After a few real-life conversations and my running the math, I’ve decided that a “50/50” rule for college saving achieves the best of both worlds.
The rule is:
~50% of your college savings goals should be saved via a 529 plan.
The other ~50% should be saved via a taxable brokerage account.
Why is that the case? Let’s discuss what we do and don’t want from our college savings plan.
PS – if you want further background reading on 529 plans, here are some other useful articles…
What We Do and Don’t Want from College Savings
We do want to save for college. Ground-breaking stuff.
We do want to reduce our income taxes.
We do want our investments to grow tax-free.
We do want flexibility while we save, in case life throws us a curveball.
We don’t want to end up with permanently frozen assets. We don’t want “leftover” 529 dollars.
529 College Savings Plans offer some of these ideals. But not all.
In fact, 529 plans are terrible at achieving some of the abovementioned goals.
Reducing Income Taxes
Many states offer income tax deductions on 529 contributions. In New York, for example, the first $10,000 contributed to 529s per year is exempt from state tax. That’s a ~$600 annual savings (depending on tax bracket).
Tax-Free Growth
529 investments grow tax-free, just like 401(k) or IRA assets. There’s no annual tax on dividends and interest. This leaves more dollars behind to compound.
Let’s Measure That Tax Savings
If we apply these two tax advantages to a reasonable scenario**, it’s realistic to expect a 529 account to result in 15-20% more dollars for college than a taxable brokerage account.
**see this Google sheet for detail.
But taxable brokerage accounts have distinct advantages on our other ideals.
Flexibility & “Frozen” Assets
Taxable accounts are very flexible. You can withdraw from them anytime (e.g. during an unexpected emergency). 529 dollars, on the other hand, must be spent on educational expenses and cannot be withdrawn for other reasons.
What if your kid decides to skip college? Unused funds in a 529 can be impossible to withdraw without taxes and penalties. Taxable accounts avoid this situation.
What’s the 529 Withdrawal Penalty?
Every 529 withdrawal—whether for education purposes or not—is made pro rata between your contributions and your earnings. The contributions are never taxed and never penalized, but the earnings can be if your withdrawal is not for a qualified educational expense.
For example:
Your 529 plan has $100,000 of contributions and $50,000 of earnings. (Two-thirds and one-third)
You make a $30,000 withdrawal. You have no choice in that $20,000 will come from contributions and $10,000 will come from earnings (Two-thirds and one-third)
If your withdrawal is not for qualified education expenses, the $10,000 earnings portion will be taxed as income (more marginal tax dollars, ouch!) and will suffer a 10% penalty.
If you run the math, you’ll see this penalty eats away at all the 529’s tax benefits. You do not want to suffer this penalty.
Finding Balance Between 529 and Taxable
The question is how to balance these various pros and cons. The 50/50 Rule does so!
Let’s say you aim to gift your children $100,000 over their four years of college. How generous! I submit you should aim to have:
$50,000 of that gift coming from a 529
And $50,000 from a taxable brokerage
You know it won’t be a perfectly ideal scenario. Whatever reality throws at you, you’ll wish you had decided to go all-in on the 529 or all-in on the taxable.
But you don’t know the future! This fact – that we’re more mortals without a crystal ball – is one of the fundamental frustrations in financial planning. If we knew the future, we could make a perfect financial plan. But we don’t, so we can’t. Our best solutions, therefore, involve hedging our bets. We’d rather know we’re 50% correct than be surprised later we’re 100% wrong.
The 50/50 Rule guarantees a middle-of-the-road solution. You’ll capture tax benefits and retain flexibility.
If Johnny gets a little scholarship and only needs 70% of your saved money, great! Use the 529 dollars completely. Dip into the taxable account when needed, and keep the remaining taxable dollars for other goals in life. You’ll be confident your 529 account will be completely drained, avoiding frustrating taxes and penalties.
Does It Have to Be 50/50?
I’ll admit: dividing the two accounts down the middle, 50/50, is an easy shorthand. You can choose a different fraction. But when thinking it through, my primary concerns are:
You need to be confident you’ll drain the 529s. If Johnny’s college will cost $200,000 and you aim to have all $200,000 in a 529, I don’t like that. There’s no margin for error.
You want to have a large enough portion in the taxable account to provide “just in case” flexibility.
Maybe 75/25 makes more sense for you. I can get on board with that. But I wouldn’t go much higher than 75% from the 529.
Working Backward
You can work backward from your future goal to discover what today’s saving rates need to be. In our hypothetical scenario of $50K in a 529 and $50K in a taxable (for college in ~15 years, we’ll say), a reasonable starting point is to put $2000 per year (or ~$170 per month) into each account. That’s how the math shakes out.
Depending on your timeline and assumed rate of compound growth, a simple spreadsheet or question to your financial planner will inform what your savings plan should be.
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
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I didn’t know how to pronounce Les Miserables until 2017. Now I know all the songs. My wife bought us tickets to the show for my birthday this year. What a triumphant masterpiece! 99% of children dislike art museums, musicals, and reading the news. But many adults find beauty or intrigue in those same ideas.
A similar “boring-to-not-boring” transition happens in personal finance. The problem is that the fun doesn’t last. We had fun getting our personal finances under control. We got hooked on that fun. It lasted for months or even a few years. Money went from a scary unknown to an exciting area of optimization.
But then we got it all figured out and…well, the thrill is gone as B.B. King sang. And thus you find yourself here, on a .blog domain. Who uses .blog?!
Don’t despair. The lack of financial fun is a good thing. It’s a sign that your finances are in a great place.
But I still find fun financial things to think about and learn. There are a few traditionally “boring” topics that I find exciting. I’ll share them below, and maybe you’ll be intrigued too.
Get to Know Your Taxes
Can it get more boring than taxes?!
Actually, I like taxes. Over the past two years, I’ve realized that the tax code is half puzzle and half game, and I love puzzles and games.
The rules are well-defined (but there are a lot of them). I certainly do not know all the rules, but the more rules I learn, the better my “strategies” become.
The “pieces” interact in different (and sometimes surprising) ways. There are always multiple ways to “solve” a tax problem. Some solutions decrease this year’s taxes, and others decrease future taxes. Sometimes, we trade off lots of effort and paperwork to save a few bucks; is that a worthwhile trade?
If you’re a young W2 worker (like me), there’s not too much to know. Our tax scenario is fairly simple.
But if you’re a retiree earning Social Security income, making IRA withdrawals, realizing short and long-term capital gains, earning interest, dividends, and more, you’ve got an interesting puzzle before you! The interactions on a simple 1040 Federal Tax return can be quite complex and involve thousands of tax dollars per year.
If you’re a business owner or a real estate investor, the “puzzle” intensifies! This is why a good CPA accountant is worth their weight in gold.
To be clear, tax planning is not about cheating the tax system. When accountants tell me they’re “aggressive,” I take it as a euphemism for “I bend the tax code until it breaks.” That’s bad—and usually illegal. Avoid that. If you’re an honest accountant, please find a different word than “aggressive.”
But working with a tax professional who 1) knows the “rules” of the tax code and 2) enjoys optimally “solving the puzzle” you bring to them…well, odds are they can solve your puzzle much better than you can alone.
Pro tip: starting this year, review your 1040 Federal Tax Return (or your country’s equivalent)…try to go line-by-line, and if you don’t understand what a particular line item means, look it up.
Wait. For A Decade or Two.
The Best Interest is a big proponent of long-term investing, which, as you might have noticed, includes the verbiage “long-term.”
We’re not talking weeks or months. We measure in decades. We beat a slow-tempo’d drum of basic tenets, like “buy and hold” and “diversify” and “don’t look for needles, buy the whole haystack.“
BORING!
To spice things up, I like to remind myself (and you) of market history. One of my favorite cautionary tales is that returns are never promised, and we’ve suffered decades of zero returns.
In that article linked directly above, I put together this chart:
WOW! Multiple ~20 year periods of zero return?!
As I’ve realized in hindsight, there’s a problem with that chart. Everything is factually correct, but the chart presents data differently than most people think. I inflation-adjusted the data. In other words, the chart does not measure dollars and cents. It measures purchasing power.
There have been multi-decade periods when investors’ purchasing power was stagnant. Their accounts increased in value, but inflation ate the entirety of those gains.
Most of us, though, measure our accounts in dollars and cents. We understand the reality of inflation, constantly knawing at our purchasing power. But we don’t inflation-adjust our conception of the world. If $1.00 grows to $2.00, we see exactly that. We don’t say, “…but inflation was 14%, so really it’s like I only have $1.86.”
To fix this problem, I reconstructed the plot to show nominal dollars.
If you read my primer on accounting for inflation in retirement, the chart above lives in “the convenient world” while the chart below lives in “the true world.”
The lesson: it’s realistic for your diversified stock portfolio to go through a ~5+ year period of negative nominal returns. If you’re unlucky, it might stretch out to 10+ years!
Now that’s exciting (in the same way BASE jumping is exciting).
It’s a far stretch from the lazy shorthand of “the S&P returns 10% year!” that too many FinFluencers use. I’ve been guilty of that shorthand, and I understand its usage when calculating 30-year compound math.
I despise that shorthand, though, when I hear it used to explain expected stock market returns to a new investor. New investors need to know that stock investing is not a smooth ride. It’s not always up and to the right. It involves years – if not decades – of what feelslike wasted time.
5 years is a long time. 10 years, per math, is longer. Are you excited to stay the course that long through thick and thin?
Important note: this analysis looked at a lump sum investment. Dollar-cost averaging, though, smooths this ride out immensely!In fact, DCA actually takes advantage of bad times and volatility. I’m a huge fan of DCA’d monthly contributions through thick and thin.
Know Your Flow
Cashflow is the cinder block of personal finance.
It’s boring and basic and plain and every other synonym thereof.
But it’s also foundational.
You cannot build strong personal finances without healthy cash flow, and you won’t know if you have healthy cash flow unless you measure it.
Buy Protection
Speaking of BASE jumping…
The exciting part of extreme sports is “the jump” itself. But it’s someone’s job to consider the “boring” questions like,
“Is that parachute packed correctly?”
“Can that bungee cable support a 300-pound man?”
“If he doesn’t make it and lands in the pit of burning tires, what’s the rescue plan?”
Ok. That’s kind of funny. But on a more serious note, about the modern miracles of CPR and AED?
Christian Eriksen is a Danish soccer player, currently on the roster for Manchester United. On June 12, 2021, Eriksen had a cardiac arrest during a national team game against Finland. 50 years ago, he would be dead. But because the training staff is both CPR-trained and well-equipped with a automated external defibrillator (AED), Eriksen’s heart was shocked (one shock!) back to life. He’s still plays today.
A similar cardiac arrest happened to Damar Hamlin in a Buffalo Bills football game in January 2023. Again, an AED shocked his heart back to life. He’s alive and well and still playing football.
These might be 1-in-10000 events. Easy odds to ignore, right? But asking, “What happens if…” can lead you to some life-saving answers. A little preparation goes a long way.
The personal finance world skews less life-and-death than cardiac arrest, but some of the financial “Q&A” will point you toward:
A well-funded emergency fund.
Life insurance (term only!)
Home and auto insurance
Disability insurance
An umbrella insurance policy
If you’re unsure what kind of insurance you do (or don’t) need, ask yourself:
If something bad happened on [this axis], do I have the assets needed to pay for it?
If I died, would my family have the assets and cash flow to continue our desired lifestyle? If not, you need life insurance.
If I got disabled and couldn’t work…
If my house burned to the ground or got swept away in a hurricane…
If I got sued when the mailman trips on my sidewalk…
Etc. etc.
If you don’t have the assets to cover your liability, you need insurance.
You Made It. Go Live Life!
If everything in your finances feels boring, that’s a good thing. You’ve reached the top.
There are plenty of nuanced topics to nosedive into.
Or, you can just go live your life. Go check out a musical or a museum. Another story must begin!
Thank you for reading! If you enjoyed this article, join 8000+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.
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I don’t usually dive into odd niche topics like this, but I just spent 12 hours car shopping over the weekend. That’s a lot of test drives and awkward conversations with over-enthusiastic salespeople. Sorry, Clayton, I can’t picture myself driving this car off the lot today…why do you ask?
Long story short, I’ve compared tons of cars recently. Hybrids, as you might know, are always more expensive than their all-gas counterparts. But…aren’t hybrids cheaper to operate? Which means…could they save us money in the long run?! This got my finance brain whirring to life.
I wrote an article in 2020 and updated it in 2023 that covers the real, total cost of car ownership. The cost of car ownership can be broken down into 6 main categories:
Purchase/Depreciation
Financing
Maintenance and Repair
Fuel
Registration/Inspection
Insurance
Financing rates, registration costs, and inspection costs are universal for all cars. There’s no difference between a traditional gas car and a hybrid on those axes.
But we know (or at least suspect) purchase costs, maintenance, fuel, and insurance costs will vary between hybrids and all-gas cars.
A Bird in the Hand…
Aesop wrote in 600 BC that “a bird in the hand is worth two in the bush.” Or, in modern terms, “I’d rather have a dollar in my hand today than two dollars in 20 years.”
Money today is worth more than money in the future. This is called discounting. And we’ve used this idea before to analyze mortgage costs.
We’re faced with a similar problem today.
When we buy a hybrid car, we spend more on the purchase price today. But, ostensibly, we save operating costs each year we own the vehicle. However, those future savings are worth less than the extra dollars spent today.
Do we save enough on long-term operating costs to compensate for the differences in sticker price and depreciation? That’s the question!
To answer it, we need to:
Understand the differences in costs between gas cars and hybrids (sticker cost, depreciation, fuel costs, insurance costs, maintenance costs).
Determine an appropriate discount rate for this analysis and apply it.
An Appropriate Discount Rate
As of 2022, the average age of all cars on American roads is 12.5 years. That said, the average car owner has their vehicle for 8 years before (most often) selling it or (less often) it breaks down completely.
Therefore, a happy medium duration for today’s analysis is 10 years. We’re going to look at the differences between hybrids and gas cars over a 10-year life.
How much less valuable is a dollar in 2034 than a dollar today?
Warren Buffett uses U.S. Treasury bond rates as his discount rate. I’m inclined to agree with him. It’s “the risk-free rate.” In any analysis, we can ask ourselves, “Would I rather pursue [this risky option], or simply invest my money in U.S. Treasury bonds for a decade or two?” Good enough for Warren, good enough for me.
As of February 2024, the 10-year Treasury rate is 4.3%. The table below shows how to apply that discount rate to future savings.
Example: I could take $74.47 today, invest it in a 4.3% annual interest bond, and I’d have $100.00 in seven years. Thus, if a hybrid car saves me $100 in 2031, it’s precisely the same as having $74.47 in my pocket today in 2024. A bird in the hand…
How Much Does a Hybrid Save Us?
We need an example of two cars to analyze. Since Kelly and I are currently active car market participants (we’re soon to have a “Baby on Board”…by the way, what’s the deal with those stickers?), I’ve been researching the Kia Sorento. Let’s dig into the details of the all-gas Sorento vs. the hybrid Sorento.
All these details I’m about to share with you are shown mathematically in this spreadsheet. Please feel free to make a copy and play around yourself.
To make a copy of a Google Sheet: File –> Make a Copy
Sticker Price and Depreciation Rate
The gas Sorento starts at $31,990. The hybrid Sorento starts at $36,990.
According to iSeeCars, both vehicles will depreciate 53% in their first 5 years.
Gas Expenses
To calculate estimated gas expenses, we need to understand:
how far we drive
our miles-per-gallon efficiency of the cars
and the cost of gas
Depending on your source, the average American drives between 13,000 and 15,000 miles per year. We’ll use 14,000 miles per year for this article.
The Kia Sorento hybrid gets 35 miles per gallon (we’re looking at the all-wheel drive model, thanks to snowy Rochester winters). The all-gas Sorento gets 24 miles per gallon.
Average American gas prices are currently $3.27 per gallon.
We combine those numbers to find out:
The Sorento Hybrid incurs $1308 of gas expenses per year.
The all-gas Sorento incurs $1907 of gas expenses per year
Insurance Costs
The average “full coverage” auto policy costs $2000. Your miles may vary (#carjoke).
Insurance is very personal in that nature. Your driving history and desired coverage level significantly affect the insurance premium.
Nevertheless, we’ll use $2000 per year for the all-gas Sorento. Hybrid insurance costs, on average, 7% more than all-gas models; the Sorento Hybrid will cost $2140 per year.
Maintenance
Most sources cite that hybrid maintenance costs are lower than all-gas engines, as hybrids use regenerative braking (fewer brake replacements), don’t use alternators or starters, and tend to have simpler transmissions.
Unfortunately, I cannot find any sources that provide hard numbers to support this claim! If you find something, please let me know.
Therefore, I’m using an average figure of $600 per year for repairs and maintenance and biasing those dollars towards the end of the cars’ lives. Newer cars break down less and are covered by various levels of warranty.
All-In Costs: Hybrid vs. All Gas
Over our 10-year analysis period, the Kia Sorento Hybrid would cost us $55,662(depreciation + gas + insurance + maintenance), as measured in 2024 dollars.
The all-gas model would cost us $56,491.
Pretty darn close, but it’s a slight nod to the hybrid model. Category-by-category, the results are:
The hybrid costs $3000 more in depreciation costs.
The hybrid saves $4997 in gasoline costs.
The hybrid costs $1167 more in insurance.
And while I’m focusing only on dollars and cents here, there’s an environmental argument too. I won’t dive into the details. But you should probably place a value on environmental costs and benefits (albeit a difficult value to define in dollars and cents).
Of course, this is a perfect example of “average pilot syndrome.” Averages are useful in theory but rarely in practice. You must re-run this analysis for your unique scenario. The first questions that come to mind are:
Which specific model are you looking into? It might not be the Kia Sorento.
What are the miles per gallon ratios of the all-gas and hybrid models?
What are insurance rates like? Not only for your preferred car, but for you?
What are the typical maintenance costs of your desired car?
How does your car depreciate over time?
Should you adjust the discount rate? (PS – you can play around with the spreadsheet yourself, and you’ll see that the discount rate does not change the outcome significantly in this case.)
Was It Worth It?
We’ve covered a lot of conjecture and “what if” questions, made some assumptions, and created a spreadsheet. Is it all worth it?
First, I think I’m directionally accurate. Will the real world play out as I’ve modeled here? Of course not. For all I know, an asteroid will blast our car into smithereens on its first night in the garage (it’ll be a new kind of hybrid; half shrapnel, half vapor). But I think I have a better factual understanding now than I did before. I hope you agree.
This was ~2 hours of work (mainly on the writing, not the math) to optimize an $800 decision. And because I’ve discounted those future dollars, that’s $800 as measured today. Not bad! For some hybrids, this is likely to be a multi-thousand dollar difference. Nice!
Time to unplug, fill up, and peel out.
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.
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The more conversations I have (both via The Best Interest and my full-time job), the more I see people overlooking and underestimating the most foundational principle of personal finance.
What is this simple fundamental? I’ll get to it in 30 seconds.
Instead of focusing on this fundamental, though, investing usually gets the glory.
“Should I invest in stocks? Which companies? What’s going to happen in 2024?”
“How much should I put in my 401(k)? What about my Roth?”
“Are 529 accounts worthwhile? What about HSA accounts?”
These are all good questions that someone should eventually understand. I get it. Investing is cool!
If not investing, then taxes are the next most popular topic.
“We earned way more income this year than we expected…any tricks to reduce my tax bill?”
“I’m retiring soon and worried about RMDs…how do I go about tax planning?”
Again, I get it. Who wants to overpay taxes? It’s another great topic. But both investing and taxes put the cart before the horse.
Because the financial fundamental that most people overlook is monthly cash flow. Your cash flow is the foundation of everything else in your economic life. All the other important stuff (investing, tax planning, all of it) comes after understanding your monthly cash flow.
What is “Monthly Cash Flow?”
What, precisely, do I mean by “monthly cash flow?” Quite simply, it’s your Income minus your Expenses. Yes – it’s that simple. Income minus expenses. Simple, but not easy.
When experts evangelize “spend less than you earn” or “pay yourself first,” they preach the gospel of positive monthly cash flow. When they suggest you budget and track your expenses, they ask you to measure your monthly cash flow.
After all, where are your investment dollars coming from? You’re not pulling them from thin air. They can only come from having a positive monthly cash flow. Investing follows positive cash flow.
A negative monthly cash flow has an inevitable – and painful – floor. You’ll run out of money. You’ll go into debt. Or go bankrupt. However you define it, you’ll achieve financial failure. None of us want that. Charles Dickens had a point in his novel David Copperfield, where the character Wilkins Micawber stated:
“Annual income twenty pounds, annual expenditure nineteen nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pound ought and six, result misery.”
Measuring Monthly Cash Flow
How do you measure monthly cash flow? I have two suggestions:
Up until ~June this year, I used the app YNAB religiously. I’ll explain why I stopped below. But I still think YNAB is the best budgeting/tracking app out there, and I’d recommend it before any others. YNAB is detailed, granular, and a perfect tool for measuring monthly cash flow.
But now that I’m married, my wife and I wanted to combine finances – including finding a budgeting/tracking method that works for both of us. We settled on a simple Google Sheets spreadsheet. We update the sheet every month with our current account figures. That allows me to do a month-to-month comparison and measure monthly cash flow.
If you’re not doing something like this, I’m concerned for you. Why? Because I’ve seen firsthand where someone:
Knew their income. It’s easy to measure, after all. Their family took home $10,000 per month.
And they assumed they knew their expenses. Roughly $7,000 per month.
Hooray! Positive cash flow of $3,000 per month…right?!
So, I asked this person:
Great. If we look back on your bank accounts (and investing accounts) from a year ago, can we see the (roughly) $36,000 in growth? …a $3,000 monthly surplus times 12 months = $36,000. We should be able to see that money and check that your cash flow measurement is accurate.
Can you guess where this is going? The money wasn’t there. There was no measurable growth over the past year whatsoever. I see this same story play out over, and over, and over…
You’re probably asking yourself: How can that be?! How can someone be “missing” $36,000 per year?
It’s always the same culprit. Always. They assumed they knew their expenses at $7,000 per month. They were wrong. It’s that simple.
They either measured poorly, or didn’t measure at all, or created a budget before spending and then never tracked their real spending after the fact.
Perhaps they accounted for typical monthly expenses but forgot to include big, one-time expenses. Your $10,000 family vacation is very real, even if it’s not a monthly expense. Pro tip: take those big one-time expenses and divide them by 12. You now have a monthly expense to add to the ledger.
A poor understanding of your expenses (your spending!) is both common and near-impossible to overcome. You have to earn a ridiculous amount of money to no longer care about your spending. One reader confessed to me that his annual income has been ~$400,000 for 10+ years, but he has barely saved beyond his 401(k).
How?! Spending.
It’s very rarely a poor understanding of your income. Income is usually one or two paychecks a month. Very easy.
Spending involves dozens (maybe hundreds?) of transactions per month. Measuring spending is tedious. And it might force you to face painful conclusions, like, “I haven’t been on the Pelaton in 8 months, but I’m still paying for it…”
Nevertheless, you can’t manage what you don’t measure. You need to understand your spending to know your monthly cashflow.
Brick By Brick…
Personal finance can be thought of like a building. It takes planning, “materials,” and plenty of time to build.
Your monthly cash flow is the foundation upon which all growth occurs. If you know it, you’re rock solid. If not, you’re building on quicksand.
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.
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You made it! The sun is setting on 2023 and dawning on 2024. Among other personal reviews, the changing of years is the perfect time to refocus on your finances. Let’s spend a few minutes discussing:
Conducting a year-end financial review
Setting goals for next year
Conducting a Year-End Financial Review
We want our year-end financial review to do two important things:
Provide clear, actionable data on our previous year’s finances.
But without requiring days’ worth of time to conduct.
So we’re going to focus the review in 7 major areas:
Spending (including Unexpected Expenses)
Income
Saving
Net Worth
Investing, Allocation, Etc.
Insurance and Estate Planning
Progress on Previous Goals
Spending
Spending is the most time-consuming part of the review. But you can’t skimp here! A poor understanding of household spending is one of the deadliest sins of personal finance. It’s all too easy to assume your spending is under control when it’s not. That poor assumption is the difference between financial health and financial decay.
So – what exactly should you be measuring?
Total dollars spent. Personally, I like measuring monthly.
Categories you spent on. Think groceries or housing or debt repayment. If you’re curious, I shared my personal budget categories here. You should be able to identify if you spent $4000 on groceries…or $8000!
Unexpected expenses. How do you handle unexpected expenses and/or items not covered by your basic monthly budget? This answer is highly correlated to financial success/failure. Ask yourself:
Did your emergency fund do its job this year? Is it in a healthy place right now?
Did you stick to your budget? Or did you allow the allure of “shiny objects” to pull your purse strings in a regrettable way?
Income
What was your household income for the year? How did it change from last year? And how do you expect it to change in the year ahead? Most importantly, how does your income compare to your spending? aka how’s your cashflow?
Saving
How much did you contribute to (or withdraw from) your savings accounts this year? The same for your Roth IRA, your 401(k), or any other savings/long-term investing accounts.
Note: this should only focus on your contributions, not whether the investments in your accounts went up or down.
Net Worth
Update your net worth, tracking all of your assets and debts. How did your net worth change over the year? Personally, this is something Kelly and I have started doing monthly. It gives us a high-level understanding of our household’s financial health.
Net worth does include whether your investment accounts have gone up or down. After all, investing is one of the reasons we’re all here on The Best Interest! 🙂
But I urge you to not let investments/Net Worth fool you during a year-end review! For example, most of us would have seen our net worth decrease in 2022, as it was a bad investing year. The opposite is true in 2023 – the S&P 500 is up 25% year-to-date!
If we measure on Net Worth alone, the poor investment returns in 2022 could “wash away” our other good financial habits. Similarly, the great investment returns in 2023 could “sweep under the rug” our bad habits.
Investing: Allocation, Performance Etc.
The year-end review is a great time to look at all of your investing accounts. 401(k), IRAs, taxable accounts, etc.
First, review your allocation and rebalance as necessary.
“Allocation” is the percentage of stocks, bonds, alternatives, etc. that comprise your portfolio. As different assets perform differently throughout the year, our portfolio allocations drift from their “target allocation.” The act of “rebalancing” is the process of making trades in your accounts to return to that pre-defined “target allocation.”
You should also review your performance.
Are your accounts up? Or down? By how much? The main reason for tracking performance is to understand if your accounts are on-pace with the underlying “benchmarks.”
For example, let’s take a retiree with a 50% stock, 50% bond portfolio. We can look at some basic indicies and see that so far this year:
The S&P 500 (stocks) is up 25%
The bond AGG index is up 2.5%
So, roughly speaking, I’d expect this retiree’s portfolio to be up ~13-14%. If their performance is drastically different than ~13-14% (up or down!), I’d want to understand why. Some reasonable reasons could be:
Their stocks investments are more value-heavy (the Dow Jones is only up ~13% this year) or growth-heavy (the NASDAQ is up ~46% this year)
They own individual stocks instead of owning indexes.
They own individual bonds, not funds.
At the end of the day, this is an exercise in asking, “Does my investment performance match my expectations? If not, why not?”
Insurance, Estate Planning, Etc.
Death isn’t a fun subject. I won’t need to beat it to dea…hmmm..
Nevertheless, you should check annually to make sure:
Progress on Previous Goals
It’s time to check in on last year’s goals. Did you accomplish what you’d hoped in 2023?
If not, why not? The curiosity to ask “why” is the best way to grow.
Setting Goals for 2024 (and Beyond)
Now it’s time to look ahead. What are some of the smartest financial goals you can set for yourself?
Saving
Savings goals take many forms. As your finances improve, your savings goals will evolve.
Perhaps the most basic is saving for an emergency fund. You should have money set aside in your bank account simply to act as a safety net should life get hard.
Retirement saving is another common set of goals. For example, my “basic” retirement savings goals are ensuring I get my employer match on my 401(k), and then maxing out my Roth IRA contributions for the year.
And then there’s “saving for an X” goals. A new house, your first car, a trip to Thailand. When you hope to have large outlays of money, it makes sense to create a savings goal for yourself. Some people call these “sinking funds.”
Reduce/Control Spending
As I wrote earlier, “A poor understanding of household spending is one of the deadliest sins of personal finance.” Controling your spending is a wonderful goal. But it’s easier said than done.
To be successful here, you must measure. You need data. You’ve got to understand how much you’re spending today and set a realistic, measureable goal for reduction.
How to do that “measuring?” I love the budgeting app YNAB. I’m also a fan of simple spreadsheets, if that’s more your style. If you’re looking for something to do today, I’d start by downloading your past 3-6 months of credit card statements and/or bank account statements. What do your transactions look like? How much are you spending? And where?
Increase Income
What can you do to increase your income this year?
Personally, I’m not a fan of recommendations like “find a new side hustle” or “get a second job.” The point isn’t to work ourselves to the bone in pursuit of money.
Instead, I’d focus on questions like, “How can I be more efficient?” or “How can I secure a raise at work?” or, especially in the modern economy, “Will a job/career change lead me to higher income?”
Even a minor pay bump, when magnified by decades, makes a huge difference.
Pay Off Debt
Debt reduction is another common goal, but I recommend caution here. Make sure you separate the math of debt reduction from the psychology of it.
The math says that interest rates matter. Low interest debt (~5% or lower) isn’t that bad, and doesn’t need to be paid off quickly. High interest debts (~8% or more) should be highly-prioritized. Credit cards, for example, with 20%+ interest rates are a five-alarm fire for your finances. The mid-level debts (6-7%) are a coin flip.
But the psychology of debt payoff is highly personal. Some people can’t stand debt, and having a 2% car loan keeps them awake at night. If this is you, I encourage you to priorize your sleep and pay down that low-interest debt! But just know that, mathematically, it’s not optimal.
It’s ok. Personal finance is a mix of numbers and psychology. We’re not automatons, and sometimes our brains trump what the numbers tell us.
The numbers: currently, risk-free savings accounts are paying 4.5% – 5%. Why use $1000 to pay off a 2% loan when you could instead earn 5% interest?
Invest More…
Investing is the flywheel of wealth creation. Put your army of dollars to work creating more dollars. Annual investing goals make sense. Most of my work is focused on investing. I won’t go too deep here. But I’m 100% behind investing early and often.
Put Together a Financial Plan
A financial plan is a bridge between your comprehensive financial ecosystem and your personal values and desired outcomes. The process of financial planning makes you realize, “It’s more than money. It’s about your life.”
A good financial plan is more than that bridge, though. Using another transportation metpahor, a financial plan is a lighthouse in the financial fog. It provides vital direction and (in rough terms) distance to where you need to go.
Considering the number of people whothink, “I have no idea where my finances are…” …I’d say putting together a financial plan is a wonderful goal for 2024.
Go Get Your Goals!
Happy New Year! I hope you had a great 2023 and kickoff 2024 with verve.
I’d love to hear from you if finances are part of your 2024 goals! Drop a Comment or shoot me an email: [email protected].
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.
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If you’re looking for holiday reading or listening, look no further. Follow me as I break down:
The most-read articles on The Best Interest in 2023.
And the most-listened-to podcast episodes of The Best Interest Podcast in 2023.
The Best of the Blog
The Best of the Podcast
The Best Interest Podcast is available on all podcast players, including Apple, Spotify, etc.
This year’s best episodes are below (both the episode numbers and titles) so you can find them on your own preferred podcast app.
Episode 50, The Banking Collapse in Simple Terms – on the Silicon Valley Bank collapse
Episode 54, Choosing FI, with Brad Barrett – on financial independence and the “4% rule”
Episode 57, Does the Debt Ceiling Affect Your Finances? – on the Federal debt ceiling, and whether you should care
Episode 60, Are You Saving Too Much, with Nick Maggiulli – packed with interesting tips, including Nick’s #1 finance tip (which has nothing to do with money!)
Episode 62, The Reality of Retirement Beyond the Numbers, with Fritz Gilbert – a must-listen for retirees
Episode 66 – Marriage, Kids, and Money, with Andy Hill – a must-listen for parents
Episode 68 – Minimalism: How Much is Enough?, with Rose Lounsbury – how to simplify our spending and our lives
Episode 69 – 529 Plans Aren’t Worth It?!, with Sean Mullaney – packed with fantastic tax advice
Episode 70 – The 7 Sins of Investing, with Jeremy Schneider – keep your portfolio simple…or else!
Thank you all for the time you’ve spent here in 2023. I couldn’t do this without you. Here’s to more “investing in knowledge” in 2024!
Thank you for reading! If you enjoyed this article, join 7500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
Looking for a great personal finance book, podcast, or other recommendation? Check out my favorites.
Was this post worth sharing? Click the buttons below to share!
What a long, strange couple of months it’s been for me. On the blog, things have been quiet. Behind the scenes, I’ve been as busy as I’ve ever been.
The good news is that this busy-ness will (eventually) lead to a number of interesting articles. I’ve been reading Cal Newport’s Deep Work, for instance, and have some thoughts on it. I’ve been thinking about the concept of “no speed limits”. Shocking but true: I’m going to write an article about my primary credit card. And I’ve been reading and writing a lot about “doing nothing”.
Today, though, I want to clear my head (and my inbox) by sharing five short financial anecdotes.
In the past month, I’ve had probably twenty deep discussions about personal finance and personal values. While some of these conversations lead to bigger things (like the three articles I mentioned above), most don’t. But they still produce intertesting concepts and ideas. They sometimes lead me to make changes.
Here are a five money-related topics that don’t (yet) warrant articles of their own, but which I still find interesting (and worth sharing).
Going With Google
During my ten days in Portugal for the FI chautauqua, cell phone service was a common topic of conversation. Some folks didn’t have any. Others were paying a small fortune just to get a tiny bit of data from their provider.
There were two types of people who didn’t have any trouble with their cell service in Portugal: those who use T-Mobile and those who use Google FI.
“What’s Google FI?” I asked. I’d never heard of it.
“It’s Google’s cell service,” Owen said. “It’s cheap and has lots of features, but you can’t use it with Apple phones.”
“Actually, you can,” Bill said.
“But the website says it doesn’t work with iPhones,” said Owen.
“The website is wrong,” said Bill. “I’ve been using it with my iPhone for months with no problems — even here in Portugal.” He showed us his phone and explained how much he liked Google FI.
“I’ll look into,” I said. And I did. Here’s what I learned:
Kim and I currently spend $117 (plus taxes and fees) for our shared T-Mobile plan. This gives us a limited amount of high-speed data (although plenty for normal needs), plus service for my Apple Watch. (When the watch dies, I don’t plan to replace it, so eventually that’ll save us ten bucks per month.)
If we were to move to Google FI, it’d cost us $120 per month (plus taxes and fees). That’s roughly the same price, obviously, with no real advantages. (We’d have access to more high-speed data, although we rarely need that. Plus, we’d get Google One, whatever that is.) And it doesn’t include service for my watch.
My conclusion? For T-Mobile customers like us, moving to Google FI doesn’t make much sense. But I suspect many people ought to consider their service.
Meanwhile, we’ve been struggling with our wireless network here at home. Although Apple no longer makes wireless networking equipment, our network is built with routers from when they did sell the stuff. Some of these routers are now a decade old (or possibly older). We have four of them.
For whatever reason, our network is constantly going down. It’s frustrating. It’s quite common that three of the routers will be up while a fourth will arbitrarily decide to stop working for a few days. (And when we changed the network name last spring? Nightmare!)
While visiting MMM HQ last weekend, I noticed that Pete uses the Google Mesh system to provide service in his co-working space. “Do you like it?” I asked. “I’ve heard other people rave about Google Mesh, but I don’t know anything about it.”
“It’s awesome,” he said. “Totally trouble-free.” So, I’ve ordered a starter set of Google Mesh devices. They’ll arrive tomorrow. I have high hopes that this will cure our wifi headaches.
Taming the Email Beast
After returning from my nineteen-day trip to Portugal, Wisconsin, and southern California, my email inboxes were swamped. (I have five separate gmail accounts. Crazy, right?)
Naturally, I complained about the situation on Facebook. My friend Charlotte sent me a private message: “Do you have time to hop on a video call?” she asked. “I’ll show you a way to tame your email.”
Charlotte spent twenty minutes walking me through an email system she recently adopted. It effectively divides your gmail inbox — and yes, you have to be using gmail — into five different inboxes, each of which is themed. Once a day, you tackle your main inbox, routing messages to sub-inboxes. Then, when you have time, you work through the other inboxes.
This is a minor change to the way I do things (and admittedly it mostly delays messages to later), but it’s effective.
I send myself email twenty times each week. It’s my note-taking system. It’s how I offload things from my brain. This is great…except that my inboxes tend to get flooded with book recommendations, article ideas, and reminders of upcoming events. It’s a mess. Using this system, I can still send myself messages, but I’m now able to flag these messages so they’re routed to the appropriate sub-inbox.
I’ve been following Charlotte’s advice for two weeks now, and I like it. It hasn’t solved my email woe, but it’s mitigated the problem substantially.
Dozens of Credit Cards
Last weekend, Kim and I flew to Colorado to celebrate the birthday of a certain mustachioed friend. While there, I had several memorable conversations.
For instance, I chatted with Amy from Go With Less about how she and her husband play the credit-card game. They have an insane number of cards — 34? 43? I can’t remember the exact count — and over three million credit-card points.
While our conversation touched on topics like manufactured spending (a concept that blows my mind and angers card issuers), I was more interested in how and why Tim and Amy juggle dozens of credit cards. Doesn’t this hurt their credit score? Turns out: No. Because they pay bills on time and never cancel cards, they have nearly perfect credit.
Here’s a video in which they address this topic:
[embedded content]
I wanted to ask Tim and Amy more about their crazy credit-card fueled lifestyle, but I didn’t have the chance. I look forward to picking their brains more in the future, though.
Health Shares for the Non-Religious
Last weekend, I also had a conversation with Ben, who famously gets his cars for free. Ben is super smart and doesn’t accept the status quo. He’s always looking for ways to challenge the system in order to make the most of his money.
Lately, he’s been doing this with healthcare.
For many people who have retired early, health insurance is thorny issue. It’s expensive. Take my case, for example. I pay $403 per month for shitty coverage. This year, I’ve met my $7900 out-of-pocket max, which means I’ll have spent $12,736 (plus co-pays and prescriptions) when the dust settles. I hate the U.S. healthcare system. It’s insane.
Well, Ben too thinks it’s insane. Rather than complain about it, though, he’s been seeking creating solutions.
“Have you looked at health-sharing ministries?” Ben asked me on Sunday morning. “They can be a great way to cut costs.”
“I have,” I said. “But they all require a statement of faith, which I’m not able to give.”
“I had the same problem,” Ben said, “so I searched for alternatives. I found Sedera. It’s basically the same as a health-share ministry. You still have to agree to abide by certain principles, but they’re not based on a religion.”
“Is it affordable?” I asked.
“Yes,” he said. “I’m paying $200 per month per person for my wife, my daughter, and myself.”
“That’s not bad,” I said.
“But here’s the thing,” Ben said. “Sedera is designed to work with a direct primary care physician.”
“A what?” I said.
“A direct primary care physician is just what it sounds like. It’s a doctor that you work with directly without a third-party intermediary. That means the doctor bills you directly, not an insurance company. When you combine this with a health-sharing program like Sedera, it’s a cost-effective alternative to traditional insurance.”
“Kim and I have an appointment to talk with an insurance broker next week,” I said. “I’ll have to look into this as an alternative.”
“Do it,” Ben said. “You won’t regret it.”
Downgrading My Motorcycle
Lastly, here’s a topic that comes from several different conversations and a lot of soul-searching on my part.
When Kim and I started dating, I was surprised to learn that she was a motorcycle enthusiast. After she bought her father’s bike from him, I decided to learn to ride myself.
I started with a low-power Honda Rebel, which was perfect for my needs. Then, a couple of years ago, I made an impulse purchase: I upgraded to a Harley-Davidson Street 750. The new bike gave me the power to keep up with Kim on long trips. (The little Rebel was always falling behind on the highway.)
Turns out, though, that for day-to-day riding, I wish I had my Rebel. Kim and I don’t make many long trips — about one per year. And when we do, I’m fine falling behind. I’d rather have a quick and easy bike for running errands or zipping downtown. My Street 750 is not the right bike for this. It takes a long time to gear up and get the Harley ready to go.
I’ve spent the past year trying to figure out my best move. I’ve talked with a lot of friends and considered several options. Do I just stick it out with the motorcycle I have? Do I buy a new Rebel? Do I do something else?
After much thought and contemplation, I’ve decided that my best plan for the motorcycle situation is three-fold:
Sell the Street 750. Use the proceeds to purchase two replacements.
Buy a (used?) scooter to use for errands and running downtown. Kim plans to sell her motorcycle, so long trips are no longer an issue. I want something quick and easy to ride. I want to be able to get on the bike and go.
Buy an electric bike for use around home. I already own a bike, but as I’ve mentioned before, I don’t ride it. For one, I am fat. For another, we are surrounded by hills. MMM has urged me to look into Rad Power electric bikes.
Making this move — which likely won’t happen until the spring, when people are looking for motorcycles — is much more aligned with my values and lifestyle. Currently, my motorcycle mostly gathers dust. I ride it maybe 1000 miles per year. I’d ride the scooter more often, and the electric bike would get me out slicing through these hills for exercise!
What about you? What financial conversations have you been having with your friends? What minor money moves are you making in your life?
Every time I get my hair cut, I’m faced with a dilemma — should I tip the barber or not? I usually get my hair cut in a small-town shop. I tip $2 on a $12 haircut. If I get to hear stories about Vietnam or histrionic political rants, I tip $3, even if I don’t agree with the barber’s viewpoints. (I tip because I’ve been entertained.) Sometimes, if I don’t have enough cash, I don’t leave a anything at all. Are these tips appropriate?
What about when I pick up Chinese takeout? Should I have tipped the guys who delivered our new gas range last fall? What about a hotel bellhop? A parking valet? Out of curiosity, I did some research on tipping practices in the United States. There’s actually significant disagreement about how much to tip for even common services.
For example, you know you should tip your waitress. But how much should you leave? Some people claim that 10% is adequate. Others claim that 20% is standard. But I suspect that most of us learned to tip 15%, and to give more for exceptional service. (The wikipedia entry on tipping currently contains the bizarre claim that “18% is generally accepted as a standard tip for good service”.) Which amount is correct?
The concern around tipping stems from the need to get it right — offer too little, and you run the risk of offending someone; offer too much, and you needlessly impact your budget. Plus, there’s actually significant disagreement about how much to tip for even common services.
After browsing dozens of pages, I drafted the following guide. The amounts listed are based on averages or on consensus, when possible.
“Tip: (noun) — a small present of money given directly to someone for performing a service or menial task; gratuity” — Dictionary.com
Food Service
It’s common knowledge that you should tip your waitress. But how much should you leave?
Some people claim that 10 percent is adequate; others believe that 20 percent is standard. But a majority of us learned to tip 15 percent, and to give more for exceptional service. (The Wikipedia entry on tipping contains the rather bizarre statement that “18% is generally accepted as a standard tip for good service.”) So which is it?
Service
Tip Suggestion
Comment
Barista
None
Many people suggest putting coins in the tip jar.
Bartender
15% of total bill or $1/drink
Pre-tip for better service
Delivery Person (including pizza)
10%
$2 minimum
Maitre d’
$5
(… up to $25 for special effort)
Takeout
None
None
Waiter
15% for adequate service
20% for exceptional service. For poor service, leave 10% or less.
General holiday tipping guidelines
Holiday tipping is never required. Even when it’s the social norm, you shouldn’t tip if you can’t afford it or you don’t feel the person deserves it.
Tipping tends to be more common (and on a larger scale) in big cities than in small towns. The best way to determine the etiquette in your area is to ask around.
In general, you should consider giving a holiday tip to the folks who take care of your home and family, especially those you see often. The more often you see someone and the longer you’ve known them, the more you should tip. (Someone who works in your home regularly — such as a housekeeper — usually expects a tip.)
For personal services like manicures, massages, pet grooming, and fitness training, tip up to the cost of one session, but only if you see the same person regularly. For example, if you get a $60 massage every six weeks, your holiday tip should be about $60.
Public servants are not allowed to accept cash tips in the U.S., but it’s acceptable to give a non-cash gift of up to $20. You might give a plate of cookies to your mail carrier, for example, or a book or a gift certificate to your child’s teacher.
When you give a tip, include a card or a hand-written note thanking the person for their service.
If you tip cash, crisp new bills make a better impression than old wrinkly ones.
Home Care Service
Here’s a list of people who often receive holiday tips and what they typically receive:
Service
Tip Suggestion
Comment
Babysitter or Nanny
One week’s pay
None
Housekeeper
One week’s pay
None
Building Superintendent
$20 – $100
It varies. Some people think this helps to keep a harmonious relationship with the super.
Doorman
Holiday gift
Bottle of wine
Furniture Deliverer
$5 – $20
It varies. Some people recommend offering cold drinks.
Garbage Collector
$15
(… up to $25 for special effort)
Gardener
One week’s pay
None
Mail Carrier
$15
(… up to $20 non-cash.)
Newspaper Delivery Person
$15 to $25
(… up to $25 for exceptional service.)
Personal Care
Service
Tip Suggestion
Comment
Babysitter
One week’s pay
It varies. Don’t pay this for one-time babysitting.
Barber or Hairstylist
10-15% or 15-20%
Some people recommend $5 to each person who shampoos or blow-dries your hair, and others recommend up to the cost of one visit for the holidays.
Coat checker
$1 per coat
It varies. Some people recommend $2 to $5 upon retrieval.
Home Health Employee, Private Nurse or Personal Caregiver
(… up to a week’s salary)
Check with the agency as some prohibit gifts.
Manicurist
15%
None
Masseuse
10%-15%
None
Nanny
One week’s pay
None
Personal Trainer or Yoga Instructor
$20-$50
Tip discreetly.
Shoe Shiner
$2 or $3
None
Spa Service
15-20%
None
Office Service
Service
Tip Suggestion
Comment
Janitor
$15-$25
None
Parking Attendant
$15-$25
None
Travel
Service
Tip Suggestion
Comment
Bus Driver (not mass transit)
$1-$2
(… if he handles luggage.)
Cab Driver
10%
($2-$5 minimum)
Chauffer
10%-15%
None.
Gas Station Attendant
None
(or $2 -$4 – there’s no agreement on tips).
Porter or Skycap
$1 per bag
(… $2 for heavy items, if the porter brings luggage to counter)
Hotel Staff
Service
Tip Suggestion
Comment
Bellman or Porter
$1-$2 per bag, $5 minimum
Or $1 per bag, $2 minimum
Concierge
$5
(… up to $20 for something exceptional; nothing for directions.)
Housekeeper
$2-$5 per night, paid daily or as a lump sum at checkout
Most suggest you tip daily.
Parking Valet
$2-$5 paid when your car is retrieved
Some say to pay when it’s parked too.
Room Service
$5 minimum
(unless the gratuity is included in check)
Most of these relate to holiday tipping, but some suggestions are appropriate any time of year. Of course, giving a tip is an individual decision. J.D. Roth used to tip the barber extra if he got to hear an entertaining story about Vietnam or histrionic political rants. What influences you to give a larger or smaller tip? Do you have any suggestions to add?
I’m actually trying to pay off the house in 10 years while simultaneously growing our tax-free account to the equivalent amount of today’s mortgage. It’s a trial run of the “work hard when the baby is young and won’t remember a damn detail about those vacations anyway” double-whammy tactic.
Dumb?
The one problem is that I literally have no money left for today’s fun money, but my adventures can be quite local and free for entertainment while the baby is growing up.
Wilhelm
Wilhelm is faced with the eternal struggle of personal finance. Many choices, fewer dollars. How do you balance:
Fulfilling today’s necessities
Enjoying each day you’re given (and spending some money to do so)
Achieving long-term goals
A dollar can only be spent once. Once spent, it cannot be saved. What to do? We struggle with today’s choice only to discover it might not apply tomorrow, dragging us back down the hill to decide all over again.
There are various rules of thumb to give us a starting point. But ultimately, this topic puts the personal into personal finance.
Rules of Thumb
One of the most common “rules of thumb” for balancing your spending is the 50/30/20 rule. It states that:
50% of your income should go toward needs (housing, food, transportation, insurance, bills, utilities, etc.)
30% should go toward wants (travel, entertainment, dining out, hobbies)
And 20% should go toward saving (emergency fund, long-term investing)
It sounds like Wilhelm is currently executing a 70/0/30 budget. All needs and saving, zero wants. Surely that can’t be ideal?!
Getting Flexible on the Mile High Club
But the 50/30/20 rule was designed for the faceless masses, not for unique individuals. It’s just like the apocryphal story of the U.S. Air Force’s initial fighter jet designs: when you design for the average, nobody fits. Instead, you need to have flexible designs.
Wilhelm is unique. As are you. There are a few important highlights in Wilhelm’s note:
“It’s a trial run.” He’s experimenting. He’s not locked in forever. He’s being flexible!
“Adventures can be quite local and free.” So true. An alternative to expensive fun is free fun. What a great (and flexible) mindset.
While the 50/30/20 framework is a starting point, it’s not the finish line. My honest feedback for Wilhelm was this:
There’s nothing wrong with budgeting trials, including those that trim your fun money down to zero. The real work is stepping back to examine your life and ask, “Am I happy with this? Or does it suck?”
Each and every one of us could exclusively eat rice and beans for every meal. It’d cost $20 per week. What a financial win! But would we be happy with that? Or would it suck? I know my answer…
That’s the struggle. Step back, review your life, your choices, your happiness…are your financial decisions bringing you some joy?
Are you in the “Valley of Drudgery?” Of floating on the “Sea of Simple Pleasures?”
We need to understand the math, too. For example, Wilhelm wants to pay off his mortgage in 10 years. The mortgage interest rate is a vital component of that “early payoff” calculus.
If Wilhelm has a 7% interest rate (thanks, 2023), his debt payoff makes sense financially. But if he only has a 2.5% rate (hey there, 2021), the math would point him away from early payoffs. The psychological relief of debt payoff exists in either case, but the financial math differs greatly.
Further reading: The Simple Math of the Mortgage vs. Invest Debate
[For example: rather than pay off a 2.5% debt, Wilhelm could instead deposit those additional payments into a money market fund earning close to 5% as of this writing.]
Further reading: An Easy $4600 From Money Market Funds
Every financial decision comes with pros and cons and opportunity costs. The eternal struggle of personal finance is evaluating those many options and choosing a single financial plan to execute…at least for today. The plan can (and should) stay flexible for the future.
Know the math, know thyself, and make a choice you feel is in your best interest.
Thank you for reading! If you enjoyed this article, join 6500+ subscribers who read my 2-minute weekly email, where I send you links to the smartest financial content I find online every week.
-Jesse
Want to learn more about The Best Interest’s back story? Read here.
If you prefer to listen, check out The Best Interest Podcast.
Children can be incredibly expensive. It’s vital to plan for those new expenses in your household budget.
Once your children are born, there are important long-term safety nets you should implement (e.g. insurance, estate planning, etc)
Thankfully, there are numerous tax breaks available to parents to ease the financial burden of raising kids. Make sure you’re capturing those benefits.
My wife and I are at that stage of life where most of our close friends and family have multiple young children. And in the many conversations we have with those parents, I’ve realized a trend:
Most parents share similar financial questions and concerns.
So let’s provide the best financial tips for new parents.
Big Financial Changes for New Parents
Some financial best practices stay the same before or after children.
But there are many big changes. Let’s start with those.
Insurance Coverage
When you have kids, review your insurance policies to ensure you have adequate coverage. The two that stand out most to me are healthinsurance and life insurance.
Health insurance is important for your family’s well-being. Why?
It provides financial protection against the high costs of medical care, ensures access to necessary healthcare services, helps cover medical expenses and safeguards against unexpected illnesses or accidents that can otherwise result in significant financial burden.
If you can’t cover it with your bank account, you probably need insurance for it.
Life insurance matters because it protects your loved ones financially in case of your untimely death. Specifically, focus on term life insurance. Not whole insurance. Not indexed universal insurance. Term life insurance only! Because life insurance is not a substitute for proper investing (despite what TikTok grifters will tell you).
If you own a home or have a car, appropriate property and auto insurance coverage is also necessary.
Child-Raising and Childcare Costs
Children are expensive!
The Brookings Institute estimated that “the average middle-income family with two children will spend $310,605 to raise a child born in 2015 up to age 17.“
[Part of their estimate included 4% inflation per year. If we crunch the numbers, that’s the equivalent of $16,400 in 2023 dollars every year for 17 straight years]
We can break that down a bit more.
If you need outside childcare, the early years of parenting are likely to be the most financially strenuous. According to Ilumine, the average cost of childcare in the US is just shy of $15,000 per year, or $1,250 per month. And according to Zippia, about 58% of parents rely on childcare so they can continue to work.
Granted, childcare expenses tend to decrease or disappear once your children enter school. But for those first five years, yikes!! $15,000 per year is a huge expense!
Most households cannot lightly absorb such a change in spending. The average American family earns $100,000 per household, taking home $6,000 per month after taxes. $1200 per month on daycare is 20% of that take-home pay!
Education
Start planning for your child’s future education early on.
We wrote a complete breakdown of 529 plans a few years ago. 529 accounts are the gold standard for education savings due to their flexibility and tax advantages. Regular contributions to such accounts can help alleviate the financial burden of higher education expenses later on.
While Coverdell accounts are also education-focused tax-efficient accounts, they are generally suboptimal compared to 529 plans, and should only be used if you are fully maximizing a 529’s potential (e.g. hitting the maximum annual gift tax exclusion of $17,000)
Estate Planning
Consider creating or updating your estate plan once you have kids. Estate planning helps avoid potential conflicts and ensures that the parents’ wishes are followed.
For example, you’ll want to designate legal guardians for your minor children, ensuring they are cared for by trusted individuals if something were to happen to you.
You should also create or update your will to dictate how your assets (financial accounts, property, and personal belongings) should be distributed in case of your untimely death.
Additionally, you might look into setting up trusts to protect and manage assets for the benefit of the children until they reach a certain age or milestone.
Long-Term Financial Goals
You had goals before kids. You still have those goals. But your timelines might have shifted a few years.
It’s essential to set and keep long-term financial goals. This could include saving for retirement, buying a home, or achieving other milestones.
Start contributing to retirement accounts early, take advantage of employer-matched retirement plans, and consider consulting a financial advisor for guidance on long-term investment and planning strategies.
Children & Taxes
Whether you file your own taxes or work with an accountant, make sure you understand and are benefitting from the tax code. Parents typically pay much less in taxes than those without dependent children.
Child Tax Credit: The Child Tax Credit is a tax benefit that reduces the amount of tax owed for eligible parents. As of 2023, the credit is up to $2,000 per qualifying child under the age of 17. The credit is partially refundable, meaning that even if the credit exceeds your tax liability, you may be eligible for a refund.
Earned Income Tax Credit (EITC): The EITC is a refundable tax credit that benefits lower-income working parents (earned income under $59,187). The credit amount increases with the number of qualifying children, and eligibility is based on income and filing status.
Child and Dependent Care Credit: Are you paying for childcare? Parents who pay for childcare expenses in order to work or seek employment may qualify for the Child and Dependent Care Credit. This credit can help offset a portion of eligible childcare expenses, with a maximum credit of up to $3,000 for one child or $6,000 for two or more children.
Education-Related Tax Benefits: As children grow older, there are tax benefits available for education expenses, such as the American Opportunity Credit and the Lifetime Learning Credit. These credits can help offset the costs of higher education and certain qualifying educational expenses.
Long story short – if you’re a parent, you should be paying less tax. Make sure you’re taking advantage. Lord knows you’re paying for it in other places.
Financial Topics That Don’t Change (Much) After Kids
Certain financial priorities and habits shouldn’t change too much after having kids…
Budgeting
My budgeting rule is simple:
You can plan your expenses ahead of time.
You can track them after the fact.
You can do both.
But you can’t do neither.
Personally, I use the YNAB tool. I sit down ~twice per month to review, update, track, and plan ahead.
You can use this link to get 2 months of YNAB for free.
Budgeting is crucial, especially after adding massively expensive children to your family. It helps you track your income and expenses, ensuring you can meet your family’s needs and save for the future. Identify your essential expenses, such as housing, utilities, food, childcare, etc. Here are some ideas for how many budget categories you should have.
Kelly and I are currently moving to a bigger house and talking about having kids. You better believe planning our budget is a huge part of the conversation.
Emergency Fund
While the size of your emergency fund might change after kids, the need for an emergency fund is ever-present.
I’ve written here before…life throws you bitter curveballs. You need to be financially prepared to handle them.
How big should your emergency fund be? Typically in the range of 3-12 months worth of living expenses. The range is all a function of “how re-hireable are you if you lost your job?” If your expertise is in high demand, a 3-month emergency fund might be sufficient. But if you’d rather take your time with an exhaustive job search, you might need a 12-month emergency fund to make ends meet.
This emergency fund money should sit in a bank account, ideally something like a high-yield savings account. You should not invest your emergency fund – here’s why.
Debt Management
Debt can be a silent financial killer. No, Dave Ramsey, it’s not all bad. But you should certainly avoid it if you can…especially if you have little rugrats running around to distract you from paying it off.
Prioritize paying off high-interest debts such as credit card debt or personal loans. Don’t take on unnecessary debt. Establish a plan to become debt-free over time.
The best medicine is prevention. The second-best is decisive action.
Unique Financial Topics Related to Kids
And then there are some unique financial topics that some parents might face.
Special Needs Planning
Parents of children with special needs should consider financial planning specific to their circumstances.
This might include certain government benefits, setting up special needs trusts, and ensuring long-term care and support for their child’s unique needs.
Thankfully, there are fiduciary financial planners who specialize and focus on this very topic.
Digital Management and Identity Protection
In today’s digital age, parents should consider their children’s digital assets, including online accounts, social media profiles, and digital files. As part of estate planning, designating someone to manage or have access to these assets in case of incapacity or death is important to protect and preserve them.
That said, children can be targets of identity theft. Parents should take steps to safeguard their children’s personal information and be vigilant about potential fraud or misuse of their identities.
Other Investing Accounts
We already covered 529 plans. But there are other potential investment opportunities for children that you might want to consider.
Custodial Accounts (UGMA/UTMA): These accounts allow parents to invest directly on behalf of their children, typically with small tax advantages (they are taxed at the child’s tax rate).
Once the children reach their “age of majority” (which is 18 in most states), the children gain full custody of the accounts. For this reason, custodial accounts should be used with caution. It’s pretty easy for $40,000 of UGMA savings to turn into a new Jeep Wrangler.
Roth IRAs for Kids: If a child has earned income, they may be eligible to contribute to a Roth IRA.
Roth IRAs are awesome. Contributions are made with after-tax money but grow tax-free, and qualified withdrawals in retirement are tax-free. Roths are a powerful tool for long-term savings and investing for a child’s future.
But let’s go back: to qualify for a Roth IRA, your children need earned income, and need to be filing taxes on that income. Odd jobs like mowing lawns and babysitting do qualify (as long as the income is reported). And for teens, official W2 summer jobs also qualify.
But kids don’t want to invest! How boring! That’s why generous, forward-thinking parents should consider the following “loop hole”:
Jonny earns $4000 as a lifeguard over the summer.
Let Jonny keep his $4000 for his own spending needs (fun, college savings, whatever…)
The generous parents contribute $4000 to Jonny’s Roth IRA. As long as Jonny reported his income, there’s nothing wrong with this solution.
By the time Jonny is done with college at 22, he might already have $20,000+ of contributions in his Roth IRA. It’s not inconceivable that that amount alone could grow to $300,000+ of tax-free money by the time Jonny retires (7% growth for 40 years).
What a gift!
Time To Graduate
Kids are great.
They’re also expensive.
Hopefully, these financial planning ideas for new parents will help you navigate your parental future!
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-Jesse
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