Financial Rules of Thumb: The Emergency Fund

April 11, 2025

People measure everything from their daily steps to how many hours they sleep and even how many calories they burn while they are sleeping. So, it’s no wonder that people wonder if what they are doing is considered “normal” in their finances. We like knowing where we stand and how we measure up compared to our peers.

But really, who’s to say what’s normal — is there even such a thing? This is why we have rules of thumb in the financial world. And while there are exceptions to all of the rules, they are generally good guidelines to help make decisions. For example, one of the more common rules of thumb is the importance of establishing an emergency fund (often called a nest egg or rainy-day fund).

How much should you have in your emergency fund?

Rule of thumb = three to six months of your expenses

While you may need more if you own a home that could be hard to sell, work in a highly volatile or specialized field or have a large family dependent on one income, this is a pretty good gauge of things to make sure you’re protected. Twelve months might even be more appropriate when real estate prices plunge, or jobs are a little hard to come by. There is no guarantee how long it will take to find new employment or sell homes if they are worth less than the mortgage.

What’s the emergency fund for?

Get you through an unexpected loss of income

The emergency fund’s primary purpose is to ensure you have the money you need to cover all your core financial expenses if you or your partner loses a job. Being unemployed is stressful enough, so it’s nice to know that you have money set aside so you don’t have to accumulate a mountain of credit card debt or miss payments that can impact your credit score. These savings will ensure this unfortunate event doesn’t cause too much long-term financial damage.

If the loss of income is more permanent, it’ll also give you time to adjust to a new reality, allowing you to keep paying your bills until you’re able to reduce them through cancellation or adjustment of service, sale of your home, or termination of your lease, etc.

Large unexpected one-time expenses

While you should be budgeting for most non-recurring expenses like home maintenance, pet illness, healthcare bills, etc., there are always things that come up that just can’t be planned for beyond having the proper insurance to minimize the impact. That said, it’s better to tap into these savings than it is to get into credit card debt that’ll amass hefty interest charges.

What it’s not there for

It’s NOT your piggy bank to tap into when you feel a spending itch or paying for expenses that you should plan for through your normal budgeting process like vacations, holidays, etc. Instead, this emergency fund is your safety net and can leave you in pretty bad financial shape if you don’t have it when you need it (and you will). That’s why the best emergency funds are those that are held in a separate account that’s a bit harder to access and remains untouched except in times of true emergencies. Once the emergency has passed, emergency funds must be brought back up to their necessary amounts to protect against the next thing!

So what do you do if you don’t have an emergency fund yet?

Figure out your monthly fixed expenses: First, you need to know how much you should be aiming for. If you don’t know your monthly fixed expenses, that’s a great start. Our Expense Tracker tool is one way to figure that out, or you can use online tools, which will link directly to your accounts and download your spending. That exercise can also help you figure out how much you can afford to save each month.
Open a separate savings account: Trust us. You’ll want to keep it separate to make it harder to tap into.
Automate your savings: Set up a direct deposit or automatic monthly transfer to your separate savings account. Your payroll department may be able to even take money directly out of your check and deposit it for you. Otherwise, set the transfer for payday so you never even have the temptation to spend the money. Don’t beat yourself up if you’re still working on getting your emergency fund fully funded, as this takes some time.

Now don’t let the math freak you out. Six months of expenses is a big chunk of change! Start first by trying to get $1,000 in your account. Maybe start with $25 per paycheck. After that, aim for three months worth of your mortgage or rent payment. Then, tack on three months of car payments, utilities, etc. If you have any little windfalls like a tax refund or won on that scratch ticket your friends got you for your birthday, use that to get you there sooner.

Finally, it’s important to reassess the amount needed in your emergency fund when you have significant life changes such as the birth of a child, a new home purchase, or even an empty nest when the amount needed may actually decrease.

The bottom line is an emergency fund is your first line of financial defense against life’s little twists and turns. Even if you’re working to pay off credit card debt, it’s important to start your emergency fund to help you avoid derailing your debt pay-off plan should an unexpected expense arise. Don’t delay. Start saving today.

to all of these rules, they are generally good guidelines to help make decisions. Similarly, there are financial rules of thumb in the financial planning profession that we then customize to each person’s goals and values. For the next several weeks, I’ll be sharing six that we regularly use at Financial Finesse to answer these common questions:

How much should I have in my emergency fund?
How much do I need to save for college?
How much do I need in order to retire?
What percentage of my income should I save?
How much life insurance do I need?
How much house can I afford?

Let’s start with number one. How much should you have in your emergency fund? The general rule of thumb here is three to six months of your expenses.

However, you may need more if you own a home that could potentially be hard to sell, work in a field that is highly volatile or specialized or have a large family dependent on one income. When real estate prices plunged along with a lot of people’s job prospects during the last recession, twelve months would have been more appropriate. That’s how long it took many people to find new jobs when selling their home wasn’t an option because suddenly their houses were worth less than the mortgage.

The emergency fund’s primary purpose is to get you through an unexpected loss of income while causing as little long-term financial damage as possible. That’s why it’s also one of my personal financial ground rules. It’s also supposed to give you time to adjust to a new reality should you have a permanent change in income status, allowing you to keep paying your bills until you’re able to reduce them through cancellation or adjustment of service, sale of your home or termination of your lease, etc.

It’s NOT really intended to be what you tap for things like non-recurring but necessary expenses like home maintenance, new appliances, veterinarian bills, etc. Those should be worked into your everyday spending plan. The best emergency funds are those that are held in a separate account and remain untouched except in times of true emergencies. And once the emergency has passed, they are brought back up to their necessary amounts to protect against the next thing.

So what to do if you don’t have an emergency fund yet? First, you need to know how much you should be aiming for. If you don’t know what your monthly fixed expenses are, that’s a great place start. Our Expense Tracker tool is one way to figure that out, or you can use a free online tool such as Mint.com, which will link directly to your accounts and download your spending. That exercise can also help you figure out how much you can afford to save each month.

Then you just need to automate it by setting up a transfer to your separate savings account. Your payroll department may be able to even take money directly out of your check and deposit it directly. Otherwise, set the transfer for pay day so you never even have the temptation to spend the money. That’s what I do. (And yes, I’m still working to get my emergency fund fully set up, so don’t beat yourself up if this takes some time.)

Now don’t let the math freak you out. Six months of expenses is a big chunk of change! Start first by trying to get $1,000 in your account. I started mine with just $25 per paycheck!

After that, aim for three months worth of your mortgage or rent payment. Then tack on three months of car payments, then utilities, etc and if you have any little windfalls like a tax refund or you won the 50-50 drawing at your kid’s basketball game, use that to get you there sooner. Finally, it’s important to reassess the amount needed in your emergency fund when you have big life changes such as the birth of a child, new home purchase or even an empty nest when the amount needed may actually decrease.

The bottom line is, an emergency fund is your first line of financial defense against life’s little twists and turns. Even if you’re working to pay off credit card debt, it’s important to start your emergency fund to help you avoid derailing your debt pay-off plan should an unexpected expense arise. Don’t delay. Start saving today.

Why You Need to Start Saving Money RIGHT NOW

February 05, 2025

Pretty much every personal finance resource will tell you that the earlier you start saving, the better off you’ll be due to the effect of compound interest. It’s a bit of a, “well, duh,” thing, but there’s more to it than just the fact that you’ll have longer to save if you start early. The thing is, the earlier you start, the earlier you can actually stop saving if you want to. Continue reading “Why You Need to Start Saving Money RIGHT NOW”

Here’s Why You Need to Stop Measuring Your Financial Progress Against Your Income

February 05, 2025

Did you find yourself looking at the total income amount on your tax return for last year and thinking to yourself, “Well, I certainly don’t FEEL like I make that amount of money?” You’re not alone. One of the most self-destructive financial beliefs that I see as a financial planner is people justifying living outside their means because they have the idea that someone who makes what they do should be able to have the things that they want. Here’s the thing: they were already living like they made this amount of money before they got there.

They find themselves in debt because they just couldn’t wait to have the new house with the furniture and that amazing vacation to Italy. Then they had kids who now have all the gadgets (and of course, they need a comfortable, stylish car to drive them around in). Sound familiar? Welcome to the club!

So now that they’re here, stuck paying off the stuff they bought when they borrowed against this higher income they knew they’d eventually make, they find themselves struggling to prioritize paying off that debt versus saving for college, a bigger home for their growing family and retirement. And as they struggle, they keep up the cycle of revolving debt, postponing taking care of the stuff that seems so far off. (Perhaps the first 15 seconds of this classic Queen song will help explain.)

So here’s the thing. In order to get on track and really start to feel like you’re making the better income level you’ve achieved, you need to spend a couple of years living like you’re making less to pay off that debt. It’ll be tough, but it’s doable. The blogosphere is packed with people who paid off tens of thousands of dollars in debt and they can’t wait to tell you about it. I’ll save you the reading and break it down into these three non-negotiables:

Non-negotiable #1: GET THE MATCH. If your employer has a 401(k) match, you should save at least enough to capture the match even if you could potentially lose it if you leave the company before it vests. Worst case scenario: you leave the job and lose the match, but you still get to keep the money you saved for retirement. Future you thanks you profusely and compound interest is excited to get to work for you.

Non-negotiable #2: STOP USING CREDIT CARDS UNTIL THEY’RE PAID OFF. I’ve seen too many people try to juggle paying off the new charges while also paying down balances and end up getting deeper and deeper in debt until they had to enter a formal debt management plan to get out of it. This could mean a few months of pain while you adjust to only spending the cash you have on hand, but it’s the only way you’ll see the light at the end of the tunnel. Make your credit card payment a fixed amount, then use the Debt Blaster calculator to pay it off. Once the debt is gone, you’ll already be used to not spending that amount of money, so you can use it to turbo-charge other savings goals.

Non-negotiable #3: GET A LITTLE NEST EGG SET ASIDE. There are personal finance celebrities who would say differently, but you need to have some savings set aside while you pay off debt or you risk sliding right back down the next time something unexpected pops up. When I started digging out of my debt hole in my 20’s, I also started saving $25 per paycheck into a separate savings account. I used that money if my only alternative was credit cards (read: a real emergency like having to buy a plane ticket for your grandma’s funeral, not a sale on your favorite Lulu® pants).

It won’t be easy, but it will be worth it. And keep these Jedi money mind tricks in mind to keep you from straying from the plan.

3 Clever Ways to Trick Yourself Into Saving Money

February 24, 2023

I actually don’t think we have a financial literacy problem in America as much as we have a financial wellness problem. Everyone I talk to on our financial helpline knows what they’re supposed to do to be more financially stable. But while knowledge is power, putting that knowledge into action is where the real trouble is. It’s the same thing with eating well and exercising. We know what we’re supposed to do, but we don’t always do it. Continue reading “3 Clever Ways to Trick Yourself Into Saving Money”

5 Ways To Help Those Most Impacted By COVID-19

March 19, 2020

With COVID-19 sending millions to work-from-home and forcing businesses to temporarily shut their doors, nearly everyone is experiencing dramatic changes in their lifestyle. If you are one of the lucky few who have been able to adjust without major impact on your cash flow, there are a few things you can do to help those in less fortunate situations.

1. Buy gift cards to local businesses

Small businesses who rely on foot traffic or in-person interaction will feel the impact of mandatory closures much harder than large chains. As a way to show your support without physically being able to show up, consider buying gift certificates to your favorite local restaurants, fitness studios, boutiques, or salons. You can use the certificate once shops re-open while still providing them with revenue to help cover fixed costs like rent, insurance, or storage.

2. Continue to pay those who count on your business

Those who work out of people’s homes or who are paid based on the number of interactions they have with people will be stressed during this time. This can include everyone from childcare professionals, maids, fitness instructors and personal trainers, or personal care providers like your hairdresser. If you can afford to do so, consider:

Paying your nanny even though you are home with your kids
Scheduling a virtual session with your personal trainer or fitness instructor
Booking a haircut, nail appointment, or massage in advance
Buying merchandise or streaming content from up-and-coming musicians, comedians, or other artists
Giving tips to delivery people, many of whom are waiters or otherwise out of work
Refrain from freezing your membership if you attend a locally-owned fitness facility even if you can’t go
Donate to wellness practitioners who are offering free resources such as meditations or yoga classes via social media or livestream

3. Invest to stimulate the economy

When there’s fear in the market, opportunities present themselves to those who are prepared. If you have extra cash to work with, now is an excellent time to take advantage of a low market while also stimulating the economy. If you’re a savvy investor and have been eyeing a certain stock for a while, now you can essentially get it on sale. If you’re new to investing and don’t want to invest time into researching, you can purchase index funds, ETFs, or mutual funds. Regardless of your strategy, ensure you’re making smart investment choices that take your goals into account.

4. Donate to non-profits or consider fostering an animal

Many non-profits are having to cancel events that account for a large portion of their annual donations. If you regularly attend charity events, consider donating whatever you would’ve spent there, or even just donating your gas money now that you’re not driving so much. For those who are working from home, this is the perfect time to foster or adopt an animal. Pets still need homes and many volunteers are unable to show up for their shifts. If you can’t foster, consider a donation to the rescue to help with supplies.

5. Reach out to those who may feel isolated, at risk, or overworked

Those who are most affected by COVID-19 will be experiencing high periods of stress, either because of the extra work forced on their plate or the bulk of their work disappearing. Reach out to those who may be struggling and let them know we’re all in this together. Even if you can’t provide financial support, sometimes emotional support can inspire people to stay positive. Some ways you can show your emotional support are:

Email your favorite restaurant and tell them you can’t wait to come back
Tell your friends in the healthcare industry how much you appreciate them
Reach out to hairdressers, fitness instructors, nail technicians, or whoever you would run into under normal circumstances and see how they’re doing
Email teachers about your children’s progress or let them know how much you appreciate the work they do
Check in on those who are in the food service industry, working from home with children, living alone, elderly, or single parents

Showing support for our neighbors, friends, and family has never been more important. Do something kind, then spread the positivity by sharing it on your social media pages! These are the kinds of things people need in their news feeds.

Avoid These Three Financial Pitfalls When Switching Jobs

May 01, 2019

For people who strive to put the maximum amounts away into accounts with annual limits such as 401(k)/403(b) plans and Health Savings Accounts, switching jobs mid-year requires some additional diligence to make sure you’re not going over.

Most company benefits departments will take steps to ensure you don’t go over the limit with contributions from your paycheck, but if you already made deposits to accounts at your prior job that year, your new job won’t automatically know to factor that in – you have to take steps to guard against that. (these issues can also arise if you have more than one job with benefits)

Keep track of your contributions in these 3 areas

Problem: over-contributing to a 401(k) or 403(b)

This issue sometimes doesn’t come to light until after the end of the year when you’re filing your taxes and your tax accountant or software points out that you put more than the annual limit into your 401(k)’s. It’s important to know that the limits are across all accounts, not per account.

401(k) & 403(b) contribution limits
	2022	2021
Amount you can put in via payroll	$20,500	$19,500
Additional if you’re age 50 or older	$6,500	$6,500

What to do if you over-contributed: First of all, it’s important that you act quickly – there is a deadline to fix this without incurring penalties, which is April 15th of the year following the over-contribution.

Send copies of both W-2’s to the plan administrator (aka the company that manages the 401(k) or 403(b)) where you wish to make the withdrawal as evidence of your over-contribution, then request that they send you the extra money.
You’ll receive a check for the amount you over-contributed, including any associated earnings.
You’ll also receive a Form 1099-R, showing the amount you withdrew.
Include the overage amount on your tax return for the year your over-contributed.
Include earnings, if any, on the tax return for the current year when you received the check.

For example, let’s say you over contribute by $5,000 and the administrator attributes $500 worth of growth to that amount – you’ll receive a check for $5,500 and include $5,000 on last year’s tax return to reflect the return of your deposit and $500 on next year’s return to reflect the income on that deposit.

As long as you do this by April 15th, you will avoid any penalties. Waiting until after could incur a 10% early withdrawal penalty or even 100% double taxation of the amount you over-contributed, so you’ll want to get this done ASAP.

Why you might intentionally go over and put yourself in this position: One reason you might intentionally over-contribute to your retirement when switching jobs is if your new job offers a better match than your previous job, and you’d be sacrificing some of the available match if you contributed less.

If that’s the case, you may decide to max out your new match, then withdraw from your old job’s account to reconcile it. If you’re planning to do this, you’ll want to wait until after you’ve successfully withdrawn your overage before rolling your old account into your new plan or an IRA.

Problem: over-contributing to Health Savings Accounts

There are several ways this can happen, especially if you switch mid-year into or out of an HSA-eligible plan. For example, if you had already put the maximum amount into your HSA before switching jobs only to find that your new job doesn’t have an HSA-eligible option, you may want to calculate the eligible amount and withdraw the excess before you file your tax return for that year.

Health Savings Account contribution limits

	2022	2021
Limit for individual	$3,650	$3,600
Limit for family	$7,300	$7,200
Additional for 55 or older	$1,000	$1,000

What to do if you over-contributed: As long as you catch this before you file your federal tax return (including extensions), you can simply request that the additional funds be returned to you, then make sure you include them in your income for the year they were contributed. Similar to retirement fund overage withdrawals, if there are any earnings attributed to the amount you over-contributed, those will also be distributed and taxed as regular income.

If you decide not to do this or miss the deadline, then you can leave the excess contributions in the HSA and pay a 6% excise tax on the amount over-contributed. Note that if you have your account invested for aggressive growth, you may find that paying the excise tax still leaves you ahead in the long run, but for the majority of people these days who simply use the savings account feature of HSAs, they usually opt to withdraw the excess rather than pay 6% tax on it.

Problem: over-paying into Social Security

This can happen if you have higher income or received a very large bonus that would take your total wages for the year over the annual Social Security withholding limit. Most people don’t know this, but you don’t pay Social Security on every penny you earn – it stops when you get to a certain limit. For 2022, that limit is $147,000 or $9,114 in tax.

Employers are required to withhold FICA tax according to the wages they pay you, so if you have more than one job during the year and your total wages exceed the limit, you’ll need to claim the excess as a credit against your income tax when you file your return. (IRS Publication 505 has more on this) If you only have one job and your employer made the mistake, then you should first try to get them to refund you the money and if not, then you’ll need documentation to file Form 843.

3 Different Ways To Save Green By Going Green

April 22, 2019

Whether or not you think that climate change is an issue in today’s day and age, there’s no denying that there are things you can do to help the environment that can also help to save you money. Here are some ideas:

1. Consider the priority of Reduce, Reuse, Recycle

Many well-meaning environmentalists think that recycling is the end-all, be-all of going green, but it’s actually lowest on the list of priorities when it comes to preserving resources. Don’t get me wrong, recycle what you can, but it’s actually better to not even use the material in the first place. A few ways this applies:

Grocery shopping bags – Paper is definitely better than plastic because you can recycle paper easier, but even better is bringing your own bags. Not only is it better for the environment, but it will most likely save you money – most grocery stores give a discount for bringing your own bag and many cities are starting to tax bags as well! Here in Chicago, that’s $.12 per bag I save due to the $.07 tax and $.05 discount. (I keep my bags by the door in a cute bin, and also try to keep one in my purse and in my car in case I forget.)
Clothing – I’ve had little success shopping at thrift stores, but I’ve had great success selling to places like Buffalo Exchange or Plato’s Closet as well as using apps like Poshmark or thredUP to sell and exchange clothing, especially stuff I can’t wear anymore but that’s still in great shape. Sure, I could donate that stuff but a lot of it gets thrown away anyway or shipped overseas. Why not ensure it’s actually reused and also make some cash in the meantime (or save some if you’re buying)?
Glass jars – Many years ago when I lead a committee that started a recycling program for local bars in Cincinnati, I was surprised to learn that the reason more bars don’t recycle is that recycling plants don’t want all that glass – it actually takes about the same amount of resources to recycle glass as it does to make it new from sand. While it’s still better to put your used glass in a recycling bin over a landfill, consider re-purposing glass jars in your house as food storage containers. It’s better for your wallet (no need to buy containers) and even better for your health as reheating something in plastic may lead to increased cancer risk, while glass does not “leach” into your food when heated.

2. Compost, even if you don’t have a yard

I’ll admit that this one takes a little more commitment, but if you had told me 5 years ago when we moved into our condo that I’d have a thriving colony of worms that produces literally pounds of “black caviar” each year in my office, I’d definitely have given you a strange look. And yet here we are, and unless I pointed it out to you, you wouldn’t even know – it doesn’t smell and it’s totally contained in a storage tote.

Besides the obvious impact of keeping food out of the landfill, there are some financial benefits to this green practice:

I don’t have to buy dirt when it comes time to plant my summer garden, I just mix some compost in with last year’s dirt
It helps me grow healthier flowers and produce, so I don’t have to replace dead plants
I’m actually able to grow some produce in containers, which means I don’t have to buy basil, tomatoes, cucumbers or spinach for awhile
Less trash = less trash bags needed and less trash service
It’s a safe place to recycle shredded documents (remember that scene from Argo where they pieced the shredded photographs back together? Obviously I’m not that paranoid, but still…)
If I wanted to, I could actually sell my compost – we have a neighbor who sells hers for $20 per 8 ounces (did I mention ours is in a 15 gallon container? That’s almost $5k in worm poop!)

3. Turn off the lights and water and beware vampire energy

This one might seem old-fashioned, but even in today’s age of Compact Fluorescent light bulbs, there’s still merit in turning off the lights when you leave the room, let alone turning off the water when you’re brushing your teeth.

Vampire energy is a newer term, which refers to electronics that continue to pull power, even when they are off. For example, your Keurig, which keeps water hot all the time in standby mode, or your DVR which is always in ready mode to record the next episode of your favorite show. I’m not suggesting you unplug everything all the time, but knowing what leaches power, such as your printer which probably doesn’t need to be on standby all the time, or your electric toothbrush, which you might only need to plug in every 4th night to recharge, can save power and money.

And when you’re going out of town for awhile? Take a minute to walk around and unplug things like your wireless router, your smart speaker, your coffee maker and other devices you don’t need plugged in when you’re not home.

Most of these are small tweaks, but just like cutting out dining out for lunch a couple times of week can help, it all adds up. Plus, it’s good for the planet, global warming or not.

Should You Really Be Freaking Out About Your Student Loans?

April 19, 2019

I’ve talked to several people lately who were freaking out about their student loans. They were feeling like they were failing at money and this debt was going to be the death of their chances at financial security. Yet when we looked into the details of their budget, I couldn’t find the technical issue.

They were making their payments on time according to the pay-off plan and were able to afford the other necessities of their life without falling into credit card debt. They were even able to save enough to capture the full match in their retirement plans and generally speaking, they were doing great at money.

Student debt payments can be crippling for many, but not in these cases. This post is for those people who are able to make their payments but are stressed about having them in the first place.

Are we being brainwashed?

I realized that the psychological impact of the loans is what’s causing most of the stress, not the payments themselves. People become fixated on the total balance of the outstanding debt and lament how little impact payments have on a monthly basis.

And because they are bombarded with messages in the media about the “student loan crisis,” they feel like they should be in crisis. It’s true that student loan debt is our nation’s fastest growing category of debt, but the average payment has not kept up that pace and in most cases, the payment is manageable for borrowers. And when it’s not, there are ways to lower it.

It’s like a mortgage on your future

I’ve heard plenty of people comment on the fact that some students graduate with student loan balances as big as a mortgage, and it’s typically in the tone of, “Can you believe that???” And while I won’t argue that the cost of higher education can be appalling, I’d like to point out that investing in your education and investing in housing by taking on debt could actually be classified in the same category: both offer you the opportunity to get something you would be unlikely to afford for many decades if you had to save up, and both generally offer the opportunity to improve your lot in life if you make good decisions about what to invest in.

The thing is, no one ever calls me freaking out about how they need to pay off their mortgage ASAP. They recognize that it’s “good debt,” where you’ll enjoy the benefits of the debt for many years beyond when it’s been paid off. The same is true of your college education, perhaps even more so, assuming you chose a field that offers great career opportunities, as most of the people I’m thinking have done. The average college grad makes $17,500 more per year than someone with just a high school diploma, so I’d say it’s worth it.

When you still just want to make them go away

“That’s all good and well,” you say, “but I still hate having these loans.” I get it. When my loans kicked in, I had to get a roommate and push back some of my savings goals because I underestimated my living expenses and the impact of taxes when I signed my first lease and purchased my first car. But as the years passed, I continued to make those payments on schedule and their impact eased on my overall financial picture as I received increases in income and paid off other debts. Clicking ‘Submit’ on that last payment in the summer of 2014 was a financial milestone for sure.

In the meantime, here are some other things to think about and ways to prioritize to help take some of that psychological stress off yourself.

1. Make sure you’re first getting the match in your 401(k) as well as any matching dollars in a health savings account, even if it’s a stretch. A 100% or even 50% return on your savings outweighs the 7% or so you’re paying on your loan. This article by Ron Lieber from the New York Times makes a great case for saving while paying down loans. It can make a 6-figure difference in your end balance.

2. Before you choose your employer based on a student loan benefit, look at the whole picture. Is the salary lower? What effect will that benefit have on your overall financial picture? Is the amount the employer is willing to pay really going to make a huge difference in your payoff timeline? Are there better benefits at your other offers like a higher match, better healthcare options or free financial coaching to help you make a plan?

3. Reframe your thinking about your loan payment. Put it in the housing payment category as just another bill. The good news is that unless you spread your payments out over your whole life, it’s a bill that will go away sooner than a mortgage in most cases.

4. Think twice before you refinance and give up benefits that come with federal loans. It’s true that refinancing can lower your interest rate and therefore decrease the total amount of interest you’ll pay over the life of the loan, but be aware that you’re turning it into a private loan and giving up benefits like income-based repayment plans or even loan forgiveness if you work in certain public service jobs.

It’s worth noting that I refinanced my loans in order to lock in an interest rate that was less than half of what I was paying, therefore cutting my payment in half while also saving me thousands in interest. So refinancing isn’t bad as long as you know what you’re giving up.

The bottom line is to stop beating yourself up just because you HAVE loans. Instead, try to focus on what else you wouldn’t have if you didn’t have the education those loans funded and then just stick with the plan. It gets better. I promise.

Do You Really Need To Tip For That?

March 28, 2019

The other day I popped into one of my favorite burger places to pick up a cheeseburger and fries to carry out and enjoy at home. As I was paying, the check-out guy turned the tablet around for me to sign and I was offered the opportunity to tip. No one was going to be serving me, but I added an extra $1 to my tab just because I was asked.

This got me thinking – why did I do that? If I were picking up the same meal at a fast food joint, they wouldn’t ask for a tip. And if I’d paid with cash, he’d just give me back my change rather than ask me if I wanted him to keep any of it.

Is it because if I’d ordered my food to eat there that someone would deliver it to my table, in which case I might offer them a tip? Was I worried that somehow the burger chef would know and do something gross to my food? Or is it simply that companies have figured out that they can easily get you to part with a few more dollars at the point of sale, so they do?

Before I go any further, I should state that when it comes to more “traditional” tipping practices such as tipping your server at a restaurant, unless the establishment specifically states NOT to tip, I’m a strong advocate for 20% or more of the entire bill. The point of this post is to discuss some of the more nuanced tipping practices that have popped up in recent years, but nothing has changed when it comes to taking care of your bartenders and servers.

When does it really matter?

My colleague Cassie offered up a similar dilemma, asking: “Am I supposed to tip on a $4 latte? Uber/Lyft? Or take out food when I pick it up? What about Postmates (some of my friends give cash to the delivery person but aren’t you supposed to tip in the app?) Or in every beauty treatment available? For instance, my hairdresser is an independent stylist, so she charges whatever she wants – am I supposed to add 20% on top? How do tips affect those who receive them? Do they need tips? Or are they getting paid adequately? I wonder how many dollars I just throw into jars vs. add 15%-20% by the push of a button…..am I a bad person if I don’t tip? I need direction!”

How to decide when and how much to tip

Cassie puts it perfectly – it seems like everywhere we turn these days we are being asked to tip, but whether or not it’s appropriate really depends a lot on how the person you’re tipping is paid along with your own personal preference. The best way to answer this is to go through each circumstance:

Coffee shop:

Should you tip? Up to you.

My logic: In order to earn loyalty points at Starbucks, you have to pay through the app, which doesn’t ask you if you want to tip. Message there: tipping is not expected, although if you’re paying cash, it’s a nice touch to throw your change into the tip jar. Caveat if you go every day – it never hurts to throw a couple bucks in the tip jar every once in awhile, even if you are paying with the app/your card.

Rideshare:

Should you tip? If the driver was courteous and got you to your destination without drama, yes.

My logic: Tipping is a way to reward your driver for making the effort to provide you with a safe comfortable ride, and I know that most of these people are either doing this for a living or to supplement inadequate earnings from their “real” job – I’m more apt to be generous. Most of my rides are in the $10 range, so I’ll add $2 or $3, depending on my experience – $2 for a clean, decent ride, $3 if the driver and I had a great chat. Longer rides, like to the airport, I’ll add 20% unless the driver made me fear for my life.

Takeout food:

Should you tip? If you’re picking up the food, I’d say no, unless it’s sushi, in which case I will leave a tip in the jar for the sushi chef, same as I would when dining in.

My logic: If I’m doing everything but cooking the food, there’s nothing for me to tip for unless the restaurant employee goes above and beyond in some way to ensure a good pick-up experience (although I can’t think of an example, tbh). This same philosophy goes for food trucks – tips are appreciated, but not required.

Food delivery:

Should you tip? Definitely.

My logic: How much depends on a few things: whether the delivery was on time, did the driver come to my door versus call me from the street, and how far they had to drive to get the food to me. Bonus $$ if the weather is nasty. Rather than tip as a percentage of spend, I tip in full dollars based on distance, timeliness and effort required of the driver.

THING TO KNOW: I recently saw a news story on a few food delivery services that make tips part of the total compensation of the driver. In other words, they promise drivers a certain amount per hour, but tips can be a part of that. As a result of this knowledge, I tip in cash when I can for food deliveries that are through an app like Postmates, Uber Eats, GrubHub, Instacart, etc.

Beauty services when they are offered by the owner of the business:

Should you tip? This is a tricky one – I always heard that you didn’t need to tip the salon owner since they get to keep all the money, but when I asked about it at my salon, where I see the owner for my haircuts, the answer was, “Most people still tip him.”

My logic: I decided to tip him as I would any other employee, considering that while he gets to keep all the proceeds, he also has to pay the rent and all the other bills. However, when I go to a colorist who does hair out of her home, I don’t tip her as she doesn’t have employees or other business expenses. My clue that she didn’t expect a tip? She sent me a Venmo request, which doesn’t have an option to add a tip.

Baby-sitter, pet-sitter or dog walker:

Should you tip? It depends on how you booked them and how often you use them.

My logic: I used to baby-sit and pet sit and when the parents contacted me directly, I never expected more than the hourly rate we agreed to. However, when families booked me through a service where the rate was set by the booking company, it was nice to receive a little more than the rate when it was someone I regularly helped out.

When in doubt, ask yourself this question

Would you leave a tip if you paid cash? One reason that a lot of businesses are asking if you want to tip is simply because they can – it’s easy and they figure why not? But if the person you’d be tipping is simply running a cash register or some other transactional work, chances are that tips are just nice-to-haves, but not a key part of their compensation.

On the other hand, if someone is serving you by bringing goods to you or providing a service like doing your nails, there’s a strong chance that they rely on tips as part of their income. When in doubt, feel free to ask!

When to be generous versus keep it for yourself

In the big picture, it’s helpful to understand that there are some instances when you should always tip, such as when you’re waited on at a restaurant or a valet parks your car – how much will depend on the level of service and how much you spent. In some of the grayer areas, such as your daily latte or a restaurant that isn’t quite full-service, I think it’s ok to forgo the tip unless you’re a regular, in which case you might want to add a tip every once in awhile as an expression of gratitude for the workers remembering your order or greeting you with the news of the day.

And when it comes to some of those areas where you could tip but decide not to, consider using that as an opportunity to boost your own savings – if you were about to add $2 on to your sandwich order at the deli, but decided that it was not necessary, click over to your banking app and transfer that $2 to your savings instead. It may not seem like a lot, but it can really add up.

These 2 Accounts Could Fix All Your Budgeting Woes

March 19, 2019

Have you ever heard of the “see food” diet? I like to joke that sometimes that’s my diet: I see food and I eat it! The best way for people like me to stick to a plan to eat better is to just not have junk food around, right?

Well, I’m also on a “see money” budget, and I think a lot of people are: I see money and I spend it. That’s why the only money I keep in my spending account is money that I can afford to spend on discretionary stuff like sushi, wine, athleisure-wear and spa pedicures, while money that I need for things like veterinary expenses, car problems and groceries is separated out.

The same principle applies when it comes to sticking to any type of budget or savings plan – if you want to spend less money so that you have enough set aside to pay for things that come up, for people on the “see money” budget, the best way to do that is to get it out of your sight.

The reason that many budgeting and savings intentions fail is that too often we try to eyeball whether we can afford to splurge on stuff, which often happens right before pay day – we see that we actually have some wiggle room in our checking account and we know it’s about to be replenished, so we go ahead and spend it, only to find that we need that extra money when something else comes up after pay day and all the money is already allocated to other priorities.

One idea I had to combat this issue, which is often what leads to credit card debt that can easily get out of hand, is to fund two specific accounts each paycheck:

Account 1: The ‘Oh, crap!’ account

This account is for things like, “Oh crap! I just dropped my phone and I need a new screen” ($90) or ,“Oh crap! I have a flat tire and I need a tow” ($100) or the latest in my house, “Oh crap! The cat has thyroid issues and needs monthly blood tests” ($120). In order to make sure you have enough money set aside to cover these things, take a look back at the last several months for all the things like this that made you say, “Oh crap!”

Set up an online savings account and have the amount put directly in from your paycheck. For me, that’s $50 per pay or $100 per month, which seems to be the average cost of “oh crap!” This account is for everyday life things that truly make you just say, “oh crap,” that you couldn’t have predicted. (Note that after the initial blood test for the cat, the $120/month became part of my monthly budget, since I can now predict it)

Account 2: The ‘treat yo’self’ account

Most people I talk to would say that dining out is one of the areas that they tend to bleed money and it’s one area they’d like to cut back, but they often go to extremes and just don’t budget anything for it. It’s unrealistic to think that you’re never going to eat out just so that you can build up a savings account or save for retirement, so why not have an amount of money set aside for things like, “Hey, I’m in the mood for a $5 Starbucks drink today,” or, “I really don’t feel like cooking dinner so I’m gonna pick up my favorite meal on the way home from work.”

Maybe this account can be used for salon pedicures or a personal training session at the gym – whatever it is that you’d like to limit, but not totally give up in order to buckle down on other goals. We all need a treat every once in awhile, no matter how tight our budget. Having a separate account with, say, $25 going in each paycheck, allows you to do that without going overboard.

What these accounts aren‘t for

Note that these accounts are different from your emergency fund, which is there to pay your bills in case your income goes away – that’s a third account that we all need, although it can sometimes do double duty if you’re just starting out. These accounts are also not there to pay for things that you can plan ahead for, such as gifts, vacation travel or ongoing care like hair cuts and childcare. That’s what the strategy I describe in avoiding the number one budget breaker is about.

Finding what works for you

The thing about cash management is that there are lots of different ways to do it, some more involved than others. If you’ve tried other methods and still struggle to plan adequately for your life spending, try this method. For me, figuring out this part about money is just as much about hacking yourself and your habits as it is about willpower and control. Keep tweaking it til you’ve found a way that works, allowing you to more effortlessly work toward other goals.

3 Financial Aspects To Consider About Getting Married

February 11, 2019

I’ve always said that there are three things that you need to find in a romantic partner in order for your relationship to thrive:

They share your values.
They are attractive, at least to you.
They have their act together – aka they aren’t a hot mess when it comes to “adulting.”

Criteria number 3 includes money – they don’t have to have a lot or make a lot (unless that’s one of your values) and it’s even ok if they owe a lot, as long as they have their act together about it and are willing to be open and honest, while also working to improve their situation if needed.

If you’ve found someone that checks all three of those boxes, perhaps you’re thinking of making it legal. It turns out that there are financial benefits to be had from that perspective. While I have worked hard to be financially independent, after 4 years of marriage (happy anniversary, babe!), it’s obvious that both of us are better off than if we had opted not to go to City Hall that February day back in 2015. Here are 3 key financial aspects (pros or cons, depending on your situation) to consider about getting married (beyond paying for the wedding):

1. It could lead to better cash flow

First of all, you can save some major money on your daily living expenses. If you’re living with roommates, you already know this – sharing expenses like housing, utilities and food is a definite benefit of sharing your home with someone. And when you’re also sharing the same bed, you may even be able to live in a smaller place than you would with a roommate if money is tight.

The old “opposites attract” adage can play to your advantage here too. When a spender marries a saver, and they are able to find a healthy compromise in their habits that helps them to achieve their goals together, it’s often the spender who has the most benefit because they often have a serious lack of savings and sometimes huge amounts of high interest rate credit card debt.

A saver can balance that out by encouraging the spender spouse to prioritize healthier financial habits — in effect, a saver sometimes ‘saves’ a spender from themselves. Serious caveat here though: this is not about a saver controlling a spenders’ habits nor is it about nagging or one spouse being “better” than the other – it’s about finding a balance that works for both of you, and may also require a saver spouse to loosen up a little bit about money.

2. Taxes – they could be more or less

Once you’re married, you’re required to file that way on your taxes – you choose jointly versus separately – and that could mean you pay less or more, depending on your situation.

For example, if you and your spouse are both high earners and file jointly, that could bump you into the next tax bracket, meaning you’ll pay a higher percentage of some of your income than you would when you were single. But if one of you earns significantly less than the other and you file jointly, your combined income will be taxed in the middle, resulting in a lower tax bracket for the high earner. Lower income couples in the 10% or 12% tax bracket may also see a lower overall tax rate when combining their income.

The standard deduction allowed for married couples is also twice what it is for an individual, while the $10,000 limitation on deducting state and local income taxes is NOT doubled, so you may find yourself claiming the higher standard deduction even if you own a home with mortgage interest and property taxes.

There’s also the fact that you can transfer unlimited amounts of money to your spouse, while you’re limited to $15,000 per year to a non-spouse before gift taxes kick in. This can make estate planning simpler if you’ve accumulated significant savings over the years.

3. Til death do you part

Getting married gives you access to retirement savings options you may not have otherwise had, like a spousal IRA – you’re only able to contribute money to an IRA to the extent that you have earnings, but if you’re married to someone who has earnings and you don’t (perhaps because you’re home caring for children), you may still be eligible to continue saving during those years.

And once your spouse passes away, being legally married will only help you. For example, you’ll qualify for spousal benefits through Social Security and if your spouse happens to die without a will, you’ll automatically have a claim on their assets. (although the rules there vary by state so it’s always better to have a will than not)

You can also roll over and combine their retirement assets with your own when your spouse dies, which can allow you to enjoy that tax-free growth for longer. (There are stricter rules governing withdrawals for non-spouses who are left retirement accounts, which Mark wrote about here.)

Keep the big picture in mind

While there are many financial factors to consider, here’s the truth of the matter: Whether or not getting married is financially beneficial has less to do with the benefits afforded and more about the person you’re actually marrying — and their financial health. As my colleague Cynthia points out, your life partner could end up being your best friend or your worst enemy when it comes to money.

The IRS Will Never Call You Out Of The Blue (& Other Scams To Watch Out For)

January 30, 2019

In order to avoid becoming a victim of scammers, it’s more important than ever to be aware of a few rules that the IRS follows so that you know when you can ignore calls or letters.

That’s not the IRS demanding payment via gift card

One of the more lucrative scams for criminals in recent times has been to prey on people who are already afraid of the IRS or the government, particularly elderly citizens or immigrants who may fear random deportation. They call and demand immediate payment via gift card such as Google Play or iTunes, threatening arrest if you don’t comply.

Here’s the thing to know: the IRS will NEVER initiate contact with you via email or phone. They always start their tax collection process via mail. If the IRS is calling you, it’s because you’ve either requested a call via written correspondence or you haven’t been paying attention to the mail they’re sending you. And they’ll never ask for a gift card, that’s not an acceptable way to pay your taxes.

It’s time to stop fearing the IRS

As a CPA, I’m required to complete an average of 40 hours per year of continuing education, so I’ve had the opportunity to attend a few seminars presented by IRS agents. I’ve learned a ton of technical stuff, but there are some key take-aways that I wish I could scream from a mountain top for all to hear:

The IRS is very slow and prefers to correspond with taxpayers via US Mail – this plays to our advantage as taxpayers because we have everything in writing.
No one ever went to jail over their taxes who wasn’t expecting it – even Willie Nelson knew he wasn’t paying his taxes, he just chose to ignore it. Making a mistake on your return will not suddenly escalate to being arrested unless you respond to the IRS with some type of threat (not a good idea).
The IRS always gives you a chance to appeal any tax they levy against you – those notices you receive for underpayment are based on information they likely received from another source, but that doesn’t mean it’s correct and they know that. This is why keeping good records is so important.
You can call the IRS to pay your taxes via credit card, but they will not call you to demand that information. If someone is asking you for a credit or debit card number, they are NOT representing the IRS. Hang up and report the call.
The IRS will not ask you to verify or provide information via email – that’s a scam. If you receive such an email, forward it to [email protected] then delete it.

What if you think you might owe taxes and you get a call or email?

If you think there may be a reason that the IRS is trying to contact you, the same information above applies, but here are a few other steps to take to ensure it’s truly the IRS reaching out to you and not a scammer:

Don’t answer calls from numbers you don’t know. If it’s truly the IRS, they will leave you a message with a number to call back, and they WON’T be threatening.
To verify that it really is the IRS trying to contact you, follow these steps, which are copied directly from this website:
- Go to IRS.gov and search on the letter, notice, or form number. Please be aware fraudsters often modify legitimate IRS letters and forms. You can also find information at Understanding Your Notice or Letter or by searching Forms and Instructions. For additional information please see “How to know it’s really the IRS calling or knocking on your door”. If it is legitimate, you’ll find instructions on how to respond. If the completion of a form is required and it’s provided by a questionable contact, you should verify the form is identical to the same form on IRS.gov by searching Forms and Instructions. If you don’t find information on our website or the instructions are different from what you were told to do in the letter, notice or form, please use the appropriate online resources. Once you have determined that it is not legitimate, report the incident to TIGTA and to us at [email protected].

The bottom line – don’t be a victim

The most important thing to know from the above is that the IRS is never going to irately demand via phone that you resolve an incident immediately, nor will they threaten arrest or other action if you don’t immediately comply. So if someone is doing these things, hang up, close the door, delete the email – it’s a scam.

Where Should You Save Extra Money: Into Your 401(k) Or IRA?

January 15, 2019

When I was a financial advisor, one of the key messages I shared with my peers and prospective clients was that the best way to save their money was to put just enough into their 401(k) plan at work to capture their employer’s match, but that any extra they wanted to save should go into an IRA (with me, of course.)

What I was taught by all the financial firms I worked with prior to finding my dream role at Financial Finesse was that the fees in 401(k) plans are “so high” that investors are always better off using non-employer based investment vehicles for their retirement savings beyond the match. This is a sentiment that’s often echoed back to me by employees who I work with via our Financial Helpline – they’ve been told the same fallacy.

I was SO WRONG in pretty much every instance

One of the biggest “aha” moments I had upon starting my work here as a financial coach was that this “rule of thumb,” which I had blindly subscribed to without ever actually verifying it, was wrong for pretty much anyone who works for a company with more than just a handful of employees.

Here’s why it’s wrong

When a company decides to offer a retirement plan such as a 401(k) to its employees, they assume what’s called a fiduciary duty – basically they become bound by a federal law that says that they have certain responsibilities around protecting the employees who participate in the plan. One of those things is making sure that their employees aren’t overcharged for the services provided by the 401(k) plan provider, including investment fees.

The thing is that mutual funds, like those offered in your 401(k) plan, HAVE FEES. But they can vary, often depending on how much is being invested in those mutual funds. So when large companies with thousands of employees offer a particular mutual fund to their 401(k) participants, they are typically able to negotiate much lower fees than you would be offered should you try to buy that fund yourself through a brokerage account.

Situations where you may pay more in your 401(k) than with a financial advisor

There are still instances where you might have investments that cost more inside your workplace retirement plan than you would pay outside:

When you work for a very small employer who may not have the negotiating power to get the fees any lower than retail rates (aka what you’d pay outside).
Your retirement plan offers unique investment options that aren’t typically available to average investors, therefore making it hard to compare those options to more standard mutual funds.
You choose actively managed mutual funds, where the fund managers try to beat the market, and you’re comparing those to passively managed mutual funds, where the fund objective is just to match the market it’s designed to mirror – actively managed funds are always going to have higher fees than passive/index funds due the nature of the fund itself.

How to figure out what fees you’re paying in all your investments

Every provider is different, so it would be impossible for me to give you exact directions on how to find this information inside your specific retirement account, but generally if you look under the investing or fund information area of your 401(k) website, you’ll find something that says “Fees and Performance” or “Fund Information” or something similar.

The fees are typically presented as a percentage of what you have invested, and are sometimes called “basis points.” When you see basis points, you just have to move the decimal two places. A fund that charges 20 basis points (in financial jargon, we sometimes say “bips” for bps) will cost .20% of what you have invested. So if you have $1,000 in a fund with a 20 bps fee, your fees would be $20 per year.

Other times you’ll just see the percentage, which is pretty straightforward. The bottom line is that if someone is telling you that you’ll save money in fees by investing with him/her instead of in your 401(k), check the facts. Ask for the expense ratio of what he/she is suggesting you invest in, then compare that to the expense ratio of the funds available in your 401(k) to be sure.

Why I’m OK With The Fact That I Didn’t Achieve All My Goals This Year

December 31, 2018

Editor’s note: As 2018 draws to a close and we launch 2019, I’ve asked each of our bloggers to reflect on their own personal goals, plans or thoughts on the past or upcoming year. Our hope is that you not only draw inspiration from our sharing over the coming weeks, but also that we are all able to feel more connected through our shared human experience and recognize that no matter where we are on our personal financial wellness journeys, that we all have similar hopes, dreams and struggles. Happy New Year! Here’s what I have to say:

Last year I called my personal goals the 3 T’s: travel, tennis and tail (getting a dog). As I reflect on how that went, I realize that I didn’t really accomplish any of those goals as they were set, and yet I feel like 2018 was a great year full of accomplishments and success. The moral of the year for me is that goal-setting is less about the actual end-point and more about giving purpose and intention to your efforts, with a requirement to remain flexible and self-aware of what’s working and not working so you can adjust on the fly. Here’s a quick review of what happened:

Travel: my travel goal for 2018 was to make the most of our Southwest Airlines companion pass by visiting at least 3 new states. I technically hit this goal because I deliberately visited two new states (shout out to Utah and Oregon!) but the third was actually checked by a diverted flight to St. Louis, which required us to drive back to Chicago from Missouri. Sorry MO, but that counts as a visit in my books! Did I accomplish my travel goal? To me, yes – I visited new places and also revisited some pretty cool other places like New Orleans and NYC. Check!

Tennis: this is a semi-success to me. We did take tennis lessons last year and I loved that, but after the lessons ended I played exactly twice and hated it. Was it the heat? My lack of skills? Not sure, but I’m going to try again this year with some more lessons and see if I am just a lesson-taker or if I can become one of those people who plays on the weekends with friends. Semi–check!

Tail: this was a bit of a stretch goal, which was basically an intention to find a better place to live where we could have a dog. The bottom line is, we have not moved, but more importantly, we realized that maybe having a dog isn’t for us right now. Luckily we were able to do a little trial by caring for our friends’ adorable golden retriever for a week, so we had a taste of the work involved. It’s not for our current lifestyle.

Instead we’ve decided to open our home to foster cats, which can be contained if/when needed and can be left alone for an entire evening without needing a walk. Goal not accomplished, but changed, so I consider this a successful effort. Check–minus?

The life lesson for all of us

Many times we set goals for ourselves and then in the process of working toward those goals, we learn new things about ourselves or the world in general. The key is to recognize when it’s time to re-think the intention behind the goal rather than pushing toward it just to say you did it.

If your goal is to run a marathon in order to get in shape, but you find that you hate runs longer than an hour, it’s ok to shift to running 10ks – you’re still in better shape than when you weren’t running at all! Or if you have a goal to max out your HSA so you can let it grow for retirement expenses, awesome, but don’t let an unexpected health event drive you into credit card debt because you want to preserve your HSA – that’s what it’s there for!

Goal setting is an important first step in any effort, but sometimes it’s ok to not accomplish the goal if the intention behind the goal still exists. Are there any areas in your life where you need to re-think the goal in order to be happier and healthier?

Happy New Year!

How Would You Answer This One Question About Your Life?

December 13, 2018

Each year on my birthday, I like to spend some time reflecting on the past year and setting intentions for the year to come. Since it’s so close to the New Year anyway, it feels especially appropriate. In years past I’ve tried setting Big Hairy Audacious Goals (aka “Be-HAGs”), including plotting out exactly what I need to do each month to get there, but after several years of reading over the past year’s goals and laughing at how I never really even started the plan, I’m switching my tradition.

The question I’ll start asking myself

I came across an article recently where the author suggested that everyone take time to answer the same question every year, and write the answer in the same journal. The question is:

What is the meaning of my life?

What that question actually means to me

It would be easy to over-think this because hey, do we ever really know the meaning of our life until it’s often too late to do anything about it? The point of the exercise however, isn’t necessarily to figure out the meaning of your life, it’s to state very simply what you think the meaning of your life is RIGHT NOW. As I think back how I would have answered that question in past years, it’s easy to see how insightful and encouraging this simple moment of reflection and projection can be.

How I would have answered it in the past

Two years ago on my 39th birthday, I would’ve answered that the meaning of my life was to become a mother. As I embarked upon a frustrating and ultimately unsuccessful (not to mention expensive) quest to get pregnant that year, I found myself searching for meaning as my 40th approached last year.

Because the fertility treatments I endured (two rounds of egg retrieval, which yielded exactly zero healthy embryos for implantation) were so hard on my body, I almost literally rolled into 40 about thirty pounds overweight, feeling fat, sick, weak and a little lost.

Therefore last year on my 40th, I definitely would have said that the meaning of my life was to get healthy. That involved more than just adjusting my diet and exercise, it also involved giving myself the grace to grieve the life I’d always thought I’d end up living and to begin envisioning an alternate, and just as meaningful, future.

How I’m answering it this year

As I celebrate my 41st birthday, I’m proud to say that I’ve lost over 15 pounds and am back to feeling strong and healthy – there’s more I’d like to achieve in my nutrition and fitness goals, but I feel more in control and once again healthy. While my intention to be healthy won’t go away, it no longer needs to be the primary focus it was last year. I also feel ready to embrace the amazing opportunities in my life that are available because I WON’T have kids (more on that in my 2019 goals post).

For the coming year, I think the meaning of my life is to, quite simply, share love. I will make a conscious effort to spread all the love I have to share with family, friends, my amazing colleagues (who are, quite honestly, some of my very best friends as well), animals, the people I work with through my job and the world at large. This means that I will abide by the 2nd agreement from The Four Agreements: Don’t take anything personally, including remembering that nothing others do is because of you — I will work to give others grace and caring, rather than getting upset when someone behaves in a way that conflicts with me.

On one hand, this sounds like a Be-HAG to me – living life 100% from a place of love isn’t always easy in today’s world. On the other hand, I’ve learned that when I approach others with love, especially in the face of stress, anger or frustration, the outcome is almost always better, both for me and for everyone else.

I know this post doesn’t really have much to do with financial wellness, but in a bigger picture way, it kind of does. When we examine our lives and set intentions and meaning to it, we allow abundance to flow and contentment to prevail. When those things happen, we naturally experience less stress in all areas of our life, including financially.

What would you say the meaning of your life is right now? If you don’t like the answer, it’s the perfect time to decide what needs to change so that you do.

7 Tax Moves You Might Want To Make Before Year-End

December 05, 2018

The new tax law that was enacted earlier this year could mean big changes for your personal tax situation. Before we wind down 2018, it’s wise to take a moment and check that you’re making all the best moves. Here are 7 things to check:

1. Double check your deductions

In previous years, taxpayers were encouraged to accelerate any deductions to the current year to make the most of them, but that wisdom may not make sense with the new tax law. For example, for people who pay estimated taxes, it’s common to pay the 4th quarter state estimate on December 31st so that you can deduct that payment in the current year. Now that the total deduction for state and local taxes is limited to $10,000, that might not be the best move anymore.

First of all, the standard deduction was increased to $12,000 for single filers and $24,000 for married, which means that you may not even be itemizing deductions anymore — only if your mortgage interest (on the first $750,000 of a mortgage) plus taxes (limited to $10,000) and charitable contributions (limited as well, depending on what you’re giving) exceeds $24,000. In other words, if your property taxes and state/local income taxes are $10,000 or more, you also have to have $14,000 of mortgage interest and charitable contributions to even need to itemize.

What does that mean to you? Before you make tax-saving moves like you have in years past such as giving to charity just for the deduction or accelerating paying taxes, make sure you’ll even be deducting those things for 2018.

2. Make up a tax shortfall with increased withholding

If you’ve had a change in marital status, a change in the number of dependents in your household, or a substantial change in income, you may have had too much or too little income tax withheld this year. Run an estimate of your tax liability and compare it to how much tax you have paid either directly to the IRS or through withholdings on your paycheck. If it doesn’t look like enough, make extra payments now while there’s still time – you can adjust your W-4 if there’s enough time, or just make an estimated payment using the proper forms. It may not save you from an underpayment penalty for prior quarters, but it should help for the last quarter.

3. Leverage retirement account tax savings

If you have a 401(k) at work, you are eligible to contribute up to $18,500 for the year (plus an extra $6,000 if you turned age 50 or older this year). If you have not reached this limit yet and anticipate higher taxes this year, consider increasing your pre-tax contributions before year-end to get closer. You can also contribute to a traditional IRA (which is deductible if your income is low enough), but you have up until April 15, 2019 to make that contribution so you don’t have to be in as much of a hurry.

4. Look into Roth conversion options

While most of these suggestions are ways to help reduce your 2018 taxable income, due to lower rates you may actually wish to convert pre-tax retirement savings to Roth either using an IRA or in your 401(k). Any funds you roll from a traditional IRA to a Roth IRA or convert in your 401(k) are treated as taxable income for the year, but depending on where you are in your tax bracket, you may find it worthwhile to lock in a possibly lower tax rate if you have many years to go until retirement or just simply think that tax rates will be higher when you do retire.

What to watch out for

Know where you are in your tax bracket and make sure any conversions don’t push you into a higher bracket.
This can be an especially smart move if you do this when the market is down.
Be aware that the new tax law took away the ability to change your mind on this, so once you flip the switch to Roth, it’s done.
Make sure you can pay any resulting taxes with funds outside your IRA or 401(k).

5. Maximize “above-the-line” deductions

While these are technically just adjustments to income, above-the-line deductions are a great way to reduce your taxable income without the requirement to itemize. Some of the more common deductions include traditional IRA and health savings account (HSA) contributions, self-employed health insurance costs, and alimony payments (although that particular deduction ends this year). Keep in mind that you can make HSA contributions via lump sum up until the tax filing deadline in April.

6. Look into tax-loss harvesting with any brokerage investments

If you own any stocks or mutual funds in a taxable brokerage account, this strategy is for you. Investments held more than one year are taxed at more favorable long-term capital gains tax rates, while investments sold that have been held for one year or less after purchase are subject to the higher ordinary income tax rates.

If you have capital gains to report for the year, consider selling other securities that may generate a loss in order to offset some or all of the gain. In addition, up to $3,000 of capital losses not offset by capital gains can be taken off ordinary income taxes annually. The remaining losses can be carried forward indefinitely. Just take care that you are only selling securities you truly no longer wish to hold anymore – if you buy the same thing back within 30 days, the IRS will disallow the loss due to the wash sale rule.

7. Don’t squander your gift tax exclusion

Any taxpayer may give cash and noncash gifts totaling up to $15,000 in value to as many people as they wish without incurring a gift tax in 2018. (Couples can combine their gift and give up to $30,000 per recipient.) If you have a sizeable estate and are feeling extra jolly this year, be sure to take advantage of this annual tax break.

As we often say at Financial Finesse, financial planning is a process, not an event. The same is true of tax planning. Begin the process today so that you can have a happy and prosperous tomorrow.

Note that Financial Finesse does not provide tax or investment advice. This article has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for, tax, legal, investing or accounting advice. You should consult your own tax professional before engaging in any transaction.

Can Being Grateful Actually Make You Wealthier?

November 21, 2018

It’s my favorite time of year, and not just because my birthday falls amid the hubbub of the holidays (ok, maybe that’s part of it). I just love the coziness, the family time, the decorations, the traditions and of course, the food. One tradition that I look forward to every year is how my family goes around the table before the Thanksgiving meal to say what we’re grateful for – it was something my Grandmother started decades ago that we all carry into the homes we share for the meal today.

It’s always so renewing to spend time thinking about what I’ll say – there have been years when there didn’t seem to be a lot to give thanks for, but after focusing on what’s good, some of the bad stuff seems less impactful. It turns out that this family tradition could really be about more than a moment of family sharing. There is scientific evidence mounting that the simple practice of giving thanks can have myriad positive benefits in life. In fact, a regular practice of gratefulness can actually help with your finances.

What is gratitude?

First, it’s important to understand that gratitude is actually made up of two parts, according to Robert Emmons, Ph.D, who is considered to be the leading scientific expert on gratitude. The first is what most of us already know: it’s an affirmation of goodness in our lives, even when there are things going wrong. An example is giving thanks for the love of family and friends, even if you’ve recently lost someone close to you.

But the second part is where it can really manifest in more of what you really want. It’s recognizing that the sources of that goodness come from outside ourselves. It means we realize that the gifts for which we are giving thanks came from other people or in some cases, a higher power, should you believe in one. We can certainly appreciate the traits we have that help us in life, but real gratitude is the humble acknowledgment that much of what we have is due to the generosity and goodness of others.

How does it work?

Dr. Emmons has found that gratitude brings several benefits: increased happiness, stronger relationships, less anxiety, longer sleep, and better overall health and resiliency. It’s that final piece, resiliency, that can really help you find more financial success when you’re able to quickly bounce back from setbacks such as earning too little, spending too much or finding yourself overwhelmed with debt. Gratitude also helps block negative emotions and helps you to quickly find solutions and get working on them. With that in mind, here are three ways to add more gratitude to your daily life, all year long.

1. Keep a daily gratitude journal. My friend Ellen Rogin observes in her book Picture Your Prosperity that people who were overspenders in her practice talked a lot about what they didn’t have in their lives, while good savers talked about what they were thankful for. In one study, people who kept a gratitude journal reported increased well-being, better health, more exercise, and increased optimism. I know Oprah is a big fan of this!

When we acknowledge and give thanks for what we do have, instead of lamenting what we don’t, we open ourselves up to receiving more of what we want. As you’re keeping your journal, think of the positive aspects of your finances. Perhaps you are working to pay down debt, but you can still give thanks for the ability to make your payments on time each month.

2. Foster an attitude of abundance. Don’t just write about what you’re grateful for. Expect more of what’s good and it will appear. The Law of Attraction says that what we focus our attention and energy on will manifest itself in our lives.

I experienced this myself. When I was first working to dig myself out of credit card debt, all I could see was how long it was going to take me to pay it off and I was preoccupied with what else I could be doing with that money. I was on the financial struggle bus. But when I shifted my mindset to placing my debt payments in the category of “just another bill,” and trusted the plan I had put together, I was better able to enjoy the money I wasn’t spending on debt and actually found myself able to pay off the debt sooner than I’d planned.

3. Give some away. Hopefully you already know how great it feels to give to others, but research by Arthur Brooks, Ph.D., finds that as people give more, their incomes actually increase. Of course, people who make more give more, but Dr. Brooks found that as people’s charitable contributions increased, so did their income. A study comparing two similar families where one family simply donated $100 more than the other, found that the higher-giving family will earn an average of $375 more income that year than the other one!

It sounds a little crazy, but consider this: giving money away or spending it on others has a tendency to make you feel more wealthy. This causes you to feel happier, and greater happiness tends to lead to greater career success, so there you have it. Want to get promoted? Maybe it’s time to start giving more freely to those not yet at your level.

Why not try it?

The best part about all of this is that focusing on being more grateful really doesn’t take that much. And even if you don’t find yourself immediately swimming in abundance, I’ll wager you’ll feel better no matter what. Can you really put a price on that?

This Money Belief Is What Keeps Many People In Debt

November 06, 2018

One of the most interesting things I’ve learned from having the opportunity to discuss money with people from all walks of life is how much of an effect that our deep-seated money beliefs have on our financial outcomes. One of these beliefs is how we perceive whether or not we need to buy something – some people buy what they can “afford,” while others go with what they actually need. I know, because I used to embody this belief.

Little decisions that are actually a big deal

Every day we make little decisions like whether to take the bus or hail a cab or whether to cook dinner versus order delivery that aren’t really just about time and/or a willingness to go the “tougher” route – how you make these decisions is actually a key determinant of your financial situation. It’s how even people who make hundreds of thousands per year end up riddled with debt and with very little savings (true story, I know people like this).

What it looks like

This really struck home with me recently, when I met up with friends who had taken the subway and walked about a half mile to the place we were meeting – a minor inconvenience versus just getting dropped off out front. These are people who could easily afford the $10 it would cost to hire a ride, but their mindset is, “Why spend the money if we don’t have to?”

On the flipside, I’ve heard people joke that they’re “too poor” to own a car, but not “so poor” that they have to ride the bus. The irony is that I own a car and yet I take the bus all the time – finding the economical way to accomplish life is not just about whether or not you can afford it, it’s about spending according to what you need – it’s a mindset.

Why it’s a big deal

This may not seem like a big deal – saving $10 here and there on transportation around a city is not going to make or break your ability to retire, (although there is an argument that it might – see this calculator) but that mindset where your spending decisions are made by whether or not you can afford something, versus whether you really need to spend the money is what’s so dangerous.

Many people use the “affordability test” when deciding what kind of car or house to buy – just because you can squeeze $450/month out of your budget in order to make a car payment doesn’t mean you need that nice of a car. Likewise, the feeling of being “house poor” often originates from someone buying what they think they can afford, which is really much more than they need.

How this mindset had me living paycheck-to-paycheck until my 30’s

I can get a little lecture-y on this, but that’s only because I’ve been there – until about the age of 32, I was caught in a loop of saving and spending that was keeping me on the edge financially, no matter how much or how little money I made. I lived in the nicest apartment I could afford and bought my last new car based literally on what I had left over in my bank account each month, not based on what would allow me to work toward other goals of escaping credit card debt and building up an emergency fund.

What changed for me

The thing that revealed this psychology to me was when I found myself needing dental work that required an up-front payment in excess of $5,000, which of course I didn’t have. Without a second thought, I charged it to a credit card, then started aggressively paying $300 per month toward the balance until it was gone. My “aha” moment was when I realized that I was able to “find” $300 per month toward a payment, but prior to that I somehow didn’t feel like I could “afford” to save that same amount.

Once I paid that balance off, I immediately added an automatic deposit to my savings in the same amount, which eventually lead to a real emergency fund. Seeing the balance of that account hit $1,000 lead to a shift – having a comma in my savings account relieved a burden of financial stress I didn’t even know I was carrying.

The key take-away

It was a crucial lesson, that translated to literally every other payment I had in my life. In the past, whenever I had a payment end, such as paying off my car loan, I always found a way to replace that payment, like moving into a more expensive apartment. If I could go back in time, I’d stop 30-year old Kelley and tell her to instead stay in the cheaper apartment and stop paying for things just because she could afford them and instead talk to her about living within your means according to what you need, versus what you want or can afford.

The next time you find yourself making a financial decision with the reasoning that “it’s what you can afford,” stop and ask yourself if it’s also what you really need, or if it might make more sense to keep that money in your pocket. The way I talk myself out of spending in these situations today is to remind myself that every dollar I don’t spend today is a dollar that can help me stop working sooner.

The Crucial Estate Planning Step Everyone Needs To Check Every Year

October 17, 2018

When was the last time you checked to make sure that all of your beneficiary designations were set up properly? It’s a good idea to take a look after any big life change such as marriage, divorce, birth or death in your family. However, even if no one important has entered or left your life recently, it’s a best practice to make sure that everything is correct at least once a year. Open enrollment is as good of time as any, since you’re more likely to be poking around your work benefits site anyway.

Why check if nothing’s changed?

Maybe nothing has changed in terms of who you’d want to inherit your assets that pass via beneficiary designation, but perhaps the actual benefit has changed. For example, the HSA provider my company uses was recently acquired by another vendor. Supposedly the beneficiary designation information was transferred along with my account to the new provider, but I was unable to verify that by logging in to my account, so contacted them to confirm.

Other reasons to consider updating beneficiary designations

Marriage, divorce, birth and death are very definitive reasons to prompt a review, but there are other subtler reasons to make updates as well:

Your children are now adults, so you may want to add them as contingent should your primary person (often your spouse) pass first
You’ve become closer to certain family members and/or grown apart from others
You have only certain children who will inherit a significant asset like your house or business, so you use other accounts to equalize with the rest of your family
You want to leave money to a charity — using HSA or traditional retirement accounts is a more tax efficient way to leave money to charity than a bequest in your Will or part of a life insurance policy

What happens if the beneficiary is not set?

One of the benefits of accounts that allow you to assign a beneficiary is that it can help you to avoid probate, which is public and can be costly, while also holding the assets up while the person’s estate is settled. (Here’s a real-life story where that happened)

If you pass away and no beneficiary is named for accounts that have that feature, your estate automatically becomes the beneficiary, which means it will go through probate.

When the beneficiary is set, but it’s the wrong person

Your Will does NOT override beneficiary designations, so for example, if you name your sister as the beneficiary of a life insurance policy, then neglect to change that once you get married, your sister may actually inherit the proceeds, even if you have a more recent Will that says your spouse should receive everything.

Even worse, there are countless cases of people who got divorced, but forgot to change their beneficiary from their ex-spouse. This gives a whole new meaning to the phrase, “over my dead body…”

Use this checklist to make sure ALL accounts are up-to-date

Set some time aside to review any of the below to make sure the beneficiary is who you want it to be, based on your life today.

Pension
401(k)
IRAs
Former retirement accounts
Life insurance through work
Other life insurance
HSA
Employee Stock Purchase Plan
Annuities
Deferred compensation plans
529 and Coverdell Education Savings accounts

Should You Contribute To Pre-Tax Or Roth 401k?

September 13, 2018

For all the efforts that companies undertake to make participating in their retirement plan benefits easy, there’s no simple way to help employees decide whether the money they contribute from their own paychecks should be traditional (also called pre-tax) or Roth (also sometimes called after-tax Roth). The answer can be very nuanced depending on your situation, and for the most part, we won’t know whether we chose correctly until it’s too late – we’ll only really know if we got the answer right when it comes time to withdraw and we actually know our taxable income, current tax brackets and lifestyle needs.

Since my crystal ball seems to be broken, I’ve attempted to distill the various factors in a way that makes more sense. Keep in mind that many of the factors listed in the chart below are just different ways of saying the same thing, but the intention is to present it in the way that makes the most sense to you.

The biggest factor affecting this decision: taxes

If we all could just know what tax rates will be when we retire and start withdrawing from our retirement savings, along with what our own income will be at that point, this would be a simple choice – if you knew your tax rate would be lower when withdrawing from your retirement account, you’d choose pre-tax and avoid paying taxes on the money today so that you could pay at a lower rate in the future.

On the flip side, if you knew that tax rates would be higher when you’re withdrawing and that you’d be paying more in taxes, then you’d choose Roth so that you can pay today’s lower rates, then enjoy your savings without tax consequences in the future. (keep in mind that I could be wrong about this – reason tells me that tax rates will have to go up in the future, but Congress has surprised us before!)

I like that I can change this strategy at any time. For example, when my husband sold some stock he’d been given as a child for a big capital gain, I switched to pre-tax for the rest of that year in an effort to lower our overall taxable income.

Income limits and the ability to withdraw without taxes

I also like the idea of having investments available to me in retirement that I can liquidate and withdraw without concern for the tax consequences, and my husband and I have too high of a combined income to contribute to Roth IRAs, so I like that the Roth 401(k) doesn’t have an income limit.

Now, there is a way around those income limits using a “back-door” Roth IRA, but that doesn’t work for me because I also have a rather large rollover traditional IRA.

Predicting the future of tax rates

I’m personally making Roth contributions right now in my 401(k) because I believe that we are currently experiencing the lowest tax rates I’ll see in my lifetime. And while I very well may have a lower income in retirement, the tax brackets themselves may be different, so even if I have a lower income, I think I might have a higher tax rate in the future.

Income limits and the ability to withdraw without taxes

Another consideration: access to the contributions for early retirement

While I can’t withdraw my Roth 401(k) contributions before I’m 59 1/2 without penalty (I COULD withdraw contributions to a Roth IRA early), if I’m lucky enough to retire before then, I can always roll my Roth 401(k) into a Roth IRA, then tap those contributions if I need to, without concern for taxes or early withdrawal penalties. That’s another reason that I want to at least have some of my retirement savings as Roth, regardless of tax rates.

Factors to consider:

Factor:	Traditional (pre-tax)	Roth (after-tax)
You think your taxes are higher today than they’ll be when you withdraw	Makes more sense	Makes less sense
You think your taxes are lower today than they’ll be when you withdraw	Makes less sense	Makes more sense
You want to avoid required distributions after age 70 1/2	Makes less sense	Makes more sense, as long as you roll to a Roth IRA
You think your income tax bracket will be lower when you withdraw	Makes more sense	Makes less sense
You think your income tax bracket will be higher when you withdraw	Makes less sense	Makes more sense
You need more tax deductions today	Makes more sense	Makes less sense
You have a long time until withdrawal and plan to invest aggressively	Makes less sense	Makes more sense
You’d like access to your contributions before the traditional retirement age	Doesn’t make sense	Makes sense

Splitting the difference

If you’re just not sure or thinking about it makes your head hurt, you could always split your contributions between the two. In other words, if you’re putting 10% away, you could do 5% pre-tax and 5% Roth. The total $19,500 (plus $6,000 catch-up for over 50) applies as a total to both, but there’s no rule that says you have to put all your money into just one bucket or the other at a time.

One more thing to know

No matter what you choose for your own contributions, you should know that any matching dollars or other contributions from your employer will always be pre-tax, per IRS rules. So even if you put all your own contributions into Roth, you’ll still have pre-tax money if you receive any from your job. Now, you may be able to convert those contributions to Roth depending on plan rules, but if you do that, know that you’ll have to pay taxes on the amount converted, so plan carefully.