How to Sequence Your “Get Ahead” Dollars

bag of moneyLast week’s post on whether to pay off credit card debt or max out a 401k raised good discussion interesting questions.

It led to a YNAB office chat about how to sequence your “get ahead” dollars – a “get ahead” dollar being defined as one that either reduces the balance of a loan or recruits other dollars (ie investments).

Here’s what we came up with:

*The usual disclaimer: no part of this article is meant as investing advice. I present this information only for discussion purposes.

1. or 2. Pay off high interest debt.

If you’re carrying debt at 7% interest or above, make it your number one priority to pay it off. Trying to get ahead in your retirement accounts while you still have debt is like trying to pedal a bike with the brakes on.

The only possible exception is when your employer-matched 401k contributions give you an instant 100% ROI on those dollars. I say possible exception because it’s hard to be wrong when you make it your top priority to get rid of high interest debt.

2. or 1. Max out your tax-advantaged, employer-matched 401k contributions.

A key distinction here would be that you’re only contributing the amount necessary to receive your full employer match. Once you’re getting all the free dollars you can from the match, put your extra dollars into a Roth IRA (I’ll explain momentarily).

3. or 4. Pay off lower-interest debt.

This would include anything in the 0% to 6% range. My mortgage is at 3.99% interest. Does it make sense to prioritize it ahead of maxing out my tax-advantaged retirement accounts?

The strict math says I’ll likely earn more than 3.99% in the market than I would in an indexed mutual fund protected by a Roth IRA. On the other hand, paying off my home allows me to have a much smaller retirement nest egg.

I personally lean toward paying off my house. We’ll see if that’s still true when I’m finished with my higher-interest debts.

4. or 3. Max out Roth IRAs for yourself and your spouse.

The 401k was originally created to supply up to 20% of your pre-retirement income, but quite a few people seem to think it’s the only retirement vehicle they need.

Not only is a 401k not likely to get you through retirement on its own, a Roth IRA has features that make it more appealing than most 401k plans:

a. After you reach the qualifying age, withdrawals from a Roth IRA are tax-free.

b. You’re likely to have more control over the funds inside your Roth IRA than you would with your company-sponsored 401k. For example, Jesse had to pay an extra fee to allow YNAB team members access to Vanguard mutual funds. I don’t think many employers would do the same, which means you may not be able to access top-performing funds unless you seek them out in your own Roth IRA.

By the way, have you checked on the funds in your 401k lately?

c. There’s less hassle and overhead associated with a Roth IRA in the event you change jobs or companies.

5. or 6. Max out traditional IRAs for yourself and your spouse.

Traditional IRAs give you an up-front bonus on your saved dollars because you make contributions with pre-tax income. In other words, you don’t pay taxes on the money you put into a traditional IRA.

You will, however, pay taxes on the withdrawals you make after reaching a qualifying age. That’s why – other things being equal – we prefer Roth IRAs. They offer the same investment opportunity (currently capped at $6,000 per year, per person) while also offering tax-free retirement income.

6. or 5. Max out Health Savings Accounts for you and your spouse.

Health Savings Accounts are the only financial/investing instrument that allows you to make pre-tax contributions and withdraw the money tax free.

You can also use the money as-needed to cover qualifying medical expenses. In other words, HSAs are great tools.

7. Having maxed out all your tax-advantaged savings vehicles, save any extra money in taxable investments.

How’d we do? Do you sequence your “get ahead” dollars differently?

For a more detailed discussion of saving and investing, check out Jesse’s (YNAB founder) 9 Day Investing Course.

Should I pay off my credit cards or max out my 401k?

questionIn the unending “pay off debt first or start investing” debate, I’ve learned about a small wrinkle:

If your employer matches your 401k contributions, you earn an instant 100% bonus on every one of those dollars. In the worst of scenarios, your credit card company is charging you interest in the high 20s.

The Big Disclaimer: None of this is intended as advice, nor should anyone reading make large life decisions based on this content or subsequent discussion. I’m just starting a conversation here; each person should evaluate his/her own unique needs and circumstances before making any important financial decision.

In other words, in cases where you haven’t reached your maximum employer match, the math tells you to prioritize 401k contributions ahead of paying off high interest credit card debt. Once you’re getting every matched dollar you can from your employer, the math says to throw the next dollar at your credit card debt.

That’s the strict math, but what might change the equation and tip the scales back toward a full focus on the credit card debt?

If a person can’t make the required 401k contribution and keep all bills paid and debts current – the math doesn’t matter. He can’t afford to “buy” the matched dollar from his employer.

If that same person is pushing every extra penny to credit card debt, and views the freed up credit card availability as his “emergency fund,” redirecting the money to his 401k for the sake of the match could create excess risk in his finances.

Sure, he could borrow the money back out of his 401k, but that carries its own risk:

  • He loses investment growth on the dollars borrowed from the 401k.
  • The loan has to be paid back with post-tax dollars (which means the payments will reduce his take-home pay).
  • If he leaves his current job, the full 401k loan could be due within 60 days, creating a situation where he still has the credit card debt, still has no emergency fund, and now has to come up with the money to pay off the 401k loan.

Although I don’t have any credit card debt, here’s how I would approach this problem:

If I were snowballing credit cards with extra money, I’d prioritize matched 401k contributions ahead of paying off debt. You just can’t beat an instant 100% ROI.

But, I’m working on the major assumption that the hypothetical borrower has broken the borrowing habit – maybe even closed/cut up the credit cards – before heading down this path.

This is all on my mind because I recently had a friend go through this process. He was snowballing his credit card debt and realized he was leaving money on the table by NOT getting his full match. He reallocated snowball money to get the full match, then did a consolidation loan through Lending Club to pay off his credit cards (and get a much lower interest rate). For him, it’s a big win in terms of interest NOT paid and interest earned.

Have you checked on the mutual funds in your 401k lately? Jesse interviews Jeff Rose, CFP

piggy bank copyHello YNABers. My name is Jesse Mecham and this is podcast number 95 for You Need A Budget, where we teach you four rules to help you stop living pay check to pay check, get out of debt and save more money.

Click here to download a PDF of the full transcript.

Today I’m pleased to have with me Jeff Rose. He’s a CFP and the author of a new book called ‘Soldier of Finance’. Jeff Rose and I are pretty good friends. We participated in a pull-up challenge at last year’s Financial Blogger Conference. I won’t say who won the challenge, but I was extremely happy with the result and Jeff was not as happy with the result.

So, without further ado, here is my previously recorded interview with Jeff Rose.

JM: I am here with Jeff Rose from He is a CFP and the author of a new book called ‘Soldier of Finance’. Welcome, Jeff.

JR: Welcome, welcome. Thank you for having me.

JM: You bet. I’m excited to have you on and excited to have our pull-up challenge in about a month.

JR: Going down, buddy!

JM: That’s right. I’m pretty dialed in on it, so we’ll see what happens, if I hang on to my belt.

Okay, so the YNAB Podcast users are pretty savvy folks. They’re pretty aware of their finances, they like this stuff, so they’re probably, by default, they’re already interested in a personal finance book. But I wanted to have you first tell me a little bit about your background and how you got into the personal finance space, and then I guess I’ll ask some more about ‘Soldier of Finance’ specifically.

JR: So as far as a little bit about my background, I was a Finance major in college and was getting to that point where I was going to graduate and really had no idea what I was going to do. And I ended up doing an internship at a local investment firm, which consisted of shredding papers and filing – really utilizing my skills. And I guess I impressed them so much with my filing capabilities and shredding expertise that they offered me a part-time job while I was still a senior in college, and then that turned into an offer to be a junior stock broker. I initially turned it down because I thought I was way too young – I think I was 23 at the time – and just didn’t know… I literally knew nothing about investing, which is embarrassing nowadays, but to me that’s just… Well, we could talk about this forever, but I was a Finance major and I didn’t know anything about investing. I’m just trying to figure that out now.

Anyway, the job market was non-existent at the time, so I ended up taking the offer and bam, the rest is history. That was ten years ago, and I just really have had a passion… I wasn’t passionate really. Obviously I was a Finance major so I felt that’s where you needed to be to make money, but I really wasn’t passionate about personal finance per se. But it wasn’t until… It was at one of the first client meetings I had when I was meeting with a couple that were, at the time, almost two and a half times my age. I think they were in their early 60s. And these people really had nothing saved for retirement. I think maybe they had, total, $30,000 savings and no pension. Social Security was basically the only thing. I don’t know why they were meeting with me. I can’t remember how it all went down. But one thing that I do remember was all the times that my parents had told me to save had never really impacted me until that moment. It was that moment when I saw this couple that were just desperate and were depressed, I’m like, “You know what? I’m not going to become them, and I’m going to do everything in my power that I can to make sure other people don’t end up like them as well.”

JM: Yes, that would be… I mean, when you’re that young and you see someone that’s several chapters further along in life, realizing that that could be you if you don’t be proactive about it, that’s a good wake-up call.

JR: It was a huge wake-up call.

JM: So you’re married, you have kids, right?

JR: We do. We’ve got three boys and we’re in the process of adopting our fourth child.

JM: That’s very cool. Congrats. I know it’s a tough process.

JR: It’s 18 months in the making, and we don’t know what that means really. It could be the next year, it could be 2015.

JM: So how is the personal finance side as far as your relationship goes, and your skill in the personal finance area? How has that helped your marriage?

JR: I think it’s been huge in the sense that… You know, the funny thing is yes, I guess I’m skilled in personal finance, but my wife also, she wants to have a say in what goes on. I think that’s great, right?

JM: Right.

JR: So she actually handles more of the day-to-day finance. I’ve been the breadwinner of the household, but that was kind of her way of contributing. She lets me do the investing side of things, although she does not let me pick individual stocks at her account – I’m forbidden from doing so. But it still has been good, just from a… We got married shortly before I was deployed to Iraq in 2005, so we had a lot of money conversations while we were deployed just because we’d just started our future. So one of the things I talk about in the book is having a battle buddy, just having somebody as your support system. And she was that. We were that to each other. But it forced us to have these money talks. You know, what was important to us as far as what debts do we need to pay off, how much do we need to have in our savings account that made us both feel comfortable, and what would it be like if I wanted to BUY something that was of a large value. So we were forced to learn that. I think a lot of new couples, they don’t do that or they don’t do it enough, and it just causes a lot of strain and hardship. But we had nothing really else to talk about other than, “Hey, how was your day?” or, “How are things going?” and so we talked about money a lot just because we almost had to.

JM: Yes, when things are tight like that you’re kind of forced to a lot of times, which is a good thing in the end. But a lot of times I think couples just kind of bury it and just kind of go on their way. They get frustrated with the other person’s behaviors but they don’t necessarily express that openly, and so you end up with people carrying a lot of baggage around and then usually it explodes at some point. It can be a strain.
So, your book, ‘Soldier of Finance’. Now, you were a soldier. You aren’t anymore, but I guess you’re always a soldier, kind of, in a way.

JR: That’s what they say, right?

JM: So tell me about kind of just the gist of the book. What angle were you coming at it when you wrote it? I know it’s been a long time coming and you’ve been working on it for a while.

JR: Not really. It was only about four and a half years! I took the fast track getting my book done!

You know, I just had this idea of wanting to write a personal finance book, because everybody wants to slave through that whole debacle. I just didn’t really have… I guess I had good ideas, like how can I be different. And it really was just a chance encounter that I had with somebody that they gave me the idea. It was like, “Hey, you need to use your soldier’s discipline to investing. That’s your book – that’s what you need to do.” And I was just like, “Why didn’t I think of that?”

So I remember I immediately went to Barnes and Noble, looked at the bookshelves. I went to Amazon, looked online. And you know, I didn’t really see anything from this tack. So the kind of premise of the book was in basic training we were each issued, every Private is issued – I think they’ve changed the term now – but it was like our soldier’s handbook or our training guide. And this was the manual that we had to carry on us 24/7, and if you were caught without it… well, you just didn’t want to be because you’d be doing a lot of push-ups, sweating, the drill sergeant would have a lot of fun with you. But in that manual, it basically gave us all the basic principles and skills that we needed to be a soldier. And if we ever came across a situation, we were supposed to refer to our handbook – that’s what it was there for. Didn’t need it every single day, but there were some days that it would come in handy. And when I started the book, ‘Soldier of Finance’, that’s what I thought of this book as. Everybody’s at a different point in their financial life, whether they’re getting out of debt, trying to get their budget in order, investing, etc. You know, you don’t really need it all at one time, but I wanted it to be a handbook that people could refer to whenever they hit that point in their life that they needed that information, if that makes sense.

JM: Yes, definitely. Well, tell me more. You mentioned your wife being a battle buddy. Tell me more about that battle buddy concept.

JR: In basic training we were each assigned a battle buddy, and this person – in this case my guy was Private Romero from Florida – and we were required to know everything about each other. We had to know our deepest, darkest secrets, our family, our interests, our hobbies. Furthermore, we were accountable for our battle buddy – you know, making sure if my battle buddy didn’t have his uniform, if he wasn’t wearing his uniform right or if his boots weren’t shined or he didn’t have the right gear for that day, it was on me. We’d both get smoked – which means doing push-ups or whatever, some other type of activity that consists of a lot of sweating and breathing really hard!

So, the whole point of that concept was learning to not just look after yourself but look out for the soldier next to you. And you can apply that same concept – whether it be your spouse, a close friend, a relative… In the battle buddy, the whole concept is… Especially I think when people are trying to get out debt, it’s kind of like when you’re on a diet or lose weight – you have an accountability partner. It’s the same concept. The battle buddy is just having somebody that’s watching your back but also not afraid to call you out if you need it.

One of the examples I have with my wife. Even when I started being a financial advisor I still had some bad financial habits that I’d got from my parents. I didn’t budget, I was buying things I didn’t need to, I had credit card debt, I had student loan debt. I was working on it, but still… I think it was my first year of being a financial advisor and I had the entitlement syndrome where I felt like, “Okay, I’ve been working hard, I deserve this.” And I think we’ve all had that. In this case the thing I felt I was entitled to was a 42-inch TV, a flat-screen TV. Flat-screen TVs were just relatively new and I had convinced myself that I was going to go to Best Buy and buy a brand new TV because I deserved it. And I just remember telling my wife my masterful plan of doing such, and I just remember her telling me – and she did it very humbly – she said, “Do you really think you need that TV right now?” And I’m like, “How dare you! How dare you question me! I’ve already thought this out! I can afford the payment, I’ve got this old 32-inch, big, lugging thing. I need this!”

I remember initially I was upset. We didn’t really fight but I kind of held it in for a little bit. But I remember I thought about it for a few days and came to the realization, “You know what? She’s right. I don’t need this right now. I have debt, I can’t afford this. What am I thinking?” You know, in your first year as a financial advisor you don’t make much at all. I’d probably have made more if I was working in a mall. But that was something, you know, she didn’t have to say that. She could have let me buy it and I would have paid the consequences. But she did and it caused kind of a rift between us, but in the long run it was for the best. And that’s what a battle buddy has to do. You can’t be afraid to speak up when that person needs to hear.

JM: Yes, absolutely. It’s an accountability situation, and a spouse would be the best one probably, because they’re so integral to every other part of our lives. Or if you have a good friend, I guess that would work with anyone. That’s a good idea.

Sometimes in a situation when you’re not necessarily sharing your finances with someone else, I wish more people would be more open with at least one other person about REALLY what’s going on. Not pretending, not, “Oh yeah, things are going well,” or, “I got a raise,” but nitty-gritty numbers, being transparent. I think people would find a lot of validation if they’re doing well, but also they’d be able to see maybe another person’s finances and be spurred on, like, “Oh wait – why aren’t I doing that? Oh my gosh, I’m spending this much on going out with my friends, and my friend here spends half that. How are they doing that?” You know, that type of thing could really get people’s gears turning.

JR: Yes, and it’s funny because as a financial advisor I get more people nearing retirement that are obviously much more willing to share their financials. They’re like, “Hey, here’s my numbers, here’s what I’ve got. How much can I spend? Can you help me?” But I wish the younger generation would, “Hey, I’m thinking about buying this car,” or, “Hey, I’m thinking about buying this house or doing a rental property. Is this something that I should be doing right now?” And they don’t seek the counsel like I think they should, unfortunately. So if you’re listening to this, please find someone. If it’s a financial advisor or a [?? 0:14:12] advisor, you’re only paying for their time – it’s worth it. I had a guy that… I think he was mid-forties. He wanted to cash out his retirement to buy a house, and he emailed me – it was eight paragraphs of information. I’m like, “Dude, go pay someone $100 to sit down with your situation. I’m not comfortable answering this over an email.” Because he even mentioned that his wife wasn’t on board with some of the decisions, and I’m like, “Seriously – hire a professional, a CPA, a CFP, whatever and figure it out.” But I wish more people would.

JM: Yes, I think they’d find… I don’t know, there’s some satisfaction when you know you’ve vetted a decision thoroughly, and that’s what more people need to do with their finances – and they’re not.
You’ve mentioned investing, and I’ve talked a lot on the Podcast – well, not a lot, but some – about investing. I’m just curious to get your 30 second approach to investing for YNABers. What should they be thinking about?

JR: Yes. Well, most people in your community, are they just starting off or have they been investing for a little while? What would you say?

JM: I think most have been investing probably a bit on auto-pilot, like, “Oh, my work has a 401K so I’m doing that.” There’s definitely…

JR: Can I talk to that for a second?

JM: Yes, absolutely.

JR: Because that’s actually one of the things I really… One of the main points I bring up in the book is I think the 401K at some point in life will probably be the largest asset that you own, probably larger than your home – depending, obviously, on where you live and how big a house you live in. But it’s either going to be the largest or second largest asset that you have. I constantly see people that are having the argument… like deferment coming out of the pay check, it goes in their 401K, maybe they chose a fund, maybe they let their employer choose some Target A fund. I just want to warn people that I think that’s one of the most reckless strategies that you can do. For one, I’m not a big fan of Target A funds. I’m not saying they’re all bad, but I’ll say I’ve seen enough of them to say the majority of them are.

JM: What’s bad about them? Because I’ve talked to some people recently that kind of frowned when I was mentioning them.

JR: You know what? I think probably one of the best ones is Vanguard. It is low cost… If you actually break it down, though, I think there’s only like three different funds in there. Whereas some of the other bigger mutual fund companies that offer them, specifically here’s what I see. You’re going to have anywhere from, let’s say, eight to twelve, maybe fifteen different mutual funds inside a Target A fund. So if you get a chance to actually slice and dice, and look at them on an individual basis, for one you’re having to pay an overlapping fee for all those funds – that’s the one way [?? 0:17:05]. If they’re all really good funds, hey, that’s fine. I’ll pay that little extra to get better managers, better returns. But really, when you slice and dice and look at them, a lot of the individual funds that you’ll see are just crap. And that’s the part I don’t like about it the most. A lot of the returns that you’ll see from some of these Target A funds, like I’ve described, they’re not doing any better than just an index fund. Return-wise, but fee-wise/cost-wise, you’re going to pay 1.5%-3.5% when you could have just bought a Vanguard S&P 500. Just a quick disclaimer – I’m not a huge Vanguard fan. I love the low fee concept, but from a guy that does research and looks at other investment options, I think that there are actually managed funds that can do better, that do do better. The unfortunate thing for most investors is that they’re hard to find. It takes a lot of time and effort. So, for what they offer I think it’s great.

JM: I heard a stat recently that there were more mutual funds than there were stocks.

JR: I believe it.

JM: So when we say, “Man, it’s really tough to pick a stock,” it’s even tougher to pick a mutual fund these days.

JR: Yes. And not to pick on anyone, but it’s kind of like Fidelity – they’re a good fund company and they have a lot of good funds, but they have, I think – I don’t know the exact number – but let’s say it’s over 100 different mutual funds.

JM: Yes. And probably more than that.

JR: Exactly. And what happens is is that all these fund companies are like, “Oh, we have this one fund that’s really, really good, but we don’t have a small cap fund, we don’t have an international fund, we don’t have a precious metals fund. So let’s go ahead and create one to serve that need.” But the reality is that maybe the person they have managing that particular sector doesn’t really know what they’re doing, but they have a product to offer to fit that sleeve and that’s what you see in those Target As. So – sorry for that, 30 second…

JM: No, that’s fine. I think we’re still under 30 seconds! And you know, I looked… I set up our 401K for our company and had to pay a little extra to get out of what was the default through the agency that we worked with. I was looking at another fund family’s target date equivalents, and they were all actively managed funds. I had just assumed that they would be index funds because that was how… And Vanguard, I think, pioneered the idea of that reallocation as you approach that date, but they pioneered it on top of index funds. Where you see other ones are coming in and saying, “Hey, we have that too,” but they’re all actively managed with a little steeper fees. So again, it’s tough. It’s as tough to pick a mutual fund as it is a stock.

JR: My 30 second clip would be if you are putting money into a 401K and you haven’t reviewed it at least on an annual basis, do so. Do so, please. And find someone who’s willing to do some Morning Star reviews or look at it. [?? 0:20:03] you can use, but if you don’t trust yourself or you don’t want to spend time it’s worth spending 30 minutes a year reviewing what would potentially be one of the largest pieces of assets that you have.

JM: Yes. And people, I think, treat it a little bit too lightly. It’s good and bad. You know, one is that it’s good in that it’s kind of out of sight out of mind, they’re automatically saving. And then it’s bad because they’re not treating that with care a lot of times.

JR. Yes. Can I tell you another story I think that might be of interest to your community? I had this lady – she had kind of the 401K but I think she had an IRA, some advisor had sold her some mutual funds. And 15 years had passed – she just left it alone and I think when she came to me it was roughly $40-50,000. She was happy because she’d made money over the years, and when I actually did some research on that fund… I mean, this thing, we can look at it from the consumer reports angle, like how does it rank compared to every other mutual fund in this area. So it’s kind of like if you’re looking at mini-vans, what’s going to be the best performing mini-van type thing.

Her mutual fund was literally in the bottom 25% for the last 15 years, and I’m like… I couldn’t even… I couldn’t have picked a worse fund. But even still, I think she still averaged 4% or 5%, which over a 15 year period is not great – it was like a bond fund but it was all stocks. So I think she said she had put in – I can’t remember the exact numbers now – but $15,000, so it had more than doubled in the 15 year period. Something like that. But when I looked at what another average fund would have done in that same time period, she really should have had between $80-150,000, depending on what she would have picked. So that to me is just another testament of why you look at your 401K, because if you have your money sitting in a dead fund for too long, one day you might wake up and realize, “Oh my gosh. Had I actually spent a little time researching or having someone else research for me, that could have put tens of thousands of dollars in my pocket, potentially more.” And that’s one of the things I really advocate in the book – it’s not being complacent with what’s going on with your finances. Something with the YNABers, obviously they’ve got their budget down on one of the coolest budgeting software programs in the world. But you know, you can’t be complacent with what’s going on with your investments.

JM: Very cool. That’s good advice. I mean, I preach basically invest in the entire stock market and do so regularly and aggressively, and then allocate so you get more conservative as you get older and might need the money a little more. So, we’re pretty aligned. You mentioned index funds and that’s kind of where I hang my hat most of the time. I’ve been guilty of the sin of picking an occasional stock, but luckily it wasn’t with anything I didn’t care about keeping.

Is there anything else specifically about the book that you wanted to tell YNABers? Anything about budgeting where you make fun of it and say it’s useless, or anything like that?

JR: You know, I think we did an interview, I did an interview previously where I told you I hate budgeting. One of the things… For the people who just can’t get on the budgeting board – which everybody here has – I’m a firm believer at least in tactical budgeting where you come across a life situation – having a kid, buying a new house, major purchase, change of jobs, etc – if you had to budget minimally, you definitely have to do it in those situations. And that’s something with me and my wife. I see the importance of budgeting – it’s hard for me to do it. But obviously I know tools like YNAB make it super-easy and super-fun. You guys have pulled off an amazing feat.

JM: Yes, making budgeting at least not wanting to have… put needles in your eyes. That’s a feat in itself.

My admission is I just finished our September budget this morning and we’re – what is this, the 19th that we’re doing this recording – so 19 days late on the budget, setting it up for September. But luckily we’ve been living this way long enough that things aren’t too crazy, so I kind of get on auto-pilot.

Cool. Jeff, thanks a ton for coming on. I wanted to have you mention really quick about the giveaway for YNABers for the book so they maybe won’t run out right away and purchase it – they might wait and see what happens with the giveaway first. I don’t know. But give me the details on that, how YNABers can pick up a copy.

JR: Yes. I think I’m going to create a landing page on the blog – on – where people can go. I actually hadn’t thought about the URL, but let’s go to it right now. Let’s say I guess you’ll have a link in the show notes – and I’m going to write it down before I forget!

JM: Yes, I’d better write it down too!

JR: And yes, I’ll definitely give away some copies. I believe it’s going to help people, so the more hands I can get it into… For those that don’t win, if you want to buy it we’ve got awesome reviews on Amazon. I’ve got to tell this story because… Hopefully the YNABers know you’re big into CrossFit and so am I. There was a guy at my gym that bought it just to be nice, and I ran into his wife. He was a blue collar kind of guy and he’s probably in his late fifties, so I didn’t really think he’d be the demographic for the book – but he bought it anyway. And he just got it I think last weekend. His wife came up to me and she was like, “I’ve got to tell you, my husband has only read two books in his life and I can’t remember the last time he read a book, but he is almost three quarters of the way done with your book. He cannot stop reading about it.” And I’m like, “Are you kidding me?! Are you sure it’s the right book?!” I haven’t talked to him yet, but his wife said… I think it’s just awesome because he was just so excited to read it. He just thought, “Man, this is really good!” and I’m like, “I LOVE it.”

JM: Cool.

JR: So anyway, hopefully whenever some of the YNABers get their chance to get their eyeballs on it, they’ll have the same reaction.

JM: I’m sure they will. Well, very cool. Thanks, Jeff. So, – that’s where YNABers can potentially get hooked up with a free copy. Otherwise, Amazon, Barnes and Noble, all that jazz.

JR: You got it.

JM: Cool, Jeff. Thanks. Good luck with the rest of the book promotions and all that, and keep fighting the good fight.

JR: Will do.

JM: We’ll talk to you later.

Until next time, follow YNAB’s four rules and you will win financially. You have not budgeted like this.

How to Calculate Your Personal Savings Rate and Start Thy Purse to Fattening

piggy bank

On Monday we talked about learning how to acquire gold. Today I dip back into The Richest Man in Babylon for more wisdom on wealth creation.

This paragraph comes chapter 3: Seven Cures for a Lean Purse. The first cure is “Start thy purse to fattening.”

“For every ten coins thou placest within thy purse, take out for use but nine. Thy purse will start to fatten at once and its increasing weight will feel good in thy hand and bring satisfaction to they soul.”

I want a fat purse, and I like the simplicity of taking 10 cents of every dollar earned and saving it for the future. Various blogs around the web will tell you to chase a savings rate of 50% or more, and they show you reasonable ways for achieving such a rate, so a 10% savings rate ought to be very manageable.

And since we already discussed it, I don’t mind saying I’ve been used to living off 90% of my income for years, as my definition of tithing is to take the first 10% off the top and give it to the church. It shouldn’t be a problem for me to simply take the next 10% and put it away for the future.

So let’s define savings rate and see where mine is.

A YNAB-friendly definition of saving would be “assigning a dollar the job of obtaining more dollars”, giving us a savings rate equation along the lines of:

Savings Rate = Sum of Dollars Assigned to Obtain More Dollars / Total Income

or, more specifically…

Savings Rate =
Personal Retirement Contributions +
Employer Contributions +
Debt Principal Payments /
Total Income Including Employer Contributions

Getting tabular with my actual numbers yields:

Savings Type Current Amount
1% Personal Contribution $58.33
3% Employer Contribution $177.99
Principal on Mortgage 1 $349.17
Principal on Mortgage 2 $62.11
Betterment Deposit $0
Principal on Student Loan $95.50
Principal on Residential Lot Loan $25
Total Saved Dollars $768.10
Gross Income $6,011.32
Savings Rate 12.78%

Note: I added the employer contribution to my gross income and calculated savings rate accordingly.

I’m shocked to see it “so high.” The analysis gives me two big takeaways:

1. I can move my savings rate a lot with relatively small contribution increases.

For example, using freelance income to add an extra $200 per month to my 2nd mortgage payment would take my savings rate above 16%.

If you’re unwilling unable to increase your income, fighting to free up an extra $100 or $200 per month will make an enormous impact on your long term prospects.

2. Debt is killing my savings rate and my future.

If I didn’t have my Deep Shame 2nd Mortgage, my student loan, or the loan on the residential lot, I’d free up the current principal payments to the tune of ~$183 per month. I’d love to have that money going to Betterment or allow me to increase my contribution to the 401k.

But the freed-up principal would be the smaller win. Getting rid of those loans would also let me save the ~$513 per month in interest those loans currently cost. (Pardon me while I barf.)

Adding the extra $513 with the $200 from freelancing to my contributions shoots my savings rate to 25%!

In other words: getting out of ugly debt and increasing my income by all of 5%* allows me to double my savings rate.

*$200 would be a 3.3% increase, but I’m allowing for T&T (tithing and taxes).

This is a productive analysis for me – it shakes me out of complacency and reminds me that a) my debt is an emergency and b) small increases in earnings massively impact my finances.

Anybody care to share their savings rate?

“Your kids can borrow for college. You can’t borrow for retirement.”

piggy bank

It’s been a fun week on the blog, with Bill’s Big Budget and Bill and Wife’s spectacular reply. In the middle of all that, I snuck in some questions about my financial goals, and the community gave me a couple thousand words of great advice. I wanted to acknowledge the quality of the advice by following up with my revised thought process about the goals.

1. $5,100 Buffer, followed by a $15,000 Emergency Fund

The comments on the post the other day helped me finally sort out in my head how I can distinguish between my buffer and my emergency fund. The difference is the intended use of the money. Buffered money, as soon as there’s enough of it, will be used in your budget. Emergency fund money ideally will not be used in your budget. That’s why I’ve now broken them out as different categories.

I think some people have questions about the sequence: buffer or emergency fund first? Until I’m fully buffered there’s really no difference, right? If I’m in the process of building a buffer, and then I have to spend $1,400 fixing my car, the buffer is the emergency fund.

So the goal is to fight like crazy to build the buffer (using tax refunds, work bonuses, extra paychecks, proceeds from selling stuff – and maybe even a freelancing gig), then use that buffer to live on last month’s income…then apply all that cash hoarding energy to building the emergency fund.

So my plan is to get fully buffered, then save up the full emergency fund, then…

2. Attack Debt

As one or two commenters pointed out the other day, my debt is an emergency. So why wait to attack it until I’d saved up the buffer and the emergency fund? Won’t that cost me (at least) hundreds in interest I’d have saved by going after the debt first?

I could go either way on this one, but I’m leaning toward saving the emergency fund first for two reasons:

1. I’m a pro at paying off debt. In 2010 I paid off about $75,000 in balances. In spite of that crazy year, I still managed to stay stressed, close to red line with cash, and a poor money manager. I want to learn to be a saver, and I’m willing to pay a few hundred dollars more in interest as my “tuition.”

2. Emergencies happen. I’ve spent over $4,000 at the dentist this year. A $1,000 emergency fund would have been no help to me, and I’d have been swiping the Visa if not for the business sale proceeds sitting in the bank.

With no ugly debts, I’d be moving on to…

3. Save at least 15% of my income for retirement.

The snowball required to achieve pay off the debt will make it easy to transition into putting away a big chunk for retirement.

The interesting mental switch for me with this goal was to not think about it in strict sequence with other goals. For some reason, I always want to put things in order, ie “once that’s done, I’ll move on to the next thing, then the next…” Maybe it’s part of being an awful multi-tasker.

The point is, you’ve set me straight and once the debt is paid off I’ll think about retirement savings the same way I think about tithing. Tithing is the first 10% off the top, retirement is the next 15%. Automatic.

I realize that’s common sense to most of you, but it wasn’t until I read through the comments the other day that it finally clicked for me.

So why not start saving for retirement before the debt is paid off? Math. The interest rate on the residential lot is ~10% and the Deep Shame 2nd Mortgage is at 8.625%. Doesn’t make sense to be paying a blended 9% interest while earning 7-9% in the market, does it?

Where does that leave my last two goals?

4. College savings goes on the back burner.

The best line in the comments the other day was “Your kids can borrow for college. You can’t borrow for retirement.”

That’s good stuff. I don’t know if that’s a Dave Ramsey quote, but it’s quality.

Another smart commenter pointed out that I don’t really need to save up for the kids’ education if I’m serious about my goal of earning $200,000 per year. If I manage to reach that income, sending $50,000 per year off to school for the 6-10 years I have kids at college won’t be a big issue, especially if all my debts are paid off. Great point.

Bottom line is I shouldn’t prioritize college savings ahead of retirement savings. Thanks for walking me through it.

And finally…

5. Finishing the basement and other home improvements.

It will happen when it happens, and it doesn’t have to happen all at once. With the debts paid off, the emergency fund built, and the retirement saving habit established, the improvements to the house can happen as cash (and bartering opportunities) become available. A third (and especially a fourth) kid will make this house feel a little cozy, but I have a friend who has eight kids in a 3-bedroom, so I think my little family could manage without a finished basement for a while.

That’s my thought process. Thanks again for helping me get some clarity. Hopefully the conversation benefited someone other than me. :)

Seeking Feedback on My Top 6 Savings Goals

piggy bank

I’ve spent the morning reading budgets sent to me after the open invitation in yesterday’s post.

I think we’re all going to love reviewing and discussing a different budget every week (or so).

I’ve had budgets from a single person with two dogs, some Aussie DINKs (dual income, no kids), an Aussie couple with kids, a German family, a military family, a young couple wrestling with debt after a business failure, a high-earning couple of Baby Boomers with two kids at private universities, and a couple of families with kids here in the US. All generously shared the details of their budgets, and some even laid out the details of their incomes.


Many conspicuously failed to mention any goals.

I’m still pretty new to the budgeting game, but it seems like one of the biggest benefits of using a budget is how it helps you set and accelerate the achievement of goals.

Now that I’m living within my means I’ve stopped worrying about keeping the lights on and shifted focus to my (and my wife’s) short, mid, and long-term financial targets.

Let me share my top six financial goals with you, then ask for your feedback.

1. 1-month buffer: $5,100 lets me live on last month’s income.

2. 3-month emergency fund: ~$15,000 to give us peace of mind in the event of home, car, and non-catastrophic medical emergencies.

3. Pay off all debt, other than primary mortgage on the house: roughly $72,000.

4. Finish my basement and make other home improvements: ~$40,000 to $50,000, depending on how much work I do myself and how much labor I can get by bartering copywriting and web work.

5. Save for kids’ college: I don’t know whether we’ll want to help the kids with school, but we want to be able to. $100,000 to get three or four kids through college?

6. Save for retirement: I’m also fuzzy on this number. $1,500,000 seems like a reasonable target, based on previous discussions.

I feel firm on the amounts and order of goals 1-3, less so on goals 4-6.

I welcome your comments and feedback, and I’m looking for discussion on one key point:

Is it smart to work on these goals in strict sequence? In other words, am I savvy or silly to hold off on retirement savings until goals 1-5 are handled? What about the sequence of the rest of the goals?

You’ll notice I left time frames out of the discussion. The rate at which I accomplish these goals will depend completely on my income growth. My brain is hard-wired to seek an income in the $200,000 per year range. If all went according to plan, I’d be earning at that level again with about three years. If all didn’t go according to plan, I’d still be living within my means and chipping away at these goals, however slowly.

Should I Keep My Christmas Fund in Betterment?

Enormous Disclaimer: No part of this post constitutes investment advice, nor am I saying this is the right or intended use of Betterment’s savings tools. It’s a pure thought experiment; all comments and discussion are welcome.

I’ve been thinking about using Betterment for some of my Rule 2 funds – like Christmas, or my annual life insurance premium payment.

Risk and return frame the whole conversation: how much interest could I earn, and what risk would there be of coming up short when I need the money?

Let’s say I want to have $1,800 ready for holiday gift giving, and we’ll pretend it’s January 1, giving me nearly twelve months to save (because I procrastinate my holiday shopping to the extreme).

I head over to Betterment to add a new goal called “Christmas.”


Betterment wants to know my target amount and when I’ll need the money. I plug in $1,800 and 1 year.


What I find interesting is the next screen that shows Betterment’s recommended allocation: 15% stocks and 85% bonds. You’d think such a short timeline would involve 95% or 100% bonds, but they must have math to support this recommendation.


Clicking on ‘See Advice’ I can see how Betterment recommends I set aside $147.96 per month to reach my goal:


So, there’s a small win – rather than setting aside $150 per month for my annual premium, using Betterment might allow me to set aside just $147.96. That frees up $2.04 to be spent on two donuts per month at the local bakery. I like where this is headed.

Where things get mildly entertaining is when you look at Betterment’s probabilities at the end of the period:

(Hover your cursor over the projected balance lines on the graph to see where you might end up.)

Looks like I’d have a:

  • 2.5% chance of having at least $1,879.42
  • 10% chance of at least $1,857.55
  • 90% chance of at least $1,769.81
  • 97.5% chance of at least $1,749.68

So, here’s the summary:

Monthly Cost:
Checking: $150
Betterment: $147.96

Probably of having $1,800 after 1 year:
Checking: ~100% (barring financial catastrophe)
Betterment: ~85%

“Best” Case Scenario:
Checking: $1,800
Betterment: $1,879.42*

*Betterment’s math only gives us a 2.5% chance of getting there. Returns could be much better, in theory.

“Worst” Case Scenario:
Checking: $1,800*
Betterment: $1,749.68**

*The bank could fail, and I’d have $0.
**Again, Betterment offers a 2.5% chance the balance would be lower. In theory, it could be much lower.

What do you think? Transaction costs are low (easy transfers between checking and Betterment), so you really only have to ask yourself if you’d take this 85% “bet” that you’ll have at least $1,800 at the end of the year, with your upside being the $25 in annual savings ($150 – $147.96 x 12) and maybe $25 to $50 in investment returns. (Jesse just pointed out that the $2.04 per month are the returns.)

Combined with a couple other similar-sized Rule 2 funds, this plan could put an extra couple hundred dollars per year in your pocket – or leave you a little short when the bills come due.

Worth it?

In any case, it’s always good to have a reminder to employ your money as profitably as possible.

Playing ‘Find the Money’ to Achieve Your Big Goals, Faster

You know you want to get out of debt and save more money, faster. Here’s a little game called “find the money” that will help you accelerate your financial goals by $30 to $100 per month – without affecting your quality of life.

Step 1: Find Your Discretionary Categories with Nice, Round “Budgeted Numbers”

For example:

Pets: $50
Restaurants: $150
Groceries: $600
Fun Money: $40

Step 2: Shave a Small Percentage Off the Budgeted Amount

Pets: $44
Restaurants: $136
Groceries: $588
Fun Money $37

Big impact on any individual category? Nope. Freed up cash? $35.

Step 3: Allocate Freed Cash to a Big Goal 

Add it to your monthly mortgage, credit card, or retirement savings category. Then give yourself a big pat on the back.

Will Category Shavings Make a Difference to Your Goals?

A win is a win. Check it out:

  • On a $300,000 mortgage at 4% interest, and extra $35 payment each month saves over $11,000 in interest over the life of the loan – not to mention cutting 16 months off the life of the loan.
  • On a $10,000 credit card balance at 18% interest, an extra $35 per month saves $1,000 in interest and gets rid of the debt eleven months earlier.
  • Adding $35 to your monthly retirement account at 8% interest for 20 years adds an extra $20,600 to your nest egg.

Life-changing amounts? Probably not, but  a win is a win. You’re adding efficiency to your budget, employing a small percentage of your dollars in higher paying positions.

If your income is stable-to-growing (cost of living raises, bonsues, etc), go through this exercise every six months, gradually increasing your “get ahead” number. Be constantly on the lookout for ways to sneak your dollars into more productive categories.

(If your income isn’t “stable-to-growing”, I’m sure you’re used to this game – minus the fun part where you allocate freed-up cash to a big goal. I feel for you – hang in there.)

*Thanks to YNAB education lead, Erin, for the post idea.


Jesse on Retirement: “The Whole Idea is Starting to Bug Me”

“You pile up enough tomorrows,
and you’ll find you’ve collected
a lot of empty yesterdays.”
- Professor Harold Hill, The Music Man

The following is a transcription of YNAB podcast episode 80 (with some small edits for flow). Make sure you subscribe to the podcast to get Jesse’s weekly take on budgeting and personal finance.

We’ve been talking a lot – especially since I launched that investment course – about saving for retirement (or other things). And in that course I talked about how the purpose of investing is to grow your wealth. Period.

And…to become, oh, what’s the word, like a fat-cat type person. People are sometimes bothered by the idea of wealth because sometimes they see wealth being wasted, or being used flamboyantly (if that’s the right word) – for show, for selfish reasons.

But wealth does an awful lot of good – especially on a micro level: wealth for your kids – to provide them a great education, or to provide the necessities of life to people, or just to give to worthy causes, or to pay for your daughter’s (modest) wedding.

Wealth isn’t bad it all. The investment side of things focuses a ton on retirement and it’s starting to kind of bug me. Mark’s been writing on the blog about how he wants to move – well not wants to move – but running the numbers on moving to a 2-bedroom apartment instead of having his house, and it would mean $200,000 in ten years, and that could go toward retirement.

And then people came back with all sorts of insightful commments about how there are all sorts of other factors besides just the savings and investing for retirement.

In the investing course I really push people hard toward starting, and I’m not backing down from that at all. The average 50-year-old has about $1,000 to their name for each year they are old (or young, depending on how you look at it)!

But the idea of saving and investing toward retirement has tons written about it – you see book after book after book talking about howy you can retire – you can stop working. And I just want to say that I think you should take a hard look at being content now.

It would be really, really said if you had these great kids (as I do – five kids, ages eight and under – basically piled in like a stack of pancakes). And we’re busy with them – it’s crazy at the house, truly crazy – absolute chaos. And sometimes I’m guilty of thinking “When it’s just Rose…” (She’s the youngest – not saying she’s my favorite, but she sure is cute) …”how simple will that be?” All the other kids will have moved on, and I just think about how simple that will be.

And then at the gym the other day someone told me “Oh, man – when they’re teenagers, everything changes. It’s crazy.”

So here I am, looking ahead the future, always thinking, “Man, tomorrow. That will be something.” Instead of enjoying right now. Enjoying the chaos for what it is, and just finding the joy in the moment.

I was reading a sermon by a church leader who says (paraphrasing): “If you’re always focused on tomorrow, you have a lot of empty yesterdays.”

I feel like the retirement siren song is causing us – or could cause us to be looking to that day off in the future where we get to retire and stop working. Where we get to travel more, or do more woodworking, or gardening, or whatever it is you’re excited about doing when you have more spare time. Always looking forward and saying “Oh, that’s going to be great. I’ll just survive for today.” Instead of just enjoying the moment, enjoying today for what it is.

Whether you’re sitting in a cubicle, crunching numbers (which is what I was doing back in the day), or whether you’re making a podcast (which is what I’m doing now) – just enjoy the moment.

Everyone should go back to the podcast where I interviewed Leo (from and listen to that again, because it’s a good exercise in being content. And when you’re content, maybe that’s the key to retirement: You may not ever really care about retiring because you’re just living in the moment and enjoying where you are.

Whether you’re in debt and slowly getting out, or you’re out of debt and looking to invest more – whatever you’re finances are at the moment. You can just be content with where you are and happy with the direction you’re facing – but you’re not looking off to some distant day and not ignoring – missing- what’s going on all around you.

Some food for thought.

The House Has Got to Go – 2 Bedroom Apartment Here We Come


Opportunity Cost: The loss of potential gain from other alternatives when one alternative is chosen.

Confession: When I said I would seriously consider downsizing our home, I was only sort of telling the truth (so much for defeating denial). Yes, I’d evaluate the costs and benefits of downsizing, but there’s no way I’d really get rid of our house, I said to myself.

Maybe that’s still true – maybe there’s no way my wife and I would leave a home and neighborhood we love for the sake of accelerating our savings. But after a couple of hours with Excel, I can now say that staying in our home is purely emotional, because financially it makes no sense at all.

Check out this table:

Housing Alternative Savings 3 Yr Value 5 Yr Value 7 Yr Value 10 Yr Value
Rent Similar Home $310 $12,450.54 $22,323.26 $33,674.98 $53,969.29
Rent Townhome $710 $28,515.75 $51,127.47 $77,126.57 $123,607.07
Rent 2-bedroom Apartment $1,135 $45,585.03 $81,731.95 $123,293.89 $197,597.22


  • ‘Savings’ estimates the difference in cost between our current home and the alternative, and includes estimates of the value of the mortgage tax credit, maintenance on the home, utilities, and HOA fees.
  • This table assumes a meager 7% return on the saved amount. If the money earned 10% per year, the 2-bedroom apartment would pay out nearly $235,000 in ten years. Yikes.
  • My wife may threaten divorce if I use this table to try to get her to move.

When I showed Jesse this table, he took it to another level: after ten years of renting, we could go right back to our current cost of living, let the $200k sit in the market for another ten years (when I’d be reaching my goal retirement age of 54), and have around $400,000 extra in savings. Four hundred grand (or $470,000 with a 10% interest rate on the savings).

Summing up: If I lived the next 10 years in a 2-bedroom apartment – investing the savings along the way, the end result could be an additional $16,000+ per year in retirement.

I don’t know what else to say about it. We love our home and our neighbors. We’ve planned to be where we are for a long time – maybe forever.

But these numbers aren’t unreasonable. It’s one thing to grasp the total cost of home ownership in the traditional sense (principal plus interest), but adding in the cost of lost savings is making the house feel really, really expensive.