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”

How to Prepare for a Potential Layoff

February 22, 2023

I recently spoke to a friend who was scared of getting laid off. She asked me how she could prepare for a layoff. The following was the guidance I gave her:

 

Stop paying extra on debts and start stockpiling cash.

 

I know this may sound counter-intuitive to many people, but if you are facing a layoff, you need as much cash to live on as possible while you look for work, especially if you have less than three months of expenses saved. Consider paying your credit card debt minimum and funneling as much cash as possible to a savings account. Also, consider earmarking any tax refunds to savings.

 

Review the budget and trim the fat.

 

This fat can be a cable or cell phone package with all the bells and whistles. You can ask for a cheaper cable plan or cut the cable cord altogether. You can choose a more affordable cell phone carrier or cancel a rarely-used subscription.

 

Contact creditors in advance to let them know of a potential layoff.

 

If you talk to your creditors before there is a problem, they can be more willing to work with you. Then, take full advantage of your potential layoff and ask your creditors for a reduced interest rate.

 

Review workplace benefits.

 

If you have accrued vacation or sick leave, ask if your company will pay you for unused time if you leave involuntarily. Have you had your annual checkup or been putting off dental work? Now is the time to take care of all your medical needs. See which benefits such as life insurance, long-term care insurance, and even some legal benefits are portable, meaning you can continue them after you separate from service.

If you have outstanding 401(k) plan loans, ask your plan provider how they handle loans during a layoff. Some companies will give you a short period to pay it back, and then the remaining balance counts as taxable income with a potential 10% penalty if you are under 59 ½. Other companies allow you to continue to pay your loan balance from your checking or savings account. In addition, medical saving plans such as HSAs can go with you, and you can use the funds for healthcare premiums while receiving unemployment benefits.

 

The key is to prepare in advance. If you are laid off, you have done the legwork to be financially prepared. If the layoff does not happen, you have built up savings and are in a great position to start re-attacking debt.

 

The 3 Most Important Financial Accounts Everyone Needs

October 10, 2017

Why is it that cash management seems to be so easy for some people, and yet so hard for others? Is it simply a matter of income—the more I have the less difficult it is to manage—or is it something more than that? Having total control over cash flow is a critical step toward optimal financial wellness, yet it proves to be more elusive than we’d like.

One event away from financial disaster

According to our research, 73% of employees say they have a handle on cash flow, but only 50% say they have an emergency fund. That means the other 50% are one unexpected event away from financial hardship.

No more wishing and hoping

So how do we go from wishing nothing bad happens to being totally confident no matter what life throws our way? It starts by having a firm financial foundation. Here are the three most important financial accounts you will ever need:

Account #1: A Checking Account

It may seem odd to think of a checking account as one of the three most important accounts you will ever need, but the checking account is a fundamental building block in your financial foundation. Your checking account is where you directly deposit your paycheck, and it should be the account used to pay all of your planned, regular monthly expenses (e.g., food, housing, utilities).

Which checking account is right for you? Check out these blog posts for ideas.

Account #2: A Savings Account

If you thought a checking account was a silly example of a critical account, then you’re probably thinking a savings account is even more silly—but hear me out. I agree, a savings account is a silly place to save money, but it is a FANTASTIC place to spend money. In other words, don’t treat it as a savings account; treat it as a spending account.

Your checking account is a great place for money you know you’re going to spend every month, but what about the money you know you’re going to spend three months from now; or six months from now; or nine months from now? (You get the picture.)

Your savings account is the perfect place to put money aside that you know will get spent soon, just not necessarily this month. That’s why we like to refer to it as a Planned Spending Account, because it is money you’re planning to spend. (Yes, we are very creative.) Others refer to it as “lump sum” savings. Whatever you call it, it’s probably one of the most overlooked accounts, but it can be very powerful when it comes to managing cash flow over the course of a year.

Account #3: An Emergency Fund

Well, if you have a checking account for planned, regular monthly expenses, and a savings account for planned, irregular, nonmonthly expenses, then what do you think this third magical account would be used for? You got it: UNPLANNED expenses.

Most of us know we should have an emergency fund for unplanned expenses, but what exactly would qualify as an “unplanned” expense? That’s a good question, and the best I can answer is to suggest that an unplanned expense is any expense that we would typically NOT plan for. (I told you we were creative.)

For example, I do NOT plan to crash my car into a tree, but I know that if I do I’ll have to pay a deductible on my auto insurance. I do NOT plan for my children to get sick, but I know that if they do I may have to miss work or find a last-minute care taker. I do NOT, necessarily, plan to lose my job, but I know that if I do I’ll still have mouths to feed until I find work again.

Don’t confuse urgent with unplanned

It’s important not to confuse “urgent” with “unplanned.” Fixing the car when it breaks down can be urgent, but no matter how old or new your car is you should save for car repairs and maintenance. Losing income due to illness or injury can be urgent, but you should carry adequate disability insurance to protect against such risk. Visiting the emergency room can be urgent, but you should save for health insurance deductibles in a planned spending or health savings account (HSA).

Financial experts don’t always agree on exactly how much you should have in your emergency fund, which is why I often tell people it’s really just a matter of how big of an emergency you want to be prepared for. That said, here’s a calculator that might help you determine the right amount for you.

Where’s the best place to keep an emergency fund? Check out these blog posts for ideas.

When it comes to building a structure that can withstand the forces of nature, triangles are the strongest shape. Why should building a financial foundation be any different?

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How Much Do You Really Need In Your Emergency Fund?

August 02, 2017

In this age when people are measuring everything from the number of steps they take, to how many hours they sleep, and even how many calories they burn while they are sleeping, it’s no wonder that people regularly ask me if what they are doing is considered “normal” when discussing their personal financial questions with me — we like knowing not only where we stand, but how we measure up compared to our peers.

But really, who am I 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. One of the more common rules of thumb I discuss with people 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 potentially be hard to sell, work in a field that is highly volatile or specialized or have a large family dependent on one income, this is a pretty good gauge of things to make sure you’re protected. 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 because 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.

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 in the case that you or your spouse loses your job. Being unemployed is stressful enough, so it’s nice to know that you have that money aside, so that 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.

In the event that 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 this is more of a last resort, as 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 just having the right 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 large interest charges.

What it’s not there for

It’s NOT your piggy bank to tap into when you are feeling that spending itch or paying for expenses that should be planned for through your normal budgeting process like vacations, holidays, etc. This 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’ll need it, I promise). 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. And once the emergency has passed, they are 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?

  1. Figure out your monthly fixed expenses: 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.
  2. Open a separate savings account: Trust me. You’ll want to keep it separate to make it harder to tap into. You’ll thank me later.
  3. 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 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 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 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.

 

Should You Use Your Emergency Fund For Medical Procedures?

July 05, 2017

After sharing our decision to pursue in vitro fertilization and how we’ll pay for it on the blog last week, I was a bit overwhelmed with the outpouring of support from friends, family, colleagues and even complete strangers. THANK YOU for your words of support and prayers, they mean so much to us!

I’ve also been asked by a few people why we aren’t using our emergency fund or Health Savings Accounts (HSAs), and those are great questions! Here’s my answer:

Using your HSA

Anyone who has discussed the benefits of the HSA with me knows that I actually emphasize the S in HSA for savings — rather than use the funds I’m accumulating in my account for everyday medical expenses like co-pays and minor bills, I’ve been paying for those things with my out of pocket spending money. The thought is that we’ll let our HSA money build up for when we have a big medical expense that we wouldn’t be able to pay out of pocket, while realizing the tax savings along the way.

Well, that day just came sooner than we had planned, so we WILL be draining our HSAs, it’s just a bit of a drop in the bucket compared to the total cost of IVF. Between my HSA and my husband’s, we can’t even cover the cost of the medication required, but we will cover what we can with this tax-free money.

Why not use the emergency fund?

As urgent and important and life-changing as this is for us, we do not feel that undergoing fertility treatment is an emergency in the way that the financial emergency fund is intended. We are stretching ourselves financially to do this, but we still need a back-up in case one of us loses our ability to earn income, which is really what the emergency fund is for —

  • To keep a roof over your head,
  • Food on the table,
  • Transportation to work and
  • Other basic needs met during times of unexpected income disruptions.

It’s why my colleague Erik wrote about the emergency fund taking priority over paying down debt — it’s your first line of defense against “life happening,” even if it’s not earning a ton of interest and you’re paying interest on other debts in order to keep it in place.

At the end of the day, we are choosing to undergo IVF. It’s true that without it we may not ever have biological children, which would change our life plans and be tremendously sad, but that’s not an emergency. It sucks, don’t get me wrong, but no one will be homeless or go hungry if we DON’T do this. We feel a tremendous sense of gratitude and fortune to even be in a position to make this choice – many people are not, which also makes me sad.

Sometimes it can feel like you don’t have a choice, like if you have an accident and receive a $10,000 hospital bill. While it’s important to make a plan to pay your medical debts to avoid them going to collections, depending on your personal situation, using up your emergency fund may not be the best place to turn — what happens if you’re unable to work and pay your rent? That’s what your emergency fund is for. (caveat: sometimes it DOES make sense, but that’s why it’s called “personal” finance)

Keep that in mind the next time you feel tempted to tap your emergency fund — is it a true emergency that will literally keep you housed, fed, clothed and employable? If not, it’s best to seek another way to pay or to make a different choice.

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Does a Money Market Fund Make Sense for You?

April 24, 2017

Are you looking for a stable value investment with easy access to your cash when you need it but a higher return than leaving your money in a checking or savings account? A money market fund could be a good fit. Here are some things to consider.

What is a Money Market Fund?

While a money market fund is often referred to as a “cash equivalent” because of its low risk profile, a money market fund is not cash. It’s actually a mutual fund which invests in very short term, low risk debt securities such as treasury bills, the debt of various government agencies, and “commercial paper” (short-term corporate IOUs). The investment objective of a money market fund is to earn interest for its shareholders while maintaining a stable net asset value (NAV) of $1 per share. The value of these short-term investments rarely fluctuates, which is why they’re considered almost as good as cash. But since they’re not cash, money market mutual funds yield a slightly higher return than savings accounts or money market accounts.

When to Use a Money Market Fund

The benefits of money market mutual funds — safety, liquidity and a higher yield on “cash-equivalent” savings — make them attractive to many savers with differing goals. Here are some common uses for money market funds:

  • For an emergency fund – A money market fund can be a low risk place to keep 3-6 months of expenses. Make sure you choose one that doesn’t have a penalty for redeeming shares.
  • For cash management – Many financial institutions offer money market accounts with cash management privileges, where unused cash balances are swept into a linked money market fund and shares are redeemed to pay a check, debit card or ATM withdrawal.
  • To save for short term goals like a home down payment – Money you know you will need relatively soon shouldn’t be subject to the volatility of the stock or bond markets.
  • As a parking place between investments – If you sell an investment, you can park the proceeds from the sale in a money market fund while you research other investment options.
  • To balance the asset allocation of your portfolio – Many investment strategists recommend that a portion of any investor’s portfolio remain in “cash,” available to take advantage of opportunities that come up in the stock and bond markets.

When Not to Use a Money Market Fund

A money market fund is considered a short term, cash-type investment. That’s great for your emergency fund but may not be the best place for retirement savings that you don’t plan to access for decades. If you’re not sure what the mix of stocks, bonds and cash (such as money market funds) should be in your portfolio, download this Risk Tolerance and Asset Allocation Worksheet.

Types of Money Market Funds

There are differences among money market funds that make for variations in taxation, safety and yield. Savers with different goals will choose different funds. Money market funds, depending on their objective, can offer a taxable return or a full or partially tax-free yield, depending on what type of debt securities they hold in the fund..

What to Know Before Investing

Money market funds are not federally insured. However, most people consider the amount of extra risk in money market funds to be so minimal as to be easily offset by the slightly higher interest they earn. Fees on money market funds can vary, so do some research before you invest, including reading the fund’s prospectus.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

 

How Should You Invest In Your Roth IRA?

April 20, 2017

If you’re like many people I’ve talked to recently, you may have decided to contribute to a Roth IRA before the deadline on Tue. However, it’s not enough to open an account and fund it. After all, a Roth IRA is simply a tax-sheltered account, not an investment. You still have to decide how to invest the money. Here are some options to consider:

Use it as an emergency fund. If you don’t have enough emergency savings somewhere else, you can use a Roth IRA as part or all of your emergency fund since you can withdraw your contributions tax and penalty-free at any time and for any purpose. (Earnings are subject to taxes and a 10% early withdrawal penalty before 5 years and age 59 ½ but the contributions all come out first.) In this case, you’ll want to keep it someplace safe and accessible like a savings account or money market fund. Once you accumulate enough emergency savings elsewhere, you can invest it more aggressively for retirement.

Save for a short term goal. A Roth IRA can also be used penalty-free for a first-time home purchase (up to $10k) or education expenses. If you intend to use your Roth IRA for either goal in the next few years, you’ll probably want to keep it in savings.

Choose investments that complement your other retirement accounts. For example, you may want to use your Roth IRA for investments that may not be available in your employer’s plan like real estate, gold, commodities, emerging markets, international bonds, and microcap stocks. They can help diversify a more traditional mix of bonds and large and small cap US and international stocks.

Choose a more conservative mix for early retirement. If you’re planning to retire before becoming eligible for Medicare at age 65 and are planning to purchase health insurance through the Affordable Care Act (assuming it hasn’t been repealed and replaced), a tax-free Roth IRA can help reduce your insurance costs because the insurance subsidies are based on your taxable income. Since a large percentage of the account may be coming out over a relatively short period of time, you may want to invest it more conservatively than your other retirement investments.

Choose more aggressive investments for long term tax-free growth. If you’re not planning to withdraw your Roth IRA early, you may want to take the opposite approach and use it for the most aggressive parts of your portfolio. That’s because the account is growing tax-free and may be the last to be touched. (It helps that Roth IRAs aren’t subject to required minimum distributions.) Some examples of more aggressive investments would be emerging market and small and micro cap stocks.

Keep it simple. If this all sounds confusing and you want to just keep your investing as simple as possible, you can look at each account separately. For example, you might choose a target date retirement fund for your Roth IRA since it’s a fully diversified one stop shop that automatically becomes more conservative as you get closer to the retirement date. All you need to do is pick the one with the date closest to when you think you’ll retire and set it and forget it. If you want something more customized, you can also use a robo-advisor or design your own portfolio based on your particular risk tolerance.

Like all financial decisions, your choice begins with your goal. Are you trying to save for emergencies? Do you plan to use the account early or late in your retirement? Or do you just want to keep things as simple as possible?

 

 

 

How to Avoid Borrowing From Your Retirement Plan

January 26, 2017

Have you ever borrowed from your employer’s retirement plan? When you need cash in a hurry, it can be tempting. After all, you don’t have to worry about a credit check and the interest just goes back into your own account.

However, there are a couple of reasons why this may not be the best idea. First, you lose any gains your money would have earned. Keep in mind that the stock market averages a 7-10% return per year, including many years with double digit returns so you could be losing out on real money.

Second, if you leave your job before paying off your loan, the outstanding balance could be considered a withdrawal and subject to taxes plus a possible 10% penalty if you’re under age 59 ½. These losses could end up jeopardizing your retirement. Here are some ways to avoid having to raid your retirement nest egg in the future:

Don’t think of your retirement account as a giant ATM. Even if your plan allows it for any reason, retirement plan loans should only be for dire emergencies and no, wanting the latest tech gadget or a vacation doesn’t qualify. Instead, calculate how much you need to save each month and have that amount automatically transferred to a separate savings account until you have enough to purchase what you want. Don’t have enough to save? Ask yourself what expenses you’re willing to cut back on to make your goal happen.

Have an emergency fund. Even if you do have an emergency, a retirement plan loan shouldn’t be your first resort. If your investments are down in value, you may not even have enough to borrow. Instead, build up enough savings to cover 3-6 months’ worth of necessary expenses and keep that money someplace safe like a savings account or money market fund. If you can’t stand the idea of all that cash just sitting there earning less than 1%, here are some ideas to put it to work harder for you.

Consider other options. For example, the average home equity interest rate is about 5%. Don’t forget that it’s tax-deductible too. If you’re in the 25% tax bracket, that loan may only cost you 3.75% after taxes, which is less than your investments will probably earn. Just be aware that your home is on the line if you can’t make the payments so this is probably not be a good idea if you’re facing severe financial hardship.

One final point is that people sometimes use a retirement plan loan to pay down credit card debt. Given how high credit card interest rates can be, this might be a smart move if it’s part of a larger plan to become free of high-interest debt. However, if you end up filing for bankruptcy, you’ll still have the retirement plan loan. In that case, you would have been better off using the bankruptcy to wipe out the credit card debt and leave your retirement account alone. (It’s generally a protected asset in bankruptcy.)

Retirement plan loans have a place, but be aware of the downsides. If you’re not sure what to do, consider consulting with a qualified financial planner. As with any financial decision, you want to make an informed one.

 

 

 

 

What I Learned From My First Maternity Leave

January 16, 2017

I had my first biological child when I was 41. At the time, I had a busy career as a financial planner for a global financial services firm and was already a stepparent. I liked my job, my team, my co-workers and the family-friendly corporate culture at my firm.

While I wasn’t quite sure what to expect after the baby was born, I had a vision that things would largely be the same, only busier. I’d be even more efficient and organized and cut back on some volunteering so I could get it all done. For those parents reading this, I’ll excuse you while pick yourself off the floor from laughing at my naiveté! If you are preparing now for parenthood, allow me to share some things I learned from returning to work after my first maternity leave:

Your HR Department is here to help you.

My HMO gave me forms to fill out for short-term disability and submit to my employer. It turns out I didn’t need them because my firm had 12 weeks of paid maternity leave with full benefits. My office HR rep was a fantastic resource once she knew I was expecting. She fully explained my benefits and how the leave would work.

Before my leave, she arranged for blinds to be installed in my team’s office indoor-facing windows, so I had a private place to nurse or pump when I returned. My manager encouraged my business partner and me to work out whatever arrangement suited us for my return, including a full-time schedule, a part-time schedule and working from home. Keep in mind that at the time I worked for a very large company that has won many awards for being friendly to working mothers, but even in a smaller company, you may be surprised at what you can negotiate.

It might start sooner than you expect.

As I wrote about here, a week or so before my daughter was due, I developed some unexpected complications and had to begin my maternity leave suddenly. It was challenging on many levels. I felt fine, and there were so many things that were left to do. Luckily, this happened late in my pregnancy, but I have friends who have had to go on leave suddenly with many months to go. A paid maternity leave that starts well before the baby is born could have financial implications.

If you still plan to take the same amount off after the baby then there will be a period of time without income. If you have sick time or PTO available, consider using that first before you begin your formal leave. Once you’re expecting, consider building up your emergency fund to cover an additional 3-4 months of living expenses above what you’ve already saved in case you have to take unpaid leave. Use this calculator to determine how much you can save.

You may want to take a longer leave.

After 12 weeks, I went back to work part time, but I found it was too soon. My baby wasn’t sleeping for more than 45 minutes at a stretch, and I was exhausted. My team at work was very understanding, and we tried keeping my daughter in the office with us for a while.

Eventually, I asked to take an unpaid leave for another three months, under the Family Medical Leave Act. That meant that I could take leave for an additional 12 weeks without pay but without risking my job. I was able to continue my health insurance coverage at the same group rate but had to write a check for my share of the premiums as I wasn’t getting a paycheck. See here to learn more about employee protections under the FMLA.

Accept you will feel torn.

Ambivalence is completely normal during the early stages of returning to work after maternity leave. When I was back in the office, part of me felt like I should be home, and when I was at home, part of me felt like I should be at work. Remember that your HR Department is here to help you manage the changes, so reach out when you have questions.

Don’t let maternity leave stress you out. Your company wants you to have a successful maternity leave and a productive return to work. With some preparation and a realistic assessment, you’ll be ready for it!

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here, and on Twitter @cynthiameyer_FF.

Financial Wisdom From My Grumpy Old Man Side

January 13, 2017

Sometimes I like to have some fun and adopt a “grumpy old man” persona for a bit just to keep everyone around me on their toes. My kids have started to say “OK, Grandpa…” when I get into my grumpy old man role.  Sentences starting with “back in my day” or “when I was your age” or containing the words “poppycock”, “shenanigans”, and “new-fangled” are standard when I’m talking as that character.

The funny thing I noticed this morning as I was playing this part is that a lot of what I say as that person is absolutely true. The principles are valid and while I may be joking around and having some fun, there is some real timeless stuff that I wish more people in today’s world would implement as a part of their lifestyle. Here are some of the top nuggets of wisdom from my grumpy old man character:

Back in my day, if you didn’t have the cash, you didn’t buy it.  I have seen more people get themselves in trouble financially through excessive use of credit cards than for any other reason. As credit card debt mounts, so do minimum payments as well as stress. I can’t count the number of divorces and therapist visits that people have attributed to credit card debt.

When I was your age, I always saved some money for a rainy day. Having an emergency fund, whether it’s a “starter emergency fund” of $1,000 – $2,500 or a 6-9 month cash cushion, is a great way to ensure that your financial life won’t get blown to smithereens in the event of a job loss, injury or illness. An emergency fund is the #1 barrier to unwanted debt.

What’s with all the shenanigans of picking all these stocks? Don’t put all your eggs in one basket. This is a time honored principle that the folks who worked at Enron or MCI WorldCom wish they had reinforced by senior management. The best way to “get rich” in the stock market is to find the next Apple or Google and put all of your money in that stock, but finding THAT stock is a lot tougher than it sounds and you’re more likely to find one that ends up going nowhere. So spreading your risk out among many different asset classes is a great way to participate in the whole stock and bond markets rather than concentrating your risk (and potential reward) in one area.

Who needs all these new-fangled gadgets that you spend so much money on? Another principle that works every time it’s tried is spending less than you bring home. So many people I talk to are very excited about the next iPhone that is coming out or 4k televisions or new and cool technologies that can make people say “wow.” Those things are fun and cool, but they can improve your quality of life only very slightly and they are usually pretty pricey.

By holding off on those purchases, along with driving lower priced cars and living in reasonably priced housing (the things Americans tend to vastly over-spend on), there will be plenty of room for savings and taking on debt will be a thing of the past.  Think about the last “cool” purchase you made and how quickly the cool factor evaporated. Wouldn’t it be cooler to save that money and be able to retire a year or 5 earlier?

Part of the reason that I can act like my grandfather and use some of the phrases I heard as a kid is that the wisdom in those phrases has withstood the test of time. Just like 2+2=4 was true when I was in elementary school and is still true today (although the way it’s taught is different now), these little financial nuggets were true then, they are now, and they will be when my kids are grandparents. (This BETTER be in a long long time!)

What to Do Before You Adopt

December 27, 2016

I recently had the joy of attending a party for friends that finalized the adoption of their son. I watch them go through the emotional highs and lows of their 18-month process. Afterwards, I asked them for lessons learned from the adoption process. They both said they wished that strategies to financially prepare for adoption were emphasized as much as the legal process. If they could go back, they would had put more emphasis on the following:

1. Assess your own finances. Ideally, you should have 3-6 months worth of living expenses saved (separate from the funds for adoption) so an emergency does not derail you from adopting.  Living expenses should be captured in a spending plan so you have a clear idea of how much you need to have monthly to maintain your living standard.

2. Calculate the best and worst case adoption expense.  The type of adoption you choose can dramatically affect adoption costs, which can range from $0 to $50,000. Include the costs of bringing the child(ren) into your household – furniture, clothing, school activities, extra healthcare insurance, etc.

Research the costs for the type of adoption you are considering and be prepared to be flexible. If an international adoption is cost prohibitive, a domestic program may be a consideration. Some state foster to adoption programs can be run privately, offering a plethora of services at minimum costs.

3. Research how you will come up with the funds. Calculate how much you can save per month and how long it will take for to have the funds for the expenses. If you find yourself short of funds, research alternatives. Think outside the box and network with other adoptive parents to come up with ideas. If you have a gift for spinning a compelling story, consider starting a GoFundMe fund, conduct a fundraising activity or ask your employer about adoption assistance.

4. Understand tax incentives for adoptions.  Aside from your employer’s adoption assistance, research the various tax incentives for adoptions. IRS Publication  Topic 607 spells out expenses that qualifies for the adoption credit and adoption assistance programs. There is a nonrefundable credit for qualified adoption expenses and possibly an exclusion of income for employer-provided adoption assistance.

Don’t make the same mistake as my friends. Consider taking some time to research not only the adoption legal process but also the financial impact an adoption may have on your finances. The better prepared you are, the less likely a financial hiccup will affect your desire to grow your family.

How to Pay for Unexpected Dental Expenses

December 05, 2016

Last week, I cracked a molar, the second time in two months, and my dentist just informed me that the only way to prevent more of this going forward is to get braces. My total costs for dental care not reimbursed by my insurance carrier this year exceeds $3,000, and the cost of braces could be up to $10,000 over the next few years. Needless to say, I was not expecting this at all. I’ve taken great care of my teeth my entire life. However, as an apparent consequence of having kids in my forties (which caused my teeth to move during pregnancy) three years of teenage braces have been undone, causing stress fractures in my teeth when I bite.

Perhaps I should have expected it though. Unexpected dental expenses happen. In fact, they are more common than not, so perhaps they should be considered “expected but unpredictable” — and expensive. On the average, per an American Dental Association (ADA) study, only 48% of dental expenses are financed by private insurance.

The typical dental insurance plan is capped at $1,500 in coverage per year. If you have an unexpected dental expense that you aren’t financially prepared for, how can you handle it? Here are some ideas:

Flexible spending account

An FSA is a tax-advantaged account at work to which you can contribute up to $2,600 in 2017 from your paycheck in order to pay certain medical and dental expenses. If you already contribute to an FSA, that’s the perfect source to pay for most dental treatments that haven’t been covered by insurance. If your dental treatment is not urgent or can be spread out over time, consider putting it off until the following year, so you can choose to fund an FSA during your benefits enrollment. FYI, if you already contribute to a health savings account, you’ll need to choose a “limited purpose” FSA (just for dental and vision expenses) in lieu of a regular FSA. For tips on using an FSA, see this blog post.

Finance it

Dental problems don’t heal themselves. If you need treatment, but you don’t have resources available to pay in full right now, you may want to consider financing:

Credit card  – The advantage of putting the charge on your credit card is that it’s easy and immediate. The disadvantages are significant though: high interest rates, lower credit score (from higher credit card utilization) and reduction in monthly cash flow from credit card payments.

Personal loan – For a borrower with a good credit score, a personal loan may be a good alternative. Rates are generally lower than credit cards. Because a personal loan is considered installment debt (like a car loan or a mortgage), it may actually help your credit score.

You’ll still see a reduction in your monthly cash flow from loan payments though. Make sure you choose a reputable lender with low fees. See this article for more tips on finding a personal loan.

Dental office payment plan – For treatment plans that stretch out over time, your dentist may offer you the option of a payment plan, typically financed by an outside company. However, a dental office payment plan can have a very high rate of interest, more than a credit card. Be cautious and make sure you read all the fine print before you sign.

401(k) loan – A small loan against your retirement plan balance can be processed fairly quickly, without a credit check or any reporting to the credit bureaus. You’ll be repaying yourself via after-tax payroll deductions at a low rate of interest. There are downsides, however, including when you leave your company for any reason, any unpaid loan balances typically become due in full or are considered an early retirement plan distribution – subject to income taxes and a 10 percent penalty for early withdrawals.

Consider a dental school clinic

Many top dental schools offer affordable care from dental students and residents. This can save you fifty percent or more on the cost of your treatment. Search “dental school clinic” online for clinics or search this list of accredited dental schools near you.

What I chose

Luckily, I was able to dip into our cash reserves to pay my dentist for this year’s treatment. That’s what emergency funds are for, after all. I can’t say I enjoyed having to spend the money though.

I also chose to defer the decision about braces until next year, so I have time to weigh the pros and cons. We have some new benefits at work and no longer have access to a limited purpose FSA, so that’s not an option for me. I have some regrets, though, for not funding a limited purpose FSA for 2016. It would have come in handy.

 

Do you have a question you’d like answered on the blog? Please email me at [email protected]. You can follow me on the blog by signing up here and on Twitter @cynthiameyer_FF.

Are You Prepared For the Unexpected?

November 17, 2016

If you’re like me, you may have been quite surprised (whether in a good or bad way) by the election results last week. The fact is that things don’t always go as we expect and sometimes life throws us curve balls. For example, I recently had a trip in which my first flight was delayed, then the Wi-Fi that I had been planning to use to get some work done on my second flight wasn’t working (here’s a different perspective on this), and then I found out my luggage hadn’t made it to my final destination.

Fortunately, I had everything I needed to finish my work (including writing this blog post) on me and the rest was delivered to my hotel by the next morning. The key is to be able to roll with the punches and that’s a lot easier when we’re prepared. The same is true in our financial lives. Here are some preparations for life’s financial curve balls:

Insurance

Knowing how my travel day had gone, I opted for the more complete supplemental liability insurance for my rental car. I knew the odds of an at-fault accident were low, but it could happen and being carless, I have no other insurance. That means I could be personally liable for thousands or even hundreds of thousands of dollars in damages in the event of an accident.

Insurance is for those unlikely but disastrous events that could leave us financially debilitated. (If the event is likely, the insurance wouldn’t make financial sense for the insurance company and if the event wouldn’t be disastrous, the insurance wouldn’t make financial sense for you.) Make sure you have enough property and casualty insurance to replace your valuables and to cover your assets in case you’re held liable for damages. That may mean having an umbrella liability policy if the limits on your auto and homeowners insurance are too low. Don’t forget health, disability, life, and perhaps long term care insurance too.

Emergency Fund

If insurance covers the unlikely events, the emergency fund is also for all the things we know will happen but can’t predict when. Your home and car will need repairs. You’ll have out-of-pocket medical expenses. You’ll probably be in between jobs at some point. If you don’t have adequate emergency savings (ideally enough savings and other supplies to get you through at least 3-6 months), you may end up having to borrow the money at astronomical interest rates or even worse, losing your home or car if you can’t make the payments.

Advance Health Care Directive and Durable Power of Attorney

These documents specify your wishes or delegate someone to make those decisions for you in case you’re unable to. You can get advance health care directives drafted and stored for free at My Directives. A durable power of attorney is relatively inexpensive or you may be able to get it for free as an employee benefit.

Investment Diversification

Just like things don’t always go as we expect in our personal lives, the same is true for the overall economy as well. That’s why we diversify our investments. Have at least 30 different stocks in various sectors (if you have a mutual fund, you probably already have this) with no more than 10-15% of your portfolio in any one stock (especially your employer’s). You may want to include bonds, cash, and even alternative asset classes in your portfolio like real estate and commodities as well. Even the most diversified portfolio can lose value but by holding for the long term (at least 3-5 years), you also diversify by time and so the good years can make up for the bad ones.

Just because most of the political or financial experts predict an outcome doesn’t mean they’ll always be right. Life has a way of making fools of us all. When it does, you’ll want to be prepared.

 

What’s Your Lifetime Medical Expense Plan?

October 14, 2016

I got a phone call from my daughter (senior in college) not too long ago, relatively late at night, asking me if I could text her a photo of my HSA card. I figured she was heading to the pharmacy to pick up some antibiotics for a sinus infection. But when I heard Nick & Danny (two of her roomies) screaming in the background to get towels and try to stop the bleeding, I learned that her calm exterior was masking something bigger.  It turns out that she eventually needed a whole bunch of staples and some glue to close up the large gash in her leg acquired when opening a box with a large knife when she couldn’t find her small scissors. She’s back to walking normally now so the crisis is over and she’s back to her normal daily activities.

It’s amazing to me how many different bills can come in from one injury. There were bills from the hospital (supplies, etc.), the ER department, the physicians group who treated her and a few others that I’m sure I’ve forgotten. The incoming mail probably hasn’t come to a complete halt just yet.

While I have an emergency fund set aside for emergencies (what else would it be for?), in the heat of the moment, I wasn’t thinking “let me pull money from my emergency fund so that she can get treated at the hospital.” I was thinking “Holy ****!  My daughter’s roomies are screaming and she’s got the calm “something’s wrong” demeanor. I need to get the hospital paid right now so that they see her.” So I used my health savings account card to pay for the trip to the hospital.

I deviated from the logic and reason that I use in my normal budgeting process. In the heat of the moment, I “messed up.”  But the good news is that I had my health savings account there as a backup. That wasn’t consistent with my long term plan, but I’m not going to look back with any regret.

My long term plan with my HSA is to build a pool of $100,000 or more before I retire. I plan to make the maximum contribution every year, pay for medical expenses from either my checking account or my emergency fund (if it’s a big one) and invest the balance for growth. Once I retire, the HSA will be there to pay for medical expenses for the rest of my life…or at least a good portion of the rest of my life.

What’s your plan to pay for medical expenses for the next 20, 30, 40 years or more? I have an outline of what I plan to do. I encourage you to come up with your own personal “lifetime medical expenses” plan. Here are some ways that people have told me that they plan to pay for medical care:

  • Health savings account – that’s the one that I’m planning to use.
  • Emergency savings – building up a large emergency savings fund, well beyond the 3-6-9 months of expenses, is what several people have told me that they plan to do to pay for their healthcare in retirement.
  • Large income streams from Social Security, pension and investment accounts while minimizing expenses – that’s the game plan for a few folks I’ve talked to recently.
  • Moving to Costa Rica, Panama, or some other foreign country where healthcare quality is good but costs are significantly lower.

These are just a few of the many ways people have told me that they are planning to cover medical expenses over the rest of their lives. I’m sure there are others. What’s your plan?

A Debate on 401(k) Loans

August 04, 2016

Asking questions and challenging assumptions are important components of financial self-defense. That’s why I was glad to see one reader take the time to raise some interesting points contesting some of what I wrote a couple of weeks ago in a blog post called “The Hidden Downsides of a 401(k) Loan.” Since other readers may have similar concerns, I thought it would be useful to address them. Besides, I love a good, friendly debate! Here are the 401(k) loan downsides from the original post, the reader’s critiques, and my responses:

Downside #1: You lose out on any earnings:

Critique: “You are wrong because the 401(k) loan continues to be a plan asset – bearing a fixed rate of interest. Instead, you should have encouraged her to reallocate so as to maintain her asset allocation (equity position) – treating the 401(k) loan principal as the fixed income investment it is.”    

My Response: Yes, it’s true that the 401(k) loan continues to earn a fixed interest rate, but that’s interest you’re paying yourself. If you take money out of your savings account and then pay it back with “interest,” I wouldn’t call that earnings. Reallocating the remainder of your 401(k) balance is an interesting idea though that could help make up for the lower earnings.

Downside #2: Your payments may be higher.

Critique: “Are you seriously suggesting that a cash advance using a credit card (with interest rates of 15% – 30% or more) is a better liquidity solution because the minimum monthly payment might be less if you stretch repayment out over 20 – 30 years instead of 5 years?  That is so obviously bad financial advice I don’t know what to say.”     

My Response: I certainly wouldn’t say that a credit card cash advance is generally better than a 401(k) loan. I’m simply pointing out that using a 401(k) loan to pay off high-interest credit card debt could actually increase your cash flow problems because the payments on the 401(k) loan may be higher than the credit card debt.

Downside #3: You also can’t eliminate a 401(k) loan through bankruptcy.

Critique: “Are you are suggesting that when entering into a debt obligation, one consideration should be that if the combination of mortgage, car and 401(k) debt become unsustainable, you should anticipate being able to stiff the creditors? Remember that a plan loan is secured debt, secured with your vested assets. So, you can default on a 401(k) loan anytime you want (just stop repayment) – you don’t even have to declare bankruptcy.  However, I am not sure why you would want to stiff yourself.”

My Response: I’m suggesting that if you’re considering filing for bankruptcy protection, you may not want to use a 401(k) loan to pay off debt that would otherwise be discharged in the bankruptcy. (As for “stiffing creditors,” keep in mind that creditors assume the risk that you may employ this legal protection and charge higher interest rates accordingly.) It’s also hard to default on a 401(k) loan when the payments are withheld from your paycheck.

Downside #4: You may not be able to take another loan.

Critique: “Really. If the plan only provides for a single loan, your recommendation is to borrow all you can and put the amount you did not need at this time into a passbook savings account or a money market fund? That is almost as bad as your recommendation concerning credit card debt. However, I will agree with you that this is one likely result where, based on “expert” advice, plan sponsors amend their plans to limit access to a single loan.”  

My Response: If you’re going to take your only allowable loan and have no other emergency funds, you might want to borrow more than you need and put the remainder in savings. This can help you avoid accruing high interest debt or even worse, missing car or rent/mortgage payments in the event of an emergency. At least with a 401(k) loan, you’re paying yourself the interest.

Downside #5: You may be subject to taxes and penalties if you leave your job.

Critique: “The better response is for the plan sponsor to amend the plan to permit repayment post-separation. In the 21st Century we call this electronic bill payment. Your response confirms that service providers/recordkeepers have failed to keep pace with 21st Century electronic banking functionality.  The other response is to prepare for any potential change in employment by obtaining a line of credit.”

My Response: I agree that plan providers should offer electronic bill payment after leaving employment, but if your employer doesn’t, you need to be aware of the risk of getting hit with taxes and early withdrawal penalties on the outstanding balance. Also, lines of credit can be cancelled. This is even more likely if you lose your job or if the economy is weak, which are two times when you’ll probably need it.

Downside #6: You’re double-taxed on the interest.

Critique: “When you receive a payout of interest earned on investments, it is taxed just like interest on any other fixed income investment. In terms of tax preferences, if you secure the plan loan with a mortgage, the interest you pay on your plan loan may be tax deductible. And, importantly, if the plan loan is secured with Roth 401(k) assets, the interest you pay may be tax free at distribution – just like it would be for the interest received on any other fixed income investment where Roth 401(k) assets were the principal.  So, no, interest is not “double taxed”.”

My Response: I agree with the point about interest from Roth 401(k) accounts not being double-taxed. However, most 401(k) accounts are pre-tax and so the interest will be taxed on the interest when it’s eventually withdrawn. Since that interest was paid by you with money you already paid taxes on, I would call that “double taxed.” That’s one reason why the loan isn’t completely free (the other being the lost earnings from point #1).

Conclusion: The employee I was talking with decided to dip into her savings rather than borrow from her 401(k) due to the double taxation of her interest.

Critique: “Since she could take out multiple loans, there was an “emergency option” even if she borrowed this time. And, assuming the tax status of interest paid to the condo was the same as the tax status of interest paid on a plan loan, the calculation you should have performed was whether, after the loan was repaid, her total net worth (inside and outside the plan) would have been higher. In this case, because the condo rate was 3.75%, she might have been better off using that liquidity option – but nothing in your response suggests you proved which alternative was superior.”

My Response: I do think her choice was the most likely to maximize her net worth the interest she gave up on her savings was less than the the 3.75% the non-401(k) loan would cost her and what her 401(k) could be expected to earn (plus the taxes on her interest payments). That’s why she made the decision she did.

Final point: Finally, don’t forget that the real purpose of your 401(k) is retirement.

Critique: “Your suggestion is that people should avoid using plan assets for any purpose other than post-employment income replacement.  However, if you (self-) limit liquidity, people will only save what they believe they can afford to earmark for retirement.  Those who limit their saving by earmarking money for retirement are more likely to fall short of their savings goals. Importantly, reasonable liquidity access has been shown to increase (not reduce) retirement savings.”

My Response: I’m simply saying that you should understand both the pros and cons before taking a 401(k) loan. In some cases, the 401(k) loan may indeed make the most sense. However, I do think that the 401(k) is not the best vehicle if you’re saving for liquidity. After all, putting your emergency money in your 401(k) could leave you short in an emergency since you can generally only borrow up to half of your vested balance (up to $50k) and the loan will have to be paid back at a time when money might be tight. Saving first for emergencies in something more accessible like a savings account is not going to make or break your retirement.

None of this is to say that 401(k) loans are always a good or bad idea. It all depends on the situation. Just make sure you’re making an educated decision even if it means having a little debate with yourself (or a qualified financial professional).

 

 

7 Signs You’re Living Beyond Your Means Even If You Can Pay All Your Bills

August 03, 2016

I’m pretty sure most people understand that the first step in achieving financial security is to spend less than you make. Sometimes easier said than done, but it’s the only way you can save any money and avoid high interest credit card debt. What a lot of people don’t get though is that just because you’re able to pay your bills each month, it doesn’t mean you’re not living beyond your means. If your bank account balance gets dangerously close to zero right before payday, you’re not “getting by,” even if you don’t overdraw and are technically making ends meet. Here are 7 other signs you’re living beyond your means, even if you are able to pay all your bills on time, and what you can do about it:

1. You’re not paying off your credit cards every month or you don’t have a plan in place to pay them off. Use the Debt Blaster to get a plan going and then stick to it.

2. You don’t have an emergency fund. This is your first line of defense against long-term financial issues. Get started on this ASAP.

3. You say you can’t afford to do that thing you really want to do. This was actually the wake-up call for me to realize that I was living beyond my means even though I was making ends meet. I really, really, really wanted an iPad and a new bike, which added up to about $1,000. I said I couldn’t afford it and yet I was spending that amount monthly on dining out and booze. If you tell yourself you can’t afford something you really want, and that thing would be reasonable for someone of your income, lifestyle and life stage to have, that’s a sign you need to examine your spending and start living within your real means.

4. Unplanned expenses like a traffic ticket or a family member’s destination wedding send you into a tailspin. If the first thing you think of when you hear a cousin is getting married at an all-inclusive resort in the Caribbean is, “How rude! I don’t have the money for that!” you are not “making it” financially. There needs to be wiggle room in your cash flow for things like this. Here’s a good way to plan for it.

5. You’re taking out 401(k) loans to pay off other bills. Even though you’re paying interest to yourself, this is still a form of debt. If you’re borrowing against your savings, you’re not living within your means.

6. You’re not on track to retire at 65. Ideally, you’d be financially able to retire before you are mentally ready, but 65 is a good age to shoot for if you’re still in the earlier parts of your career. Here’s how to find out if you’re on track. If you’re not, the earlier you start saving, the sooner (and easier) you’ll get on track.

7. A job loss or medical emergency would severely alter your future. If going without even just one paycheck would send you into late fees with all your bills, it’s time to get a system in place that helps you save for these unexpected events.

The best and easiest times to escape the paycheck-to-paycheck lifestyle is when you experience any type of windfall like a tax refund, an unexpected bonus or even just your annual single-percentage increase at work. Be strategic with that money and use it to find some space in your finances, rather than just adjusting your spending to match. You don’t have to wait for a windfall to do this though. Even just a small change each day that you mindfully use to put away a little extra adds up.

 

Building a Strong Financial Foundation

August 02, 2016

One of my favorite things to do is to talk to employees or honestly anyone about their finances. I find that some of the best guidance I give comes from other people. I also get a lot of insight as to why people find themselves constantly in a financial hole.

As I was doing a series of financial consulting appointments, I started to notice a trend in people wanting to make the right financial decision but not in the right order. My mantra to all is to look at building your finances like building a house. If you do not lay the right foundation, your house will crumble at the first sign of stress. For instance, if you start paying off debt with no savings, eventually life is going to happen and you will either have to stop paying on your debt to take care of the emergency or worse, get into even more debt because there was no cash to take care of the expense. Here are some steps to lay down a strong financial foundation:

1. Create and stick with a monthly spending plan. The greatest resource you have to help you achieve your financial goals is your income. If you do not have a written plan for how you are going to spend your income, you may overestimate how much you can spend and have nothing left over for emergencies.

Having a monthly spending plan is an important foundation to your finances because you need to know how much money you really have to use towards goals. It will also give you insight into how much you need in savings and how much you can actually save.Consider using websites like Mint to create a realistic spending plan to account for your spending.

2. Have an emergency savings account. An emergency fund is a foundation to a great financial plan because it makes sure you can take care of the unexpected like paying your mortgage if you suddenly lose your job or replacing your transmission without having to go into debt. I actually label my emergency savings account as “debt free insurance.” I found labeling the account is a constant reminder to my husband and myself that the purpose of it is to protect us from having to use debt to cover emergencies. This also prevents us from getting tempted to use this account for non-emergencies.

If your emergency account is at ground zero, break up your goals. First, shoot for a goal to get $1,000 into the account as soon as possible to cover minor emergencies and then set a goal of at least 3 months of expenses. Consider setting up automatic payroll deductions to reach your goal.

3. Pay off high interest credit card debt. For many that carry high interest credit card debt, they will save more money by paying off the 13-20% interest than they will make in an investment averaging 6-10%. No debt also means that your money can go towards your financial goals and not your creditors’ bottom line.

I had a meeting with a wonderful young woman who was contributing regularly to a Roth IRA but was carrying credit card balances with over 20% interest rates. I told her the best investment she can make is to pay off her credit card. We used the DebtBlaster Calculator to come up with a strategy to pay down her debts. She was surprised that she could pay off her debt in less than ½ the time by paying off her higher interest rate first, adding an extra $100 a month and committing ½ of her average tax refund amount to her debt.

As you look to getting your house in order, make sure you lay a foundation that can withstand the test of financial stress. It may not be fun. However, your foundation will help you withstand the financial crisis that will inevitably come and help make sure that whatever else you build does not buckle at the first sign of financial stress.

 

3 Numbers That Matter More Than Your Credit Score

June 22, 2016

While knowing your credit score and the elements that impact it is important to your overall financial well-being, I sometimes find that people are overly concerned about it at the peril of other more important financial measurements. Your credit score only really matters when you’re applying for a loan, certain types of insurance and increasingly, when applying for a job. If none of those things are on your horizon, then your score is more like your high school ACT scores – perhaps a point of pride, but pretty irrelevant for the time being. Here are three more important numbers you should be focused on instead:

Net Worth

What is it: Assets (bank accounts, investments, home, car – basically cash or anything you could turn into cash) minus liabilities (credit card balances, car loans, student loans, mortgages, 401k loans – anything you owe).

Ideal number: As high as possible.

Why it matters: Your net worth is the ultimate measure of your ability to weather financial storms and maintain financial choices in life. The higher your net worth, the more financial freedom you can afford. There are countless cases of people who were millionaires on the asset side but broke on the net worth side as cautionary tales of neglecting this important number. Many of these people suffered during the last recession when their debts were called.

How to track it: I calculate my net worth on a monthly basis using Google sheets at the same time I sit down to set up any bill payments for the month. Here’s a snapshot of what it looks like:

Net worth snapshot

One nice side effect of this is the fact that I’m checking on all of my accounts at least once a month, so I can also do a quick check for anything fishy.

Worth noting: I pay all my credit cards off each month, but I include them on this sheet because that’s money I still owe that is reflected in my checking account above. It’s the only way to have a truly clear picture of what I have. I keep things like my student loan and Mini Cooper loan on there both for historical accuracy as well as for the psychological thrill of seeing a big fat ZERO under old debts. It’s a little, “Yay me! Look how far you’ve come!” moment each month.

Retirement Readiness

What is it: The best way to measure whether you’re saving enough to retire comfortably when you want to, especially if you have many years to go until retirement.

Ideal number: On track to replace about 80% of your current income, unless you’re within 5 years of retirement (when you can be more specific about how much you’ll need each year).

Why it matters: Retirement, which really just means transitioning to living off your savings one day, is one financial goal that pretty much all of us share. Whenever anyone asks me what to do with extra money or if they can afford to take on an additional debt payment or savings goal, my first question is, “are you on track for retirement?” Even though it may be one of your longest-term goals, it should be in the top 3 in terms of priorities.

How to track it: There are countless calculators out there, but for people with a 401k or other workplace savings plan, I prefer this Retirement Estimator.

Worth noting: Many people who say they aren’t on track to retire have never run a calculator. Knowing is the first step!

Emergency Fund

What is it: A cash cushion in place to tap into in case of an unexpected loss of income due to job loss or extended illness or injury.

Ideal number: 3 months of expenses, minimum. For single income households or career fields that aren’t as certain, at least 6.

Why it matters: Life happens and when it does, having cash that’s easily accessible takes away much of the financial stress and allows you to focus your energy on finding a job, healing or adjusting to the new normal.

How to track it: If you’re starting from zero, start with a goal of setting three months of rent or mortgage aside. Then tack on three months of your next highest expense and so on until you have all essential expenses covered. Once you’re at three months, make sure you adjust for any changes such as a new home, new baby, etc.

Worth noting: It can be tempting to keep a credit card on hand instead of the cash or want to invest the cash for higher earnings, but resist. Should something happen, consider the probability that it could be due to an economic downturn when credit may not be as easily accessible and/or the stock market could be down. The best place for your emergency fund is in a high yield savings account.

These are the three numbers you want to focus on. Even if you’re not at the ideal numbers yet, you’ll be well on your way to financial freedom if you can find a way to track them on a consistent basis. And you just may find your credit score improving as well.