Bimodal Spending: Say “Hell Yes!” or “No”

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I had a creative brainstorm this week. An idea—that I’ve dubbed bimodal spending—overtook my mind. And now I want to convince you to adopt it in your life.


First things first, let’s define bimodal.

Out in the real world, it’s common to see normal distributions. They occur when most data clumps around the average, and few data are dispersed at the extremes. A normal distribution looks like this.

Image result for normal distribution

Many of us are also familiar with uniform distributions, where data is spread evenly among a range. A uniform distribution looks like this:

Image result for uniform distribution

But a bimodal distribution, as the name implies, has two (“bi”) modes. It has two distinct peaks, which often occur at opposite ends of the range. A bimodal distribution looks like this:

Image result for bimodal

What is Bimodal Spending?

My creative conception is that we should apply a bimodal distribution to our spending.

Bimodal spending asks you to say either hell yes! or no! to major expenses. Go whole-hog, or go not at all. No middle ground. Keep in mind: the significance of hell yes! fades if you say it too much. You can’t just say hell yes! to everything.

Think of all the things you enjoy. If you’re like me, the list is long. Food, travel, hiking, sports, music. Oh, reading and blogging! Spending time with friends and family. Fostering dogs. I like lots of things!

If I’m not careful, my “passion graph” would look like this:

I love everything! passion graph

I could spend $1000’s on each of these pursuits. I could buy lots of stuff, go on lots of adventures. But is this stuff worth it?

I say no. It’s not all worth it. Only some are worth it. We know that luxurious spending brings less fulfillment as we spend more. Why? One limiting factor is time. I don’t have the time to devote to each of these pursuits.

If I try everything, then I’ll spread myself too thin. Being spread thin is not enjoyable. It’s not optimal.

That’s why I’m reimagining my “passion graph” to look like this: a bimodal distribution.

Bimodal spending passion graph

If something is hell yes!, then I’ll devote time and money to it. But if it’s only “kinda fun” or an “occasional pastime,” then I want to prune it from my budget and schedule.

From Bimodal Passions to Bimodal Spending

I want to focus my “fun money” on my hell yes! passions. I want to “rout all that was not life”…or eliminate that which doesn’t light my fire (thanks HDT!). So how does that translate into a bimodal spending distribution?

I want my dollars to either go towards:

  1. Basic life needs
  2. Hell yes! passion activities

It should look something like this:

Bimodal spending graph

Either the bare necessities or the true marrow of life. Not much in between.

Anything in the middle of the graph will bring me little “fulfillment per dollar.” I want the dollars I spend to do good. Sometimes that’s through charity, giving to others, contributing to group activities, etc. But if I’m spending on myself, I want to squeeze out as much fulfillment as I can.

Here’s a gentle reminder:

Look at the stuff all around you.

That stuff used to be money.

And that money used to be time.

I don’t want to spend money (a.k.a. my time) on average stuff. I’ll pay for the necessities. And after that, I want my spending to make me say, “Hell yes!

Bimodal Spending = Pareto Principle

Bimodal spending is a rehash of the Pareto Principle, also known as the 80/20 Rule. Focus 80% of your fun spending on your favorite 20% of activities.

Or you can push the ratio even further. Spend 95% of your fun money on your top 5% activities.

The other 95% of your “fun” activities? Spend as little there as you can. They aren’t hell yes! They’re milquetoast. They’ll only pull resources away from the activities you truly enjoy.

Whatever the ratio you choose, it’s amusing that Pareto rears his insightful head yet again!

Ramit’s Rich Life

Bimodal spending is reminiscent of Ramit Sethi’s “rich life” idea. To quote Ramit, living a rich life means having the:

“Ability to spend my time and money on the areas that are important to me.”

Ramit Sethi

How does Ramit suggest you pursue your rich life? Simple. He tells you to “spend extravagantly on the things you love, and cut costs mercilessly on the things you don’t.” 

That’s bimodal spending!

Categorize your pursuits as “things you love” and “things you don’t.” Or create a bimodal passion graph!

Spend extravagantly on the right side of your passion graph. And cut mercilessly on the left end of your passion graph. Ramit Sethi is a bimodal spender!

Anecdotal Examples of Bimodal Spending

Friend-of-the-blog Martin loves travel and fine dining. It’s one of his passions. That’s why it made sense for him to spend two weeks in Lima, Peru, and plan a meal at Central (considered one of the best restaurants in the world).

It’s a once-in-a-lifetime experience. The memories of the trip still bring him joy today. That’s a hell yes!

But I contrast Martin’s love of travel against my interest in golf. At one point in life, I had enough time to golf 3-4 times a week. I practiced putts for hours. I could draw and fade the ball. I wasn’t great, but it was a serious pursuit.

But now I only have time to play once a month. I’m constantly out of practice. I don’t have time to regain the skills I once had. I still like golf, but it’s not a hell yes! anymore. That’s why I’m making it a no.

I’m not going to spend $500 for a new set of golf clubs. I’m not going to spend $1000 for a membership at a golf course. For me, those things aren’t worth it.

My hell yes! spending lies elsewhere. I’ll buy $200 hiking boots and a top-of-the-line laptop to support the Best Interest. But not new golf clubs (even though I do like golf).

But Mark (another friend-of-the-blog!) absolutely loves golf. He plays as much as he can. He’s traveled to Ireland to play historic courses. He plays in the rain and snow (because you’ve got to make the golf season count in Rochester!).

New clubs and a course membership help Mark live his Ramit Sethi “rich life.” Golf is a hell yes! for Mark.

Different strokes (get it?!) for different folks. We each get to create our own passion graph and plan our bimodal spending accordingly.

Bimodal Spending in Everyday Life

Even down in the “bare necessities” categories (food, housing, etc.), I’ve found that bimodal spending helps me feel more fulfilled.

Cars: I don’t love cars. I don’t want or need an expensive car. I want to spend as little on cars as I’m able (here’s the Best Interest’s breakdown of car expenses). I plan to drive my Toyota into the ground and then continue to pay for efficient function over form.

Groceries: I love cooking and baking for people. I want to spend extra money to make sure my pizza has the highest-quality cheese. I want to spend money on imported vanilla extract.

But for most meals, I’m spartan. All I need for breakfast are a couple eggs and a slice of toast. 95% of my meals are simple. 5% are extravagant. That’s mostly no and a little hell yes!

My laptop: This example is meta. I’m writing this post on a 5-year-old HP laptop whose cooling fan sounds like a weed-eater. RNGGG-RRNNGGG.

It’s a $250 model that’s way past its prime. But the Best Interest is certainly one of my passions. To support the blog—and soon-to-be the Best Interest Podcast!—I’ve been saving up for a new MacBook.

I’ve waited and waited on buying a new laptop because I didn’t have a hell yes! reason to spend that much money. But now I do! I’ve been budgeting for the laptop for a few months, and now it’s time to pull the trigger.

Dining Out: My girlfriend loves dining out. And I certainly enjoy it too. We’ve started saving our dining-out dollars for hell yes! dining experiences (COVID notwithstanding).

We forgo a few “average” dining-out experiences and save those dollars for unique and memorable experiences.

I’ve had my fair share of $10 burgers. They’re great. But I’d rather save my dollars to widen my palate’s horizons.

The Second Peak

Is bimodal spending such a cool concept that it will take over the personal finance blogosphere? Or will it fade like a wispy cloud lost in the Andes Mountains?

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Average Net Worth Targets by Age

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Today, we’re going to compare net worth targets by age. How much money should you have as you age? How should your average net worth grow?

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Digest the 25th, 50th (i.e. average net worth), and 75th percentile data below. In particular, focus on how bleak some of the real savings data looks, and how large swaths of the population fall into these less-than-ideal buckets.

Note: If you have some money but you’re unsure what to do with it, use the financial order of operations.

Apologies to my international readers—most of this data is pulled from or targeted towards U.S. readers. I suggest you use Numbeo to scale these values to your locality.

Let’s get started!

**Note: I recommend using YNAB to track your progress. You and I both get a free month of YNAB if you end up signing yourself (or someone else) up with the link above. No extra cost to anyone involved. You get a 34-day trial, and then an additional free month. That’s two months to figure out if you like it.

The Good Stuff—Average Net Worth By Age

You didn’t come here to scroll to the end of the article to see the average net worth targets. Let’s get to the good stuff!

So here are five expert viewpoints of average net worth targets by age. This initial plot is the 50th percentile, or median, net worth.

Where are these values coming from?


First, I pulled from Fidelity. Their recommendations are all relative to salary (e.g. “3x your salary by age 40”). I used the median American salary by age to convert salary targets into average net worth targets.

Note: Fidelity defines net worth as retirement savings only, and does not count other assets (e.g. your primary home’s value). The other methods below do include other assets beyond your retirement savings.


Next, I pulled data from DQYDJ. DQYDJ originally pulled of their data from the Federal Reserve Board’s Survey of Consumer Finances (labeled “The Fed” on the plot).

This Fed data is from 2016—the next set of data will come out later this year.

Keep in mind: the stock market is up about 50% since 2016. But for someone who might not have access to the market—or does not have lots of money in the market—that 50% increase might not make a large difference in their average net worth.

This DQYDJ/Fed data is real data. It’s not a hypothetical target or subjective goal. In my charts today, you’ll see three sets of “subjective targets” and only one set of “real data.”

The Balance

Next, the financial aggregation site The Balance follows a similar formula to Fidelity. At particular ages, they say, your average net worth should aim for an ever-growing multiple of your salary.

Financial Samurai

The Financial Samurai, a.k.a. Sam, is a long-time financial blogger with a no-nonsense attitude about saving money. Sam’s lofty targets are for, he says, people who:

  • Take action rather than complain about an unfair system
  • Max out their 401k and IRA every year
  • Save an additional 20% or more after taxes and 401k/IRA contribution
  • Take calculated risks through investments in various asset classes
  • Build multiple streams of active and passive income
  • Work on a side hustle before or after their day job
  • Focus on the big picture and don’t nitpick with minutiae
  • Want to achieve financial freedom sooner with their one and only life

Fair enough, Sam! Sam’s high net worth targets are going to be far above average.

The Best Interest

And finally, I took my own stab at some average net worth targets by age. I did this based on deciles of American salaries, typical milestones in the average American’s life (various debts, children, growing salaries) and the savings rates that might rise and fall as a result of those life events.

  • A young couple might be able to save some money—but having children will put a dent in their savings rates.
  • As the couple’s salaries rise, savings will increase. But if/when they help their children with college, their savings rates might take another dip.
  • While young, one’s investments might be higher risk (and higher reward). But as someone ages, their portfolio is likely to trend towards safer investments.

Inflation Multiplier

I also took inflation into account.

The average 30-year old today might be making $40,000 per year. But the average 60-year old today was making $25,000 per year back in 1990 (i.e. when they were age 30). What are the consequences?

While the average 60-year old today might hope to have an average net worth of $800K (Best Interest opinion), that’s not what a current 30-year old should treat as their target or goal.

If we assume 2.5% annual inflation for the next 30 years (leading to a 2.10x total inflation increase), then a 30-year old today should target $800K * 2.10 = $1.68 million by the time they are 60.

Here are some approximate inflation multipliers based on the number of years you want to project into the future. For example, someone age 50 would want to look 20 years into the future if they want to see what their net worth target for age 70 should be.

Number of years in future Inflation multiplier
5 1.13
10 1.28
15 1.45
20 1.64
25 1.85
30 2.10
35 2.37
40 2.69
45 3.04

Looking at the table above, forecasting 20 years in the future requires an inflation multiplier of about 1.64.

Analysis of the Median Net Worth Targets

Let’s take another look at those median net worth targets. What conclusions can we draw?

median net worth targets by age

Of course, this is just my opinion. But the non-Best Interest American net worth target numbers seem low to me.

This is probably an obvious (and biased) conclusion. My method comes up with higher numbers, so I’m going to be biased into thinking the other goals are low. But why do I think so?

Let’s start by analyzing this data through the lens of the “4% Rule,” which states that you should take your annual spending and save ~25x that much for retirement.

The Best Interest target ($850K) allows for a retirement income of roughly $34K ($850K/25) per year, or $2800 per month. Financial Samurai’s targets lead to $40000 per year or $3300 per month. When you add in Social Security benefits, that’s a very reasonable allowance for the average American.

The other methods suggest median net worths of $500K, $300K, and $220K, for a monthly allowance of $1660, $1000, and $730, respectively. With the assistance of Social Security, it’s certainly possible to live off these amounts. But there’s more risk involved.

The average Social Security benefit in 2020 is estimated to be about $1500 per month. Let’s add that to the allowances from the previous paragraph.

Would you feel comfortable living off of $3160, $2500, or $2230 per month? Depending on your area of the country, cost of living, medical expenses, retirement goals, etc., it’s a scary question.

What happens if something goes wrong with your plans? Going back to work at age 80 is not an enticing prospect. Neither is asking your children for a handout.

Are these hyperbolic outcomes? I don’t think so.

How to Compare? Apples to Apples?

Does it make sense to set the same average net worth goals for both a teacher and a doctor? We know that their net worths targets by age will be dramatically different.

The average American doctor’s gross income in 2019 was more than $300K. Meanwhile, the average teacher’s salary was $60K. Of course, there are millions of people that will fall within and without this range. Does it make sense to compare average net worth targets when incomes are so different?

In my opinion, yes it does make sense to do this comparison. But it’s only one data point that you should use—not an end-all-be-all.

It’s just like a young track athlete comparing their race times to record holders. Of course, they’ll be slower than the record holders. But it gives them a target, an understanding of the gap, a percentage difference to track their progress against.

Besides, the comparisons I presented above are median net worth calculations. They account for the highs and the lows, and they let you know where the middle of that scale lands. Some people start from nothing and build net worth. Others benefit from large generational wealth transfer. This average net worth analysis does not discern between the two.

If you’re making a lower salary but you love to be frugal, then set your targets high! Aim for a high net worth that’s a decile or two above your salary decile.

If you’re fresh out of law school, you’ll probably be in a mountain of debt. You might be low on the scale now, but your long-term financial prospects are good.

Keep circumstances like that in mind as you review today’s charts. This is where age, work experience, education level, etc can all play important roles.

Location and Cost of Living

We’ve covered how inflation and income can affect your position in the average net worth plots. But we should also discuss how your cost of living can affect these results.

Life in San Francisco or New York City costs more than life in Rochester, NY. And life in Rochester costs more than life in rural Kansas. Rent, gas, groceries—all these commodities have different prices around the country.

Therefore, the average net worth benchmarks should change with location.

Use the crowd-sourced site Numbeo to do some of these comparisons. For example, here are some results comparing Rochester to Boston—where Numbeo suggests we need 50% more spending in Boston than in Rochester to maintain similar standards of living.

Numbeo uses New York City as a baseline, giving it an indexed score of 100. The United States as a whole has an index score of 56, suggesting that the average American has a cost of living that’s about 44% less than the average NYC resident.

Look up your city or region to compare it to the United States index score of 56. The percentage difference will give you another way to interpret the average net worth results.

For example, Philadelphia has an index of 62, which is 10% higher than 56. If a Philly resident is using today’s data for retirement planning, they should consider adding 10% to all of the data points.

75th Percentile Net Worth Targets by Age

75th percentile net worth targets

The plot above shows the same five experts’ opinions, but at the 75th percentile.

One interesting aspect of the 75th percentile net worth targets is that the Fidelity recommendation lines up well with the Fed data.

This suggests that people who earn more also save a larger proportion of their income, and people who save more are more likely to meet Fidelity’s thresholds. That’s real data lining up with Fidelity’s subjective targets.

These people have higher average gross income. They have a high net worth. They likely utilize a retirement savings plan. Or they might be the secret millionaire next door.

If we go back to the average net worth chart, we notice that the Fed data lags behind both Fidelity’s targets and the Balance’s targets. In other words: average real-world saving does not meet the average expectations of Fidelity and the Balance.

It takes above-average earning and saving to meet the Fidelity and Balance targets. This is an important point.

It’s not ideal, but it’s reality.

In general, systems that require above-average effort in order to obtain average goals (e.g. to meet suggested average net worth thresholds for retirement) are bad systems.

A good system would only require an average effort to achieve average results. But this is where the Stockdale Paradox is important. Don’t find yourself ten years in the future having not taken action today.

25th Percentile Net Worth Targets by Age

And to make matters worse, check out the 25th percentile chart below.

Here, three of the subjective net worth targets are all in family. Fidelity and my Best Interest targets line up very closely to each other, with the Balance falling 20-30% lower.

But how does the real net worth data compare? At retirement age, real people’s net worths are only 15% to 25% of where they “should” be.

It’d be nice to reach Financial Samurai’s targets, but many people do not have the means to maximize their savings accounts to the extent he recommends.

Let’s put a face to this data. It’s 25th percentile, meaning that one out of four people in the U.S. falls on or below this graph. Dunbar’s Number suggests that the average human can comfortably maintain 150 meaningful relationships–which would suggest that you (yes, you) closely know ~40 people (on average) on or below the 25th percentile plot.

Real people, real lives, real worry. For a 60-year old, to retire on a $50K net worth (or less) is likely impossible to do. On DQYDJ, I looked at the 25th percentile net worth for 70 year olds—it’s $56,000.

25th percentile net worth is meager all the way to the end of life. That’s a sobering fact.

The Wealth Divide

What might be causing this household net worth disparity? How do people have negative net worth, or lower-than-needed net worth?

Rising expenses and wage stagnation is an easy cause to point to. The lack of financial education hurts. So does poor financial health—like having a low credit score and paying high interest rates. Student loan debt and credit card debt suck.

Some people are behind from the start. Your first net worth out of college is likely to be negative. Many people wake up 10 years later and find their net worth hasn’t grown. That’s the python-squeeze nature of debt.

Wealthier college graduates don’t have to battle that python. It’s not their fault—that’s just how it is. Without that student loan debt, their average net worth increases rapidly.

After 10 years of work, they’re likely to be debt-free. They’re likely to own real estate. They’re more likely to be collecting passive income or contributing to their retirement account. What do all these activities have in common? They all increase net worth!

Sure, annual salary matters. Total household net worth is a function of salary—just ask the Federal Reserve.

But the net worth divide we’ve seen today starts at the beginning of people’s careers and often never closes. It’s there at age 30, age 40, age 50, age 60.

Why Do Net Worth Targets by Age Matter?

I’m just another personal finance writer, but I think average net worth benchmarks are an important metric of financial health.

Your current net worth isn’t make or break, but it let’s you know how you compare to your age group. Age 30 millennials should think about their financial future. Age 60 retirees should be aware of their cash, stocks, bonds, mutual funds, etc.

Personal net worth is like your blood pressure. It’s a good metric of health.

If you’re behind, you need to take action. While something like wealth transfer inheritances usually helps, you probably shouldn’t rely on one. Instead, increase your savings rate. Utilize your 401(k) i.e. pretax income.

Your financial future will grow from your financial present.

What Counts as Net Worth? And What Doesn’t?

Let’s do some housekeeping. What actually counts towards net worth? The answer is subjective, but it comes down to assets minus liabilities.

In general, I considered the following as contributors to net worth (i.e. liquid net worth contributors).

  • Bank accounts
  • Retirement accounts (401k, IRAs, etc)
  • Investments (stocks, bonds, REITs, etc)
  • Other saving vehicles (e.g. Health Savings Accounts, 529 college savings plans)
  • Equity in real estate (e.g. your home value)
  • Common debts—mortgage debt, credit card debt, average student loan debt, etc.
  • Pension and social security

Note: Fidelity’s targets were based solely on retirement account funds.

And what doesn’t count towards net worth?

  • The value of common possessions (e.g. a car, a computer)
  • Illiquid or non-transferrable assets (e.g. airline miles)

And what is a maybe? These are assets that are fairly subjective and up to you.

  • Collectibles, jewelry, art—how liquid are they? And are you sure you’d want to sell them?
  • Business ownership—again, how liquid is it? If you can sell shares, that’s good. But if you own a gas station, is that part of your net worth?
  • Accrued annual vacation days or PTO, unless transferable to cash at future date.
  • Future inheritance. Probably ok to count if you’re sure you know what you’ll be inheriting.
  • Life insurance policies. Does it count as net worth if it only comes true after you die?

Today’s values account for a single person. The average American family’s net worth is likely ~double what we’ve presented today. I.e. average household net worth = 2x average individual net worth.

How to Calculate the Value of a Pension or Social Security

This involves a little bit of math. First, I’ll ask you to come up with four important numbers. Then I’ll show you two important equations. And then we’re going to work through an example together.

The four important numbers are:

  1. [N] The number of years you estimate you’ll be retired. If you’re retiring at 60, a safe number to use here would be 25 (assuming you live to the above-average age of 85) [ 85 – 60 = 25 ]
  2. [M] The number of years until you retire. I’m currently 30. If I retire at 60, then the number I’ll use here is 30. [ 60 – 30 = 30 ]
  3. [R] The rate of return of the pension plan or Social Security. Here are some good sources for pension plan historic data and SS historic data. If you want to be safe, use less than 6% for a pension or less than 5% for Social Security.
  4. [P] The assumed annual payment once you retire. For Social Security, here’s a convenient calculator. For pensions, each specific fund will likely have its own rules. Example: a typical pension pay-out might be equal to 50% of a worker’s average salary during their final three years of work.

Equations for Pension/Social Security Value at Retirement and Discounted Current Value

The two important equations are:

Fund Value at Retirement = P * [(1 – (1+R)^(-N)]/R

…we’ll call this Fund Value at Retirement the FV. Next, we need to take the FV and discount it backwards to today’s Present Value, or the PV.

Present Value = FV/[(1+R)^M]

Example: Calculating the Present Value of a Pension Fund

Wallace is a 35-year old teacher. He’ll likely retire at 60. And he’s going to be conservative in estimating that he’ll live to 82.

We now know that N = 82 – 60 = 22 and that M = 60 – 35 = 25.

Being conservative again, Wallace is going to use R = 7% as the fund’s rate of return.

And finally, Wallace knows that his pension will pay him 55% of his final year’s salary. He’s currently making $55,000 and assumes he’ll get a 2% raise for each of the next 25 years. His final year salary, therefore, will be about $90,000. And 55% of $90,000 is $49,500 per year = P.

We now know N, M, R, and P. Let’s plug them into our equations. I like to use Microsoft Excel to help keep track of my values and (if needed) easily change them to adjust my final values.

Future Value = FV = P * [(1 – (1+R)^(-N)]/R = $49500 * [(1 – (1+7%)^(-22)]/7%

FV = $547,531

Present Value = PV = FV/[(1+R)^M] = $547,531/[(1+7%)^25]

PV = $100,882

So, if Wallace wanted to include his pension value in his current net worth calculation, he’d use $100,882.

Retiring for Today

We’re at the 95th percentile for this article. I hope the average net worth comparisons today did not steal your joy, but instead opened your eyes to the wide gradient of net worth targets by age in the U.S.

Net worth targets by age are not an extrinsic competition. They’re intrinsic: will I be able to set up my loved ones and myself for fulfillment today, tomorrow, and for the rest of our lives? At least that’s how I think of it.

Looking at net worth percentile data simply helps gauge whether you’re on track, making progress, or need to change behavior. It’s important to realize—ideally at a younger age—that many people in this country are struggling against themselves in their intrinsic race. I hope today’s post might help you avoid that struggle.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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Tagged DQYDY, fidelity, financial samurai, net worth, the balance, the fed


75 Personal Finance Rules of Thumb

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A “rule of thumb” is a mental shortcut. It’s a heuristic. It’s not always true, but it’s usually true. It saves you time and brainpower. Rather than re-inventing the wheel for every money problem you face, personal finance rules of thumb let you apply wisdom from the past to reach quick solutions.

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I’m going to do my best Buzzfeed impression today and give you a list of 75 personal finance rules of thumb. Some are efficient packets of advice while others are mathematical shortcuts to save brain space. Either way, I bet you’ll learn a thing or two—quickly—from this list.

The Basics

These basic personal finance rules of thumb apply to everybody. They’re simple and universal.

1. The Order of Operations (since this is one of the bedrocks of personal finance, I wrote a PDF explaining all the details. Since you’re a reader here, it’s free.)

2. Insurance protects wealth. It doesn’t build wealth.

3. Cash is good for current expenses and emergencies, but nothing more. Holding too much cash means you’re losing long-term value.

4. Time is money. Wealth is a measure of how much time your money can buy.

5. Set specific financial goals. Specific numbers, specific dates. Don’t put off for tomorrow what you can do today.

6. Keep an eye on your credit score. Check-in at least once a year.

7. Converting wages to salary: $1/per hour = $2000 per year.

8. Don’t mess with City Hall. Don’t cheat on your taxes.

9. You can afford anything. You can’t afford everything.

10. Money saved is money earned. When you look at your bottom line, saving a dollar has the equivalent effect as earning a dollar. Saving and earning are equally important.


I love budgeting, but not everyone is as zealous as me. Still, if you’re looking to budget (or even if you’re not), I think these budgeting rules of thumb are worth following.

11. You need a budget. The key to getting your financial life under control is making a budget and sticking to it. That is the first step for every financial decision.

12. The 50-30-20 rule of budgeting. After taxes, 50% of your money should cover needs, 30% should cover wants, and 20% should repay debts or invest.

13. Use “sinking funds” to save for rainy days. You know it’ll rain eventually.

14. Don’t mix savings and checking. One saves, the other spends.

15. Children cost about $10,000 per kid, per year. Family planning = financial planning.

16. Spend less than you earn. You might say, “Duh!” But if you’re not measuring your spending (e.g. with a budget), are you sure you meet this rule?

Investing & Retirement

Basic investing, in my opinion, is a ‘must know’ for future financial success. The following rules of thumb will help you dip your toe in those waters.

17. Don’t handpick stocks. Choose index funds instead. Very simple, very effective.

18. People who invest full-time are smarter than you. You can’t beat them.

19. The Rule of 72 (it’s doctor-approved). An investment annual growth rate multiplied by its doubling time equals (roughly) 72. A 4% investment will double in 18 years (4*18 = 72). A 12% investment will double in 6 years (12*6 = 72).

20. “Don’t do something, just sit there.” -Jack Bogle, on how bad it is to worry about your investments and act on those emotions.

21. Get the employer match. If your employer has a retirement program (e.g. 401k, pension), make sure you get all the free money you can.

22. Balance pre-tax and post-tax investments. It’s hard to know what tax rates will be like when you retire, so balancing between pre-tax and post-tax investing now will also keep your tax bill balanced later.

23. Keep costs low. Investing fees and expense ratios can eat up your profits. So keep those fees as low as possible.

24. Don’t touch your retirement money. It can be tempting to dip into long-term savings for an important current need. But fight that urge. You’ll thank yourself later.

25. Rebalancing should be part of your investing plan. Portfolios that start diversified can become concentrated some one asset does well and others do poorly. Rebalancing helps you rest your diversification and low er your risk.

26. The 4% Rule for retirement. Save enough money for retirement so that your first year of expenses equals 4% (or less) of your total nest egg.

27. Save for your retirement first, your kids’ college second. Retirees don’t get scholarships.

28. $1 invested in stocks today = $10 in 30 years.

29. Inflation is about 3% per year. If you want to be conservative, use 3.5% in your money math.

30. Stocks earn 7% per year, after adjusting for inflation.

31. Own your age in bonds. Or, own 120 minus your age in bonds. The heuristic used to be that a 30-year old should have a portfolio that’s 30% bonds, 40-year old 40% bonds, etc. More recently, the “120 minus your age” rule has become more prevalent. 30-year old should own 10% bonds, 40-year old 20% bonds, etc.

32. Don’t invest in the unknown. Or as Warren Buffett suggests, “Invest in what you know.”

Home & Auto

For many of you, home and car ownership contribute to your everyday finances. The following personal finance rules of thumb will be especially helpful for you.

33. Your house’s sticker price should be less than 3x your family’s combined income. Being “house poor”—or having too expensive of a house compared to your income—is one of the most common financial pitfalls. Avoid it if you can.

34. Broken appliance? Replace it if 1) the appliance is 8+ years old or 2) the repair would cost more than half of a new appliance.

35. Used car or new car? The cost difference isn’t what it used to be. The choice is even.

36. A car’s total lifetime cost is about 3x its sticker price. Choose wisely!

37. 20-4-10 rule of buying a vehicle. Put 20% of the vehicle down in cash, with a loan of 4 years or less, with a monthly payment that is less than 10% of your monthly income.

38. Re-financing a mortgage makes sense once interest rates drop by 1% (or more) from your current rate.

39. Don’t pre-pay your mortgage (unless your other bases are fully covered). Mortgages interest is deductible, and current interest rates are low. While pre-paying your mortgage saves you that little bit of interest, there’s likely a better use for you extra cash.

40. Set aside 1% of your home’s value each year for future maintenance and repairs.

41. The average car costs about 50 cents per mile over the course of its life.

42. Paying interest on a depreciating asset (e.g. a car) is losing twice.

43. Your main home isn’t an investment. You shouldn’t plan on both living in your house forever and selling it for profit. The logic doesn’t work.

44. Pay cash for cars, if you can. Paying interest on a car is a losing move.

45. If you’re buying a fixer-upper, consider the 70% rule to sort out worthy properties.

46. If you’re buying a rental property, the 1% rule easily evaluates if you’ll get a positive cash flow.

Spending & Debt

Do you spend money? (“What kind of question is that?”) Then these personal finance rules of thumb will apply to you.

47. Pay off your credit card every month.

48. In debt? Use psychology to help yourself. Consider the debt snowball or debt avalanche.

49. When making a purchase, consider cost-per-use.

50. Make your spending tangible with a ‘cash diet.’

51. Never pay full price. Shop around and do your research to get the best deals. You can earn cash back when you shop online, score a discount with a coupon code, or a voucher for free shipping.

52. Buying experiences makes you happier than buying things.

53. Shop by yourself. Peer pressure increases spending.

54. Shop with a list, and stick to it. Stores are designed to pull you into purchases you weren’t expecting.

55. Spend on the person you are, not the person you want to be. I love cooking, but I can’t justify $1000 of professional-grade kitchenware.

56. The bigger the purchase, the more time it deserves. Organic vs. normal peanut butter? Don’t spend 10 minutes thinking about it. $100K on a timeshare? Don’t pull the trigger when you’re three margaritas deep.

57. Use less than 30% of your available credit. Credit usage plays a major role in your credit score. Consistently maxing out your credit hurts your credit score. Aim to keep your usage low (paying off every month, preferably).

58. Unexpected windfall? Use 5% or less to treat yourself, but use the rest wisely (e.g. invest for later).

59. Aim to keep your student loans less than one year’s salary in your field.

The Mental Side of Personal Finance

At the end of the day, you are what you do. Psychology and behavior play an essential role in personal finance. That’s why these behavioral rules of thumb are vital.

60. Consider peace of mind. Paying off your mortgage isn’t always the optimum use of extra money. But the peace of mind that comes with eliminating debt—it’s huge.

61. Small habits build up to big impacts. It feels like a baby step now, but give yourself time.

62. Give your brain some time. Humans might rule the animal kingdom, but it doesn’t mean we aren’t impulsive. Give your brain some time to think before making big financial decisions.

63. The 30 Day Rule. Wait 30 days before you make a purchase of a “want” above a certain dollar amount. If you still want it after waiting and you can afford it, then buy it.  

64. Pay yourself first. Put money away (into savings or investment accounts) before you ever have a chance to spend it.

65. As a family, don’t fall into the two-income trap. If you can, try to support your lifestyle off of only one income. Should one spouse lose their job, the family finances will still be stable.

66. Every dollar counts. Money is fungible. There are plenty of ways to supplement your income stream.

67. Savor what you have before buying new stuff. Consider the fulfillment curve.

68. Negotiating your salary can be one of the most important financial moves you make. Increasing your income might be more important than anything else on this list.

69. Direct deposit is the nudge you need. If you don’t see your paycheck, you’re less likely to spend it.

70. Don’t let comparison steal your joy. Instead, use comparisons to set goals. (net worth).

71. Learning is earning. Education is 5x more impactful to work-life earnings than other demographics.

72. If you wouldn’t pay in cash, then don’t pay in credit. Swiping a credit card feels so easy compared to handing over a stack of cash. Don’t let your brain fool itself.

73. Envision a leaky bucket. Water leaking from the bottom is just as consequential as water entering the top. We often ignore financial leaks (e.g. fees), since they’re not as glamorous—but we shouldn’t.

74. Forget the Joneses. Use comparisons to motivate healthier habits, not useless spending.

75. Talk about money! I know it’s sometimes frowned upon (like politics or religion), but you can learn a ton from talking to your peers about money. Unsure where to start? You can talk to me!

The Last Personal Finance Rule of Thumb

Last but not least, an investment in knowledge pays the best interest.

Boom! Got ’em again! Ben Franklin streaks in for another meta appearance. Thanks Ben!

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The Power of Baby Steps

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Today’s simple graphics will enlighten you on the power of baby steps and the potency of small repeated marginal gains.

Table of Contents show

A Baby’s Growth

It’s easy to overlook the rapid growth that humans undergo.

At first, we’re a helpless whiny lump that’s capable of only three things: eat, sleep, bathroom. This baby, one might assume, must have a pretty low ceiling.

Fast forward two full years and…ok, some progress has happened. Our baby is now zooming around of her feet, and she’s babbling, and she’s feeding herself, albeit poorly. These are some true baby steps. Small progress. But this is largely still a helpless child.

Walking Baby GIFs | Tenor

By age five, she’s talking. That’s cool. She can eat food without spilling, she can read (whoa!), and she can run around. Compared to an adult, she’s small and weak and dumb (sorry, it’s true!). But there’s been fantastic progress.

I won’t go much further. We know that brains and bodies continue to grow into adulthood. And we know that adult humans are capable of amazing accomplishments. But the path from helpless whiny lump to amazing adult—that path was walked one baby step at a time.

Let’s bring back Wallace

Remember Wallace from “The Best Time to Invest?”

He’s back, and he’s trying to improve himself via a similar baby step method. What’s he improving?

It could be anything, financial or otherwise. Perhaps Wallace wants a fully funded emergency fund. He wants to eat a healthier diet. Or maybe he wants to be a better writer.

I’m going to refer to these improvements as levels. Wallace is at Level 1 right now. He’s a whiny helpless lump, but he’s looking to grow.

Wallace is going to focus on building towards his goals using a simple 1% improvement every week. Whatever the goal, whatever the skill. Wallace’s wants to take baby steps of 1% improvement each week.

Wallace’s will improve from 1.00 to 1.01 in Week 1.

And then he’ll improve from 1.01 to 1.021 in Week 2.

Slowly but surely, Wallace will progress. His level will improve.

But baby steps are slow

Baby steps are slow. And that’s why baby step improvements can be frustrating (at least for adults—not so much for babies). Take a look at Wallace’s first year of progress. It’s that little blue streak at the bottom of the plot.

baby step year 1
After one year, Wallace has grown from 1.0 to 1.7

Whether he’s saving money or writing a blog or improving at chess, Wallace has barely made any progress (at least, based on my chosen Y-axis).

But Wallace is a grinder. He believes in the power of baby steps. So he continues to focus on weekly 1% improvements for two more years.

baby step year 3
After three years, Wallace is at Level 4.7

Ok! At least Wallace’s growth is no longer looking like a flat line. Let’s fast forward another couple years.

baby step year 5
After five years, Wallace is at Level 13.3

Wallace hits the curve

After five years, it’s apparent that Wallace is starting to “hit the curve.” His 1% improvements no longer look like a straight line. Instead, those improvements are building on one another in a compounding manner.

When he started, Wallace was at “Level 1.” His 1% improvement was tiny—1% of 1 is 0.01. But after hundreds of 1% improvements, he’s now around Level 13. The 1% improvements now increase his level by 0.13 each week. In ~6 weeks of Year 5, Wallace grows more than he did the entire Year 1.

All styles of exponential growth exhibit this behavior. Growth compounds on growth. The early steps feel slow, barely making progress. The last steps feel monumental. But those monumental steps wouldn’t have been possible without the years of slow progress beforehand.

Many 4-year olds can’t read, but many 9-year olds can read chapter books. Five years of consistent practice can bring a sea change of improvement.

It’s just like the parable of rice filling up a chessboard.

baby step year 10
After ten years, Wallace is at Level 177

The curve continues to steepen through Year 10. Now at level 177, the idea of being at level 1 is a distant memory for Wallace. It’s just like the idea that “a lot can change in ten years.”

But are baby steps always possible?

I’ve shown you an assumed scenario where Wallace is always able to make 1% improvements. And maybe that’s too ambitious of an assumption.

Even if Wallace hits the top of his game—like Lebron, Adele, or Meryl Streep—he will probably hit some sort of plateau. You can’t necessarily get better forever. But the goal doesn’t need to be infinite growth. Instead, the goal is to find an effective mindset to achieve growth. And that’s what the baby step method provides.

A widely shared story of baby steps involves coach Dave Brailsford’s leadership of the British Cycling team.

Have a Laugh with the 20 Best Cycling GIFs! - We Love Cycling magazine

Brailsford’s vision expanded beyond training and racing and physical attributes. Instead, Brailsford wanted to improve every aspect of a cyclist’s life—diet, sleep, even relationships. Of course, it included their training and recovery and equipment, too. Brailsford was thinking about baby steps. If he could find 70 different places to make a 1% improvement, the cyclists would end up 100% better (1.01 ^ 70 = 2). Sounds easy, right?

They bought more comfortable pillows to help the cyclists sleep through the night. They cut out refined foods, replacing them with something nutritious. The team considered every component on the bicycle where mass could be reduced, even if only by a gram.

These small improvements worked wonders.

Under Brailsford’s leadership from 2007 to 2017, British cyclists won 5 Tour de France titles. And they won 66 Olympic or Paralympic gold medals. Oh, and they won 178 world championships. British cycling dominated the world cycling scene.

Baby steps work.

Baby steps in personal finance

There are plenty of opinions about simple financial goals that you can add to your baby step to-do list.

Unburying yourself—from debt, from bad habits, etc.—isn’t a one step process. It takes time. And it requires small improvements. You know—baby steps.

You can earn money in bits and pieces. A little raise here, a side hustle there. You can find odd jobs or use smartphone apps that pay you money. Little baby steps all over.

College loans and mortgages can take decades to repay. Learning a new budgeting system requires patience. The math behind interest rates might take a few attempts to understand. Rome wasn’t built in a day. And your personal finance success will take time too. But it’ll come if you stick with it.

This plot shows the small baby steps I’ve made over the past two years. In blue are my slow and steady investments. In red is my slow and steady debt payoff. And the white circles combine the two to show a steady increase in net worth.

Winning the lottery would be cool. So would investing in next Amazon, Apple, etc. while they’re still a startup. But if I don’t get that lucky, I’ll be ok. My baby steps are slowly building up.

Keep on Growing

Take it away, Clapton!

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And, as always, thanks for reading the Best Interest. If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

And thank you to Feedspot for including me in their Top 100 personal finance blogs. What an honor! Gotta keep on growing…

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Improve Your Finances in 2021: A Guide

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Personal finances are, well…personal. The advice I give my neighbor is different than what I’d tell you. But there are foundational principles that apply to most everyone. If you want to improve your finances in 2021, I can’t give you specific advice. But I can talk about the foundational principles that help everyone. Let’s discuss those ideas and improve your finances.

Table of Contents show

Step 1: Create a Net Worth Statement

You need to know where you stand today. Sum up all your assets and debts. What do you have, where is it, and what job is it doing? This is analogous to stepping on the scale before starting a weight loss plan.

First, what’s in your bank accounts? Checking, savings, etc. And why are you keeping money there? Some of it is likely supporting your monthly expenses. Some of it might act as an emergency fund. But be careful. It is possible to have too much money sitting stagnant in a bank.

Next, how much money do you have in long-term investments? You might own stocks. Maybe you have a 401(k), Roth IRA, or other retirement accounts. If you want to, you can even find the current-day value of your pension or government retirement account.

Many people also include their house and property as an asset. I’ll leave that choice up to you. The argument against doing so is that you can’t live in your house and also sell it for money. You can’t have your cake and eat it too.

After you’ve summed up your assets, you’ve got to account for your debts.

Credit card debt. Student loans. Your mortgage. Car debt. Account for every single debt.

For now, sum your assets and your debts to see where you stand. If you’d like, you can compare compare your net worth to your age group.

But the real point of building a net worth statement will be apparent after today’s exercise is complete.

Step 2: Create SMART Goals

Your net worth statement shows you where you stand. Next, you need to ask where you want to be. It’s time to create SMART goals. The SMART acronym stands for specific, measurable, attainable, relevant, and time-based.

This should be a fun exercise! Write down every goal, big or small. We’ll prune them down later. Use the financial order of operations or your net worth statement to help with ideas.

Note: You can download a free PDF on the financial order of operations. It comes with detailed explanations and a flowchart about optimizing where your dollars go.

Alternatively, I recommend asking yourself some important questions. For example:

  • Who matters most to you?
  • What activities do you most enjoy?
  • How do you prefer to spend your time?
  • Where do you want to live?
  • What drives you? What’s your ‘why’?
  • When do you want to retire?

These kinds of questions will shed light on the best uses of your money, the best ways to improve your finances. That is, how your money can optimize your position on the fulfillment curve.

You can then fit those answers into the SMART framework.

For example, “I want to get out of debt—about $21,400.” We can quickly check off the SMAR boxes, but we can’t do the T (yet).

Or, “I want to pay for my kids’ college. I want to save $250K in the next 15 years.” For this one, I’d argue that the MRT boxes are filled, but we could use some specifics about how attainable it is. How much do you need to save this year in order to reach that goal? Can you actually save that much this year?

Write down some goals for your loved ones, for yourself, for the life you want to live.

And the next steps will help you fill out any missing letters on your SMART goals.

Step 3: Create a Budget

Your budget measures and controls your cashflow. Money coming in (e.g. paychecks) and money going out (all the stuff you buy). Creating and maintaining a budget is the third step to improve your finances.

Your budget informs you how much extra money you’ll have at the end of each month. This is the money that you can use to reach your goals.

In fact, many budgeters—myself included—build their goals directly into their budget. For example: I set aside money every month to eventually purchase a rental property with my brother. It’s part of my budget. It’s part of my process.

In Step 2, we had some partial goals. How long will it take to repay our debt? Our budget tells us. How attainable is paying for our kids’ college? Our budget tells us.

A goal with a budget is a plan. A goal without a budget is just a dream.

This step takes some time, but it’s the habit that will change your future. It’s also the hardest part of this list. Losing 20 pounds is a great goal, but jogging and dieting are tough. Similarly, developing a new budgeting habit can be difficult. The most important part of your budgeting habit is adherence.

If you’re looking for budgeting methods, here are many ways experts budget.

Step 4: Tie It All Together & Improve Your Finances

All the hard work is done. It’s time to tie the steps together.

Your net worth statement (Step 1) showed you where you stand. It highlighted places for improvement.

The goals you created (Step 2) are tied to what’s most important for you. Those goals describe where you want to be, who you want to be with, and what you want to be doing.

Your budgeting (Step 3) informs how much money you can put towards your goals every month. This is how you can ensure your goals are actually SMART.

And now you step back, review your work, and make sure everything is in sync.

Do your goals address holes in your net worth statement? Is your net worth going to improve?

Are your goals specific to what’s most important in your life? Are they SMART?

And does your budget give you the data you need?

This all sounds pretty simple…because it is! If there’s anything I’ve learned in two years of personal finance research and writing, it’s that 90% of money problems are straightforward to fix. Today’s advice isn’t specific to you—but each of the steps asks you to consider your situation. And it will help improve your finances.

I hope you enjoyed today’s Best Interest. Thank you for reading. Consider sharing it with those in your life.

If you enjoyed this article and want to read more, I’d suggest checking out my Archive or Subscribing to get future articles emailed to your inbox.

This article—just like every other—is supported by readers like you.

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