start calling nonstop. You feel guilt and shame because you can’t pay what you know is owed. Just the thought of that possibility causes anxiety for most of us.

What if that weight could be lifted off your shoulders? What if you had no payments, no interest, and no creditors? That feeling would be priceless.

That is why Lauren and I committed to living without loans when we got married. The reduced stress around money positively affects our relationship and our quality of life.

And don’t forget that when you pay down debt you get a guaranteed return on your money too, because you save on interest that you would have had to pay. In many cases you can save tens of thousands of dollars by paying down your debt early.

Back to the question. Should you invest or pay down debt?

The math says to save early, but the more emotional and quality of life side says to pay down debt.

It is situation dependent so I will answer it in a few ways. Most people will fall into one of these categories or close to it.

The first one is: Drowning in debt/Way more debt than you should have

If this is you, you have car loans, student loans, multiple credit card payments, possibly a mortgage, and maybe even more debts out there. Some of that debt has very high interest rates.

Worrying about your debt might be keeping you up at night. You may be current on all of your payments, but you are living paycheck to paycheck to barely make it.

The answer for you is that once you have a small emergency fund in place you need to get a plan and get out of debt as soon as possible.

All of your available resources should be going into making this happen and all investing should be put on hold. If you need help building a plan to get out of debt a great place to start is this article about using the debt snowball.

The second scenario is: You have some debt but it’s not out of control

This will probably capture a big portion those reading this. You have a student loan and maybe a single car payment, maybe even a mortgage. You don’t have any high interest debt like credit cards. You are able to make the payments and though it would be nice to have them gone your debts aren’t crushing you.

You probably worry about finances but it’s not worrying about how you will make it to the next paycheck. You are more focused on how you will ever get ahead while you constantly have student loan and car payments to tackle.

If this is you the answer is a little more complicated. If your work has a sponsored retirement plan like a 401k and it has a match, you should be taking full advantage of that match.

In my case if I contribute 5% of my salary my company will match 4% of my salary on top of my contribution. It’s like getting a 4% raise and it will grow over time. Take advantage!

This is still similar even if you don’t have a company match. You should star by investing around 5% of your income into a tax favored retirement account like a Roth IRA.

But anything beyond that 5% or the amount needed to get your full company match should be going toward getting out of debt up until the point when all you have left is a mortgage.

The reason for this is: Debts are weighing down your ability to maximize the potential you have to live, give, and invest.

They also create an emotional weight. Even if you aren’t overly worried about debt things like car payments and student loans create unneeded stress on you and on your relationships. They also create risk if something unexpected were to happen.

Could you invest a little more and still go after your debts? Sure and it wouldn’t be a terrible financial decision. But living without debt as I shared before has financial benefits that cannot be quantified. Getting out of debt as soon as possible is critical to reaching your financial goals numerically and emotionally.

Alright last one: You don’t have any significant debt other than a mortgage.

I’m going to assume your mortgage rate isn’t something crazy high and if it is you probably need to refinance if at all possible. Most mortgages out there are between 3-5% for a frame of reference.

If that is you, you should maximize your investing. Most experts agree that you should be saving/investing at least 10% for retirement. Some even recommend 15%. You could invest more on top of that for other things as well, but at least start with retirement.

You hopefully have a work plan matching that as well. By saving like this as early as possible you will likely have the opportunity to retire a millionaire.

You could possibly retire early, buy that lake house you have always dreamed about, or that sailboat, or car, give to charity, give to your family or friends, etc. You can leave a legacy for your children and grandchildren. The possibilities are awesome to think about.

By investing early, as much as you can, you open up all sorts of possibilities for your future. You will not be “financially trapped” or a slave to payments and working long hours.

That is the dream!

Whichever of the three categories you fall into the key is to go after it as soon as you can. Start today.

Get some money set aside for an emergency. Even if you have zero dollars set aside right now getting a few thousand should take most people 6 months or less if you are truly committed.

Next if you have too much debt, go after it with everything you have got! If you are in the middle and you have some debt, invest a little and use everything else to go after that debt! If you only have a mortgage, invest like crazy! You can tackle the mortgage early too, but don’t neglect your ability to grow your money by investing.

Everyone has the potential to be successful regardless of salary and situation. If you will commit yourself to a plan and take it one day at a time you will get there and it will happen much faster than you imagine.

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Saving & Investing

Saving For College: What Is The Best Option?

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For the first time I am writing a post based on a reader request. To be honest she didn’t ask me to specifically write this blog post, but asked if I had written about saving for college.

I haven’t, but it’s such a good topic to tackle that I had to do it.

Saving for college is such a great idea. Tuition costs are out of control. Student loans have ballooned into the trillions of dollars and roughly 7 out of 10 Americans graduate with some student loan debt.

It’s crazy and it’s getting crazier every year. Most kids leave college and have a new car sized debt to tackle. That’s a rough way to start out.

But it doesn’t have to be that way. Before we get into the saving options there are several other options that can help minimize student loan debt or avoid it completely. Here are a few:

Scholarships: There is so much untapped potential here. Go to your high school guidance counselor and get a list or just search online. There are scholarships that go unclaimed because no one applies for them.

I applied for several scholarships before college. The one I got I spent maybe 3 hours applying for. A $1000 scholarship for 3 hours of work is so worth it.

A Job: Crazy I know, but what if students worked while in school to help offset the cost? I don’t have the reference handy but I have read on multiple occasions that students who work at least part time while in school get better grades on average than their peers that don’t.

Community College and In State Tuition: The first two years of college are all prerequisites anyway. Why not pay a lot less at a community college for the same credits? Also staying in State can save thousands of dollars vs. going to an out of state school.

Public Schools vs. Private: I love private schools, they are great, but they are super pricey too. They do offer lots of scholarships but if those don’t offset the cost enough don’t forget that public schools give you the same piece of paper after 4ish years that a private school does.

There are other great strategies as well but those are the big ones. For some people going into a trade and avoiding college altogether might be a great option. But the point of this post is to get at this last way to avoid student loan debt: Parents Saving For Their Kid’s College Education

If you are a parent and you want to help pay for college where do you start?

First start early because as many of my previous posts have explained, time is the most important factor in investing. So the sooner you can start saving the better.

What about the how? What accounts are best?

When it comes to college savings accounts you have a few options. The big ones out there are: 529 plans, ESAs (Educational Savings Accounts), State programs, and life insurance plans.

Let’s look at each option:

529 plans have been the most popular over the years. The money invested in a 529 grows over time within the account and when it is used to pay for qualified education expenses the funds/earnings can be withdrawn tax free.

529s have no income restriction and the yearly maximum contributions are crazy high. (most allow $150,000 per beneficiary for a married couple) You can also transfer them to another child within the immediate family and there is no age limit on when they can be used. Some states with income taxes even allow tax breaks for contributions.

They used to have more limitations but some of those have been relaxed with tax reform. There are a few drawbacks though. The biggest is that in many cases you have to use a broker to manage the investments within the plan and that usually includes some higher fees/commissions. If you aren’t comfortable investing on your own the cost could be worth it though.

Another drawback is that you cannot use the money in the account for expenses at K-12 schools. For example the books, fees, supplies, etc. that you might pay for if your child goes to a private high school would not qualify.

Coverdell ESA / Educational Saving Accounts are next on the list and they have grown in popularity because you can self-direct the investments which brings the costs down. But you have to be comfortable choosing your own investments. These have the same tax advantage as the 529 plans and the same transfer benefit that allows you to transfer them to another member of the beneficiary’s family.

The drawbacks include a $2000 per year cap on contributions and an income restriction. You can only qualify to contribute into an ESA if your joint income is under $220,000 or your single income is under $110,000. After those points the ability to contribute phases out. Also the funds have to be used by the time the beneficiary turns 30.

I personally have my kid’s college savings in ESA plans. The two biggest reasons I chose this option are:

I could self-direct the investments and avoid broker costs. And we wanted the flexibility to use the money on private school costs if we chose to send our kids to private school before college.

Just because I chose an ESA plan doesn’t mean it’s the best option for everyone. It simply fit our needs best.

State Programs: I can’t speak to the specific plans of each state, but generally these plan require that you buy “units” of some sort that are guaranteed to cover a certain percentage of tuition at any future date. The benefit is that you are protected from tuition inflation.

The downside to most of these plans is that there is not a lot of flexibility if your child decides to go out of state or to a private college. In some cases you can still use the credits but the benefit can take a really big hit. Another downside is that the money is tied up with the state. Some states have not managed their programs very well and at times they have gone under which has caused losses for those that invested.

These plans could work out for some individuals specifically if you are certain your child will go to college and that they will go to an in state public school. But who is certain of what will happen with their kids a decade from now? In general you can do better with another option.

The last option we will discuss is Life Insurance: If you have read the blog you know I am not a big fan of any life insurance other than term insurance. The same holds true here when talking about using a permanent or whole life type policy to fund college savings.

The biggest reason is that these types of policies are REALLY EXPENSIVE. To give you an idea according to Investopedia 50% or more of your first year premiums will go to paying commissions. Additionally it will take up to 10 years or more for the cash value within the policy to surpass the premiums paid. Yikes!

Basically the only way to make it even close to comparable to any other plan is to start saving immediately after your kids are born. Even then most of these policies will continue to charge 2% or more in administrative costs on top of those up front commissions. That is almost double what a broker would charge in a 529 account.

(If you want a detailed picture of the difference between term and whole life insurance check out this post.)

So why would anyone use life insurance? The reason people will choose a life insurance policy is that in many cases the growth is guaranteed to an extent. So no matter what the stock market does your account value will grow. The second reason is that Life Insurance doesn’t count against the parents assets when they apply for financial aid via a student loan.

And the how does it work? The parent can open a whole/permanent life insurance policy and then borrow against the policy to pay for education expenses without a tax impact. Then they pay back the policy over time. If their child chooses not to go to college there is no risk of losing money in taxes.

There are still several issues here that I feel are big disadvantages. Again its way too expensive compared to all the other options. Another is that saving up for years and paying all those fees just to take out a loan that you have to pay back to your own account perpetuates the drag that payments create on reaching your financial goals. Lastly the “guaranteed” returns are a nice thought, but you get the guarantee because you paid the high fees.

If you save diligently for college you won’t be very worried about applying for financial aid anyway.

Could you experience a market downturn that hurts your college investment, absolutely. But history has shown that the market over 5 year, 10 year and 15 year timeframes is generally a pretty strong bet. Just make sure that as you get closer to college you lower the risk on your investments. And if you choose to use a broker they will do that for you.

Conclusion: Saving for college is a great idea. Anyway that you do it is better than doing nothing at all. But for me I want to maximize my dollars to ensure that as many as possible are going to my children’s education vs. a broker or salesman.

I can’t tell you exactly what is right for your situation but for most people I think a 529 plan is probably the best bet. They are the least restrictive and if you aren’t comfortable investing on your own the costs of a good broker are worth it.

But if you are comfortable investing and aren’t looking to save more than $2000 per year per child an ESA is probably even better.

I prefer to keep my life insurance and investments separate because it saves so much on cost. I got a good term life policy and save for college using an ESA. If you need a term life quote check out Haven Life Insurance. My wife and I have 20 year term policies at $500,000 and pay roughly $15-$20 per month each.

Don’t forget that letting your kid pay some of their own education can be an important lesson for them in managing finances. The lessons I learned from working part time while in school and then hustling like crazy to pay off my $20,000+ student loans in 1 year were priceless.

I want to help my kids pursue whatever education they feel is right for them but also give them the gift of learning to responsibly manage that pursuit including the financial lessons that come along with it.

Everyone has a goal for their family and with whatever route you choose you can be successful. The biggest key is to build a plan, start early, and stick to it.

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