The Biggest Mistake Most Couples Make With Their Money – Money and Marriage Podcast #6

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There’s a key step to managing your money effectively that most couples overlook. In this popular episode of the Money and Marriage Podcast, you will learn what this mistake is, why it’s so critical, and how to avoid making this mistake in your family.

If you want more help implementing the lessons from this podcast episode, I’ve prepared a free training to guide you through my favorite exercise related to this podcast episode, which you can access here.

Full Episode Transcript

I want to invite you to close your eyes for a second and imagine your favorite company in the world.

What’s a company whose products or services you just can’t imagine living without?

Now for me, I can’t imagine a world where my day doesn’t start with Dunkin Donuts coffee. I might be a DC resident at heart, but I grew up in Massachusetts… And those roots run deep. I love me some Dunkin coffee.

But enough about me, let’s go to you. I want you to pretend – Whatever company it is that you can’t imagine a world without their stuff, imagine that you are in charge of making financial decisions at that company.

Your employees come to you as the person in charge of making financial decisions with two different product ideas to invest the company’s money in. Both of them are great ideas. They’re potentially good investments. You can expect that they could do well in the marketplace, but you only have the funds available to do one of them. You can only choose one of these two investment options.

How do you decide how to allocate your resources? How do you make that decision on which of these two new services or products to invest the company’s money in?

There are some different answers you could potentially give to that question. But in my view, the correct way to make that decision is by reminding yourself what the company’s all about in the first place. By focusing on what your company is known for, what they’re best at what their competitive edge is, right?

What’s the most important thing to the company? Which of the two options best aligns with that. That’s where you’re gonna invest the resources, right? When your values are clear, the decision becomes easy.

Now for a company, what this would mean is going back to the company’s mission statement. What is the company’s mission? That right there should make the investment decision crystal clear.

Quickly going back to my Dunkin Donuts example, I’m gonna give you Dunkin’s mission statement, as of this recording, right now. It’s a couple of sentences long, but pay attention to the words that they choose to include in this mission statement.

Here it is: “From coffee beans to jelly filling, Everything we do is about you. From chefs who create exciting new flavors, to crew members who know exactly how you want your drink—we prioritize what you need to get you on your way. We strive to keep you at your best, and we remain loyal to you, your tastes and your time. That’s what America runs on.”

When you think about Dunkin, they’re all about providing a consistent product, efficiently, so you can get where you need to go. They don’t want you spending all day sitting in a Dunkin store doing your work. That’s not who Dunkin is. They could be, but that’s what they’re not choosing to be. They want you to come in, get what you need and go about your business and get on your way. Right?

So if you’re the head of Dunkin Donuts, and you need to figure out what new products or services to offer, you choose the option that’s in line with those values, right? Anything else is the wrong option for them.

Now compare this to their biggest competitor, Starbucks. When you go into a Starbucks, think about it. Think about the last time you walked into a Starbucks. There’s a heavy emphasis on the experience you have while you’re there, from the overall ambiance, and the lighting, and the music, to the customized, fancy drink orders, to the weird, I would say, names that they have for their drink sizes. Nothing is generic there, right? The Starbucks experience is very distinctive – from the table settings to the different snacks that they offer, right? Everything.

Starbucks is all about the experience. It’s not about efficiency at all. You have to wait in a couple of lines. You need to wait to get your order. They’re all about the experience. And of course, all of that, as you might imagine, is in line with their company mission statement, right?

Their mission statement is shorter. I’ll read it to you here: “To inspire and nurture the human spirit. One person, one cup, and one neighborhood at a time.”

You might have noticed this looks nothing like Dunkin’s mission statement. <laugh> And what that means is that the “right” new product idea for Starbucks should look very different than the “right” new product idea for Dunkin. If you’re the head of each of those companies, making financial decisions for them, the ideas and the things that you offer should look very different.

But the only way you know which product to choose if you’re in that role is because the companies took the time to articulate what’s most important to them, what they stand for, and who they are in the form of a company mission statement.

Now I’ve talked through this example a few times over the years, and I always title this lesson “The Biggest Mistake Most Couples Make With Their Money”. And after having spent five minutes talking through company mission statements, Dunkin Donuts, and Starbucks, you might be wondering, what in the world does this have to do with the biggest financial mistake that couples tend to make?

I’ll answer that question for you by asking you another question in return: What’s your family’s mission statement or vision statement? What does that look like for you?

We’ve talked about how Dunkin and Starbucks make their financial decisions. It’s not just about the numbers or the potential ROI, right? Those things matter. But at the end of the day, the most important thing is prioritizing the things that are most important to them and most in line with that, right?

You need to do the same thing with your household finances, but that’s difficult because you can’t do that and prioritize those most important things until you actually identify what those things are in the first place.

So let me ask you: When was the last time, if ever, that you took some time as a family to clearly identify what’s most important to you and your partner? Have you ever spent 20 or 30 minutes defining what “financial success” looks like for your family?

Now, if you have, that’s awesome. You’re one of the rare few who have.

If not, now’s the time to do so. This is the most important step to making good financial decisions as a family that you can take. And it’s the one that almost everybody overlooks.

We immediately get into questions like “Where should I put my money?” “How should I be allocating my resources?” “How can I get the best return on my investments?” But we do so without figuring out why it is you’re investing in the first place.

The right financial decision for you and your spouse is the exact wrong decision for a lot of other couples out there. Over the years, I’ve seen couples make the wrong career moves, buy the wrong house, invest in the wrong type of accounts, and settle down in the wrong part of the country. The list of mistakes goes on and on. And almost always, when we run into those types of dilemmas, the thing that’s missing in the decision-making process is that mission or vision statement, knowing what it is they’re trying to work toward in the first place.

I’ve created a resource for you to help you create your family mission statement on your own. If you head to you can get access to my favorite training that I give to folks to help you develop your family mission statement on your own. But whether you do that or go about this another way, you need to implement this in your life. You need to know what it is you’re working toward because when you do, when you are able to articulate what that vision is, your decisions become a lot easier.

And in the meantime, I invite you to go check out your favorite company. That company I asked you to think of at the beginning of this podcast – go look up their mission statement, see what they have to say about what’s most important to them and think about the types of products and services that they offer and how that aligns with it.

And then go ahead and do the same in your family.

The Future of Roth IRAs

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If you’ve ever spent any time on a personal finance blog, you’ve likely come across one, or two, or twelve articles comparing the Traditional IRA to a Roth IRA.  (If you haven’t, congratulations on finding more interesting things to read about!)  At the time of this posting, for example, a Google search for “traditional vs Roth IRA” yields approximately 94,600 articles.

So rather than walk through the usual IRA material (although we do provide a quick summary to get you up to speed), in this post I wanted to discuss future potential changes to the tax treatment of Roth IRAs.  Over the years, I’ve had several people raise concerns about contributing to Roth IRA accounts, fearing that the “tax free” treatment of the accounts may be taken away in the future.

Long story short, I think it’s unlikely that Roth IRAs will be taxed in the future, and it shouldn’t stop you from contributing to one today.  While it’s certainly possible that some of the details will change over time, Congress has very little incentive to change the tax treatment of these accounts.

What is a Roth IRA, exactly?

I know the legal and tax structures of retirement accounts isn’t the most fascinating topic (at least for some of us!), so I’ll keep this short and sweet.  If you’re looking to save for retirement outside of your 401(k),  you have two account options to choose from: a traditional IRA and a Roth IRA.  What’s the difference between the two?

  • When you pay tax on your savings-  all retirement accounts have some tax advantages built into them, but you need to know how the taxes work to make the best choice.  With a traditional IRA, you receive tax advantages in the beginning; the money you contribute to the Traditional IRA isn’t taxed this year, and it grows tax-deferred in the account until you retire.  But, since you didn’t pay taxes on the money now, you’ll pay income tax on all the money you withdraw from the IRA when you retire.  Roth IRAs have the exact opposite tax advantages; you pay income tax on the money you contribute to the account now, but the growth and withdrawal of money in the account is tax free when you retire.
  • Income limits- There are a few restrictions placed on both types of accounts.
    • If you make “too much money”, you can’t directly contribute to a Roth IRA.  The IRS website is the best place for a complete list of details on these limits (and the other bullet points on these lists), but as a starting point, your ability to contribute to a Roth IRA in 2018 starts to phase out when your income exceeds $122,000 for single taxpayers and $193,000 for married (filing jointly) taxpayers.
    • This limitation isn’t in place for Traditional IRAs, but your ability to deduct your contribution may be reduced or eliminated if you or your spouse have a 401(k) (or similar) plan at work.  Again, you can refer to the IRS website for the complete set of details.
  • Flexibility– The Roth IRA is a more “flexible” account to work with than the Traditional IRA.  For example, while most early withdrawals from a Traditional IRA are taxed and penalized, you can withdraw your contributions (as opposed to the investment earnings) of your Roth IRA without penalty.
How to Decide if You Would Be Better Off With Roth

When deciding between these two types of accounts, the main driver of your decision should be based on your tax rate.  Simply put: if your tax rate now is higher than you expect your tax rate to be when you retire, a Traditional IRA is probably the right choice for you.  Take the tax deduction now while your rate is high, and pay taxes at the lower rate when you retire.

On the contrary, if your tax rate is relatively low right now, paying taxes right now and getting the tax free income in retirement is likely the better deal for you.  This makes the Roth IRA a particularly compelling choice.

Remember, though, it’s not enough just to look at today’s tax rates to make this decision.  You need to think through how you expect the tax rates themselves to change over time.  Just because you expect to have lower income when you retire than you do now doesn’t mean that your overall tax bill will be lower if Congress raises the tax rates over the next few decades.

Ultimately, this is a decision you need to make based on your overall financial situation.  But in my view, given that tax rates are at historically low levels right now, I think it’s likely that tax rates will rise between now and when we retire, making Roth IRAs a good deal for most low- to middle-income millennials.  (Keep in mind, though, that I don’t think the same way that Congress does – thankfully! – so this is purely my opinion, and not a specific recommendation.)

Will Congress Kill the Roth IRA?

Roth IRAs are fairly popular (as far as financial topics go…) with people in our generation.  Nevertheless, I often get questions about whether or not the Roth IRA will actually be tax free several decades from now when we retire.  Will Congress really honor the promise of the Roth IRA?

In my opinion, yes, they will.  I completely understand the concern that the Roth IRA may be taxed in the future, but I think it’s highly unlikely. Here’s a few reasons why:

Politically, it would be extremely difficult. The people who would be affected the most by a tax on Roth IRAs are the elderly and the retired, who also happen to statistically be the most dedicated voters in this country.  There’s a reason that proposed changes to Social Security and Medicare almost always fail; retirees vote, a lot.  The AARP is one of the most well-organized lobbying groups in the country, and any law change that negatively affects retirees will be met with strong resistance.  Simply put, this isn’t a winning issue for Congress to take up. 

Congressional math is silly.  I probably shouldn’t pick on Congress as much as I do in this post… but they just make it so easy.  Because here’s the thing: the way Congressional legislation is reviewed, taking away the tax benefits of Roth IRAs will actually decrease the amount of taxes collected.

Intuitively, this doesn’t make sense.  Why would taxing a tax-free account decrease tax revenue?  Because of the system that Congress uses to evaluate budget bills.  The Congressional Budget Office uses a 10 year future projection to evaluate the tax impact of the bills it passes.  And in a relatively short time period like ten years, eliminating the Roth IRA would decrease the amount of tax revenue the government collects for two reasons:

  • People don’t take a lot of money out of Roth IRAs every year, so the overall projected tax increase is relatively small.
  • On the other hand, a lot of people contribute to Roth IRAs today… and remember, you’re taxed on the income that you put into a Roth IRA.  If Roth IRAs are eliminated, this savings will be redirected to tax-deferred accounts like the Traditional IRA or 401(k), which will decrease the amount of taxes the government collects now.

Over the long run, eliminating the Roth IRA would increase the amount the government collects in taxes.  But, Congress only evaluates the effects of tax legislation on a ten year time horizon… which means that if they were to pass a bill eliminating the Roth IRA, they’d be passing a tax cut bill, not a tax increase.

Silly?  Absolutely. Good for the Roth IRA?  Yes.

It is much easier to use Roth IRAs now than it ever has been before. Not only has Congress not made moves to eliminate the Roth IRA, they’ve technically made it easier to contribute to a Roth IRA.  Indeed, over the past several years, Congress has passed legislation allowing you to “convert” your traditional IRA into a Roth IRA, potentially allowing people over the income limits mentioned above to contribute to a Roth IRA indirectly.  This is a good strategy for certain individuals, but it’s a complicated process that shouldn’t be attempted without consulting a financial planner or tax professional.  But, it goes to show that Congress isn’t making it harder for you to access a Roth.  On the contrary, it’s easier now than ever before.

If we look at all of these factors, it becomes pretty clear that taxation on Roth IRAs is not a likely scenario in the near future. If you think a Roth IRA is the right choice for you, don’t let fear of future tax law changes hold you back.

Planning For the Future

That being said, there are a few different possibilities of legislation that could feasibly happen in the coming years affecting Roth IRAs, but none of them are reason enough to deter you from using the accounts.

The first possibility is the implementation of some sort of required distributions on Roth accounts in the future. Under the current tax law, you need to start taking distributions from a Traditional IRA when you turn 70.5 years old (because making it an even “70 years old” would have made too much sense…), but you don’t currently need to do this with a Roth IRA.  It wouldn’t surprise me if Congress implemented mandatory distributions from Roth IRAs at some point in the future… but that’s not a reason to not contribute to one.  

Another possibility is for Congress to implement a maximum amount of money that can be held in a Roth IRA. By restricting the amount that can be held in a Roth IRA, the government could prevent you from contributing to a Roth IRA in the future… but as I mentioned before, Congress doesn’t have a strong incentive to do so.  And again, this isn’t a reason to avoid contributing to a Roth IRA today.

Making a Contribution

Once you decide which account to use, it’s time to put money into your IRA of choice.  And if you happen to be reading this article between January 1 and April 15th of any given year, you have an additional choice to make.

Currently, there are caps on how much money you can put into IRA accounts – both traditional and Roth – each year. These caps were relatively steady for a few years, but there’s been an increase from 2018 to 2019; last year you could put $5,500 per year into an IRA, and now you can put $6,000 starting in 2019.  (Once you turn 50, you can add an extra $1,000 to your IRA each year).

But, you have until Tax Day (April 15th, or the next business day if it falls on a weekend) to make your contribution for the prior year.  So, as I mentioned, if you are reading this article at the beginning of the year, know that it isn’t too late to make an IRA (Traditional or Roth) contribution for last year!

If you want help figuring out which type of IRA is right for you, or need retirement savings advice in general, don’t hesitate to reach out! I would love to set up a free introductory phone call with you to walk you through what you need to know.

Solving the Millennial Retirement Savings Challenge

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Last week was a big week in the financial world — America Saves Week! From February 25th through March 2nd, the finance community came together to help impact the lives of Americans through motivating, encouraging, and supporting them to save money, reduce debt, and build wealth (particularly through automated savings).

Now, there is an important distinction to make here; “saving money” doesn’t just mean adding money to your bank account, it means paying down debt as well. When working with clients, there are two main metrics I like to focus on:

  • The first is Net Worth. This is the concept of how much money, investments, and “stuff” you have, minus how much debt you owe. As you grow through life, this number should continue to increase every year, which can be achieved by either saving money or paying down debt.
  • The second, and more relevant metric is a little bit harder to describe and calculate.  To boil it down, it essentially summarizes “What is the likelihood you will be able to retire at a decent retirement age and not run out of money?”  There are a lot of factors to consider when running this sort of calculation; I use advanced statistical software to run this type of projection.

I want to talk about both of these metrics in this post.  Because while many millennials are doing a good job saving in general – either by adding to their bank accounts or paying down debt,  statistics show that many of us are “behind” when it comes to retirement savings.  

Why Retirement Will Be a Challenge for Many of Us

Currently, we are saving significantly less for retirement than previous generations did, for several reasons:

  • Student loan payments. Many millennials are directing their would-be retirement savings to pay off student loans in a way that our parents and grandparents did not have to do.
  • Rising cost of housing. When our parents and grandparents were our age, buying a house was much more affordable. For a typical family, the cost of a home was only around 2 times their average annual salary. In today’s economy, purchasing a home on average costs about 4 times their average annual salary — and that is not even considering that most of today’s jobs are in large cities, where the cost of housing is even higher.
  • Lower company retirement benefits. Most of our grandparents had pensions through their jobs. Some of our parents even did too. Because of the rise in independent contractors and the gig economy, it is becoming harder and harder to come by solid retirement benefits — even 401(k)s are harder to come by than they used to be. Average employer contributions have fallen, too, which is putting more pressure on the individual to save on their own.
  • Relatively flat wage growth since the financial crisis. Since around 2008, there has been very little wage growth across the country, meaning that while prices have gone up, our incomes haven’t necessarily. We have less spendable money than previous generations, making it harder to allocate a significant portion of it to retirement savings
  • Social Security and Medicare are expected to cut benefits in 15-20 years. Having these programs to fall back on when we retire might not even be a possibility for a lot of millennials. If these programs are cut, it will mean that much more pressure is put on the individual to completely financially support themselves through retirement.

Simply put, we face a greater set of challenges in preparing for retirement than our parents and grandparents.  Which means that unless we prepare accordingly, we will either need to delay retirement or partially sacrifice one of the most beneficial strategies we can use to help save for retirement…

Compound Interest

 Compound interest is often described as “magic” or “a miracle” for people trying to save up money over time. The idea that the we can keep our money invested — and the return will exponentially increase over time — is a very appealing one to investors of any age. Consider the graph below.  If this year we invest $1,000 at an 8% rate of return, next year we will have $1,080, in 10 years we’ll have $2,200, in 20 years we’ll have $4,600, but in 40 we see this number grow all the way to $22,000. In the simplest of terms, earnings go from $0.80 in the first year, to $1,750 in the 40th year (that’s a pretty significant increase!).

This looks amazing — and it is! — but there is one key takeaway you should note — you need to keep your money invested and untouched for a very long time to see the “magic” of compounding happen.  Compound interest is a beautiful thing, but we lose most of the benefit if we don’t start investing early enough.

(And, of course, the chart above assumes a constant, consistent 8% investment return each and every year.  While the long-term annual return in the stock market is around 8%, we know that it can vary drastically from year to year!)

As we’ve already discussed, as a generation we are putting more and more money towards student loan payments and housing costs.  Which, in turn, means that less and less money is being put towards savings that will compound in retirement accounts and we begin to lose the impact of the compounding, making it harder for us to have enough money to retire at a “normal” age.

Retirement Shouldn’t Be Your Only Priority!

This isn’t entirely a bad thing.  One of the major criticisms I have of the financial planning industry is the degree to which we focus on retirement.  I started Pacesetter Planning back in 2016 because I believe that financial planning should be about more than just saving for retirement.  Short-term goals, such as buying a house, planning a career change, and paying down debt are important too!  The key is finding the right balance between your short- and long-term financial priorities.

Ultimately, you shouldn’t be putting all your money aside for retirement.  Too many people in this world work as hard as they can, in jobs that they hate, saving as much as they can for 40 years so they can “retire”… and then abruptly change everything about the way they life their lives. Instead, you should create your dream life right now so that you won’t be in a rush to retire in the first place!

Saving for retirement is important… but I’d rather have you create a fulfilling life, balancing your short- and long-term goals, and work in a job that gives you energy, doesn’t burn you out, and is something you won’t be in a rush to retire from.  But, of course, you will want to retire at some point… so how should you approach retirement savings if you feel “behind” in your long-term savings?

The Answer is Surprisingly Simple

To be prepared for retirement, the key is to continue to save more — even if you’re not directly saving for retirement.

Remember, paying down debt is an entirely valid form of saving, including your mortgage debt if you have it (although buying a house is NOT a way to save…more to come on that next week!).  So while you may not be doing a lot of “traditional” retirement saving at the moment, that doesn’t mean that you aren’t saving at all.

This brings up the question — How can short-term saving help you if the money isn’t going into retirement accounts? Well, there are two primary inputs into the calculation we use to determine how much you need to save for retirement, and short-term saving can have a big impact on one of them.

  1. How much do you have saved? This is pretty intuitive, and what we usually focus on. Once you have enough money in your retirement accounts, you can retire.  This input includes the amount of money you are currently saving for retirement, and how much you expect your cumulative savings to be worth by the time you retire.
  2. How much do you spend each year? The second component doesn’t have anything to do with savings at all… or at least, it doesn’t have anything to do with savings directly.  In order to know how much money you need to retire, we need to know how quickly you’re going to spend your money in retirement.   The more you spend, the more you’ll need to have saved for retirement.

The last sentence above hints at the key link between how your short-term savings and debt paydown can help you retire earlier.  The more you spend, the more you’ll need to have saved for retirement.

The problems holding our generation back from saving for retirement largely aren’t related to spending at all!  We’re saving… but the savings is being redirected elsewhere.  Which means that if you continue saving at the rate you’re saving, even as you pay off your student loans and accumulate enough money to make a down payment on a house, you’ll need less money set aside for retirement to begin with because your spending is low!

That’s worth repeating: If you lower your spending today, and build the habit of saving so that you continue to save once your loans are paid off, the less you will need to save for retirement in the first place. Saving money – even for short-term goals – helps you retire earlier because it decreases the amount of money you need to retire in the first place.

Think of retirement savings as filling a bucket with water. Over the course of your career, you’re putting money into your retirement savings “bucket”. When you retire, you start spending that money you’ve saved – for the sake of this metaphor, let’s say that when you retire, you poke a hole in the bottom of the bucket so water starts to leak out of your “retirement savings”. How quickly the water flows out of the bucket is critically important. If you spend a lot, you better make sure you have a TON of water in that bucket before you poke the hole in it, because the water is going to flow out of the bucket really quickly.

On the other hand, if you only poke a small hole in the bucket, the water inside will flow out of the bucket very slowly.  Which means that you don’t necessarily need a huge bucket of water to begin with!

If you want to spend a lot of money during retirement, you need to make sure you save enough to be able to retire comfortably.  The more you spend, the more important compound interest is to you. But if you keep your spending in check, the water will leak slower, meaning that the bucket has to be less full in the first place.

Big Idea: There is a “Double Benefit” When it Comes to Increasing How Much You Save:

Increasing your retirement savings will fill up the retirement savings “bucket” faster, which will certainly help you retire earlier.  But, filling the bucket is only half the equation.

If you’re spending less money, you’re slowing the the speed at which the water flows out of the bucket in the first place, which means that the water level does not need to be as high. If you are able to do both of these things, you can maximize your potential savings and have much more flexibility in when you can retire.

The key, though, is to be able to maintain this over time. Once you student loans have been paid off, redirect this type of saving to saving for something else. Even if you can’t save for retirement right now to fully benefit from the “magic” of compound interest, you can still put yourself in a great position to retire. By following these saving tips, and assessing what you would like retirement to look like for you — you can easily put yourself in the position to get where you want to be!

If you still have questions, or would like help walking through a savings plan, please contact me and we can set up a free introductory call!

Why You Shouldn’t Join a Multi Level Marketing Company (and What to Do Instead)

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Why Multi-Level Marketing Companies are the Wrong Choice for the Aspiring Entrepreneur

A lot of the topics I discuss on this site involve ways to effectively spend and allocate your money, whether that be though repaying student loan debts, choosing investments, or buying a new home. One thing that’s not talked about enough, though, is how to actually make more money. Increasing your income is arguably the most important factor in your “financial equation”, and one that is often minimized by many in the financial industry. Recently I’ve received a lot of questions about how to increase income, whether that be through your current career or starting a side hustle. One question stood out and brought up some points that may be important for you to consider:

“I’ve noticed some of my friends leaving their jobs to start selling makeup or skincare products for a well-known Multi-Level Marketing (MLM) company.  I always thought these types of businesses were unreliable, but more and more people I know are joining them and they seem to be doing well. A friend has asked me to join her team…should I?”

Now, this may sound like an appealing offer — to be your own boss and make money on your own hours — BUT…

I would recommend staying far away from these MLM sales organizations. I completely support the entrepreneurial spirit, and wanting the work freedom these types of businesses claim to offer, but you’re much more likely to find success and fulfill that spirit in other ways. The best way, in my opinion? Get involved in or even create your own bona-fide startup!

What’s a Multi-Level Marketing Company?

Before going in to why I’m so pessimistic about these “businesses”, it’s important to talk about what exactly they are, because most people aren’t entirely sure. Unfortunately, the opportunities most companies depict couldn’t be further from the truth for the majority of their “business owners”; their business models make it hard to identify the full job responsibilities on the surface. To add to the confusion, this type of business goes by many names, including Multi-Level Marketing, Direct Selling, and Network Marketing. If you find a brand that identifies as any of these things, consider that your first warning sign.

What’s the difference between a “normal” company and an MLM?  In a “normal” company, the company makes its revenue (for the most part) in one way: by selling products or services to customers.  MLMs, though, are different. If you “build your business” by working for an MLM, you make money in two ways.  Some of your revenue comes from selling their products… but most of your income comes from recruiting salespeople to work below you. MLM companies are common in industries such as makeup and skincare, haircare, nutrition, and sometimes even insurance. (Fun fact — if you look back and some of my more controversial posts about the insurance industry, you will find some comments from one of the biggest MLM insurance companies out there.)

Before making the career change to an MLM, or any career change for that matter, you should be sure that you are fully prepared to do so. Just like any other transition to a new career, jumping in to join an MLM requires planning. You need to make sure you are financially ready for whatever may come with the change — because sometimes it can bring on more financial hardships than expected. If you are unsure how to do this, take a look at my free Quit Your Job guide, where I break down the steps on how to prepare and how to know when you’re ready to make the shift.

How Do I Know if a Company is an MLM?

With so many different business structures out there today, it can sometimes be difficult and confusing to identify which companies actually operate with an MLM business structure. If you see these things in a company, they are most likely an MLM:

Advertising opportunities to “be your own boss” or “work few hours but get big pay”. These types of companies love to highlight that their independent distribution structure means the distributors have huge freedom in when and how they work. While this may be true, using it as a selling point is slightly misleading; working few hours and earning big pay only comes for a small few in the company.

Their products are not sold in stores. Oftentimes the products these companies are selling are not available for purchase anywhere else, making them the sole distributor. Most of the time you will not even see these companies on Amazon, which is shocking in this digital age where so much of our shopping and purchasing is done online. These products are typically purchasable through distributors (yes, these are those people in your Facebook feed posting about buying the latest, most innovative nutrition supplement).

They don’t just want you as a customer; they want you to sell it as well.  This is probably the biggest giveaway of an MLM company. When those selling the product are asking you to join their team and sell as well, know that their motivation comes from the ladder structure I mentioned earlier. Any company where your ability to recruit new employees has an effect on your income is one you should probably avoid.

Here’s Why Joining an MLM is a Mistake

Now that we have a clearer image on what exactly this type of company looks like, let’s address why joining one might not be the right move.

These companies have a very dubious business model.  A business structured so that your earning potential stems from recruiting people to sell below you is not sustainable. The relevant regulators in the US haven’t come out and outright said that MLMs are pyramid schemes… but they’ve come very close to.  Additionally, these companies usually have a “minimum monthly spend” amount for their employees to maintain an inventory of the product. They must purchase a specified amount each month in order to stay eligible as a distributor. Any company worth working for will not force you to spend money to buy products each month.  And indeed, these spending requirements are one of the primary reasons that so many people drop out of MLM organizations after only a few months.

The economic rewards promised are highly unlikely. In fact, the majority of MLM workers actually lose money (oftentimes due to that pesky minimum monthly spend mentioned above). The median MLM distributor often only makes around $2,500 a year, rather than the big bucks these companies advertise.  And (not to give you horrible flashbacks to 10th grade math class), if the median employee only makes about $2,500 per year, that means that half of the distributors make less.  The people who are making hundreds of thousands of dollars a year are the 1% of the 1%, and usually got into the company very early. It’s highly unlikely to have the same success as you see in the testimonials on their sites.

Along with that, there are only a tiny percentage of people that stick it out long enough to even get to a point where that would be possible. 50% of people drop out of MLM businesses in the first year, and only 10% stay longer than 5 years. To put that in perspective, it’s been found that 50% of small businesses last 5 years or more; that is a significantly higher success rate, and is even more meaningful when considering the fact that small businesses often have a reputation of being hard to maintain in the first few years.

Don’t Quit on Your Entrepreneurial Goals… Just Don’t Join an MLM!

It is highly commendable to want to pursue a more do-it-yourself career, or position yourself in a job where you have flexibility and entrepreneurial abilities. If being your own boss appeals to you, do it, just don’t do it by selling makeup or overpriced energy drinks and by recruiting other salespeople to join you.

A little personal blurb…I had an experience recently at a networking event with an independent distributor for a major energy drink MLM. This woman was very knowledgeable not only on the product, but on health and wellness in general. She knew her stuff and had a lot of great ideas, but everything she said was brought back to the energy drink she wanted to sell. Eventually, I looked right at her and said “ This product really isn’t going to fix the problems you just identified. But, I’ll hire you on the spot, right now, to be my health and wellness coach”. She immediately shook her head, and continued to insist that taking XYZ product would solve my issues. I explained to her that I wasn’t interested in the company, I was interested in her, but she would not budge. Her final statements to me included “Well, why don’t you take a few samples and think it over.”

Here’s the thing. She had a lot of great health insights, and is someone I gladly would have worked with as a health/nutritional consultant, or even a personal trainer. How much would I have been willing to pay her for that kind of service? A lot more than what she would have gotten paid for the energy drinks. Probably 10 to 15 times more. But, she couldn’t see it. I told her, multiple times, that I’d pay her more to have a different type of work arrangement, but it didn’t go anywhere.

What’s the Point?

This situation highlights the fact that for every MLM out there, in any industry, there is a business you could start with an equivalent skillset. Looking into health and wellness? Become a nutritional coach or personal trainer. Want to work in makeup and skincare? Be a makeup artist or skincare consultant. From interior design to hairdressing, ultimately you can become a “consultant” in whatever industry it is you are looking into.  And while starting any type of business involves taking some risks, the odds are very good that you’ll be better set up for long term success than you would be by joining the equivalent MLM. Take it from me – being your own boss for in a real business is awesome.  It’s a lot of hard work, but if you have the drive and passion, I have all the faith in the world that you can make it happen for yourself.  If, that is, you prepare appropriately.

If you’re still unsure of how to start a transition like this, you can download my (brand new!) guide on How to Quit a Job You Hate to help you be as ready as possible to take the leap. Still have questions? I am more than happy to chat with you. Feel free to contact me and we can set up a call!

Why Financial New Year’s Resolutions Don’t Work

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“What’s it like to work with a financial planner?”

It’s a question I get asked all the time.  When most people think about a stereotypical “financial planner”, they tend to immediately think of an investment manager.  The conversations focus solely on investment management strategies, how to “beat the market”, and sometimes life insurance sales.  

While any good financial planner will touch on investments and insurance as part of a comprehensive financial strategy, this isn’t what working with a (good) financial planner is like, at all.  

How do I describe what I do as a financial planner?  Quite simply: I work with my clients and their finances the same way a personal trainer works with someone at the gym.  While we work with different subject areas – trust me, you don’t want me giving you physical fitness advice – personal training and financial planning have the same three key job requirements:

Help you get clarity on what you want to achieve. In the gym (and in everyday life), it is important to define exactly what you are looking to get out of the experience.  One of the most important steps in creating a financial plan is taking a step back to reflect on what’s most important to you in your life, and defining specific financial goals to help you realize that vision.  A personal trainer can’t help you improve your race time unless he or she knows whether you’re trying to run a 3k or a marathon. The same applies to your finances!

Develop and implement an effective way to get from Point A to Point B. Just like with physical growth, this process is different for everyone. It is important to ensure that the methods you establish to help you save money, pay off debt, or make other financial changes are effective for your life in a way you can consistently stick to. It’s vital to follow the most efficient path from where your finances are now to where you want them to be in the future.

Hold you accountable to your best intentions. This is the tactic I find MOST important, as I see it to be the biggest deal-breaker in whether or not you find success in the financial plans you make. Individuals who invest in personal trainers at the gym often see more consistent and continued progress than those who do not. Why? Because they make a commitment to the personal trainer that they will show up to the gym regularly, and because the trainer will be able to tell if they haven’t been making progress. I want to spark that same level of motivation in my clients when it comes to financial responsibility. I do what I do because I want to make sure that they show up for themselves and can move things forward at the pace they want to see.

If you want to learn more about the benefits of having a financial “personal trainer” and how I can help you get on track with your financial goals, contact me and we can set up a free introductory phone call!

Now, in order to stay true to my word and hold you accountable, I’ve got to ask…

How are your New Year’s Resolutions going?

If they’re still going strong, congratulations! It is not an easy feat, and you’re one of the few who have successfully carried their New Year’s transformations beyond January. But if you are like most people, your resolutions probably haven’t been top of mind for a few weeks now. In this post, we talk about why New Year’s Resolutions, particularly financial ones, do not work for most people and what you can do to make sure you actually make financial progress in 2019.

Why Most New Year’s Resolutions Fail

Statistically, over 75% of people give up on their New Year’s Resolutions by February 1 — and that is for ALL resolutions. Resolutions specifically relating to money are often the hardest ones to keep.  Aspiring to make improvements to your financial situation is a great goal, but unfortunately New Year’s resolutions are typically an ineffective way of doing so. Why?

Financially, January (and December) tend to be the toughest months of the year.

Coming out of the holiday season, many individuals are stuck with large bills to pay from all of their gift-giving and traveling. If you can relate to this feeling, know that this is 100% normal.  But if you start preparing now, next year can be much more manageable! Starting to make changes in your finances before you’ve paid off your holiday credit card bill can be disheartening. What’s more demoralizing than starting new financial habits, making some improvements, and then logging into the computer later that month to pay a massive credit card bill? You’re much more likely to stick to a goal if you can see a few “quick wins” early on.  

To add to that, if we simply look at basic human psychology, we see that people tend to stress over financial losses much more than celebrating gains. Case in point: when I talk to clients about their investments, they often quote investment gains as a percentage – “My account is up 6% this month” – and they quote discussions about investment losses in dollars – “My account is down $600 this month”.  The reason? The losses feel more real to us. Psychology tells us that we often need to gain $2 to emotionally recover from a $1 loss. Because of this, those post-holiday spending bills can make it harder to see the positive progress and can dampen the motivation to continue towards your goal.  

January 1 is really just another random date.

If we look at it logistically, there is no difference between January 1 and any other date on the calendar. We often feel more motivated to makes changes at the beginning of the year because we feel like we are “supposed” to, but this self-motivation doesn’t last. Once a few days go by, we often lose the motivation brought on by the start of the calendar year, and January 7th feels more like December 7th than January 1st. At the end of the day, your self-motivation to make changes at the New Year is probably the same as at any other point in time.. There’s nothing wrong with starting on New Years if you’re ready, but if you’re not, don’t feel pressured to!

January is a difficult month in general

In the days and weeks following New Years, many people are still coming off of their “holiday high” of time spent celebrating and relaxing. Getting back into work and the stresses of regular life can often put a strain on individuals that greatly decreases the motivation to stick to resolutions. Lots of people tend to cave and give in to guilty pleasures (I can’t say I haven’t done this as well), which can throw you off track or cause you to stop altogether.

How to Set Financial Goals that Actually Work

Because of these things, many people procrastinate, become frustrated, or completely give up on their financial resolutions by this time of the year. However, this doesn’t have to be the case! Here are some strategies to set financial goals that actually stick.

  • Set your goals NOW.  The beginning of the year (or month, or week) is an arbitrary start time.  Why wait when you can act on your best intentions now?   
  • Be specific. Understand what is really important to you, and why. When speaking to clients about this, I love to dive deep into the “why” behind the changes they want to make; it exposes the motivations and can create a driving force for that individual. Once you think you’ve figured it out, ask yourself “why” one more time. You might be surprised and what you’ll learn about yourself.  Ultimately, this is important because the reasons behind the goals you set will be what compels you to stick with them.  “Self-motivation” doesn’t always work in the long term, but focusing on why you want to make a change works incredibly well.
  • Break down your goal into small, manageable steps (and focus on the first step!) For example, if your goal is to buy a home, break it down into subgoals: figure out how much you can afford, review credit reports, talk to multiple mortgage lenders, etc. By doing this you can create a timeline that is actually doable; and not only that, but by focusing on one small step at a time, you can make a daunting challenge seem much more manageable. Simply focusing on the first step along the way makes your goal much more realistically achievable and can get you excited about tackling that task.
  • Set SHORT deadlines. After you break down your goal into steps, set deadlines that encourage you to act now! Whether that be a week or a month (no more than that), setting short deadlines will keep you focused on the task at hand and actually accomplish what you have set out to do. Oftentimes, setting a deadline too far in the future, or not setting one at all, can lead to procrastination and avoidance. And when that happens, you’re back to facing the same problem you had when you set your New Year’s Resolution.
The Biggest Motivator

All these steps will help, but perhaps the biggest piece of advice for those of you out there struggling to stick to your financial goals is to find an accountability partner.

Whether that be a friend, family member, or coworker, having someone else to check in on you consistently and ensure you’re on track is the best way to keep motivated. Remember, while some people have a lot of success keeping up an exercise program on their own, it’s the people who hire personal trainers who see the best results.  Part of this has to do with the plan they help you develop, but personal trainers keep you accountable and make sure you’re doing the work week in and week out.

The same is true for finances. I am here to help guide, support, and keep you on track – but it doesn’t necessarily need to be a planner, either. Our friends, coworkers, and family members can be great accountability partners as well.  Now go find that person in your life, and set your goals together!

If you would like help refining and setting your goals to start NOW, and getting started on making real changes today, I am more than happy to set up a free introductory call with you. If you’ve already got a few, let me know what your goals are in the comments below!

Can You REALLY Get Public Sector Loan Forgiveness?

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Fears about the long-term viability of the Public Sector Loan Forgiveness (PSLF) have surrounded the program ever since it was established in October 2007.  In fact, we’ve discussed these concerns on the blog before!  But since we last discussed the future of PSLF, the initial round of forgiveness data seems to validate a lot of the concerns I last discussed in 2017, as the vast majority of applications for forgiveness were rejected in 2018.

That being said, most of this fear is misplaced.  There are three primary requirements you must meet in order to achieve loan forgiveness under PSLF – and unfortunately, the “fine print” is confusing for each of these three requirements, and the needed information historically hasn’t been clearly communicated by federal loan servicers.

At the end of the day, PSLF is a viable option for you – as long as you make sure you meet the three requirements, to the letter.  And despite scare tactics put out by companies that make money when you refinance your student loans – which, incidentally, will disqualify you from PSLF – borrowers who are currently in repayment are not threatened by any future changes to the PSLF program.

If you’d like to learn more about how to make sure your loans are on track to qualify for PSLF, download our free Student Loan Guide to learn more!

What is Public Sector Loan Forgiveness?

Before diving into the loan forgiveness provisions of PSLF, I want to give you some background on the Public Sector Student Loan Forgiveness program as a whole. This program was created to encourage citizens to pursue government jobs in exchange for loan forgiveness –the main selling point being that working in one of these jobs for 10 years would qualify you for complete loan forgiveness.

Unfortunately for the government, the PSLF program has essentially been too successful; not only did individuals in many different fields pursue these types of jobs in government in search of the benefits this program offered them, but a growing number of graduate and professional students accepted jobs at teaching hospitals and other non-profits seeking forgiveness for 7+ years of student loan borrowing.  The government didn’t intend to open this program to the volume of people currently seeking loan forgiveness, which has prompted several proposals to change the program over the years.  Critically, though, these changes will only affect future borrowers. If you are currently repaying loans seeking PSLF forgiveness, this should not be a cause for concern.

What Problems Face the PSLF Program?

When this program was first launched, the specifications and requirements for forgiveness were very vague and poorly communicated.  Additionally, Congress and the Department of Education have made significant changes to student loan policy several times over the past 15 years.  All of these changes were well-intentioned, but they made it hard for borrowers to keep up to make sure they had the right loans to qualify for PSLF forgiveness, and that they were on a qualifying repayment plan.  This particularly affects borrowers who had taken out student loans prior to 2010.

Unfortunately, the changes in student loan policy and poor communication of the requirements to applicants meant that almost 100% of people were rejected for forgiveness the first year it was offered.  And the fact that loans only started to be forgiven over the past year and a half is enough to raise concerns about the program by itself, at first glance. It is important to note, however, that this program began in October 2007. Because of the 10-year forgiveness requirement period, the first round of applicants eligible for forgiveness only submitted their applications a little over a year ago. To potential applicants for the program, seeing that the rejection percentage was so large and the total number of people who have had loans forgiven was so small, it’s completely understandable that  individuals are afraid to count on the application process altogether simply because they associate the program with failure.

But, here’s the catch: the PSLF program is not a failure, and it won’t be for anyone currently seeking loan forgiveness who reviews the detailed program requirements  PSLF is still in its early stages and there are many reasons to expect that the program will be successful for you in the coming years:

  • This is a blessing and a curse, but the government has only rejected applicants because their loans, payments, or jobs did not meet the requirements for forgiveness. Unfortunately, due to the poor communication about the program requirements, many individuals who thought they were eligible for PSLF actually were not. But the good news is that if you do make sure you comply with the “fine print” requirements for PSLF, you can expect loan forgiveness. With my help, we can ensure that you are meeting all the requirements for eligibility and are set up on the right path towards success.
  • Many people experience issues with the student loan servicers that process the payments. These companies often make a lot of mistakes processing loans that can incorrectly calculate your monthly payment or put your eligibility for forgiveness at risk. For the average millennial, it’s very difficult to identify and fix these potential issues.  With the help of a student loan planner (like me), this can be much more manageable.
  • I expect the number of accepted PSLF forgiveness applications to increase significantly in the coming years.  As I mentioned, the government did a terrible job getting people the information they needed to know how to qualify for the program.  That has gotten better over time, and it’s much easier for students who entered college in 2011 or later to have loans that automatically qualify for the program.  Just because so many people have been rejected in the first year or so of forgiveness applications doesn’t mean this will continue.
How Can I Make Sure I Get Loan Forgiveness?

Despite what you may have heard, qualifying for PSLF can be MUCH easier than many think… you just need to do your homework. Student loan policy has developed over time, and the changing options mean that additional steps may be required to maximize your likelihood of forgiveness.  If you focus on meeting three key requirements, you can feel good about your chances of achieving loan forgiveness.

As long as you make sure you are on track through each step, attaining forgiveness through this program is possible. I have laid out the three major steps you need to take right from the start to optimize your possibility of public sector loan forgiveness:

  1. Make sure your loans are eligible. The biggest myth around PSLF, that gets the most people into trouble, is assuming that every federally-issued student loan qualifies.  Not every type of federal loan qualifies for Public Sector forgiveness, so you should review your loan documents to verify. If the loans you currently have were distributed before 2010 (these type of loans are classified as “FFEL loans”), or are categorized as Perkin’s loans, you will need to consolidate them through the federal government to make them eligible for PSLF.  For those of you who have not yet started repaying your loans, be sure to check that your loans meet the eligibility requirements
  2. Make sure you are on an eligible payment plan. Often, individuals don’t realize that the payment plan they are on may be hurting their chances of loan forgiveness or reducing the amount that will be forgiven. Critically, you won’t get credit for any time where any of your loans are in deferment or forbearance.  While the Public Sector Loan Forgiveness program is often associated with a forgiveness time period of “10 years”, the real requirement is represented as 120 monthly payments.  If you make one payment a month for 10 years, this gets you to the required number of payments… but if you skip payments or place your loans into deferment or forbearance, you need to “make up” that payment in the future before you can apply for PSLF.  Additionally, “graduated” or “extended” payment plans won’t qualify as PSLF-eligible payments, either.  If you are seeking PSLF, you should make sure you are either on an Income-Driven Repayment plan or the standard 10-year repayment plan.  (And as a side note, you should make sure you are on the right Income-Driven Repayment plan.  In my experience, student loan servicers often put you on sub-optimal plans unless you specifically request the “right” one for you!)
  3. Make sure your job is qualifying and eligible. This loan forgiveness plan offers benefits to a wide range of professions, but it is important to confirm that your position qualifies. To be more specific, qualifying jobs include working for one of the following types of organizations:
    1. The Government
    2. A 501(c)3 Nonprofit
    3. The AmeriCorps or Peace Corps
    4. A Public Service Organizations.  Generally, non-profits as a whole will qualify.  But, there are a few exceptions.  Specifically, even if you work for a non-profit, jobs that are political in nature or labor union jobs are not eligible for forgiveness.

Once you understand these three criteria and confirm your eligibility, you can feel confident that you are on track for PSLF.

What is the Future of Public Sector Loan Forgiveness?

As I mentioned, a lot of the fear around PSLF has to do with future changes to the program.  And to be candid, this program is likely to see tweaks to it in the future. Congress has already tried to make changes to this program since the Obama administration, and I believe some new changes will come to fruition in coming years. Both Presidents Obama and Trump have discussed putting some type of limit on how much can be forgiven by the program.

Currently, Republicans in Congress has introduced the Prosper Act, which would completely eliminate PSLF altogether.

However, this is not a cause of concern for people who currently have student loans. This change would only affect new borrowers, not those who are already pursuing forgiveness. These forgiveness provisions are often written into borrower’s loan agreements; it will be a massive legal fight for the government to take these provisions away from current borrowers, and there is strong legal precedent for changes in student loan policy to only affect future borrowers.

So, if you or someone you know is considering going back to school with the goal of achieving loan forgiveness through PSLF once you graduate, this should be a legitimate concern. But otherwise, there is no need to fear.

The Key Takeaways

From all this information, there are two big takeaways:

  1. Public Sector Loan Forgiveness is very attainable as long as you do your homework and stay on track. Take the time to make sure that your loans, payments, and job qualify for the program.  And each year, you should recertify your income and file the Employment Certification Form to prove you work in a qualifying job.
  2. Recognize the conflicts of interest in the student loan industry.  As I mentioned at the beginning of this post, I was inspired to discuss the fears about the future viability of PSLF am discussing this topic mainly because of an article sent to me by a private student loan refinancing company.  Ultimately, this is a pretty good overview of the program, but the section in the middle calling PSLF into question is misleading and intentionally stokes fear about the future of the program.  Remember, this company is a private student loan lender, meaning they make their money by taking loans eligible for PSLF and refinancing them into ones that aren’t. As long as you follow the PSLF program requirements, there is no need to be concerned about achieving forgiveness through the program.  And above all, if you’re seeking PSLF forgiveness, don’t refinance your loans!
What’s the Next Step?

If you would like to learn more about this program or your eligibility, I encourage you to download my Student Loan Guide to give you some help in determining whether or not you are on track to qualify for PSLF. I am also more than happy to set up an introductory call to walk through any questions you may have!

The Best Strategies to Save for Retirement

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What are the best strategies to use to save for retirement?  In this video and in the summary below, I respond to a few questions sent to me regarding the “right” ways to save for retirement.  Specifically, we discuss these three questions:

  • Presuming that a 401(k) alone won’t be sufficient to fund your retirement, what are the “next best” places to put your retirement money?
  • Pre-tax vs. Roth retirement accounts- what’s the best option to choose?
  • How much do you really need to save for retirement?

(Bill’s Note: The video below was originally recorded as a Facebook Live broadcast on November 26, 2018.)

The Three Tiers of Retirement Savings

Not all retirement savings accounts are created equal.  If your goal is to save aggressively for retirement, you’ll likely need to make some decisions about where you should be putting your money for retirement. 

I like to think about retirement savings accounts in the context of three different “tiers” that you should contribute to, in the following order:

Tier 1: Employer-Sponsored Retirement Accounts

If you have access to a retirement plan through your work, this should almost always be your first priority to save for retirement.  Typically, these accounts are structured as 401(k) accounts (for private sector workers), 403(b) accounts (for non-profit and education workers), or 457 accounts (for government employees).

If you don’t have access to a 401(k), 403(b), or 457 account through your work, you should skip to Tier 2, with one caveat.  If you are self-employed, there are a myriad of other retirement account options you could set up.  We’ll discuss these in more detail another day.

Assuming you do have a 401(k) or similar account at your job, there are several things you should consider:

  • If your employer matches your contributions, you should, at a minimum, contribute enough to receive the full match.  This is the closest thing to “free money” that you’ll ever get, so take advantage of it!
  • One of my favorite strategies to help people find ways to save more for retirement is to increase your 401(k) contributions by 1% every time you get a raise at work. You won’t notice the money you’re “missing” from your paycheck, since your paycheck is going up, anyway!  But you’d be surprised how big an effect thee gradual changes can have.  By the time I left my corporate job at PwC before starting my own business, I was contributing 12% of my paycheck to my 401(k), simply by following this strategy.
  • Most employer-sponsored retirement accounts are pre-tax accounts.  In other words, you don’t pay income tax on the money you contribute to these accounts (and in return, the money will be taxed when you withdraw funds from these accounts during retirement).  But “Roth-style” 401(k) plans have become increasingly common in recent years, which work the exact opposite way- you pay income taxes on your contributions today, but can withdraw the money tax free in retirement. If you have access to a Roth 401(k), you should seriously consider utilizing it.  More on Roth accounts in a bit.
  • Finally, make sure you know the maximum contribution you’re allowed to make to your retirement accounts every year.  For 2019, the max you can contribute is $19,000 per year (assuming you’re under the age of 50).  Typically, the IRS raises this limit each year (it was $18,500 in 2018, for example.)

But, as the three questions at the beginning of this post strongly implied, 401(k) savings alone typically aren’t sufficient to completely fund your retirement.  So, after setting up your 401(k) contributions, what should your next step be?

Tier 2: Individual Tax-Advantaged Accounts

As you have probably noticed, a key component of optimal retirement savings strategies includes managing taxes on your investments and retirement income.  As a result, you should always look for tax advantages in your retirement savings strategies, whether they’re traditional accounts (no taxes now, but you pay taxes during retirement) or Roth accounts (pay income taxes now, grow and withdraw the funds tax free in retirement). 

There are several different options available to you in Tier 2.  And my favorite one might surprise you.

Health Savings Accounts (HSAs)

Outside of a 401(k)/403(b)/457, HSAs are my absolute favorite way to save for retirement.

Why?  Because HSAs are essentially the last complete tax shelter that exists in America.

When choosing between a Traditional or Roth IRA, you pay taxes on your contributions at some point; whether it’s today or during retirement, your money gets taxed eventually.

But as long as you use the funds in your HSA for qualifying medical expenses, the money you contribute and invest in an HSA is never taxed.  Presuming your HSA account allows you to invest the money in your account, this can be an incredible savings vehicle for retirement.

This probably isn’t a shocker for you, but one of the primary challenges in preparing for retirement is making sure you have enough cash on hand to support your medical bills as you get older. With the rising cost of medical care, using an HSA to save for these retirement expenses is an incredibly efficient way to prepare for this.

Of course, there are a few qualifiers here:

  • You’re only eligible to open and fund an HSA if you have a high-deductible health plan. And if you do, you need to make sure you have a sufficient emergency fund to meet your deductible if you want to use your HSA for long-term investing.
  • The maximum contributions you can make to an HSA are relatively low.
HSA Contribution Limits for 2018 and 2019

HSAs are commonly overlooked as a retirement savings vehicle… but they really shouldn’t be.

NOTE: HSAs and Flexible Spending Accounts (FSAs) are not the same thing.  You should not be using FSAs to save for retirement, because you need to use the money in FSAs each year or it goes away.  Conversely, you are allowed to accumulate money in an HSA.

Traditional/ Roth IRAs

In 2019, you can contribute $6,000 to either a traditional or Roth IRA (up from $5,500 in 2018). Although, it’s worth noting that you have until April 15, 2019 to make that $5,500 contribution to your IRA for the 2018 tax year!

There are several questions you need to answer to determine which is the right type of account to use. Here’s how to decide which one to contribute to:

Can you deduct a traditional IRA contribution?  We’ve already established that “traditional” retirement accounts allow you to deduct your contributions from your taxable income this year.  But here’s the catch: if you have a 401(k) or similar account at work, you likely can’t deduct your IRA contribution on top of that.  The rules are somewhat complicated, and you should seek professional advice to verify your ability to deduct your IRA contributions.  But, this should be the first question you answer before making your decision.

Are you eligible to contribute to a Roth IRA? “Making too much money” is generally a good problem to have.  But, it can make you ineligible to directly contribute to a Roth IRA.  The table below shows the income restrictions on making direct Roth IRA contributions. 

Roth IRA Income Contribution Limits: 2019

Two caveats about this:

  1. These income restrictions do not apply to Roth 401(k) plans.  So, if your employer offers one, it is worth considering regardless of your income levels.
  2. You technically can still get money into a Roth IRA utilizing a Roth IRA conversion strategy. This is a very complicated process and it’s important to make sure you do it the proper way to avoid trouble with the IRS, so you should seek professional help before attempting this on your own.

When will your tax rate be higher: now, or during retirement?  This is the fundamental driver of the Traditional-or-Roth IRA decision.  Simply put, you want to pay taxes when you’re in a lower tax bracket.

If you expect your tax rate to be higher in retirement than it is now, you should pay taxes on your income now and withdraw it tax free in retirement by using a Roth IRA.  If, on the other hand, you expect your income (and income tax rate) to be significantly lower when you retire, a Traditional IRA is probably the right choice for you.

However, this is more complicated than it appears at first glance.  Remember, we’re not looking to compare your tax rate today with what your tax rate today is for your expected retirement income level.  You need to think about how tax rates will change between now and when you retire to make this decision.  Which, given that your retirement date is likely decades from now, is notan easy task.

My personal belief? Particularly after the passage of the Tax Cuts and Jobs Act in late 2017, today’s income tax rates are at all-time lows.  Which makes me inclined to believe that tax rates are likely to be higher when we retire, making Roth IRAs a great option for young people today.  That’s just my opinion, of course; I don’t have any more of a crystal ball to predict the future than you do.  But, particularly if you’re close to exceeding the income limits, you should seriously consider a Roth IRA.

How much flexibility do you need?   One final thing to consider: Roth IRAs are much more flexible than traditional IRAs.  While I don’t typically recommend that you withdraw money from your retirement accounts before retirement, you should know that you can withdraw your contributions to your Roth IRA at any time, without penalty. (As long as your investments haven’t gone down significantly in value of course- you can’t withdraw something that isn’t there!)  You can’t withdraw the investment earnings in your Roth IRA without paying a significant penalty, but you canwithdraw your contributions. 

Make Non-Deductible Contributions to Traditional IRAs

Even if you can’t deduct your traditional IRA contributions, it’s a strategy worth considering.

Even though you won’t be able to deduct a $6,000 (2019 maximum) contribution to a Traditional IRA now, and you’ll pay taxes when you withdraw the money in retirement, there’s still one tax benefit you can take advantage of:  between now and when you retire, you won’t be taxed each year on the investment earnings in your account. 

You might be losing the “primary” benefit of a traditional IRA if you can’t deduct the contributions, but at least you’ll save on taxes every year between now and when you retire by sheltering your investments in this type of account.

Tier 3: Regular Investment Accounts

You should be investing your retirement savings into something.  Which means that once you’ve run out of retirement account options, your final option is to invest in a regular brokerage account.

There are no tax benefits to holding this type of account.  The money you put into this account is after-tax money, your investment earnings will be taxed every year, and you’ll be taxed when you sell your investments.  But, the primary challenge in saving for retirement is making sure your money grows at a faster rate than inflation.  By investing your money as opposed to keeping it in a savings account, you give yourself the best possible shot to make sure that happens, even if there aren’t specific tax benefits for doing so.

What Shouldn’t You Use to Save for Retirement?

In a nutshell: you shouldn’t use permanent life insurance or annuity products to save for retirement. 

I’ve written at length before about why I hate permanent life insurance as an investment vehicle for retirement.  It might come with tax benefits, but the costs of these products far outweigh the benefits for the vast majority of people. 

And for young people, annuities are even worse. Until you’re at least 50 years old, you shouldn’t even consider purchasing an annuity.  And even then, there are still probably better options for you.

I’ll probably do a whole separate article about why I dislike these products.  But until then, if you’re contemplating using life insurance or annuities as a retirement-savings vehicle, you should seek advice from a third party who doesn’t sell these products for a livingto make sure it’s the right fit for you.

How Much Do I Need to Save For Retirement?

Unfortunately, there’s no generic answer I can give to this question.  Everybody’s retirement savings needs are different, so you should work with a financial planner to develop a retirement plan specific to you and your vision for your life to answer this question.

Simply put, the way you want to live in retirement significantly impacts the math on how much you need to save.  Consider two different families:  one of whom wants to purchase a vacation house on the beach when they retire, and the other wants to sell their primary house, downsize to an apartment, and buy an RV to travel the country.

Which person will need more money to support their vision for their life in retirement?  All other things equal, the first one.

You need to develop your own retirement savings plan to determine how much you need to save.  If you want to learn more and get this process started, I encourage you to book a free breakthrough session with me so we can discuss more and start developing your plan of action. 

KEEP More of Your 2018 Money, plus What We’ve Got for You in 2019

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In this short video, I’ll tell you what we have in store for you to close 2018 (including how to KEEP more of your 2018 money) and I have a BIG announcement for you at the end of the video!

 Watch the Video ⬇️ 

In the video above, I talk about three simple and practical ways we can work together without (or before) comprehensive financial planning services: through Focused Project Planning services.

Timestamps for your convenience:

1:06 – “Lighter” ways to work together: Focused Project Plans
1:20 – Student Loan Analysis and Payment Planning
1:39 – Health Insurance Plan Selection & Open Enrollment
1:56 – End of Year Tax Loss Harvesting (<< BIGGEST opportunity at this time of year, especially in our current stock market conditions.  There could be a great opportunity to keep more of your 2018 money by saving on taxes!)

⬆️ If you’re interested in working together through Focused Project Planning, please schedule a call with me!

I also made a special announcement in the video (at 4:36)…

could be one of 10 people
in my Personal Savings Pilot Program 
beginning together on Tuesday, January 1st! 

My program goal is to double your monthly savings amount
without feeling like you’re sacrificing your quality of life.

If you’re ready to challenge yourself
to putting your money where your mouth is…

Click below to apply for your chance 
to be one of just ten people in this program!

2 Options to Keep Holiday Spending Inside Your Budget

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With Halloween behind us, the holiday spending season is here. And with the holiday season comes travel plans, parties, family gatherings, and, of course, gifts.

With all of that comes costs.  Significant ones. 
A study from PwC estimated that millennials spent over $1,000 on holiday-related expenses in 2017, up 26% from 2016.

I’m not writing this to say that holiday spending is a bad thing. 
True story: I’m the lunatic who starts listening to “White Christmas” in October. ?? 

Here’s my question instead: 
From a financial planning perspective, how do you prevent irregular expenses from destroying your monthly spending projections?

It’s not Just about Holiday Presents

What do I mean by irregular expenses? 
Spending that isn’t completely unpredictable, but doesn’t happen every month.

Breaking your leg and needing to pay for an x ray isn’t an irregular expense- it’s an emergency, and its why I encourage all my clients to have an emergency fund before focusing on other financial goals. 

That’s not what we’re talking about here.  Instead, we’re looking at the money you spend every year or so in a way that’s predictable, but not frequent.

Holiday spending is particularly relevant in December, but this isn’t the only irregular expense that comes up during the year.  This also relates to:

  • Thanksgiving travel (or hosting!) costs
  • Car insurance payments (usually made twice a year)
  • Renters or homeowner’s insurance payments
  • Reoccurring medical expenses (for example, a refill on prescriptions or contact lenses every x months)
  • Annual car registrations and inspections
  • Car maintenance (ex: new tires every 60,000 miles)

Some of these are more predictable than others, but you get the picture.  If you aren’t careful, you can have a huge, irregular expense in your budget every other month.

Getting back to the holidays, I’m not just picking on gifts.  There are a lot of other costs that can add up around this time of year- travel expenses, shipping costs, decorating, cooking/baking, and Christmas cards, just to name a few.

So, what should you do about it?
There are two main ways you can approach irregular spending.

Holiday Spending Option 1:
Keep and Fund an Irregular Expense Account Using Past Average Spending

Personally, this is my favorite method to approach these issues. 

In a nutshell, using this approach you would average out your yearly expenses across every month, and use these savings to cover the holiday spending and expenses when they come due.  Let’s break it down.

Irregular Expense Account Step 1:
Estimate Your Yearly Holiday Spending and Irregular Expenses

In order to plan for your irregular expenses, you have to have a ballpark idea of what they are.  While it can be difficult to calculate some irregular expenses, generally I recommend that you let your own spending history be your guide.

With bank account and credit card information online, it’s not terribly difficult to piece together a ballpark estimate of your past irregular expenses.  And it’s well, well worth the time and effort.

For example, let’s say that on average, you’ve spent $1,000 on holiday spending – gifts/travel/decorating/cooking – every year in December, $500 every March and September on car insurance, and $150 on annual car registrations and inspections.   If these are your only irregular expenses, your total for annual irregular spending is $2,150.

Just to be on the safe side, let’s round up by a couple percentage points and use $2,200 instead.

What does this mean?  On top of your monthly budget for rent, food, etc., you need an extra $2,200 to cover your expenses each year.

Irregular Expense Account Step 2:
Break It Down By Month

In this step, we’re going to divide your annual irregular spending into an average amount per month. Then, add that amount to your current monthly budget.

The idea here is that rather than only thinking about holiday spending in December, it’s best to set aside some money every month so that when the holidays roll around, your budget stays intact. 

Going back to our example, if you spend $2,200 on irregular expenses every year, averaging that out every month means that you’d spend $183.33 per month on these items if you spent it evenly throughout the year.

So, how do you stop irregular expenses from blowing up your budget?

Estimate them on a monthly basis, then save that amount each month.  That way, when it comes time to buy that holiday gift or get your car inspected, you can use cash you’ve saved up in advance to cover it.

Is it easy to save $183.33 each and every month? 
It might be, or it might not be, given your budget.  That isn’t really the point.

The point is that if you did the first step correctly, you’ve been spending that money already in the past year or two.  Rather than dealing with it in large chunks, you’re planning ahead to make it easier on your wallet when the time comes.

Irregular Expense Account Step 3:  
Where to Put the Money in the Meantime?

Saving a set amount each month to cover sporadic expenses and holiday spending is great. 
But that begs the question- where do you put the savings?

I’m a big believer and proponent of having multiple savings accounts for different goals. 

Assuming you aren’t paying fees on your savings accounts (if you are, you shouldn’t be!  There are plenty of free options out there), the only drawback to having multiple savings accounts is keeping track of them.

I’d argue that it’s much easier to keep track of your money if you have different accounts earmarked for different purposes, rather than one or two accounts holding the money for everything.

Your emergency fund is different than your irregular expense fund,
which is different than your travel money,
which is different from your savings to buy a house….
You get the picture.  One of the easiest ways to keep your money allocated for the correct purpose is to use different accounts.

So, if you set up a separate irregular expense account, your goal should be to contribute to it evenly each month to fund these expenses.  Make it easy on yourself, and automate this savings.  Schedule a direct deposit from your paycheck, or an automatic debit from your checking account, once a month to make sure you’re saving what you need to be saving.  Your wallet will thank you when the holidays roll around!

Irregular Expense Account Step 4: 
Reevaluate Annually

I work with all of my comprehensive financial planning clients to update their financial plans annually. 

There’s a good reason for this: things change, and change often.  What worked for you this year might be too much or too little next year. 

Set your targets based on what you’ve done in the past, but make sure to reevaluate at least once a year to make sure you’re saving the appropriate amount.


We need to have a brief time out before we go to the second option for how to keep holiday spending from blowing up your budget.

So far, we’ve only talked about irregular expenses. 
But, irregular income works exactly the same way. 

If your cash flow increases once or twice a year, either earmark those funds toward a long-term savings goal, or average out this income each month to treat it more like a raise than a bonus.

What am I talking about here? 
For people who have seasonal income, this definitely applies to you, but I bring this up to primarily speak to one irregular source of income that most of us receive each year- your annual tax refund. 

If you get $500 back from the IRS every April, build it into your monthly income budget for the rest of the year, just like we did for your irregular expenses, rather than spending it all at once.

Time to talk about the second option for handling irregular expenses.

Holiday Budgeting Option 2:
Benchmarking and Flexibility

Let’s say that the thought of diligently setting aside money in January and February that you won’t be able to touch until December gives you some anxiety.  What do you do then?

The short answer, of course, is that you need to come up with a way to pay for your holiday spending and expenses in real time.  This can be challenging, but there are a few good ways to go about it.

Benchmarking and Flexibility Step 1:
Set Spending Caps

Before you start your shopping, set some hard caps for yourself. 

Again, this best done in conjunction with your historical spending, but the key is to come up with a realistic number and hold yourself to it.

For example: this year, you might commit to only spending 1.5% of your annual income on holiday-related items.

That’s a great first step, but now it’s time to divide it up. 
Let’s say that 1.5% of your annual income is $1,000 (if your post-tax income is $66,666.67).  How are you going to spend that? 

For example:

  • $50 for decorations
  • $75 for baking expenses
  • $75 for Christmas cards
  • $250 for a train ticket home
  • $550 for gifts

From there, divide each category down even further.  Of the $50 you’re spending on decorations, $35 might go toward a Christmas tree, $15 toward lights.  For your gift budget, break it down by person. 

This way, once you’re browsing your favorite online stores, you have your targets in mind before you buy.

Benchmarking and Flexibility Step 2:

Of course, limiting your expenses this way is great, but it doesn’t completely solve the problem of where the money is going to come from. 

Hopefully, by putting reasonable caps on your holiday expenses, you’ve made the burden light enough to solve the problem through some flexibility in your budget.

Obviously, your rent and electric bill still need to be paid.  But most people I’ve worked with have some discretionary money built into their budget somewhere. 

Maybe its money you set aside for eating out on the weekends, or for going to the bars.  Maybe you like to go to the movies or to sports games. All of those things are great, and they absolutely belong in your budget.  But, when these irregular expenses come up, they should be the first place you look to cover the costs if you haven’t been setting aside money for them.

Saving and cutting down on discretionary money isn’t fun, but your wallet will thank you come New Year’s if you plan accordingly!

The Elephant in the Room

If you’ve made it this far, you may have noticed I left out a step.  I’ve made an assumption and left it unaddressed until this point, but it’s an absolutely crucial one.

I assumed you have a monthly budget.

I don’t think anyone actually likes budgeting. But, I can’t overstate the importance of a monthly budget if you want to make financial improvements in your life.

I was in this position a few years ago.  I never sat down to budget how much I was spending on food, transportation, entertainment, etc. each month.

And guess what?  I wasn’t saving anything.

I also know that in order to achieve just about any financial goal you have, the first step is going to be to make a monthly budget.

It’s okay if you’re still getting your finances organized. I can help.
If you want to learn how to do this and (more importantly) how to make yourself stick to it, click here to schedule a free intro call

Why Budgeting Doesn’t Work For Most Couples (And How To Make It Work For You!)

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Visa card example of why budgeting doesn't work

When most people think about trying to improve the state of their finances, “budgeting” tends to be one of the first words that comes up.

And that’s a shame.  Really.

I’m not sure I’ve ever met anyone who actually likes budgeting.  And there are a few good reasons for not liking traditional budgeting:

  1. Most of us think that “budgeting” means at best, being cheap, and at worst, cutting our spending on things that we like to spend money on.
  2. Budgeting isn’t easy. In fact, the way most of us try to make budgets for ourselves, it takes effort to consistently make it work.

What happens when we make something that isn’t fun difficult as well?  We don’t actually do it.

Which is why I like to approach budgeting with a very different mindset.  In this video, I discuss how to approach budgeting in a way that will make you more aware of where your money is going each month. We also discuss ways to align your budget with what’s actually important to you, in a way that’s easy to maintain.

Most people make it easy to spend a lot of money, and hard to save.  In the video below, I’m going to show you how to make it hard not to save money.

To download a FREE copy of the Newlywed Money Checklist that we discuss in this piece, click here to grab it!

(Bill’s Note: This video, and the lightly edited transcription below, was originally recorded as a Facebook Live broadcast on January 29, 2018.)

Introduction:  How Can I Make My Budget Stick?

Welcome, everyone! Welcome to our weekly Facebook Live chat. We broadcast this at 8:00 PM Eastern time every Monday.  Today, we’re doing a little bit earlier because I’m going to be in a meeting with a client at 8:00 PM.

Today, I want to talk a little bit about budgeting.  And specifically, why I think budgeting tends to not work for people.  And we’ll share some strategies to get around this.

I got a question from someone today who follows the page- let’s call him Eric. (I typically don’t use people’s real names because I know money is a sensitive subject for people. And so, I try to respect everybody’s anonymity for these questions.)

Anyway, I got a question from “Eric”.  It says, “Hi Bill, I’m a big fan of the new video series and have a question that I’d like your opinion on. I recently downloaded your Newlywed Money Checklist and I’m currently working through it with my wife.  We got to the section that discusses creating a budget and we got stuck with it. We’ve tried a few things in the past related to budgeting and they never seem to really work for us. How do we make a budget for our family that actually sticks?”

Amen, Eric! That’s a great question.  One that I get quite a bit actually.  First off, congrats on not only your recent marriage, but taking a step forward and downloading the Newlywed Money Checklist.  And not only just downloading it, but actually working through it. That’s awesome. It’s a big step.  If anyone wants to grab this checklist and follow along as we go, click here to download it.

Most Budgeting Strategies Are Difficult to Maintain

So let’s get to the heart of the question. Budgeting really and truly doesn’t work for a lot of people. And the reason for this is that we make it so difficult for ourselves to actually do it and stick to it.

I’ve seen a lot of different strategies that people have used over the years to try to manage their budget.  Everything from creating spreadsheets- literally typing in all different ways that they spend their money.  Or, using a tracking site like, where you sync your credit cards and they pull in your transactions for you.  Sometimes, people try a strategy where they literally only spend cash as a way to really try to prevent yourself from overspending.  And even a derivative of this, which I actually like a lot, called the Dollar Bill Savings Method. I’ll probably talk a little bit about that strategy on another Facebook Live because I do think it’s kind of an interesting strategy for people who are struggling with trying to save.

But ultimately for most people, however you do it, budgeting means keeping track in detail of where your money is going each and every month.

There’s a reason why that doesn’t work and why I don’t like to think about budgeting in this way. It’s really two-fold.

Budgeting Highlights our Weaknesses

First and foremost, I think we tend to overlook it, but most people I talk to have some sort of anxiety, or shame, or even guilt about how they handle their money. It’s not something we’ve ever been taught, and it’s not something we’re inherently good at. We need to practice how to handle our money over time. Most of us are far from perfect in this regard, and we tend to not like to pay close attention to things we’re not perfect at.  As a species, this is something that all of us struggle with.

Here’s the thing- paying close attention to our budget tends to emphasize these weaknesses, or are these things that we’re unhappy with.  And as a result, people just don’t like to pay attention to their budget, which I think is perfectly understandable. But ultimately, it doesn’t help solve the problem

Traditional Budgeting Methods Are Hard

And secondly and probably most importantly, it’s a lot of work. We make it really, really hard for ourselves to actually track our budget.

If we’re using spreadsheets, we need to update them manually.  If you’re using Mint, you actually have to remember to log on to see how you’re doing.  And then once you get there, a bunch of your transactions are categorized incorrectly, so you need to go in and fix those. And finally, they don’t track your cash spending at all on these platforms. So, you have to actually manually input all the different ways you spend your cash.

Budgeting sucks. Plain and simple. It’s not easy. It’s not fun. And if you make it hard on yourself to do something that’s not fun, guess what?  It’s not going to happen. Like most New Year’s resolutions, you start budgeting, you’re excited about it at the beginning, it lasts a couple of weeks, but as soon as things get busy, it’s the first thing that we tend to drop because it’s something that we don’t enjoy and it’s hard.

Introducing… Two New Ways to Think About Budgeting

Which is why I like to think about budgeting in a completely different state of mind. To me, budgeting isn’t about only spending $20 at Starbucks this month. (And if you spend $21, that’s BAD, and Mint’s going to send you a nasty email calling you out on it!  Give me a break.) That’s not healthy. I don’t think that’s the way we should be doing budgeting.

Instead, budgeting is about two “A” words. Awareness of where your money is going (and awareness is never a bad thing, right?)  And aligning your money with what’s actually important to you.

So let’s walk through these one by one, starting with awareness.

Budgeting = Awareness

If you want to start budgeting, this is what I recommend, particularly for people who want to be saving more and find that they’re having a hard time doing it. I want you to do this:  before you start breaking out the spreadsheets or syncing all of your accounts to Mint, walk through this exercise.

This is something that, full disclosure, is not something that I’ve developed myself. For those of you who have followed the page for a while, you’ll know that I consider myself to be a “disciple” of Carl Richards. Carl is a two-time New York Times bestselling author of books about how to manage money.  (If you are serious about making improvements to the way you handle your finances, they are must-reads.  You can find them here and here.) He also writes a weekly column in the New York Times about money that I highly recommend. This is an exercise that he does and I think it’s really instructive here.

If you’re having a hard time budgeting and want to get started, do this for me over the next two weeks. Whenever you go to spend money, no matter what it is, no matter where it is, no matter what you’re spending it on, whether it’s necessary or whether it’s just for fun, do the following.  Whenever you spend money from today until two weeks from now, stop for a minute. And just think about it.

Actively try to think about how you’re spending money. Say to yourself, “Hmmm. I just went to the store and bought $125 worth of clothes. Isn’t that interesting?”

“I just spent $45 a bar… Isn’t that interesting?”  Just stop to think about it for a minute. Literally think about it. There’s no judgment, but whenever you spend money, just stop and be mindful about it for a second before you start rushing to the next thing.

You might be surprised, if you actually stop for a couple of seconds to pay attention, about the trends that you start to notice with where your money goes. You know, I frequently hear from people who do this who didn’t realize how much they were spending in particular categories of expenses that they didn’t actually really care about.

They spend money on whatever it is, they just do it, and it’s habitual. But when they actually stopped to think about it, they started to catch on to some of these trends.  So before you start putting yourself through a ton of work to track your transactions manually, stop and reflect on what you spend money on.  And see what you notice.

If it doesn’t work for you, then move on to the second piece that we’re to talk about, but give it a shot.

Budgeting is about bringing alignment between what your say is important to you financially and where your money actually goes.

Aligning Your Money With What’s Actually Important To You

The second strategy, the other way I want you to try to think about budgeting has to do with aligning where your money goes with what’s actually important to you.  Putting your money toward the things that are important to you, FIRST. This is my preferred method because I think it probably is the easiest one and it’s the fastest way to get results when it comes to your budget. There are a few steps involved.

First and foremost, I want you to figure out how much money is coming in every month, and I’m not talking about your annual salary divided by twelve. I’m talking about how much money actually gets deposited into your bank account every month.  After taxes are taken out, after your 401(k) contributions- how much money is coming in every month?

How Much Do You Actually Need To Save?

The second piece is a little bit harder. And it involves figuring out how much money you actually need to be saving to make sure you’re able to do the things that are important to you.

Never mind what you should be saving. What do you actually need to save?

Look, this is a complicated step.  It’s not easy to calculate how much you need to be saving to retire when you want to 30 or 40 years from now. It’s not easy to figure out how much you need to be saving to pay for a child’s college several years in the future. But you need to actually sit down and do this, first and foremost.

If you need help with that, reach out. I’ll help you figure out what those numbers are for you- but however you do it, you need to figure them out.

To recap this budgeting method so far: step one, how much money is coming in? Step two is how much do you actually need to save?

Automate, Automate, Automate

And then once you have that, I want you to login to your bank and schedule an automatic transfer coming out of your checking account every month to either a savings or an investment account for that dollar amount.

If you go through step two and find that you need to save $2,000 every month, I want you, tonight, to go ahead and set up a $2,000 transfer from your checking to your savings account every month.

And that really is the key here. We make it hard on ourselves to save.  For most people, when money comes into the checking account, we spend it and then whatever’s left over, we save it… if we actually remember to log in and transfer it to your savings account.

I want you to set this transfer up automatically. Make it hard for yourself not to save.

Remember, this isn’t permanent. If there are some months where you have higher expenses – if a car breaks down, if you just want to spend a little bit more money that month – that’s OK. You can always go to your savings account and transfer money back to your checking account.

But make that the hard step.  Pay yourself first, and then, if you actually need a little bit more money, you can pull a little bit out of savings. I’m giving you permission to do that.

But don’t make it easy for yourself to just spend that money. Actually put it away and make it so you actively have to think about taking it out. And if you do that, you’re going to be much, much more likely to actually make your budget work for you.

Spend the Rest, Guilt-Free!

And once you do that, once you set up the transfer for how much you need to save every month, spend the rest however you want. I don’t care.

If you’re able to save as much as you need to in order to accomplish the things that are important to you, I really don’t care where the rest of your money goes. And frankly, neither should you.

As long as you’re actively putting money toward the things that are most important to you, do whatever you want with the rest. Don’t worry about it, and don’t feel guilty about it. You’re saving as much as you need to. It’s really that easy.

It’s Not Always That Simple

Now, there’s one caveat. If you tend to actually spend more than you have left after putting money into savings, that’s when this strategy can get a little bit more difficult. And then, and only then, is when I want you to just start thinking through budgeting in the “traditional” sense. At this point, you’ll need to look to cut spending from particular places.

If we’re able to save as much as we need to save and you have a little bit of money left over, you don’t need to worry about it. But if you find that you’re having a hard time saving what you want to be saving, this is when we’re going to start trying to find ways to cut back.

And from there, here’s what I would do, in order, if you’re looking to solve this problem.

There Are Two Components to Budgeting.  Start with the One that Nobody Ever Talks About

First and foremost, when we talk about budgeting, there’s two components to it. There’s the income side and the spending side.

Most people tend to only focus on the expenses, but if you really are having a hard time saving as much as you need to every month, I want you to actually start by looking at the income side. Are there ways you could grow your income? From putting your money into investments that actually pay you income that could help potentially close that gap, to negotiating a higher salary at work if you think you’re underpaid and can back that up, to even starting some sort of side hustle. You might not actually need to cut your spending at all.

When we think about budgeting traditionally, we tend to only focus on the spending piece. But we really should be taking a look at the income side as well. So first and foremost, let’s start there.

Find the Easiest and Most Impactful Ways to Trim Spending

If that’s not enough, or if growing your income isn’t an option for you for whatever reason, the next step is not to start nickel and diming on your coffee every month.  That’s the hardest way to actually do this.  Instead, what are your top three or four categories of expenses every month? Where does most of your money actually go?

Now, for most people, this is some sort of combination of your rent or mortgage payments, student loan payments, transportation costs, food or even clothing. Pull all that stuff together in those big categories and ask yourself, what’s the easiest and least impactful cut that you can make to your biggest areas of expense?

In other words, if the goal is to cut your spending by a certain dollar amount every month, what’s the easiest way to actually do that? For most people, that’s not going to be coffee, right? Start with the biggest areas of expenses.

So maybe it means that it might make sense for you to move to a cheaper apartment the next time your lease is up. Or taking the bus or subway a little bit more rather than taking Ubers. Or if you have student loans, trying to switch your student loan repayment plan might be a good idea (if you have federal loans).  If you have private student loans, maybe trying to refinance them is a good idea. Or trying to cook a little bit more at home might be a good idea if you spend a lot on food.

The point is, there’s a lot of different ways to do this.  And each one is different, depending on what you actually need to be doing.

Make That Your Goal.  Not Just Budgeting

But only if you need to, write and make that your New Year’s Resolution. Don’t just make budgeting your resolution, but actually find the easiest and most impactful areas to cut if you need to. And when you do that, you’re going to find your budget tends to just come in order.

Make it as easy as you can on yourself. Make it hard not to save for yourself and from there, only if you need to cut spending, cut the pieces that are the easiest and most impactful for you to cut.

But ultimately, if you take anything away from this video here today, recognize that if you’re struggling with traditional budgeting and you feel like it doesn’t work for you, you are not alone.

Make Budgeting As Easy As It Can Be

The best thing you can do to make your budget work is to figure out how much you need to save every month and set it up to save that amount automatically. Move it from your checking to your savings account without thinking about it, without actually going in and doing it every month, and make the rest of your spending revolve around that. If you need to pull some of that money out of savings for whatever reason, you always can do that, but make that the hard part.

It doesn’t take a lot of time to do this. But you should be making it easy for yourself to save rather than the other way around.

Anyway, I hope this was helpful. Thanks so much to “Eric” for sending in this great question and working through our Newlywed Money Guide.  You can download that guide here if you’d like to learn more.

And again, if you have any questions about figuring out how much exactly you need to be saving every month, reach out and I’d be glad to help you out however I can. Thanks so much for joining us, and I hope you have a great day.