Our Low Cost, No Fuss, DIY Money Management System

Wintertime skyline

So exactly how do frugal weirdos manage their money? I get this question a lot and it makes me realize that, despite the fact that this is ostensibly a “personal finance” blog, I don’t discuss the precise machinations of my personal money management system very often. And the reason for that is quite straightforward: Mr. Frugalwoods and I don’t actually do very much in service of “managing” our money. There’s a misconception that in order to be smart about your money, you must be constantly fiddling or adjusting or otherwise doing something with it. False, I tell you.

To the contrary, I find that the less we poke at our money, the better off it–and we–are. A lot of folks tell me they don’t have the time to handle their money and so they think they should hire a professional. False again. It takes precious little financial acumen, and even less time, to successfully manage the average family’s finances. If you are marginally organized, can do basic math, and know how to use a computer, then you can manage your own money. Because the vast majority of what you should do with your money is… wait for it… nothing.

Our snowy woodland trails

The less you spend, the less you withdraw, the less you tinker with your investments–and the more money you plough into them–the better off you’ll be. Money is quite content to hang out by itself with its little money friends at the money playground (aka the stock market) and is actually averse to being disturbed. I’m oversimplifying, but only slightly.

To illustrate, today I will take you on a tour of all things Frugalwoods finance. Since one of the challenges of my Uber Frugal Month is to evaluate how you’re spending and managing your money, I thought I’d go ahead and do the same. By the way, you can sign-up to join the over 9,900 folks taking the Uber Frugal Month Challenge at any time and you’ll start with Day 1, so you won’t miss a thing!

Do I Need A Financial Advisor?

Frugal Hound in the summertime

Probably not. I have a number of beefs with the professional financial services industry: they overcharge and underserve, and they make us mere mortals feel like royal idiots by using terminology ain’t nobody (probably even them) understands. Today I shall endeavor to use plain old, regular words that we all understand and if something still stumps you, feel free to ask a question in the comments. Our comments section is a wonderful place to learn–mostly from other commenters since, let’s be honest, I only have so much to say. Also, please remember that I’m not a financial professional and my advice is merely my opinion.

If you do feel that you need a professional to help you get started, make sure that you hire a fee-only financial advisor who will act as your fiduciary because then they’re legally bound to put your best interests first. Unfortunately, many financial managers do not charge a fee–which sounds great, because free service, right? WRONG. They will then get kick-backs from investing your money into shady, sub-par investments that benefit them, not you.

The first question to ask a prospective financial advisor is “are you a fee-only fiduciary”? As crazy as it sounds, it’s legally ok for a non-fiduciary financial advisor to recommend terrible investments to their clients that financially benefit them, but not their clients. So if you feel you must hire someone, make certain they’re a fiduciary. Furthermore, for most people, having an ongoing relationship with a financial advisor is not necessary.

Where We Keep Our Money

Our apple trees in blossom!

Our assets are distributed across the following vehicles: cash, real estate, and investments (comprised of both 401ks and low-fee index funds). We use Fidelity for all of our banking since it’s online, offers a low-fee index fund (FSTVX), a low-fee Donor Advised Fund, no ATM fees (you can use any ATM for free), an app for depositing checks, and seriously good customer service.

Checking Account

This is where our liquid assets–a fancy term for cash–live. It’s a good idea to have a portion of your money liquid so that it’s easily available in case of an emergency. Most of our assets are invested, but we maintain roughly four months’ worth of living expenses in this checking account just in case we need cash fast (for a car repair or illness or other unforeseen large expense). However, I don’t advise keeping all of your money in a checking account since they typically have low interest rates, which means your money isn’t being utilized to its fullest potential.

401ks and 403bs

Mr. FW and I each have traditional retirement accounts from our employers past and present. If your employer offers a 401k (at a for-profit) or a 403b (at a non-profit) and if they match your contributions, you should contribute the maximum amount they’ll match.

Frugal Hound scopes out our neighbor’s cows

Wait, what’s a 401k again?

  • A 401k (or 403b) a tax-deferred retirement savings account offered through some employers. You don’t pay income taxes on the money you put into your 401k, but you will pay income taxes when you withdraw your money in retirement.
  • You’re allowed to put a maximum of $18,000 per calendar year into your 401k (in 2017).
  • Your employers can choose to match your contributions with money of their own:
    • These matching funds do not count against that $18k limit.
    • For example, if your employer matches up to 8% of your salary in 401k contributions, that means you can put in your $18k every year and your employer will contribute an additional 8% of your salary.
    • Matching funds are free money. I cannot stress this enough. If your employer offers matching funds and you’re not taking advantage of them, you are literally leaving free money on the table. For this reason, matching funds are a major consideration for many people when they evaluate potential employers.
  • You can begin to withdraw money from your 401k when you’re 59.5 years old. Prior to that age, you’ll pay a penalty to withdraw the money. For this reason, you shouldn’t ever liquidate a 401k prematurely except in the case of a life-shattering emergency. A 401k is not your emergency fund and it’s certainly not your “I’d like to buy a boat” fund.
  • A 401k should be considered but one element of a robust savings regime. Saving to your 401k should NOT constitute your sole savings.

For more on 401ks and their awesomeness, please enjoy: 401ks Are Your Friend: Demystifying Personal Finance Part 3

My home office

Solo 401k

Since I am now self-employed, I’m going to set up a solo 401k in 2017.

Real Estate

We own two properties, one of which is a revenue generating rental in Cambridge, MA (where we previously lived) and the other is our homestead in Vermont (where we currently live). We bought our Cambridge home in 2012 with the intention of one day renting it out since Cambridge is a super hot rental market. 65.4% of all housing units are rented in Cambridge, a fact bolstered by the two major universities anchoring the city: Harvard and MIT. At present, the rent our tenants pay in Cambridge covers the mortgage on the Cambridge home, all expenses (taxes, insurance, maintenance, our property manager), with money leftover (this is what I mean by “revenue generating”–we make money every month off of this property). For more on our properties, please enjoy: The Finances Of Our City Rental And Country Homestead and That Time We Bought A Homestead and Why Did We Buy Our House?

Wait, why do you have mortgages? There’s nothing inherently bad about having a mortgage and, in fact, it’s often the most prudent financial choice. The key is that our mortgages have very low interest rates and so, our money is better utilized in the stock market. It’s also true that if we paid off both mortgages today, that’d be a lot of our net worth tied up in real estate. We prefer to remain more diversified. Paying off a mortgage might feel good psychologically, but it might not be mathematically–or financially–prudent. A house can be a relatively illiquid asset and, it’s certainly not guaranteed to appreciate.

Love this ancient maple in our woods

Investments

All the rest of our money is invested in the stock market. We invest in low-fee index funds through Fidelity’s Total Stock Market Index Fund (FSTVX), for the simple reason that we have all of our accounts through Fidelity and thus it’s very easy to transfer money. What this means is that we’re invested across the entire stock market, providing us with a great deal of diversity in our investments, which is important. This also means that we pay extremely low fees in order to have our money invested, which is equally important. Our culture has a shroud of mystery surrounding investing, which is completely uncalled for. There’s no need to pay someone to “manage” your investments, because–get this–low-fee index funds often outperform managed funds.

The best part about this investing approach (other than that it works) is that you can do it yourself. We frugal weirdos are inveterate insourcers, so this is fabulous news! You don’t need to—and I’d posit shouldn’t—pay a professional to manage your investments for you. These so-called “managed funds” typically deliver lower returns than our aforementioned low-fee index funds. My friend JL Collins puts an even finer point on it in his book, The Simple Path To Wealth: “82% [of managed funds] failed to outperform the unmanaged index. But 100% of them charged their clients high fees to try.” So, yeah…

And in case that first quote didn’t drive it home clearly enough, here’s another zinger from Collins: “…the simple truth is this: the more complex an investment is, the less likely it is to be profitable. Index funds outperform actively managed funds in large part simply because actively managed funds require expensive active managers.”

Babywoods in our yard last summer

From a technical standpoint, investing in low-fee index funds is exactly like doing any other online banking–you just click around and DIY. As I said at the beginning, if you can use a computer, you’ll be just fine.

Wait, what’s a stock again? For answers to this query and more, I highly recommend you check out JL Collins’ book, which I review in full in this post: For the Love of Frugal Hound, Manage Your Money Yourself! (by following The Simple Path to Wealth). My write-up here merely scratches the surface of investing while Collins gives it the full treatment in his book. Also, the book is easy to understand and actually interesting to read (and I’m not just saying that). Collins’ inspiration for the book came from a series he wrote on his blog in order to explain financial management to his daughter (who is now in her mid-twenties). So, it’s sweet as well as helpful.

When do you invest, Mrs. FW? I’m so glad you asked because the answer is: all the freaking time. Trying to time the market is a fool’s errand because: 1) it’s impossible, 2) you’ll drive yourself nuts, and 3) you’ll probably never actually invest. No one–not a single soul–knows what the market is going to do. And so, the most prudent course of action is to start investing when you have the capital (fancy word for “extra money”) and don’t look back. Pulling your money in and out of the market is a surefire way to not make any money from investing. In order to appreciate long term gains, you must remain invested for the long term.

Our apple trees in mid-summer

To remove human error and second-guessing from our investing strategy, Mr. FW and I have our account set up to automatically invest a specified amount of money every single month.

Thus, we add to our investments every month of every year. Market’s up this month? Money automatically goes in. Market’s down this month? The same amount of money automatically goes in. If you have a tendency to overthink or micromanage things (ahem, that would be me… ) then I highly recommend automating your investments.

How We Spend Our Money

Ok obviously the crux of this is that we spend very little money. That’s kind of our thing around here, being all extreme frugality and such. But when we do spend money, we try to do so strategically by utilizing credit cards and tax-advantaged accounts where possible.

Track Your Spending

Frugal Hound sniffs the air on a hike through our woods

I’m listing this task first because, before you spend a dime, you should have a way to track and review your spending every month. This is step #1 in building a healthy financial life. You MUST know how and where you’re spending your money. Without this rudimentary knowledge, it’s impossible to create goals or to know how much to have in your emergency fund or calculate your savings rate. I use and recommend Personal Capital for this task because it’s free and easy to use. Not tracking your spending would be like starting a weight loss plan without knowing what you weigh.

Use Credit Cards

Mr. Frugalwoods and I purchase everything we possibly can with credit cards for several reasons:

  1. It’s easier to track expenses. No guesswork over where that random $20 bill went; it all shows up in our monthly expense report from Personal Capital. This prompts me to spend less money because I KNOW I’m going to see every expense in detail at the end of each month.
  2. We get rewards. Who doesn’t like rewards? Credit card rewards are a simple way to get something for nothing. Through the cards we use, Mr. FW and I get cash back as well as hotel and airline points just for buying things we were going to buy anyway.
  3. We build our credit. Since Mr. FW and I don’t carry any debt other than our mortgages, having several credit cards open for many years (which are fully paid off every month) has greatly helped our credit scores.

The view from our upper field

If you’re interested in opening a credit card, I highly recommend using this site to search for a card that’ll best fit your needs. And if you’re interested in travel rewards cards specifically, check out this list curated by my friend Brad from Travel Miles 101. I respect Brad’s work in the travel rewards space and I trust his advice on which cards will reap the best benefits.

Huge caveat to credit card usage: you MUST pay your credit card bills in full every single month, with no exceptions. If you’re concerned about your ability to do this, or think that using credit cards might prompt you to spend more money, then credit cards are not for you–stick with using a debit card and/or cash. But if you have no problem paying that bill in full every month? I recommend you credit card away, my friend!

Autopay Your Bills

Babywoods in our fall yard

For all of our bills that can’t be paid by credit card, we pay by automatic draft. This is a simple process to set up whereby our bank automatically deducts from our checking account in order to pay our electricity, mortgages, internet, and credit cards.

Autopay ensures that we never miss a payment, we’re never late for a payment, and we don’t have to waste time writing checks or setting up bank transfers every month. It’s just another way to remove human error from our money management system.

Charitable Giving

Mr. Frugalwoods and I believe in giving back and in supporting worthy non-profit organizations. Since we want to do so strategically, we have a Donor Advised Fund (DAF) from which we make our charitable gifts. DAFs allow donors to take the tax deduction for their full contribution to their Fund in that calendar year. Then, donors can choose to allocate grants to the non-profits of their choice at any time in the future. Since DAFs are invested, and thus earn interest, they’re a wonderful way to ensure you’ll be able to support charities for decades to come and avoid capital gains taxes. For more on this topic, please enjoy: How We Make Meaningful And Tax Efficient Charitable Donations.

What About Saving for Babywoods’ College?

Babywoods: not ready for college quite yet

After researching 529s (tax-advantaged college savings plans) in Vermont, we’ve decided not to open one for Babywoods for the following reasons:

  1. Since the tax savings of a 529 are on state taxes–and not federal taxes (at the point of contribution)–the savings wouldn’t be significant for us.
  2. The fees for management are higher than our low-fee index funds.
  3. I’m not a fan of segregated savings accounts, especially ones like 529s that are restrictive in how they can be used (i.e. only for college).

Since we save as much as we possibly can every month, there’s not much benefit to creating a separate savings account or opening a 529 for Babywoods, although we might do so in the future. We will stay the course with our high savings rate and make a determination when the time comes of how to pay for her college. From a philosophical perspective, we don’t want to simply hand Babywoods a chunk of money for college with no expectation that she’ll have to work. Mr. FW and I both had jobs during college and I think it would be good for Babywoods to as well. But we have 17 years yet to iron out what type of agreement we’ll create with Babywoods in exchange for paying her tuition.

Our pond in full fall regalia

Now, this is NOT to say that 529s are bad. Perhaps they’re ideal for you! If you’re tempted to spend money you’ve saved or if you’re not saving at a very high rate or if you’d like to be able to invite family members to contribute to your child’s 529, then they might be a great option for you.

I merely want to illustrate that a 529 is not a requirement in saving for college. 529s also vary dramatically by state, so you’ll need to research what your state offers.

Be aware that there’s no rule saying you need to open a 529 in order to provide for your child’s future. If you’re saving at a healthy rate, and invested in low-fee index funds, I wouldn’t worry too much about opening a 529 (unless it’ll save you a significant amount on your taxes).

What other things do you recommend, Mrs. FW?

I’m so glad you asked! I have a newly published section of the blog titled Frugalwoods Recommends that outlines the things Mr. FW and I recommend. It covers everything from life insurance to underwear, so I hope it’s useful!

FAQs

Our driveway puts on a good leaf show

Here are a few FAQs from readers:

  • If I invest in low-fee index funds, is my money stuck in there forever? No, you can liquidate stocks at any time, although you shouldn’t invest money you’re going to need in the near future. A caveat here is that if you decide to invest in mutual funds, many of these have a short-term redemption fee, which means if you sell the mutual fund during the specified waiting period, you’d have to pay a penalty. Investing should be a long-term proposition, because that’s the only way to make money from it. However, you can sell your index funds at any time and return your money to cash, say for a down payment on a house.
  • How much should be in my emergency fund? This question is entirely dependent upon how much money you spend every month and also your threshold for risk. An emergency fund should be able to cover your monthly expenses for however many months you’re comfortable with. The idea is that if you lost your job tomorrow–and weren’t able to get a new one quickly–this fund would tide you over until you could get another job. It’s your insurance against debt and/or financial ruin. A general rule of thumb is to have six months’ of living expenses in an emergency fund, but that’s not an ironclad rule.
  • Fall colors in our yard

    Can I take money out of my 401k? This is a complicated question, but the short answer is: no. 401ks (and 403bs) are traditional retirement accounts, which means you can’t access this money–without a penalty–prior to age 59.5. If your option is either bankruptcy or taking money out of your 401k, then it might be worth it to pay the penalty and liquidate your 401k. But short of that, leave your 401k alone! However, it’s important to note that for people who are planning on early retirement, there are methods by which you can extract money from your 401k early without penalty. This process is called the Roth Pipeline and my good friend The Mad Fientist has this excellent article on the topic.

  • Is all debt bad? No! Debt is not necessarily a bad thing. It all depends on: what the debt is for and what the interest rate is on the debt. For example, we choose to carry two mortgages because the interest rates are low and our money is better leveraged in the stock market as opposed to tied up in real estate. However, credit card or car loan debt with a high interest rate is bad and should be paid down immediately. My general rule is: don’t take on debt for things you should be able to pay cash for (such as: groceries, used cars, vacations) and you’ll be fine.
  • Winter on the homestead

    Should I pay off my mortgage early? Probably not. I know it’s a common goal to pay off a mortgage early, because it sounds great and it feels good psychologically. However, from a financial and mathematical standpoint, it’s often unwise. If you’re a multi-millionaire and have millions of extra bucks laying around, sure pay off your mortgage. But otherwise, I view holding a mortgage–and having money properly invested in diversified assets (aka low-fee index funds)–to be a much less risky decision. Why? Say you funnel all of your extra money into paying off your mortgage early. Then, two months later, you lose your job and have a health crisis and your cars break down and you need a new roof. And all of your money is now tied up in a potentially very illiquid asset–your home. While you might be able to get a HELOC (home equity line of credit), you also might not. Furthermore, a mortgage is an excellent hedge against inflation. Inflation is when money becomes less valuable and the neat thing about a mortgage is that it’s denominated in the dollars you originally paid for the house and so, over time, as inflation increases (which generally happens), the money you’re using to pay off your mortgage is “cheaper.” Essentially, it’s not bad to hold a mortgage and it’s actually a fine component of a diversified portfolio of assets. In sum: paying off your mortgage is a lot like putting all of your eggs in one basket.

  • Our snowy barn and snow-buried garden

    What’s the best way to pay down debt? Whatever way you’ll stick to. Mathematically, it’s smartest to pay down your highest interest debt first, and then move on to your next highest interest debt, and so on. However, some people need the psychological boost of knocking out a few small debts entirely and so they’ll pay down the smallest dollar amount debt first, regardless of interest rate. I highly recommend that if you have any non-mortgage debt, you build a plan to wipe it out ASAP. Debt is the proverbial anchor holding you back from just about any other financial goal. Get rid of it and then get going on building a solid financial future.

  • What should I do first in managing my money? This is a nuanced and complex question entirely dependent on your goals, your age, your income, your family status, and more!!! However, it’s also true that the below steps work for just about everyone:
    1. Track your spending (using Personal Capital or a similar free service).
    2. If you need/want to save more money, sign-up for my Uber Frugal Month Challenge and follow the steps outlined in Uber Frugal Month: The Ultimate Guide To Saving More Money Than You Ever Thought Possible.
    3. If you have non-mortgage debt, pay it off.
    4. Build your emergency fund.
    5. Contribute to your 401k or 403b.
    6. Invest the remainder of your money in low-fee index funds.

Final Thoughts

Sunrise at the homestead

How you manage your money will likely be different from how we manage our money, but the overarching themes I want to drive home are:

  1. Unless you’re a billionaire with extremely complex assets, you can manage your own money.
  2. There’s no need to overcomplicate things with millions of different accounts.
  3. Adhere to this simple principle: make money, save more of it than you spend, don’t go into debt, and invest the surplus for the long-term.

Our entire philosophy–for both our lives and our finances–is to make it easy to do the right thing. By having an uncomplicated approach to managing our money, we’re able to do it ourselves in precious little time. I’ve seriously spent more time writing this post than we spend on actually managing our money. There’s a pervasive myth in our culture that in order for something to be “good,” it needs to be expensive, complicated, or performed by a professional. While I consider that trope true for some things, it’s not for financial management.

Think of your money like Frugal Hound: they both prefer to be fed regularly and then left to laze by the wood stove of compounding interest. The best way to prevent yourself from becoming tied up in knots about investment decisions is to invest in low-fee index funds and not make daily investment decisions. The best way to pay down debt is to avoid it in the first place. And the best way to provide for your retirement, and your children’s futures, is to save money.

How do you manage your money?

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120 Responses

  1. Michele says:

    Great post! Re: 529s, did you know that you can open a 529 in any state regardless of where you live? I haven’t done this myself but I looked into it when I wanted to help my sister pay her tuition expenses.

  2. Wade says:

    Excellent post. Lots of good information. Bogleheads.org is an amazing forum for all things “index investing”. The Boglehead (named after Vanguard founder Jack Bogle) is a great place to learn about all financial/investing topics.

  3. Mitch says:

    As usual, a great post. I suggest you be a LOT more forceful about the likelihood (or rather, not) of an actively managed fund beating a low cost index fund. Returns in the short term are largely luck but over time (especially 20+ years) a low cost market index fund will beat almost 100% of the managed funds. And NO ONE can pick the funds that will beat the market. In fact, there is a saying that the most dangerous place to invest your money is a fund that has beaten the market for 1, 3 or even 5 years. The likelihood this will continue is near zero.

  4. I agree; most of the time a financial advisor is completely unnecessary.

    It’s funny how FIRE people are divided on the mortgage issue. I’m decidedly anti-mortgage, since paying it off works significantly in our favor for FIRE, but many times, like in your situation, it makes sense to keep the mortgage. That’s the case with our one car payment, oddly enough. Oh, math!

    I also use a credit card for all of our expenses because it has more fraud protection and extends warranties on everyday purchases. In the event that something breaks after its warranty, my bank will still cover it. Hollah!

    As far as how I manage our money, here’s what we have:

    1. One checking account. I know some people like to keep things separate, but it’s easier for us to budget with one account.

    2. One savings account. This is just a plain ol’ savings account with our bank. I’m hoping to upgrade to a checking account with a more aggressive interest rate sometime this year. Fingers crossed!

    3. One credit card. We use this lil’ guy for all of our daily purchases like gas and groceries, etc. It offers more protection than a debit card, which I like.

    4. Retirement. Mr. Picky Pincher contributes to a 401k with employer matching (that lucky duck!). I have a Roth IRA since I’m a contractor and don’t receive employer matching of any type. We don’t max out our retirement accounts yet since we’re prioritizing debt repayment, but we definitely invest into these accounts every month.

    As far as budget management, we created our own budget system on Google Docs. It’s extremely granular and calculates our monthly savings rate, cost per meal, etc.

  5. Mrs. BITA says:

    Nice summary of all things financial. The one thing I’d add about a 529 is that like your 401k your money will grow tax free, so it has that advantage over a taxable account. The other thing that should be obvious but totally was not to me when I started investing was to think about my asset allocation across all my accounts: 401ks (his and hers), taxable, Roths etc.

  6. Joe says:

    Re 529s – they *do* save federal taxes. I live in a state with no income tax (WA) but still use a 529 for my daughter. Although the 529 is funded with after-tax dollars, the money in the 529 grows tax free. You do not have to pay federal income tax on the growth. Example: I earn $1,000. I pay income taxes and I’m left with $800. I put the $800 in my 529. 12 years later the balance is $1,500. I pay ZERO tax on the $1,500 so long as i use it for tuition. If I had simply put the $800 in a non-qualified investment account maybe I could have beaten the growth. Maybe I’d have $1,600. But I’d pay tax on the entire gain upon withdraw.

    529 plans are also protected from creditors in certain situations.

    Of course do your own due diligence!

    • Mrs. Frugalwoods says:

      Yes, but only at the point of withdrawal. Contributions to a 529 are not federally tax-deductible. I allude to this in the post, but I’ll make it more explicit now. Thank you for mentioning 🙂

    • Mark says:

      Yes, to add to this… index funds usually have distributions each year, which means you pay capital gains each year on investments in taxable accounts. The distributions are usually small, 2% of fund value, which translates to a 0.3% tax burden each year with a 15% long-term capital gains rate. But you avoid this with a 529.

      Also, distributions from a 529 plan do not affect AGI. Whereas if you keep your kid’s college money in a taxable account, when you withdraw and realize all of the gains, the long-term capital gains will increase your AGI, which could push you in a tax bracket where your capital gains are taxable or make it harder to qualify for certain deductions in the future.

  7. You guys have it figured out! For someone just starting out it can be complicated to have so many different buckets to hold money in and pay things out of, but automation and less “fiddling” with investments helps a TON. The more things you can automate the better!

    For our 401ks and IRAs, it’s been so great to have broad low-cost index funds that we don’t have to think about and just keep putting our money into. We haven’t gotten into the real estate part like you guys except for our house so that simplifies things a bit.

  8. Thankfully, there are people like you and Mr. Frugalwoods out there spreading the word on how best to handle familial finances. It always amazes me how everyone around me thinks they can’t manage their own money. And let me say, these are highly educated folks in a demanding career field. We also go the route of low-cost index funds at one of the popular brokerage firms. We do like the idea of living mortgage-free, so we’re also working on knocking that out – even though we know it’s more of an emotional decision than a financial one. Now if only we could escape to the woods one day. Haha! Mr. MMM would love that! 🙂

  9. Sherikr says:

    One thought on 529s. These are a great option if you have family members who are interested in gifting funds to your children for college. This is a primary reason why we opened up a 529. We were grateful that the grandparents wanted to help with college, and setting up a 529 assured our family of the purpose of the funds. 😀

  10. Rob says:

    Great post! I’ve been following your and JL Collins posts and they have really helped me learn more as well as simplify my finances. I have been wondering if the investment account is a good place to build up a down payment for a house? I’m finally reaching the point where I can start saving for that and I have wondered about that one for a while. Thanks for any advice and thanks for writing such great posts!

    • SharonW says:

      I used an investment account for my down payment savings, and it worked out well. Your time horizon is the key factor. Two things to consider: (1) How long will you be saving? I was on a 10 year plan, but finished in 8 because I got lucky and the markets returned more than expected. I think that anything less than 5 years should not be invested. (2) Can you wait out a market downturn near the end of your plan? Otherwise you may find you lost money, but if you can hold off buying once you’ve saved enough in the event of a market crash, no worries.

  11. Sandy says:

    Great post! Two comments/additions:
    1. You might want to also discuss the benefits of an HSA. It’s the only triple-tax-advantaged investment option that is tax free going in, tax free on earnings, and tax free when you take it out. The caveats: you must have a high-deductible health plan to qualify for an HSA, and the funds must be used for allowed healthcare expenses. It’s a great option for some people, especially those who can afford to pay their high deductibles now and use the money later, during retirement.
    2. The contribution limit for 401Ks is higher for those over 50; they can contribute an additional $6,000 for a total of $24,000.

    • Nora says:

      Agreed – I love my HSA. It really helps and I can put money in now and save it for the future, even if it is next year. If you plan to have kids, this is a great way to save up for those large future deductibles. I’m also saving for Lasik that way. My HSA also invests once I have enough in there.

      • Mrs. Frugalwoods says:

        Great point on HSAs! The key is to ensure that everything you want to use them for will be covered and to make sure you’ll actually use all the money you put in. Thanks for bringing them up :)!

        • Alexandria says:

          I think you are confusing FSA and HSA. You do not need to use up the money in a HSA. It’s a great tax shelter and the money can be used eventually for retirement (is a lot like a 401k) if you do not need for medical expenses.

  12. VERY thorough run down of how to handle money. I think the simplistic approach suits you and sounds great. I would say you definitely downplayed the point of investing in a 401(k). Especially if your employer is matching! Everyone should take full advantage of this.

  13. Holly says:

    Good advice all around! I fortunately made some good decisions and only a few bad ones when I was younger and now as a recent retiree am enjoying the benefits. One comment, though, if you are in a place where you intend to spend the rest of your life, it is extremely beneficial to have your mortgage paid off before retirement. Without a mortgage, my bare bones budget for everything ( including insurance, taxes, health insurance, the works) is just about $1,000 / month, which means that even with modest retirement income there is room for some choices beyond bare bones. If I had to add a mortgage to that amount, I would be struggling. Now, whatever happens, I have a place to live.

  14. Cindy says:

    Gorgeous sunrise !

  15. FrugalCat says:

    I said it many years ago and it’s still true- Money is like a garden. Yeah, you do have to plant it, water it and weed it, but most of the time, you just have to LET IT GROW!

  16. Nora says:

    I love money markets for my emergency fund. It is unlikely I will need cash – more likely that I need liquid funds. I can easily transfer them to my checking account and withdraw the cash or put the amount on my credit card, then pay it right off. My Ally online savings has 1% interest (better than checking) and the only limit is 6 transactions per month. We typically only deposit money in and transfer to checking if we need some of it.

    One other thought on index funds are short term vs. long term capital gains taxes. If you hold your investments longer, you reduce taxes!

  17. K says:

    Great to see Babywoods standing ! Put me in the no-mortgage crowd. We owned our first condo outright and sold it to buy a house outright.
    Day 24 of UFC, got my grocery bill down to $75/week, pretty cool. Can’t wait to add it all up and compare to prior months expenditures–very eye opening–I thought I was frugal but now……woot!

  18. Jay says:

    I have my IRA with a financial adviser and I need to move it from his care to mine. I guess you can invest in index funds with an IRA. Something I need to look into. Thanks for the post

  19. Johanna says:

    Hi, unfortunately a lot of your options are not available in Germany (personal capital, 401K, …) and from my viewpoint the taxes on brokering aka buying/selling stocks are higher here. Even though I would like to try putting (some) of our money into index funds, my husband is against it. Here a lot of people lost money when the big dot.com and housing bubble burst and he says he doesn’t want to lose half of his money if the stock market crashes when we need to take money out of the stock market because of retirement. Any tipps on how to bring him around? Any tipps from fellow german readers on what to do or not to do here? I have a Riesterrente and an old Bausparvertrag that’s filling up slowly, as well as some money on a Tagesgeldkonto which yields 0.2% interest/year at the moment….
    Sad times for risk adverse frugalists…
    Greetings,
    Johanna

    • Julie says:

      Hi Johanna,
      I’m not German, but my husband is and we have a bit of money in Germany. I think you are right that the taxes in buying and selling (and capital gains) are higher in Germany 🙁
      I also know that my husband was not so keen to invest in the stock market and took some persuading (I developed a financial plan and showed it to him, and also we started just putting a little in until he felt more comfortable, good luck!).
      We use flatex for buying and selling ETF on the stock exchange (always make sure that they are domiciled in German as you can lose money on taxes there, this is a good website for looking for etf: https://www.justetf.com/de-en/find-etf.html)
      Here is a blog that provides a list of other financial independence blogs in Germany (a lot are in German which is not so great for me because my German skills are sub par..)
      http://whatlifecouldbe.eu/german-financial-independence-blogs/
      I’m sure they will have much more information on the best options in Germany (I just wish I could understand more of them 🙂

  20. Heather says:

    Just signed up for Personal Capital – after fighting with a Google spreadsheet attempt – and this is amazing!!

    • Mrs. Frugalwoods says:

      Yay! So glad you like it! I fought with my own spreadsheets for years and, since Personal Capital is free, I think it’s a great solution 🙂

  21. Great primer Mrs. FrugalWoods! That’s some solid advice on financial advisors — most of them are not fiduciaries and lead their clients into very poor investments.

    I’m a big fan of fstvx like you guys are. Fidelity has been a decent place for us to store our money for almost 15 years now.

  22. Larz says:

    I’m very curious about your decision to avoid a 529. With such a high savings rate, I would assume you exhaust your 401k/IRA/Roth contributions already with money to spare. If that’s the case (huge IF), it seems like you would definitely benefit from the tax free growth of a 529 for college savings. And precisely because you have 17 years before you need the money, this is exactly the time you benefit the most thanks to the power of compounding.

    Further, Vanguard funds are used for the Iowa 529 plan. Although the 529 tacks on additional expense, you can still get access to total US stock market and total US bond market ETFs for .20% expense ratios. You have no obligation to use the 529 of the state you live in. I don’t.

    Caveat – if you are not maxing your Roth contributions, the Roth seems to be a more compelling vehicle for college savings than the 529. All the same benefits, but with the added freedom to be used for your own retirement if you accidentally overfund it or Babywoods joins the circus in lieu of college. 🙂

    • Mrs. Frugalwoods says:

      For us it’s a decision to keep our extra money in index funds where it can (eventually) be used for anything. I’m not a huge fan of the fact that a 529 can only be used for one thing. However, we might one day open one for her. There’s nothing inherently wrong with 529s, the point I’m driving at is that a 529 is not the sole vehicle to utilize in saving for college. And, there’s no federal deduction at the point of contribution, which is where and when we personally would be looking for tax savings (for example, that’s why we opened up a Donor Advised Fund in 2016).

  23. Michelle says:

    Mrs. FW, or anyone else reading, do you have any tips on reconciling conflict on where charitable giving should go? My spouse and I do not disagree on how much should be given, just on where it is going. He wants to give more to one specific organization (that I am not entirely comfortable with), while I would prefer to spread it more equitably among a few charities that we feel passionate about. He also makes more money that I do, so I feel like I have less of a say.

    • Mrs. Frugalwoods says:

      Hi Michelle–I delve into this in greater depth in my post on charitable giving, but basically, Mr. FW and I each get to pick our own charity to support and then we jointly select several to support. And, for what it’s worth, we’ve never operated under the system of “whoever makes more gets more say.” Mr. FW and I have combined finances, which means all of our decisions are 50/50. Some years I make more, some years he makes more. Doesn’t change who has more of a say–it’s both of our money, so we are equal partners in deciding how to spend it. Hope this helps :)!

  24. Melina says:

    Thanks for taking the time to share this! With regards to Babywoods, when you say you’ll stay the course with the high savings rate, do you mean the index funds? Is the account in her name (not sure if there are tax benefits to this) or simply mentally earmarked in your account with Mr. FW? I apologize in advance if this is a silly question to ask. We are not FI, so I want to ensure future funds are properly allocated.
    I’ve heavily debated the 529 for our kids. Not to sound like a downer, but most of us have expectations that our children will value education and pursue further education into college or grad school…but that’s not always the case. I believe they can even be applied towards trade/specialty schools, but not even then there are no guarantees that formal education is the path our kids will pursue. Does anyone have any insight on this? It scares me to be locked into something like a 529 that may not pan out as I planned. My kids are still young (4 and 2) but for now they each have a savings account in their names. It’s an online savings account with Ally, but 1% interest rates aren’t much to get excited about.

    • Julia says:

      My husband and I looked into options when our now almost 2 yr old was born. We were also hesitant about using a 529 in case he decides not to pursue higher education. We found that a custodial account was a good fit for us- it can be invested in the stock market and does not have to be used for education purposes. I believe the money will be transferred into his name when he turns 18 (or 21?? I can’t remember the details.). Might be worth checking out for you!

    • Mrs. Frugalwoods says:

      Hi Melina! Not a silly question at all :). Yes, all of our “extra” money is invested in low-fee index funds. We don’t segregate or earmark our accounts simply because it’s easier not to. For folks who are tempted to spend money when they see it all in one big chunk, separate accounts might make sense from a psychological perspective. However, there’s no financial reason to have separate accounts unless it’s a 529 or other specifically tax-advantaged vehicle. Or, if you’re trying to differentiate between the money each kid receives from grandparents or something like that, then separate accounts might be helpful. And, I agree with you on the 529s–I don’t love that they can only be used for higher education. Hope this helps!

    • Sarah C says:

      There’s a type of account called UGMA or UTMA (Uniform Gifts to Minors Act (UGMA) or Uniform Transfers to Minors Act (UTMA) that are custodial accounts opened in the child’s name, to which both parents and other can contribute – and they can be used by the kid for anything, not just for higher education (when they are old enough to access the funds). You might look into that, Melina.

      • mary w says:

        As a general rule I would suggest avoiding UGMA or similar vehicles. As Sarah noted, they become the childs money at 18 (21 in some cases, I think) to do anything with. It’s hard to look at a small child and think that they could become a drug addict or want to finance their BFs band tour, but it does happen. The money is theirs.

        If not using a 529 (that you own) keep the money in your name.

  25. Laurie says:

    All of these are exceedingly well thought out points.
    The only thing we do slightly differently, is that my husband will buy extra stocks when they ‘go on sale’. For example, the Brexit crash was a moment to buy up what we could afford at the time. Turned out to be a great time for us.

    Otherwise we simply put a pre-determined amount in monthly and let the markets sway in the breeze. Long term thinking!
    (We are both extremely fortunate (!) to have a ‘defined benefit plan’ through our employer. They are rare, I think, and we are going to be sure to hold on to them tight!)

  26. Lisa says:

    I currently have a Roth IRA at Vanguard (VTSMX, planning to convert to VTSAX later this year when I hit $10k) and a 403(b) through my employer with TIAA. The TIAA is currently in a lifecycle fund, and I think it might be better to move it to a mutual fund or ETF. Does anyone know of something comparable to VTSAX in the TIAA portfolio?

    • Erin says:

      Lisa, I’m in the same boat as you. The closest I could find that was offered in my employer’s plan was VINIX (Vanguard Institutional Index Fund Institutional Shares) with a super low expense ratio of 0.04%. Hope this helps!

  27. Debbi says:

    We had a 529 and a custodial investment account for our first child but are not doing this for our second child because of its negative impact on financial aid eligibility. When you complete the FAFSA, the financial aid folks assume (reasonably) that one fourth of the money in the 529 account and in any account in your child’s name is available each year for college. If you save in your name, they assume that a much smaller percentage of the funds are available each year for college. This increases your eligibility for financial aid, including some primarily merit based scholarships. Of course, my recommendation on this is contingent on being confident that funds you have saved in your own name will not be used by you to go to Hawaiia every year for vacation, rather than to finance your child’s post-high school education. Also, if you have a custodial account in your child’s name, you are legally required to turn it over to them at 18. If you save in your name and your child’s scholarships are so awesome that you have money left over after college (we were in this lovely situation), you get to decide when your child is mature enough to handle a small windfall wisely. I have known a few children with this kind of self-control at 18 but most take a bit longer to get there. Finally, some children choose paths that do not involve college. Saving in your name gives you the freedom to help you child with whatever worthy endeavor they choose. I am not a financial advisor, so feel free to ignore me as you see fit!

  28. Rebecca says:

    My husband and I have been swiftly paying down our mortgage in the past couple years (last year we literally put $20,000+ extra into the principal), and it’s become so automatic than any extra cash at the end of each months gets funneled into the mortgage that I find myself struggling with this advice to invest it instead. I know it makes rational sense, especially since the interest rate on our mortgage is less than 5%… but even though I know how to set up an investment account (I already set up my own IRA with Vanguard and this would be very similar), it’s hard somehow to make that jump when putting everything into the mortgage is so simple and easy and it feels so good to see the amount we owe going down and down. Anyone have thoughts on this?

    • RR says:

      Mortgage interest payments are also tax deductible. In fact, taxpayers can deduct the interest paid on first and second mortgages up to $1,000,000 in mortgage debt (the limit is $500,000 if married and filing separately).

    • katscratch says:

      For myself personally, with just my salary to rely on and at my current net worth, the peace of mind would be well worth the financial hit to my investment portfolio.

      I would feel very differently if I were already financially independent, however- in that case I would invest the additional funds instead. Hopefully over the next 10 years I’ll get to test that theory 😉

  29. Katie says:

    If my employer does not match any contribution to my 403b, should I still have one? Or would it be better to invest that money somewhere else.

    • Mrs. Frugalwoods says:

      Hi Katie–this is a good question and it depends on your income and your marginal tax rate. However, in almost all situations, the tax benefit of the 403b (matching funds or not) will be the right choice.

  30. B. Lyman says:

    My husband will retire in a year.at age 66 so my perspective is a lot different than that of people who are Mr. and Mrs. Frugalwoods ages. We’re pretty well prepared but not as well as they are.. Mr. and Mrs. Fruglewoods, the two of you are exceptional and I and many others are in awe of you!

    The first issue is the amount of interest a homeowner will pay over the life of the loan. You can end up paying almost as much in interest as you will on the principle. For example, with a 30 year, $100K mortgage at 4% you would end up paying almost $72K in interest. (http://www.amortization-calc.com/) I’d rather spend that money on something I want or need instead of making a bank richer. If you’re mortgage free you will never be kicked out of your house as long as you pay your property taxes. You might not be able to afford rent if you lose your home. Even with a good emergency fund set up a person can be out of work for a long time–a year or two or even longer. (My husband was out of work or underemployed for 21/2 years and then a student for another 2 1/2 years–so 5 years of poorness. My salary at the time barely covered our expenses). Stock market returns might be negative for years so the interest saved on a paid off mortgage could represent a pretty good rate of return.

    During the stock market boom of the 1990s people took out loans to buy stocks because they were 100% confident that the rate of return would be so great that borrowing money to buy them would be a smart financial strategy. The favored vehicle was a home equity line of credit. The stock market crashed when the dot.com bubble burst in 1999 and then 9/11 hit and lots of people found themselves in big trouble with upside down mortgages and worthless stocks. It was similar to the 1920s when people bought stocks on a “margin.”

    In spite of what I’ve written I’m a big believer in investing in stocks. We’ve always contributed enough to my husband’s 401k to get the matching funds from his employer. Our contributions were invested very aggressively for decades–100% into stock funds which is a smart thing to do when you’re decades away from retirement. We changed to a more conservative mix of stocks and bonds about 4 years ago in preparation for retirement.

    (Make sure you have a Roth401k so you don’t have to pay taxes on your withdrawals like you will have to on a traditional 401k.)

    No person can make assumptions about the future. It’s foolhardy to do so because life rarely unrolls as planned. The one constant in life is that unforeseen and unavoidable events will happen. Paying off a mortgage is 100% certain and that’s why I think it’s a worthy goal to do so. We have a good-sized mortgage and it makes my stomach clench whenever I think of it. We’re going to pay it off as soon as we can. What we’ll do is put the money into savings until we reach the amount we’ll need to pay off the mortgage so the money’s liquid. I guess this is what Mrs. Frugalwoods means by “it’s psychological” when it comes to the comfort level of having a mortgage.

    For me, when it comes to mortgage interest, Ben Franklin is right: “A penny saved is a penny earned.”

  31. Sarah C says:

    Just a quick warning to those interested in using Personal Capital: it does not allow you to download transactions older than 3 months, so if you’re looking to organize all of your spending from a previous year, or something like that – look elsewhere.

  32. Excellent post! I also ascribe to the “Keep It Simple, Silly” method, although I do have 529’s for my three boys.
    -401k
    -IRA’s, after tax investments, etc. are all at Vanguard in index funds
    -Checking and savings accounts
    -529’s with my state (I live in CT – a state famous for its taxes) and Vanguard

    I do like having targeted savings accounts, but that’s a personal choice. I definitely see how many folks would be fine keeping everything together. For short-term goals I have multiple savings accounts with the same company, where opening a new account takes just minutes. Keeping it simple makes less to track, and dollar cost averaging into index funds is the way to go!

  33. What a helpful and informative post! And I am loving these longer posts, keep them coming!

    In Australia you can have what is called an offset account against your mortgage (no fee). This means any money you have in there is offset against your mortgage when calculating interest. However, the offset account is your account, so you can withdraw and add to it like any regular transaction account. This gives us the best of both worlds- you can pay your mortgage “down” by filling up the offset account but the money is still liquid to you in the event you need it.

    That’s what we’re doing- “paying off” our mortgage by filling the offset account. We want the money available just in case an emergency occurs or, alternatively, we can take advantage of another investment opportunity. You can only fix mortgage rates in Australia for about 5 years, so we’re protecting ourselves against interest rate rises (currently paying 4.35% on our mortgage) by filling up that offset before they rise too high.

  34. This is all very reasonable. I like your style.

  35. andrea says:

    Hi Liz, a question for you: If your mortgage was a revenue generating investment, would you take the same approach to paying it off as you do with your residential property or would you try to pay it off faster?
    Thanks!
    Andrea

    • Mrs. Frugalwoods says:

      Hi Andrea-
      I’m not sure I understand the question. So our rental property is revenue generating and we are not paying it off ahead of schedule. Our residential property is not revenue generating (since we live there) and we are similarly not paying it off ahead of schedule. The rationale for this is that our money is better utilized by being invested, as opposed to tied up in real estate. It adds diversification and reduces risk to hold our mortgages. Does this answer your question? Let me know if not :)!

  36. Florence says:

    I just finally signed up for Personal Capital and downloaded the app. I love it. So easy, so nice to have everything in one place. It also is a great reality check for me to see my spending there.

    The only problem I have with it is probably not really a problem with the app, but with how we deal with our money in general. When my SO and I buy shared goods like groceries, I usually put it on my credit card to get the points, and she pays me half of the amount through Venmo.

    The Venmo then shows up as “income” for me in Personal Capital, which is cool I suppose, but it also shows the full grocery amounts…basically it looks like I’m earning more than I do, and also spending twice as much as I do for groceries and things. Not sure how to organize this so that I can easily see how much I actually spent! Though, I suppose once we combine finances this won’t even be an issue anymore… 🙂

    • Jen says:

      We have a lot of expenses like this (ie: work expenses that later get reimbursed, sharing a cell phone bill with friends who reimburse us for
      their portion, rebates…). It does really throw off both our income and expenses by thousands of dollars per year in PC. Personal Capital also doesn’t let you “split” transactions (ie: $100.00 Amazon bill is a mix of gifts, toiletries, household and pet, but I have to choose only one category for it). Mint.com has both of those features, plus excellent
      Budgeting tools to help keep track of money “buckets”- no need for separate accounts. Of course Personal Capital is much better than Mint for investing and retirement planning (although there are all the annoying phone calls and emails…). We end up using both Mint and Personal Capital – Mint for more accurate tracking of spendin, budgeting and savings categories and Personal Capital for investing and retirement planning.

  37. Katie says:

    Totally, 100% off topic, but do you still have the wildlife camera? I really enjoy references to the random sightings. It’s what I would like to imagine the Vermonter life is entirely comprised of – beautiful views of woods, wildlife spottings, and of course, maple syrup.

    • Mrs. Frugalwoods says:

      We do :)! I’ll try to remember to include photos of creatures in next month’s “This Month On The Homestead.” We’ve had foxes, coyotes, deer and more this winter. And, you’re pretty much correct about the Vermont life!

  38. Kam says:

    Excellent post! I will add one more thing about the age one can withdraw money penalty free from a 401k. There is a way to withdraw money in a 401k without penalty at age 55 or later. It’s called the “rule of 55”. Here’s the rule: you can withdraw money from the 401k of your current employer without penalty if you quit/get fired/or retire from the employer in the year you turn 55. Of course, you can also do this at age 56, etc. This does not apply to an IRA.

  39. SBeth says:

    Question regarding using Personal Capital…since one links all of their account with the system, are you concerned about ID Theft? As a victim of ID Theft, I am very wary of exposure. Thanks! P.S. Love your blogs!

    • Mrs. Frugalwoods says:

      Ahh, yes, a good question! So here’s my take: for us, it’s a cost/benefit trade-off to use online banking and Personal Capital–it makes our lives so much easier that the nominal risk is worth it to us. Personal Capital only has “read access” to your accounts, so a hacker wouldn’t be able to do anything nefarious to your bank accounts via their site. At the end of the day, we’re all in much greater danger of having a credit card stolen when we make a purchase at a store than with the modern online banking system. In our experience, the increased visibility of having our accounts all in one place is more of a deterrent to having our money stolen because we notice wrong charges more quickly and can report them to our cc company immediately. And, for what it’s worth, Mr. FW is actually a software engineer who focuses on internet security in his job and he’s happy with how Personal Capital protects user information. But, you’ve gotta do what you’re comfortable with–different strokes for everyone!

  40. Emily says:

    Love the post (and the blog) Ms. FW! Question for you and others about paying off all non-mortgage debt: what do you think about holding on to student debt that has a locked-in low interest rate (3.65%, 30 year term). I have about 40k in federal student loans (law school). We could get aggressive and start paying it down dramatically (knocking it out in about two years), but that would mean paying down debt instead of investing that money. Given our AGI, we can currently deduct interest paid on the student debt, so I’ve leaned towards treating it like a mortgage and just holding on to it. Thoughts?

    • Mrs. Frugalwoods says:

      Hi Emily, great question! I think it depends on your income level. On one hand, 3.65% for 30 years is nice and low. On the other hand, $40K is not a huge amount of money–depending on your income. If you could pay this off in a relatively short, aggressive burst (through extreme frugality), then I’d pay it off. If not? Then hold onto it. This is a generalization, but, any debt that’s equal to or less your annual income you should be able to pay off in a relatively short period of time. I hope this helps! And, others may have other opinions to offer as well :).

      • Emily says:

        Thanks, Ms. FW!

        • Maggie says:

          I was going to have a similar question about my 1.9% interest rate car loan, with $20,000 outstanding (far far less than my annual income!), thinking the inflation hedge you mentioned might apply. Do you think short burst payoff or hold because the rate is so much lower than inflation?

  41. Great writeup with some great simple presentation of complex ideas to get people started. I’ll take a slightly counter position on financial advisors. I still recommend not using them unless they are fee only, or even better a one time consultation. But some people need that initial kick in the pants to get started. Thats what you should be paying for. It depends on the type of person your are. Its like all those fin tech tools around siphoning off a few cents of each purchase to savings. It’s a bad idea as a purely financial consideration. However some people just need that one time coach or that short term prop to help them develop those long term habits.

  42. Ashley says:

    Hey Liz! I am loving the challenge. I know you’ve gotten this before, but have you seen the Dave Ramsey Financial advice? Yours is so similar, with a few exceptions like using credit cards for the rewards, paying off your house early and paying off debt based on the amount owed (smallest to largest) simply for the behavior aspect of it all. I have learned so much from Dave, and a lot from you, too. You guys are inspiring! I wish I would have started a little earlier like you all did, but I’m still so thankful I have 20+ years ahead of me before retirement age.

  43. This is the way, keep it nice and simple and watch it grow. I had 3 different investments each with different fees and charges eating into any gains. Its time to simplify life and just watch it grow.
    Though I think my finances are to simple that my day to day spending is not optimal as we don’t use credit cards for any purchase as we don’t have much of the rewards that you American’s get or have the credit score issue. We budget using cash every week for our spending so there is a lot of leakage that is not managed properly, I don’t have credit card reports detailing how and why we spend. This is something I am looking to update in 2017.

    Love your blog and it has inspired a semi rural move for us, from 282sm block to 1600sm. Nothing like your acreage but more space for us!

  44. Great post, Frugalwoods!

    I find that automating most of my bills or even transfers help me as the money that I can spend would already be transferred into my investment account. What you “don’t see”, you can’t spend!

  45. FDM says:

    Awesome post, our finances are on both ends of the spectrum, our budget is way to simplified that we have a lot of holes in at and our investments are to complex that we make it hard for ourselves. My first up 2017 goal is simplify it all and look for those holes to plug.

    Appreciate the blog, you have been an inspiration for our move to a more rural setting this year!

  46. So many fantastic points in this article I don’t even know where to begin! Let’s start at the top. I completely agree with your thoughts on financial advisors and wrote about this on my blog a few months ago. They charge high fees and most of them are just using software programs to determine your appropriate asset allocation. The same programs that are now available for free through tools like Personal Capital. They also push the products that they receive nice bonuses on, like whole life insurance. Don’t make investing harder than it is. Invest in low cost index funds that track the market, and invest on a regular basis like everytime you get paid.

    Also, debt has become such a negative word in the personal finance community. There are so many blogs out there championing paying off debt for the psychological boost it provides. I’m not big on this. I think growing your investments which will increase your net worth at a higher rate will provide just as much or more psychological boost for most people. It just doesn’t make sense when people plow money into a 3% mortgage when the market is returning double digits. They’re missing out on a lot of growth.

    And finally, use credit cards! There are so many benefits to using credit cards. It’s easier to track your expenses. It’s safer than carrying cash in your wallet as the credit card companies will refund any fraudulent charges. And you earn rewards! We put everything possible on our credit cards and pay the bill in full each month. In the last 7 years or so, I’ve earned enough points through sign up bonuses and normal spending to pay for the materials for a new roof, and to completely fund a 9 day trip to Hawaii. Don’t give up free money.

    Fantastic article. So many other good points, but I’ll stop here 🙂 Thanks for sharing!

  47. Our money management styles are extremely similar with the one exception I choose to use Vanguard. One comment on the 529 is if Babywoods goes to college and gets scholarships, I believe you are able to just pull out a certain amount from the 529 for that reason. Just another thing to think about when considering them. Take care!

  48. I also don’t like to complicate my finances. I’m not frugal, but I am a minimalist, so I’ve been able to really create a nice financial situation for myself, without any depravation, or much effort… or so it seems. 🙂

  49. Tracking our spending and sticking to a budget are our crucial points to making sure we manage our money effectively. We have weekly budget meetings and make sure we are on track with our spending

  50. Stacey says:

    You recommend Personal Capital for budgeting and I would really love to use it but my husband and I are very uneasy with putting in so much of ourselves online. Can you recommend a software that is an equivalent that we can buy and load into our computers so ease some of our fears? My searches resulted in very few choices and the old fallback Quicken is apparently not so great anymore from what I’ve read.

    • Mrs. Frugalwoods says:

      So, I don’t recommend software for the simple reason that it’s typically not free. However, if you are interested in going that route, I’m sure there are good options out there. And, for what it’s worth, here’s my take on internet security: for us, it’s a cost/benefit trade-off to use online banking and Personal Capital–it makes our lives so much easier (and is free) that the nominal risk is worth it to us. Personal Capital only has “read access” to your accounts, so a hacker wouldn’t be able to do anything nefarious to your bank accounts via their site. At the end of the day, we’re all in much greater danger of having a credit card stolen when we make a purchase at a store than with the modern online banking system. In our experience, the increased visibility of having our accounts all in one place is more of a deterrent to having our money stolen because we notice wrong charges more quickly and can report them to our cc company immediately. And, for what it’s worth, Mr. FW is actually a software engineer who focuses on internet security in his job and he’s happy with how Personal Capital protects user information. But, you’ve gotta do what you’re comfortable with–different strokes for everyone!

  51. Cindy Matsumoto says:

    Wonderful informational points! . The only comment I wanted to make was about possibly mentioning credit cards and bank accounts that do not fund big banks. I know this is not a political blog, and I do not want to write anything controversial, but mentioning credit cards like the one from Sierra Club that gives back to environmental issues and uses a responsible banking institution is a great way of not only giving back to charity without feeling any economic pain and also feeling good that our money is used without hurting others. I am in no way affiliated with the card, besides using it. I just think its a great cause. We use a credit union and our Sierra Card for everything. Thank you for being a genuinely positive and inspiring blogger!

    • Cindy, thanks for posting this! I’d never heard of the Sierra Club credit card. I’ve been thinking about moving all of my banking away from big banks (I already do my main banking with my local credit unions, but have credit cards and a high-interest savings account with big banks), and the possibility of using the Sierra Club card is taking me one more step in the right direction.

  52. Something else that we often forget about with House mortgages is that inflation also eats away at the value of the principal which is a benefit too. Paying off a home too quickly will negate the positive benefit of inflation reducing the value of your principal. Just a thought.

  53. Megan says:

    Would your investment strategy be different if you were fully retired and needing to live off of your savings, rather than on your wages and rental income stream? My mother has been looking for advice, and I’m not sure the best to give!

  54. Kam says:

    Not sure it’s been commented on yet or not, but one should consider their investing their “emergency fund” in a Roth vehicle (401k or IRA). Contributions to a Roth can be withdrawn at any age without penalty. This way, your “emergency fund” money isn’t sitting in some lowly money market account earning below the inflation rate.

    Of course, there is exposure to additional risk if your Roth is heavily invested in stocks. Still, it’s my opinion that the risk is worth the reward, but your risk tolerance may be less than mine. For many people on this blog, I suspect there is additional money outside of the “emergency fund” that could be tapped in case of a true emergency that can mitigate this risk.

  55. Chadnudj says:

    One quibble, and it’s with this:
    “If your option is either bankruptcy or taking money out of your 401k, then it might be worth it to pay the penalty and liquidate your 401k.”

    NO! PLEASE DO NOT DO THIS!

    If, God forbid, your finances get to a state where you are considering bankruptcy, DO NOT liquidate or touch your 401k or IRA accounts, because those accounts have bankruptcy protection! The LAST thing you should do if you’re facing bankruptcy is liquidate 401k/IRA accounts.

    Instead, declare bankruptcy. It will be terrible and ruin your credit, but it will discharge your debts. You’ll come out of the process with your debts cleared AND your 401k/IRA still sitting there, and (hopefully) with a better financial plan going forward.

  56. Megan says:

    Where and how do you save for larger purchases – your used cars, large equipment for the homestead, etc? I understand that you keep 4 months of cash liquid in a checking account, but do you have a separate account set aside to save for these items?

    • Mrs. Frugalwoods says:

      The rest of our money is invested in the stock market–in the low-fee index funds I mentioned.

      • Sophie says:

        To ask a follow-up (and potentially dumb!) question, when you need some money liquidated to make that large purchase (e.g., a car, a down payment), do you simply “transfer” money from the index fund into checking? What are the fees like on transactions like this? We’re looking to boost our down payment savings with a more aggressive approach, but I feel quite clueless about how you actually access this money again in the (relatively – 5-8 years) short term. Thank you!

        • Mrs. Frugalwoods says:

          That’s a great question! Not dumb at all! We use Fidelity’s no transaction fee funds, which means it doesn’t cost us anything to liquidate stocks. So, if we need to make a large purchase (like you noted: a car or a downpayment), we can simply liquidate stock and transfer it into our checking account for free. That being said, when we know that a big purchase is on the horizon, we’ll usually just stop transferring money into our index funds for a few months and let our savings account grow. Then, we make our big purchase and transfer any excess into our index funds. We consider our investments a very long term proposition, so we generally don’t liquidate them. That being said, there’s no penalty or fee for doing so–hence, if we had a very expensive and unexpected emergency, we could liquidate stock immediately and access that cash. I hope this helps!

  57. Not Karen says:

    Two questions/thoughts:

    1) Regarding credit card rewards, I’ve read a lot of articles about people supposedly earning free trips through credit card rewards and sign-on bonuses, but I don’t understand how they actually accomplish this as all the rewards and bonuses I see from credit card websites have high spending requirements. For instance, one was advertising a bonus that required $1,000/month spending on the card for three months. My regular spending on things that can be put on credit is only $500-600. Am I missing something, or are these people just spending way more than me regularly (on what??)?

    2) Do you think buying a house should be a goal (financially speaking) for everyone, or is being a renter for life a financially sound option?

    • Miranda says:

      I’ve used sign up bonuses a lot. Sometimes I’ll wait to open a new card until I know a big purchase is coming up, like braces or a used car. Other times I’ll prepay for things. I’ve paid for 6 months of electricity or health insurance, for example. I’ve also bought gift cards for things I frequently use, like the grocery store or gas station.

      As for your second question, whether or not to buy a home depends on where you live and your situation. NY Times has a great calculator that takes into account appreciation, maintenance, taxes, rent increases, etc.

      Personally I rent. I’m single, and there are no homes in my area under 800 square feet. What I pay for rent is less than what I would pay for a mortgage, not to mention the lower utility bills and taxes for a smaller space. I invest what I save by renting. I’ve done the math and for me, in the long term, I’ll come out ahead this way.

    • Mrs. Frugalwoods says:

      Miranda has good advice! So, for credit cards, it just depends on what rewards you’re trying to earn and how much you spend. Our cards don’t have spending requirements (because we’d never meet them). My friend Brad writes a ton about maximizing credit card usage, and you can see his list of recommend cards here.

      As far as buying a house goes, this is entirely dependent upon many different factors: where you live, how much money you make, how long you plan to live there, what your rent costs, what the housing market’s like where you live, how handy you are… and the list goes on. It’s not as though buying a house is a 100% great idea or 100% bad idea for everyone. For some folks, lifelong renting is the best financial choice; for others, buying a home is. I have this post on the topic, which should give you some ideas of the questions to ask in making this decision. I hope this helps :)!

  58. Amanda says:

    Since I’m self-employed too, wondering what the advantages of having a solo 401k vs. an IRA. I settled on an IRA last year but wondering what your thoughts are if you don’t mind sharing. Thanks!

  59. Becky says:

    I’d like to know the answer to Amanda’s question as well. My husband is self-employed and I am a stay at home mom. I have my old 401k from my working days, and trying to decide if it would be better to rollover into an IRA. My husband doesn’t have anything of the sort…Yet. Gasp, I know!

  60. Rach says:

    Dear Frugals and others, Placing this question here for those who might have a great opinion…
    Our family is being offered a large financial gift and can’t easily decide if we should:
    a) use it in total to pay off large debts and keep saving toward the purchasing a home (taking ages).
    b) use half the money to pay off some debts (those with highest interest rates first) and half the money toward a house straightaway.
    I understand a lot of deciding has to do with our personal situation and that can’t all be dished out here. But here’s a picture: we stress about the debt, it’s manageable but holding us back from saving, but also stress about staying longer in our current housing situation.
    Great thanks to all!

  61. The less you spend, the less you withdraw, the less you tinker with your investments–and the more money you plough into them–the better off you’ll be.

    Absolutely. We are typically our own worst enemy. If we just stay out of our way, we’ll do much better.

    Pick a simple broad market index fund. Set up automatic contributions. Leave it alone. Wake up 20 years later lots!

  62. Christy says:

    Fab post, Mrs Frugalwoods! Like you, we bought our first home with the intention of eventually turning it into a rental. We’ve been focused on slaying our mortgage as quickly as possible, and have $50k in a savings account offsetting our mortgage (we’re based in NZ) reducing our interest costs. While the debt-hating part of my brain really wants to bite the bullet and transfer that money directly onto the loan to bring the debt figure down, another part didn’t want to lose that sense of reassurance that ready access to such a fund has should an unforeseen situation arise. Your post has offered a really refreshing viewpoint.. so much so that there are several product disclosures in front of me for different index funds offerings, and the highlighter is out to start reviewing! Thanks a bunch!

  63. This is so comprehensive, I love it! A lot of people have their brokerage accounts with Vanguard and they seem to have their own unofficial dedicated fan club. They’re great but it’s cool to see someone using something different like Fidelity.

    I still need to get on the Personal Capital train…

  64. I must say that this is a terrific Personal Finance 101 blog post that all young people, and some older people, should absolutely read. Everyone has their own feelings about the particulars – how much to store in the emergency fund, what percentage of your assets should be liquid, etc.
    But we can all agree that if more people had the basics laid out here, the world economy would be on more solid ground.

  65. Christine says:

    Hmmm…. Stock market vs. paying off the mortgage.

    Financial Independence for me is about security. Having a paid off house is security.

    The stock market is the potential of making money and the potential of losing money.
    Though the historic return on the stock market is 7%, it is when you personally are in.
    I know people who had to sideline all their retirement plans because the market tanked in 2008. They thought they had this “nest egg” in the market that they were about ready to withdraw on yearly, and suddenly that nest egg wasn’t anywhere near what they thought it was and it takes a long time to recover when you had your heart on retiring.

    That 4 month emergency fund becomes awful puny when you are out of work for a year or two or even longer. Even in the tech industry. When companies aren’t doing well or simply in fear mode – they simply do not hire.

    My husband was laid off and our house was paid for. No fear of losing everything we worked so hard for.
    Remember a lot of people paid their mortgages for many years before losing their homes. All that money down the tubes.

    We have watched our investments plummet with everyone else, but since we were secure, we could ride it out and not sell “low”. We’ve had to ride it out multiple times – remember 2001- tech boom over? Actually when hubby was laid off, we took the kids out of school, packed up the camper and travelled for a month. That is security.

    “It would take 27 years for the stock market to recover and surpass its pre-crash level” – The Great Depression.

    Of course, one could hedge one’s bets and do both.

    If you pay only ONE extra payment per year on your mortgage, you save a ton in interest and shave many years off your loan. You’ll have to do the math.

  66. MP says:

    Hi there,

    I think we have the same tastes as yours for countryside and the freedom feeling it brings!

    I loved your pictures! The article too, though 😉

    I may ping you for a Mustachian visit when we visit our beloved (and close to Vermont) Quebec next time ^^

    Until then, enjoy your little paradise guys!

    Cheers from Switzerland,
    MP

  67. Heather says:

    Thank you for this! I have a question – I have a 401a with ICMA Retirement Corp. My investment options include a handful of index funds (and they all have the lowest estimated expenses – ranging from 0.18% to 0.26%). One is classified as a “Bond Fund”, three are U.S. Stock Funds (500 Stock/Broad Market/Mid-Small Company), and one is an International Fund. I’m 45 years old and have a pretty sizeable amount – but honestly I’m quite lost as to the best place to put the money to maximize it’s growth. Any suggestions on what is the best way to divvy up investments? Thanks!

  68. Craig says:

    Hey guys, I like the new picture with Babywoods in the “About Us”. With the new year I started self-employed work and started contributing to a solo 401k as well. Contribution limits are a bit funky to understand at first, but I think I got it down now. Best of luck!

    • Mrs. Frugalwoods says:

      Thanks! I thought we should include her in the pic, you know, since she’s now almost 15 months old ;). Congrats on the new work–C mentioned that was on the horizon! Would love to hear all about it!

  69. Bev says:

    I was wondering if you could please explain about the difference between index funds and a 401K? I guess I thought they were the same thing, both retirement funds. Please excuse my ignorance on this subject, but I’m just another person out there trying to learn and do the right thing. I did not read through all of your comments but I do read all of your articles. So, they’re different types of investing with different rules? Your plain English is a God-send. Thank you for all you do here. Bev

    • Mrs. Frugalwoods says:

      Hi Bev! They are indeed different things. 401Ks are retirement accounts offered by employers that you can’t withdraw from (without a penalty) prior to reaching age 59.5. Low-fee index funds are investment accounts (in the broader stock market) that anyone can open through a brokerage service (we use Fidelity, another popular one is Vanguard). There are no age limits or restrictions on index funds. Here’s a post we have just on 401Ks: 401ks Are Your Friend: Demystifying Personal Finance Part 3.

      And if you’re interested in learning more about low-fee index funds (and investing generally), I highly recommend my friend’s book: The Simple Path To Wealth. He explains everything in very plain English and it’s a great, informative read. I hope this helps :)!

  70. Bev says:

    Thank you. That’s very helpful. I know my age is showing, but I’m someone who has struggled with money her entire life, being a single mom, working two jobs, etc. My priority was surviving, and investing was a foreign language saved for the elite few, not of my world. Those days are all long behind me, thankfully, and I now find myself with not only enough money to pay all my bills (mortgage and utilities only), live quite well, and still have some left over for retirement, saving, and investing. I do know there are others my age who find investing complicated, mostly because the money just wasn’t available so many years ago. I guess I thought the index funds was another retirement fund with restrictions, but I see that it’s not. It can be used for that, but the rules are different. Thank you, Liz, for your patience and explanations. I will re-read that referenced article of yours and get the book. Glad you are all so happy in Vermont. I still love it here, too.

    • Mrs. Frugalwoods says:

      Hi Bev–my pleasure! And do check out the book–the author JL Collins is in his 60s (and lives in NH–he and his wife come visit us on the homestead periodically 🙂 ) and so he covers investing for many different stages of life. Since I’m in my early 30’s, my investment portfolio is much more aggressive than you’ll want yours to be, since you’re closer to traditional retirement age. In general, as you age, you decrease the risk of your investments. I am oversimplifying here, but the book explains it better :). Take care!

  71. AnnieG says:

    “Matching funds are free money.”

    I think it is more accurate and effective to say “matching funds are part of your salary.” Forgoing part of your salary is certainly something no one wants to do.

    529s:

    As a parent who used a 529, and as a tax accountant, I do not recommend them unless (1) you get a state tax deduction and/or (2) you are in a high tax bracket. A few quick reasons: FASFA; kids will see the money as “theirs” (trust me, this is a problem); more complicated taxes than it looks like on the surface (students frequently owe taxes on a portion of the withdrawal); kid may not attend college or may get scholarships (that really happens, both my son and DIL received full scholarships, including room & board).

  72. Em says:

    Awesome post! has tons of information I can definitely use when it comes to tracking my spending and paying bills- it’s still a struggle for me even if I try to save as there are expenses that do come up and I end up asking myself, ‘where did my money go?’ I’m slowly trying to build up my finances and absolutely taking down notes from this article. 🙂

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