Bulletproof Spending and Savings: Never budget again. Build wealth automatically.

I’ve been using a personal finance system for years now that allows me to know exactly how much I spend (and on what), pay all of my bills on time with zero effort, save and invest a large portion of my income. All of this takes me less than 15 minutes a week to manage on my smartphone. It’s both simple and powerful, and can be set up in less than an hour or two by anyone.

Financial expert Ramit Sethi was the inspiration for this system.

Step One – Grab a pen

On the back of a napkin, or on a spreadsheet, add up how much you spend each month on fixed expenses, things that are predictable and must be paid, and discretionary expenses, things that can vary a lot and can be delayed or changed when needed. Ignore expenses that come straight out of your paycheck like income taxes and health insurance, and don’t count any investing like 401k or IRA contributions.

Exact numbers aren’t needed. Overestimate your expenses since you’ll probably forget a few things, and it’s better to guess too high than too low. Take a maximum of 15 minutes to do this right now. Look at your online bank and credit card statements, especially year-end summaries, to quickly get an accurate estimate of your spending over the past year (including seasonal spending like winter holiday shopping and summer vacations.)

A single person who rents in a big city might have a budget like this:

Sample budget for single city person

Step Two – Take 20 minutes to set up free Capital One 360 checking and savings accounts

Do this even if you’re not ready to start the system yet. It’s free, you don’t have to deposit anything until you’re ready, and will only take a few minutes. Doing this now will make you more likely to complete the system later.

From this link, create a 360 Checking account. Pro tip: deposit $250 from your non-Capital One bank account if you wanna collect the $25 bonus. Link your other checking account either way so that it’s ready to go when you need it.

Capital One 360 Checking account Apply Now

Next, create one 360 Savings account for each of the ‘Discretionary’ categories sketched out in your budget that. If there are some categories that you don’t care about tracking individually, lump them back in with your Fixed list. I keep a separate Travel account, one for Household/Hobby items, and a few others. Limit yourself to 3 – 5 categories for simplicity. Make sure to give a nickname to each account to describe it (e.g.: ‘Travel’.)

Make sure to also set up discretionary accounts for short-term savings goals such as a future Wedding, New Car, or House Downpayment, for things you expect to purchase within the next 1 – 2 years. (Longer-term savings goals like Retirement will be handled separately.)

Finally, create one more 360 Savings account and label it ‘Short term Savings’. This will be where all of your income above your monthly spending (Fixed + Discretionary) will go. For example, if your take-home pay is $4,000 per month, and your expenses are $3,000, that extra $1,000 will be put into ‘Short term Savings’ for you to invest later.

To protect yourself from accidentally overdrafting your Checking account, click your Checking account, then click ‘Account Services & Settings’ and ‘Overdraft Settings’. Choose ‘Free Savings Transfer’ and choose your ‘Short term Savings’ account. This will allow Capital One to automatically pull money from your Short-term Savings account into your Checking if don’t have enough to pay your bills. If this should happen, you need to ‘refund’ yourself by moving money back into your Short-term Savings account from either your Checking or discretionary Savings account to replace the overdraft.

Setting up overdraft protection with a free savings transfer Capital One 360

Make sure to choose ‘Free Savings Transfer’:

Free Savings Transfer

Step Three – Redirect your employer’s direct deposit to your new Checking and Short-term Savings accounts

You’re doing great! Keep going and don’t get bogged down by the one-time annoyance of these last, crucial steps. If your employer offers direct deposit of your paycheck into your bank account (most do), set it up/change it so that your monthly Fixed + Discretionary amount is going straight into your 360 Checking account. See the FAQ below if you aren’t able to do this because.

In our $3,000/month example, if you get paid monthly, then set your direct deposit to put $3,000 per paycheck into your Checking, with the remaining balance going into your Short term Savings. If you get paid twice per month (semi-monthly), divide by two and deposit $1,500/paycheck into Checking. For biweekly/once every two weeks, multiply your monthly amount by 12/26 (ex: $3,000 * 12/26 = $1,385 per paycheck.)

(If you haven’t already, make sure to set up pre-tax contributions to your company’s 401k  with at least 10%-20% of your paycheck up to an IRS-maximum of $18,500/year (for 2018), or at a bare minimum, enough to collect any employer matching that you might be eligible for. If you use an HSA, you should also schedule automatic contributions to come straight out of your paycheck via your employer.)

Step Four – Set up automated transfers from your 360 Checking into your Discretionary 360 Savings accounts

From Capital One 360, click any account, then click ‘Transfer Money’ (top-right), and set up your ‘Monthly’ budgeted amount for the 5th of each month to go into one of your Discretionary category accounts (ex: $300 for Travel.) Do this for each of the accounts you created earlier. Make sure to first fund the account with a months’ worth of money, or schedule the transfer far enough out to give time for your direct deposit to occur.

Monthly discretionary transfers

The idea behind this is that from now on you’ll first check to make sure you have enough money in that discretionary account before you spend it.  After you spend the money, you’ll transfer the amount spent into your Checking account (or wherever the bill will get paid from.) Let’s say I want to buy a new couch that will cost $400. I first make sure that I have at least that much in my Household saving account, then I buy the couch with a credit card that auto-pays from my Checking account. Right afterward, I transfer the $400 from my Household account into my Checking, so that when my credit card bill comes due my Checking has enough in there to pay the added couch expense.

Step Five – Redirect your credit cards, payment accounts, and other bills to all get paid automatically out of your 360 Checking account

Now that you’ve set up all your accounts and recurring transfers and deposits, set up autopay on any credit cards or other bills that you have to come from your new 360 Checking account, preferably on the 3rd of the month, if you have a choice. Make sure to also make your 360 Checking account the default choice for any payment services you use like Paypal/Ebay, Venmo and Apple or Android Pay.

Go through every utility and service provider that you get a bill from and set up autopay, opting in to paperless emailed statements as well, including your landlord or mortgage company.

I try to pay all my fixed expenses with one credit card for simplicity. When I can’t pay by credit card, I use automated bank transfers, like for my public utilities, or online rent payments. (You can also get cash from your 360 Checking with no fees from any Allpoint ATM, and can request physical checks too from Capital One.)

Even rent payments to old-fashioned landlords that require checks can be automated since Capital One 360 allows you to schedule mailing a physical check using their bill pay.

You can also use a special credit card to pay for one specific discretionary category, and then set up that card to autopay straight from that Savings account. I use a ‘No Foreign Transaction Fee’ credit card specifically for travel expenses which I autopay straight from my Travel savings account, but then use a different rewards card for all my other expenses.

Congratulations, you’ve finished the one-time setup and are ready to use your new bulletproof financial system!

Step Six – Ongoing maintenance: transferring discretionary payments

Anytime you want to spend money that falls into one of your discretionary categories, 1) check to make sure you have that much in your corresponding Savings account, then 2) once you make the purchase, immediately transfer the spent amount from the corresponding Savings account into your Checking account (ehere the bill will get paid.) I use the Capital One 360 mobile app. This is the one manual step that you must do to stay on budget. Get in the habit, and it becomes second nature. You can also juggle money between discretionary accounts as needed. The only Iron Rule is to stick to your total spending goal of Fixed + Discretionary.

If you find that your estimates weren’t quite right, and you want to adjust how much you spend in different categories, or need more or less to be deposited into your 360 Checking each month, just tweak the steps above. The goal here isn’t to deprive yourself of spending money on things you love, or to meet someone else’s standards of what you “should” spend money on. Instead, you set your own spending priorities in a way that will keep you ‘honest’ on them, while allowing you to spend every dime that you’ve allocated for yourself guilt-free, since you know that your savings & budgeting is now all being taken care of automatically.

Step Seven – Ongoing maintenance: investing the Short-term savings for the long-term

You should periodically invest all of that money that will be piling up in your Short-term Savings account. Log into your investment account (or open one) and link your Short-term Savings account to it so that you can electronically transfer money.

Whenever I notice that a thousand bucks or so have accumulated into my 360 Short-term saving account, I log into my Vanguard investment account and transfer it into my Target Retirement Fund. Choose a Target fund with a year that is 15 years after your planned retirement date. E.g.: if you’re 30 and plan to retire at age 62 in 2050, choose the 2065 option. Fidelity and other money managers also have these funds. Make sure you’re paying low fees (less than 0.2% is ideal) and are broadly diversified.

There you have it. In just a couple of hours you’ve completely changed your financial life so that you know exactly how much you’re spending each month (without any ongoing budgeting), and have put yourself on the path to saving for financial independence.

Closing Thoughts

Each year, or whenever you have big money changes (have kids, buy a house, get married, change jobs), you can review your plan and adjust as needed, but try to set something that you’ll stick with for a long time so that you can truly be following the plan that you set for yourself. For me, sticking to my original budget that I set for myself 6 years ago has become a [nerdy] financial challenge that’s allowed me save more and more as my income has increased while keeping vmy spending constant. (But I’m definitely not depriving myself; nor should you! There’s still plenty of room in my personal budget for my hobbies, trips overseas, whiskey, and nights out with the lady or friends. Instead, the budget forces me to build DIY skills and prioritize what’s most important in my life.)

Recommended optimizations – Get cash with no ATM fees anywhere in the world

Whew… We’ve covered a lot of ground, but there’s one more item I recommend doing. If you use cash for some of your expenses, set up a Charles Schwab Investor Checking account. You can then use that to withdraw money from anywhere in the world and Schwab will refund your ATM fees at the end of each month. You’ll have to set up a Schwab brokerage account too, but there’s no obligation to fund or use it. (I don’t, and I’ve had the account open for years with no problems.)

I like to use cash as my going out/eating out/fun money so that I don’t have to worry about transferring money to my Checking every time I want to eat out or buy a drink at a bar. There’s also something about physically seeing the ‘pocket money’ I have for the month that helps me mentally plan out what I can spend. To make this easy, I add one more direct deposit step that sends my cash to my Schwab checking account each pay period. For our $3,000 example, let’s say our Single Person wants to use $250/month in cash to pay for Going/Eating Out. Instead of creating a Capital One 360 Savings account for that, their direct deposit will send $250 straight to Schwab from their paycheck, and only $2,750 to their 360 Checking, with the balance still going to Short-term Saving as before.

Now, they just use their Schwab ATM card whenever they need cash (and will get a ‘hard-decline’ by default if they run out, which is free, but could be embarrassing if you’re using the card as a debit in a public setting :). Just use your credit card as a fall-back and transfer money later if this happens!)


Q: What if my employer doesn’t offer direct deposit / they don’t allow me to specify a fixed amount to go to one account and the balance to go to another / I’m self-employed?

A: Just deposit your whole paycheck into your 360 Short-term Savings account. Then, within Capital One, click any account, click ‘Transfer Money’, and schedule a monthly transfer of your monthly budget amount (ex: $3,000) at the beginning of the month from your Short-term Savings to your 360 Checking account:

Capital One 360 Transfer from Savings to Checking

Q: Do I have to use Capital One 360 for this system to work?

A: Ally Bank will work for this system too. Whichever bank you choose must let you create multiple savings accounts for free with no minimums, AND schedule recurring automated transfers between accounts. Feel free to suggest other banks that meet these requirements and that you have personally used in the comments.

Q: Why schedule the transfer for the 5th of the month?

A: Scheduling for the 5th of the month will help group all your monthly bills together, ensure that any end/1st of the month paychecks have time to hit your account beforehand, and that 1st of the month bills like rent get paid first. You should also set up your credit card(s) and, if possible, other bills to be paid around the 3rd or 4th, just prior to these transfers.

Q: What if I’m retired?

A: Just treat your fixed income, such as social security or a pension, as your ‘paycheck’, and deposit it in the way described above. If you’re also drawing down your personal retirement investments, you can set up monthly recurring withdrawals to fund your checking account.

Ramit Sethi will teach you to be rich – 4 links to wealth: negotiate, automate, cut costs & earn more

Ramit Sethi is my favorite financial blogger and advice-giver for the ‘basics’ (which can still be complicated) of personal finance: spending, saving and earning income.  He recently railed against those who worry about things that they can’t control, yet fail to do the simple steps that will really matter.

His quoted question below to these people (and everyone else who needs to take control of their money) have 4 excellent starting points (links) for personal financial freedom.  Check out each of these and apply them to your financial life.

“Have you negotiated? Automated? Earned more? Taken the 30-day challenge to save $1,000?”


Ramit stresses the importance of negotiating all things financial, from credit card interest rates, getting out of bank fees, to your next salary raise.


The best way to save is to automate the process so that no active effort is required on your part.  This can be anything from setting up direct deposits on your paycheck (most employers allow you to split the check into multiple accounts, the better to target your savings goals), having 401k deductions come out of your check, or using Vanguard (or whoever your mutual fund provider is) to invest money from your bank account on a regular schedule.  (If you already have a Vanguard account, go here.  If you need to set up a Roth IRA or other financial account, go here.)

Earn More

Expenses are only half of the financial coin of savings.  Earning a healthy salary is also a big help along the road to wealth.  Here’s a few ideas on how to make more money:

Get an education (academic or vocational, formal or informal) that increases the worth of what you know, and your ability to apply that knowledge and make money (or other benefits) from it.

Ask for a raise at work.

Start your own business on the side, or find a part-time or freelance job that you can do in your spare time.  (Make it something you enjoy and that energizes you, otherwise it’ll be hard to force yourself to do it given your other work/life commitments.)

Save Money – Enter Ramit’s ’30 day challenge’

Ramit put together a fantastically useful list of 30 tips (described in each of the links below) to save money.  These aren’t the typical ‘stop buying lattes’ ideas generated on so many financial blogs.  Instead, they’re likely to save you big bucks without taking away the things that you really enjoy in life.

While I’ve copied Ramit’s entire list below (with his links for the details of each tip), his original post can be found here.

Full list of Ramit Sethi’s tips from iwillteachyoutoberich.com
Tip #1: Pack lunches for the rest of the week
Tip #2: Turn your thermostat down 3 degrees
Tip #3: Sell something on eBay today
Tip #4: Involve your friends in your savings challenge
Tip #5: Optimize your cellphone bill
Tip #6: Use gas prices to become your own hedge fund
Tip #7: Create a “No Spending” day once a week
Tip #8: Implement the A La Carte Method
Tip #9: Only buy new things when replacing something old
Tip #10: Use the free rewards from your credit card, car insurance, and workplace
Tip #11: Never pay full retail price for clothes or eyeglasses again
Tip #12: How I’m saving $2,000+ on eating out in 2009
Tip #13: How to negotiate your car insurance
Tip #14: Use self-persuasion to share how much you’ve saved so far
Tip #15: Forget going to a bar — ask people over for dinner
Tip #16: Cancel any large purchase this month
Tip #17: Buy generic for the stuff you don’t care about
Tip #18: No Christmas gifts this year
Tip #19: Save Money, Eat Well and Look Hot in Less Than an Hour
Tip #20: Change the date of Christmas
Tip #21: Save thousands by pre-paying your debt
Tip #22: Analyze your progress in the 30 Day Challenge (plus, see how I’m doing)
Tip #23: Go cash only for 15 to 30 days
Tip #24: Cut your commute expenses by 40%
Tip #25: Earn more money using your God-given skills
Tip #26: Gardender? Cleaning lady? DIY instead
Tip #27: Use barriers to prevent yourself from spending money
Tip #28: Use price-protection guarantees to always get the lowest price (travel, retail)
Tip #29: Stop being a loser and spend money to save money
Tip #30: How I’m saving $25,000+ in 2009


Hindsight: Looking back on the 2008 – 2009 recession

On October 2nd, 2008, I wrote an article called ‘What do do (and what NOT do to) in today’s turbulent financial markets’.  My main message urged investors to stay calm, and simply assess their financial situation as they would in any other type of market.  Then, I told folks to ‘do nothing’ in terms of changing their current investment plan.  I urged people not to pull their money out of the market, and to continue contributing regularly as they would under any other circumstances.  (I also suggested that now might be a good time to start investing as well.)

Now that the stock market recession appears to have passed (leaving 10% unemployment and several bankruptcies in its wake), let’s take a look at my advice and what the market has done since:

Roughly one and a half years has elapsed since I wrote the article (as of this writing.)  From that time period the total stock market (represented by Vanguard’s VTSMX, the blue line above) is up about 10%, with the S&P 500 (large cap stocks, the red line) up about 7-8%.  If we assume dividends were about 2-3% per year during this time period, the total market return was probably about 15% since then.

During the next 6 months after my article, things continued to get WAY worse, and then improved dramatically from a low in about March of 2009.  Of course, I had no idea which way markets would go in the short-term when I wrote my article (and don’t believe anyone who says they did), but history has demonstrated that after long periods of time, stocks tend to do fantastically well compared to other asset classes.

Academic studies show that investors are terrible at timing the market.  They tend to pull money out when prices dive, and put money in when prices skyrocket (think 1999.)  Obviously, this is contrary to the difficult-to-follow-but-oft-quoted Wall Street adage ‘buy low, sell high’.  Such studies have also shown that the investors who trade the most perform the worst, partly due to excessive trading fees as well as bad timing.

When you combine this information it is clear why a policy of regular stock market investment (‘dollar cost averaging’) into stock market index funds tends to outperform other more active investment strategies.  Perhaps an even greater benefit of this approach is a huge reduction in mental burden on the investor.  Investors who stuck to regular investment plans would have purchased a lot of shares on the cheap during the market decline, profiting immensely during the subsequent rise.


I wrote this look back at the recent recession not to say ‘I was right’.  (For the several months following my advice, stocks plunged!)  For all I knew, the recession could have lasted much longer than it did (or it could have been shorter.)  Stocks could still be below where they were when I wrote the article.

The important takeaway is that sticking to a well-thought-out investment plan makes sense even in times of severe market fluctuations.  A key part of this is making sure you’ve planned out your financial future enough to put things on semi-autopilot.  Start by following these four simple steps to wealth.

(If think you might benefit from professional advice or investment management, send me an email at Ward.Williams@greenlakepartners.com for a free consultation to see if I can assist you.)

It’s official: Green Lake Financial Partners is open for business!

Just wanted to let everybody know that as of today, Friday April 9th, 2010, Green Lake Financial Partners, my investment advisory firm, is a Registered Investment Advisor with the state of Washington.

Green Lake Financial Partners is a fee-only financial planning & investment management firm.  ‘Fee-only’ means we do NOT benefit from any commissions from expensive mutual fund companies, insurance companies, or brokers trading in our client’s accounts.  I firmly believe that this is the best way of avoiding conflicts of interest that are so prevalent in the wealth management & financial planning industry.

If you, a family member, or someone else you know is interested in determining if I can help, send me an email today at Ward.Williams@GreenLakePartners.com.   We can schedule a free 30 minute consultation (it can be in person, over the phone, or even over email, although the first two options work much better.)  Please note that I’m only taking on a limited number of clients right now.  To be fair to everyone it will be ‘first come, first served.’

If you’re eager to begin, you can jump-start the process by filling out this questionnaire and sending it to me at the above email address.  I also have a (limited) website at GreenLakePartners.com.  It has my contact info and some required disclosure and will be updated in the coming months to include more information about my practice.

Currently, we offer two types of services, both of which are aimed at helping you achieve your financial and life goals by enabling you to hang on to more of your money, protect yourself & family, retire, increase your expected investment returns, and live a richer life.

These two types of services are Financial Planning, for a fixed or hourly fee, and Investment Management, for a percentage of client assets under management (AUM.)

Under the financial planning ‘umbrella’, we give our clients a comprehensive recommendation package covering major like:

1) cash flow (looking at cash in versus cash out)

2) retirement planning (IRAs, 401ks, when to take social security, how to retire early)

3) insurance analysis (how to protect yourself, how much coverage you need, where can you find and save on insurance or cut what you don’t need)

4) investing (recommending asset allocations and appropriate investment choices give a person’s time horizon and risk tolerance)

5) banking, savings, and debt management (how to get the most out of banks, lowering ‘bad’ debt levels and interest rates, whether to pay off a debt or invest)

6) Education funding (investing for college, 529 plans, pre-paid tuition, Coverdell Education Savings Accounts)

7) Income tax planning (ways to pay less taxes through tax-advantaged accounts and investments)

8 ) Estate planning (Wills, Living Wills (medical power of attorney), trusts)

For a specified percentage of assets under management, Green Lake Financial Partners actively manages your investment portfolio, picking mutual funds and ETFs that may include stocks, bonds, cash, and REITs that suit your investment goals, risk tolerance and time horizon.  We keep your costs low and your assets diversified by finding what we believe are the best & most reliable funds and ETFs.  We also monitor your portfolio and make periodic changes (like retirement portfolio rebalancing) corresponding to your age, changing cirumstances, finances, goals, and our assessment of potential investment options.

Required web disclosure:

Green Lake Financial Partners is currently registered solely in Washington State.  As a result, investment advisory services can only be provided to Washington State residents at this time.

(With a limited exception: Green Lake Financial Partners can serve up to 5 clients from each non-Washington state.  If you are not a Washington state resident, please inquire to see if we can serve you.)

Four Simple Steps for Guaranteed Wealth

This is kind of an improved (and shorter) version of the ‘Rules and #$^%’ article I wrote a long time ago.  Since it’s been a while since I launched Words of Ward with that article, I’ve decided to post this as a good refresher of the basics to building wealth.

Let’s go over four simple steps to building your personal wealth.

Step #1 – Spend less than you earn

1) The single most important rule to becoming wealthy is this: Spend less than you earn. However, that’s a little like saying the way to health is to eat right and exercise.  Everyone knows this, and yet it’s difficult for some to do consistently.

The trick to growing rich is not to deny yourself the things you love in life, but to take a step back and try to prioritize your spending by what matters most.  First, estimate your monthly expenditures.  The easiest way to do this is to take last month’s credit card & bank statements and add up the numbers in each spending category.  If you track your expenses on Mint.com or Quicken Online, then you should already have a lot of this data.  Then, add in irregular expenses that aren’t reflected like gifts, tuition and car repairs.  What did you spend most on? Where can you cut back?

Pursue free or lower cost substitutes that allow you to enjoy similar things at a cheaper price.  Think borrowing instead of buying, generic versus name brand, or jogging outside and cancelling gym membership you rarely use anyway.  Use Ebay and Amazon.com and shop for deals.  Go to cheaper grocery stores like Costco or Safeway (or anyplace where the majority of shoppers are Asian) as opposed to QFC or Whole Foods (yes, Safeway sells organic too.)  Avoid temptations by staying away from the mall or online shopping sites.

Remember to focus on your biggest spending areas like repeat purchases (clothes, eating out, subscriptions) or large purchases (cars, housing.)  Savings 5% on $1000 is better than 25% on $10.  Read these excellent savings tips from twenty-something personal finance guru Ramit Sethi: http://www.iwillteachyoutoberich.com/blog/announcing-the-save-1000-in-30-days-challenge/

Step #2 – Pay off high-interest debt ASAP

Many credit cards have Annual Percentage Rates (APRs) anywhere from 11 to 20-something percent. By reducing and eventually eliminating your high-interest debt, you’re giving yourself an instant and guaranteed return on your money. Carrying around a $4000 balance at 20% means you’re paying $800 per year in interest.

Pick the lowest rate card you have and plan to use it only for emergencies until you’re credit card debt-free.  Make your other cards unavailable.  (One personal finance blogger recommends freezing them in water.)  If you know you’ll still abuse that one card, switch to cash-only.  Put a budgeted amount of money into an envelope each pay period and use only that amount for discretionary spending.  You could have an envelope each for groceries, eating/going out, clothes, etc.

To pay down your debt, pay down the card with the highest rate aggressively until it reaches zero (then cancel that card, you really only need one or two at the most.) Repeat with the next card.  If you have any non-retirement savings you can get at (including ‘emergency funds’), use these to pay off your debt.  This is because your credit card APR is probably higher than anything you could hope to consistently earn through investing.

Once you’re out of debt, stay that way!  Always pay your credit card balance off at the end of the month.   If you don’t have the money for something in a checking or savings account, don’t buy it.

Step #3 – Leverage and automate your savings

Learn to love free money.  If your employer offers a match on retirement contributions, max it out before you spend/invest anywhere else (even before paying off your credit card debt.)  Use an IRA or 401(k) to instantly earn 33-39%[1] more on every dollar you contribute by eliminating Uncle Sam’s take.

Use paycheck deductions to automatically save for your future.  Once you set up that 10% 401(k) deduction, you’ll never even miss the money.  Set up multiple INGDirect.com high-interest savings subaccounts with monthly automatic deductions from your checking account to save for big purchases like vacations, a wedding, or a house down payment.

Step #4 – Smart & easy investing: long-term savings in low-fee stock index funds

In most long (10+ year) time periods, stocks absolutely destroy every other asset class (like bonds, treasuries & real estate.)  In rolling 30 year periods, stocks outperformed bonds 99.4% of the time over a period of 200 years, according to Jeremy Siegel’s ‘Stocks for the Long Run.’  Any money you don’t need in the next 5-10+ years should probably be entirely in stocks.  Don’t let the poor stock market returns of recent years bias you against what has been the greatest wealth creation instrument of the last 200 years.

Look for a low-fee broad market index fund to invest your long-term savings in; something like Vanguard’s Total Stock Market Index (VTSMX).  Roughly 70-80% of actively managed mutual funds underperform the market, in large part due to their high fees of 1-2% per year.  A good index fund will often have an expense ratio of less than one fifth of that amount.  The graph below shows how a 1% difference in expenses makes a huge difference in returns if you start with $10,000 invested at a 7% real return.  In 30 years, you’d have over $17,000 more in the lower-fee index fund, a 32% difference!

To summarize…

Cut your savings & grow your earnings to spend less than you make.  Pay off your high-interest debt if you have any.   Automate a tax-deferred or employer-matched savings plan.  For short-term (0-5 years) goals, use a high-interest savings account or a bond index fund like Vanguard’s VBMFX.  For long-term goals, invest in low-fee stock index funds.  There are a few other financial considerations I didn’t cover, including having proper insurance levels to protect yourself, but these 4 steps form the majority of what you need to know to guarantee yourself a rich life.

[1] If you’re in the 25% or 28% tax bracket, you get $1 of pretax contributions to a 401(k) for what would’ve only been $0.75 or $0.72 in after-tax income.  0.25/0.75 = 33% more money working for you.

Top 5 places to put your money TODAY

This is NOT the place for your hard-earned dollars!

Where should you put your money?  There are a ton choices including credit card debt, retirement accounts, mortgage payments, that new Le Creuset stockpot that you’ve always wanted, a trip to Tahiti, etc.  Below is a list of where I think most people should put their money in order of priority.  That means that I recommend maxing out the first item on the list before going down to the others.

This list assumes a couple of things:

1) You have some cash to put towards these things.  If you don’t, you need to read Rule #1 of personal finance, cut costs where you can, optimize your spending, and automate your savings.

2) You are not endangering your health, have proper levels of insurance, and aren’t making yourself miserable by living like a total pauper because you’re following my savings suggestions to the extreme.

3) You’ll tailor this order to your own personal situation.  (But even so, I strongly recommend following items 1 & 2 in that exact order.)

Okay, ready?  Numero Uno for where your money should go is….

1) Employer 401k matching

If you’ve read my articles on retirement, you’ve heard me say this before: don’t leave free money on the table!  What type of return do you  historically get from a risk-free investment?  Treasury bonds have returned about 4-5% annually.  What is your employer match return?  If you get matching of 50 cents on the dollar up to 6% of your salary, your return on that first 6% saved is an instantaneous, huge, risk-free 50%!!! There’s no better investment in the world that I’m aware of.  Max this out no matter what!

2) High-interest debt, like a credit card

– Some readers might quibble with this as #2, I can hear them now: “What!? Paying off your credit card balance is always the first thing you should do!”  There may be emotional benefits to making this #1 that you should consider, but  if your employer matching is 50% instantly, and your credit card rate is 25% annually, you’ll do way better to first max out your 401k matching.  After that, put the rest of your cash towards that VISA balance.

(Of course, if you have a rate as outrageous as this one, you may want to switch to paying this off first…)

3) Emergency fund (3 – 6 months worth of living expenses)

You need to have some money socked away for unforeseen expenses or losses of income.  While you should at least have long-term disability insurance to protect yourself against injury, you also need a shorter-term stash of cash to tide you over if you lose a job, get sick, or have to replace something valuable, like a car.  The general rule for insurance is to insure things which you wouldn’t be able to replace relatively quickly and that would cause you hardship if you had to go without them.  This includes your home, life, health, and possibly your car or jewelry, depending on the retail value of these items and your personal savings.  (Make sure to avoid useless insurance.)

Expenses you can afford should be ‘self-insured’ by your emergency fund or other savings.  Raising insurance deductibles and banking (NOT spending) the difference in premiums is a good way to self-insure against small losses ranging from a few hundred to a few thousand dollars.  Store emergency money for unexpected car repairs, insurance deductibles (which can be large if you have catastrophic health insurance like I do), or high vet bills for your disgustingly-cute Cavalier King Charles spaniel.

Whether you need more or less living expenses saved depends on how steady your income is & how many liquid assets you already have (like non-retirement stocks that you could tap.)  The more financially secure you already are, the less of an emergency fund you need: a self-employed person with few liquid assets needs more emergency funds than a union schoolteacher with 20 years seniority and a sizable investment account.

Like all short-term (less than 3-5 year) savings, your emergency fund should be investing in something that is not only stable and liquid (easily accessible), but that will also give you a decent return on your investment.  High-interest savings accounts like the kind from INGDirect* fit the bill for very short-term savings since the principal is guaranteed by the FDIC.  Bond funds, which may vary slightly in principle but generally yield a higher return than savings accounts or CDs, work better for money that might sit there awhile.  I use a low-fee, highly-diversified bond index fund for my emergency fund due to the higher returns compared to high-interest savings accounts.

(Read this for an advanced way to juice your emergency fund interest rate while keeping your principal safe & accessible.)

4) Tax-advantaged retirement accounts (401ks, Roth or Traditional IRAs)

After you’ve maxed out your employer retirement matching, paid off your debts (except perhaps your lower-interest mortgage or student loan), and stored money for emergencies, it’s time to go back to saving for your retirement.  Read up on the Roth IRA, and then read this to see if it would be better for you to put your retirement savings in a pre-tax account like a 401k or an after-tax account like a Roth IRA or Roth 401k.  For people in high-ish tax brackets (25% and above as a rule of thumb) and who don’t already have a large pre-tax dollar nest egg saved up, I recommend putting the bulk of your retirement savings into a 401k plan (or a Traditional IRA if your employer doesn’t offer a 401k.)

If retirement is still 5-10+ years off, invest in broad, low-fee stock-market index funds like those that track the S&P 500 or the total stock market.  Index funds outperform mutual funds about 70-80% of the time and require no maintenance on your part since they passively track the entire market for you!  Any good 401k plan should offer at least one of these indexes.  If you’re investing in a Roth or Traditional IRA, select a mutual fund company that offers a good selection of  low-fee index funds like Vanguard or Fidelity.

Putting money into a tax-free retirement vehicle is critical to building up a nest egg for the future.  Assuming you’re in the 25% tax bracket (and some other things**), an investment in a tax-advantaged retirement account made when you’re 25 will be worth about 55% MORE in real dollars when you’re 65 than would an equivalent investment in a taxable account.  (Obviously, if your tax bracket is higher, it’s even more advantageous to avoid taxes.)

5) ‘Regular’ taxable investment accounts & short-term savings for big purchases

After you’ve either maxed out your retirement options (you’re a beast!) or decided you’re contributing enough to retire how you want to at a given age, it’s time to look at plain ol’ taxable investment accounts for long-term savings.  (Index fund recommendations still apply.)  I like to think of these as early retirement accounts; the more you sock away now, the quicker you can exit the rat race (or do something for lower pay that you like more.)

Also, you should be saving regularly for big purchases like a house, wedding, vacation or new car.  For these short-term items, I use the high-interest savings sub-account technique that I learned from Ramit Sethi (you could also use the Roth IRA ‘hack’ I mentioned in priority 3 above.)

Simply open an ING high-interest savings account*, then create multiple savings accounts, labeled according to each item you’re saving for (‘Wedding’, ‘San Francisco trip’, etc.)  Then, set up an automatic monthly contribution to each account based on the amount of time you have to save and the amount of money you’ll need.  For example, if you need $30,000 to put down on a house in 2 years, that’s $1250 per month that you need to be saving ($30,000/24 months = $1250 per month.)

Note that you might sometimes rank some short-term savings goals as higher priority than maxing out your retirement accounts (#4.)  That’s fine, but do NOT neglect your retirement.  Investing early, even with just a little bit of money, is the most important factor to building wealth.  Saving for retirement will be way easier if you start today with whatever you can.


So there you have it, the rank-ordered top 5 places to put your money: 1) Max out employer matching contributions before anything else, 2) pay off high-interest debt like credit cards, 3) create an emergency fund of 3-6 months worth of expenses, 4) put as much as you can into tax-advantaged retirement accounts, and 5) bankroll anything left into short- & long-term (taxable) savings/investment accounts.

Take each step one at a time until you’ve successfully mastered it, then move on to the next one (don’t try to do it all at once!)  Once you’re eventually able to do all of these things, consider yourself pwning your money!

Now that you know where to put your money, find out WHAT to invest it in here.

[And just for good measure, here’s a link from the Motley Fool’s insurance page, which should contain some complimentary info to this post.]

* If you want to set up an ING Direct high-interest savings account, the first 24 people that email me can get a referral link that will get them a $25 bonus if they deposit at least $250 when setting up the account (I’ll get a $10. referral bonus.)

** This assumes dividends & capital gains remain at the historically low rate of 15% for those in the 25% and up brackets.  It also assumes an effective tax rate at retirement of 16%, which corresponds to an income in today’s dollars of about $90K for a married couple.  If dividend or capital gains rates go up, tax-advantaged accounts perform even better against taxable accounts.  On the other hand, if your tax rate goes up relative to the capital gains rate after you’ve retired, tax-advantaged accounts lose some of their edge (but they’re always better.)

Do you suffer from these common big money mistakes?

Even though you may think you’re handling your money rationally, there’s many psychological factors that even very sophisticated people fall victim to.  Learn how to fix these big money mistakes below.

I just finished reading the fantastic “Why smart people make big money mistakes and how to correct them.” The authors focus on the behavioral economic factors that cause us to do boneheaded things with our money.  The book concludes with actions for people to take to overcome some of their irrational financial behaviors.

See if you’re making some big money mistakes, and learn how to fix them:

1) Raise your insurance deductible. Gary Belsky & Thomas Gilovich explain that because we count highly memorable events as more probable events (think fear of airplane crashes), we tend to overestimate the odds that we’ll have to file an insurance claim for life, auto or health.  Therefore, we pay too much in premiums for low deductible policies.  Instead, raise your deductible from, say, $100 or $250 to $500, $1000 or more.

2) Next, create an emergency fund to “self-insure” against paying deductibles and for other smallish losses. Read my other articles about paying less for auto insurance premiums, and also about using catastrophic/high-deductible health insurance. Because we think about all the terrible things that could happen to us, no matter how unlikely, we sometimes buy insurance we don’t need.  Go here to learn about insurance you should avoid.

3) Pay off credit card debt with emergency funds or other non-retirement savings. Often times, we use ‘mental accounting’ to separate different accounts of money in our mind.  We might treat our emergency fund as sacred, and at the same time max out our credit cards.  Once you accept that a dollar in your emergency fund has the same value as a dollar on your credit card, you’ll realize that making 5% in a money market fund and paying 14% in credit card interest at the same time just doesn’t make sense.  Besides, if you have an emergency after doing this, you can just put it on the plastic.  (Of course, once you pay off your credit card debt, keep paying your full bill every month!)

4) Switch to index funds. I often champion the virtues of low-fee index funds. They give you instant diversification and ensure that you’ll beat about 80% of actively managed mutual funds by just matching market returns.  Also, they let you put your investments on near-autopilot, freeing up your time to do the things you really love without worrying about quarterly earnings reports or whether your fund manager really knows what he’s doing  investing in Siberian oil fields.  Be honest with yourself that you probably don’t have any business trying to outperform investing professionals (who themselves often don’t have any business doing it.)  Also, DON’T be fooled into picking the latest ‘hot’ fund or stock.  Funds with high recent past performance are often just random aberrations, and are likely to perform worse than average going forward.

5) Review your assets and track your spending for a month. Take a snapshot of your personal wealth by tallying up all your debts and savings.  Then, track your spending for a month.  This second part is hard, but the rewards are absolutely huge.  You may think you know where your money is going, but if you’re one of those people that have credit card debt or just can’t seem to save enough, you must do this.  Even if you’re pretty on top of your money, tracking where your cash is going can be very revealing (I know it was for me.)  Fortunately, credit cards and online software like Mint or Quicken help you do this pretty painlessly.  Just make sure to account for cash expenditures too.

6) Set up a payroll deduction. We often find it painful to send our hard-earned dough to a savings account when that money’s already in our checking account.  Eliminate this phenomenon (called ‘loss aversion’) by making investments straight out of your paycheck through a payroll deduction.  That way, you’ll miss the money less since it will never feel like you had it in the first place.  Your 401k plan is a great place to start, but you should also consider automating the rest of your money to build wealth without thinking about it (hardly.)

7) Max out your retirement savings (or at least the employer matching part until you can save more.)  Retirement accounts like 401ks, 403bs, and IRAs are great places to build wealth because of their tax savings.  Read more about retirement savings here.  At the bare minimum, max out your employer’s matching portion of your 401k. (It’s free money!)  This is so important that you should do it at the expense of putting more money towards paying off your credit card debt! (And I really hate credit card debt, so that’s saying a lot.  Pay that plastic off as your second highest financial priority.)

So there you have it, 7 steps to fixing some of the biggest and most common money mistakes that even smart people make.  As always, email me with questions about your particular situation, or leave a comment and I’ll answer back as soon as I can.

Automate your finances – Perspectives from the Fool and Ramit Sethi

Below is a good summary of the automations you can make to simplify and improve your finances, courtesy of the Motley Fool:

Use the tips in this article and automate:

1) Your savings via direct deposit of your paycheck to your checking or savings accounts.  Depending on what your employer allows (ask HR), you can break up your direct deposit by placing some of your money in a checking account and some in a savings or brokerage account.

2) Your retirement via 401k contributions straight from your paycheck.

3) Your credit card bill by automatic payment of at least the monthly minimum plus whatever else you can afford (if you have a revolving balance) or the whole amount each month (the preferable choice.)

4) Your other bills by signing up for automatic payment on utilities, student loan, car payment, and even your rent or mortage (using your bank’s online bill payer if the company you’re paying doesn’t have an online payment option.)

5) Take a page out of Ramit Sethi’s book by opening high-interest savings accounts to auto-save for large purchases like weddings, cars and houses, or smaller things like a plasma TV or that $500 pair of Jimmy Choo heels.  (A really fantastic article on finance automation by Sethi is link here.  The article gets into the nuts and bolts of how to picture and implement the above.  I highly recommend reading it.)

Automate your finances to save time, money and peace of mind!

How to travel, live where and how you want to, and still save half your income (and how I’ve done it) – Part I

In this series of posts, I’m going to teach you how you can build a strong financial life while still enjoying the things you love most like traveling & living where and how you want to.  I’ll also talk about how I did it, showing you step-by-step what you can do in your own situation.

Part I – Create a spending plan that meets your needs

A lot of personal finance websites emphasize frugality as the sole means to financial well-being.  They come replete with tips like “don’t accelerate too quickly to save on gas” or “buy one-ply toilet paper.”

I believe that for most people, these tips are not worth the effort to implement, nor are they the key ingredients to a healthy financial life.  So…

Here’s how YOU can take control of your finances (Hint: Take action today; if you don’t, stop reading my blog, it can’t help you.)

Step 1) Put a copy of your most recent paycheck in front of you.  Write down how much you make in monthly gross income (take your pay and multiply by (26/12), or 2.167, for those with biweekly salaries.)

Add in any bonuses you expect to receive, or any income you make through other sources (baby-sitting on the side, unemployment benefits, drug-trafficking etc.)  Since you’re reading my blog, I’m going to assume you’re not retired, and thus aren’t getting social security checks.  I’ll also assume you’re a working stiff that relies mostly on your own earned income, and are not cashing in investments (but if you are, count these too, plus any sweet trust fund income that Daddy set up for you, you spoiled bastard.)

Step 2) Get a rough, back-of-the-envelope calculation on how much you spend.  This step takes the most work, but it’s also the most important; you need to know where your money is going to take control of it! I recommend an excel template like this one to track this info (combine, leave blank/delete and modify items to fit your situation.  Use the ‘Actual Cost’ columns for expenses; later, we’ll use the ‘Project Cost’ columns for what you’d like to spend.)

The steps below are in order of increasing difficulty.   If you’re too lazy to go through the 4 sub-bullets, at the very least, fill in your biggest expenses and give a rough estimate to the rest.

  • Since you already have your paycheck in front of you, calculate the expenses that come straight out of this: health insurance, other insurance like voluntary disability or life, federal/state/local taxes, and anything else.  For those with biweekly income, figure the monthly expense of these paycheck deductions by taking your biweekly paycheck’s deductions and multiply them by (26/12) or 2.167.  This is your monthly expense (which is pretty accurate assuming you don’t owe much or get a large tax refund at the end of the year.)
  • Calculate easy-to-track expenses like rent/mortgage and any other monthly or annual payments you make (internet, cable, cell phone plan, student loan payments, car payment, Netflix, magazine subscriptions, car or life insurance.)  Of course, for annual/ semi-annual/quarterly expenses, you’ll need to divide by 12/6/3 to get the monthly expense.
  • Estimate the regular payments that aren’t always the same amount each month (like utilities, or gambling losses funneled to your bookie.)
  • Estimate how much you spend on irregular items like groceries, eating out, clothes, entertainment (going out to bars/clubs, movies, CDs/DVDs), travel, gifts, and charity.  Also, create a miscellaneous category to lump together hard-to-track or infrequent purchases.  Look over your 3 most recent monthly credit card and bank statements to give you more accurate information and bring items to your attention that you otherwise might have forgotten.  Crunch some of that data to give yourself a monthly average of expenditures based on the reality shown in those statements (which should be available online.)  When you look at the hard data of what you actually spend, you’ll be surprised at what’s costing you an arm and a leg.  I certainly was the first time I did this.

Step 3) Subtract your expenses calculated in 2 from your gross income in 1.  Hopefully, your expenses are less than your income.  If so, congrats, you’ve achieved the first rule of personal finance: ‘spend less than you earn’.  Also insert into the equation how much you’re investing in your 401k, money market fund, savings account, etc.  For kicks, you can divide that number by your gross salary to see what percentage of your income you’re currently socking away.  (Depending on the number, you’ll likely want to increase that percentage to meet major goals like retirement, paying for a wedding, buying a car/house/Jackson Pollack etc.  Don’t worry about that now, we’ll talk about that in a future post.)

Step 4) Look through your expenses for areas where you are spending more money than you’d like to.  This means writing down what you’d LIKE to be spending in each category, and comparing this with what you’re ACTUALLY spending.  If you’re using the recommended spreadsheet, fill out the ‘Projected Cost’ column with your budgeted numbers.  The goal here is to cut spending on areas that don’t really add much value to your life.

If you’re not sure about what number to use for a given category budget (“is $200 per month reasonable for going out to eat?”), don’t sweat it too much; just put something down that seems reasonable to you.  If you want, you can break it down by units of consumption: i.e.: “If I want to go out for lunch three times per week, and I usually spend $10 each time including tax & tip, that’s about $30 per week and about ~$130 per month (= $30/week * 52 weeks/12 months.)”

Be honest with yourself

Think about what you enjoy doing most with your time and money (or what you wish you could be doing with more of each.)  Then, resolve to cut things that don’t matter as much to you.  Here’s a great article by Ramit Sethi on this idea of getting your finances in order and focusing spending on what matters to YOU (rather than what other people spend, or what they think you should spend.)


Now that you’ve tracked your spending & set up a budget, you’re ahead of 95% of people in terms of understanding & managing your money.  In the next post, we’ll cover how to automate your savings & spending to set up an emergency fund, pay off debt, and invest simply and smartly for the things & experiences that you want out of life.

What to do (and what NOT do to) in today’s turbulent financial markets

Unless you’ve been living in a cave that’s under the ocean AND on another planet, you have likely heard about a bit of trouble going on throughout the US’s financial system.  First, house prices dropped, then stocks prices, now entire banks like WaMu and Lehman Brothers have gone under (taking the markets further down with them.)

While Congress and the United States Treasury Department try to figure out what to do about the mess that Wall Street (and, let’s be fair, Main Street) got us into, most investors are left trying to figure out what actions to take in their personal lives.  Although I certainly don’t pretend to be an expert on the macro economy (and you don’t need to be to make good decisions when that same economy is acting crazy), I will offer some advice.  The first step is absolutely essential; fortunately, it’s pretty straightforward:


This is a pretty standard rule in any scenario of perceived crisis.  If you’re panicked, you can’t think straight.  If you can’t think straight, you can’t make good decisions, SO RELAX!  Take a deep breath, remind yourself of all the things that are going fine in your life (or at least pretend if things aren’t), and try not to think about that tanking retirement fund.

Really though, after you’ve calmed down, stop and reflect on your personal financial situation.  (Stop worrying about the rest of the country for a minute, and do Ayn Rand proud by thinking only of yourself, and your immediate financially dependent family, if applicable.)  If you’ve followed the rules I’ve recommended, you are hopefully already in solid financial shape.  If you’re not, you need to apply the next step.  (Even if you don’t think you need it, read over it anyway, just in case there are some things you’ve missed.)

Get fit financially

No course changes here folks, continue to pay off your high-interest debt, establish a short-term “emergency fund” (you could put it into a Money Market Fund like Vanguard’s VMMXX.  Don’t worry, the government has said it will guarantee Money Market Funds for a while.)  Get yourself the necessary insurance for your health, life (I believe term is best for most people), disability, car and house, and whatever else you need insured.  (Keeping in mind that many of those types of insurance may be provided by your employer at a good price.  Check into the details with your Benefits department at work.)

Note that we haven’t decided to take any different course of action yet due to the fiscal crisis that we’re facing.  “But, surely” you might be saying, “our plan of action has to change when it comes to our investments, right?  The stock market just isn’t safe any more!  Our retirement and kid’s college funds are in there!”  Well, sorry to disappoint, but the next vitally important step in our plan to deal with these troubling times is…


Well, almost nothing at least.  DON’T rush to cash out your stocks and bonds.  DON’T take all the money out of your savings and checking accounts to stuff it under your mattress (the FDIC insures those deposits at up to $100,000 per account.)  DON’T lose faith in the stocks, the number one wealth-creating opportunity available to all Americans.  In fact, the only “change” I might recommend is to strongly consider starting to invest in stocks (and to continue your regular investing if you’ve already started.)  Over long time periods, stocks are by far the best investment you can make with your money.

Unless you plan on needing the money in less than 3-5 years, the majority, if not ALL, of your long-term savings should be in stocks.  That especially includes your retirement, young children’s college funds, etc (assuming, of course, those events are still several years away.)

With the market in turmoil, it can be very difficult to maintain your disciplined investing strategy.  Stick to it!  Keep investing regularly, DON’T try to time the market, and avoid trading in and out of stocks.  The market has been hit hard recently, but as history shows, the biggest upturns in the economy generally follow the biggest downturns.  Don’t miss out on a huge rally by setting your long-term money on the sidelines. 

Remember that volatility (referred to as “risk” by some folks) is your friend.  Steady investments like bonds and CDs generally pay low to middling returns.  When you buy (and more importantly HOLD) those broad index funds (like the total stock market index fund VGTSX from Vanguard), those short-term ups and downs historically translate into huge gains after many years.


So, to summarize, DON’T PANIC, get yourself financially fit enough to weather any financial storm and keep investing regularly in a diversified collection of stocks, like low-fee index funds (that way, if one of them blows up, you’ll have plenty of other quality business to fall back on.)  Your own financial security is in your hands!  This is just a broad overview of how to handle this adversity, if you have specific questions, please leave a comment or email me.

Hang in there!