I know you all spent the weekend just hoping I would publish a post this morning about how Mr. Frugalwoods and I manage our money. Right? Right?!? I know I did.
I’ve received a number of comments and emails lately asking for greater illumination of our financial mechanics and so today, I will oblige. I’d especially like to thank Emily from Evolving Personal Finance for her excellent questions after my August 2014 Expenditures post as well as a thoughtful email I received from a reader yesterday, both of which motivated and formed the basis for this post.
Anyone can follow the techniques we use, since we don’t employ a financial planner, advisor, stock broker, or Chief Financial Hound (CFH) to manage our dough on our behalf. We take a fairly straightforward approach and don’t do anything too funky. We don’t publish our income or net worth here for privacy reasons, so this is definitely an incomplete picture of our finances, which I’m sorry about. But, you’ll still get this gist, I promise.
Please proceed only with these critical caveats in mind:
- Everyone’s individual financial situation and long-term goals are different and you gotta do what works for you. The ways in which Mr. FW and I manage our stash might not work for you and I firmly believe there’s no one-size-fits-all approach to personal finance.
- I’m not a financial planner nor am I certified or qualified in any way. In fact, I’m probably the least qualified person I know to dispense financial advice. Ya’ll, I have BAs in political science and creative writing and an MA in public administration. So, yeah…
- That being said, Mr. FW and I are 31 and 30, have no debt (other than our mortgage), plan to retire early in three years, and have a net worth that would make most think we’re either twice our ages or some kind of trust fund kids, which we are absolutely NOT.
And now, without further ado… The Frugalwoods Finance FAQs:
How Do You Budget?
We actually don’t. Mr. Frugalwoods and I never sit down and hammer out a budget. Why? For us, it honestly works better to assume we’re not going to spend any money and consider everything we do spend as a debit to our savings rate. I know that’s kinda bizarre, but hear me out.
If we set a goal of, say, $200 a month for groceries, I’d obsess over how much we were spending and would feel terrible if we overspent. Conversely, if we hit the 29th of the month and I saw we’d only spent $150 on groceries, I’d feel as though I could go blow that last $50 on strained organic goat juice souffles*. What we do instead is set parameters around our grocery purchases (and all purchases) and simply remain consistent within those dictates. We honestly operate from the perspective of “we’re not going to buy anything.” This is obviously not true, but it prevents us from thinking we’re allowed to buy stuff we truly don’t need.
*Not an actual food. That I’m aware of.
Do You Smooth?
We are, in fact, quite smooth operators (you should see us on a dance floor), but we don’t smooth out our expenses–we just pay as we go. Our aim is for our annual expenses to remain low and consistent. Due to our lack of smoothing, our savings rate fluctuates from 65%-85% month to month. We know we’re extremely fortunate in this arena because our assets enable us not to worry if we’ll be able to afford surprise monthly expenses (like a repair for the ol’ Frugalwoods-mobile or some beard cream for Mr. FW).
But Mrs. FW, Do You Really Save Everything You Don’t Spend?
Yah! No lie, we save every dollar of our income that’s not accounted for in our monthly expenses. Our savings percentage rate is cash saved after taxes, after both maxing out our 401Ks.
In other words, we calculate our savings percentage by the following equation: monthly after-tax savings / take-home pay. We both work full-time and combine our income into a joint account.
How Do You Save For Retirement?
Mr. Frugalwoods and I both have monthly automatic payroll deductions into our employer-matching 401Ks. We each contribute the annual federal maximum (which is $17,500) to our individual 401K vehicles. We don’t include this amount in our percentage saved every month; if we did, our percentage would be higher. But, we don’t include it since we don’t consider it discretionary–we’re going to save that amount no matter what and we’re also not going to take money out of those 401Ks anytime soon. More on our plans for a backdoor Roth conversion another day, another time.
Why do we max out our 401Ks?
- Free money! Our employers are pretty great. Mr. FW gets an 8% match, Mrs. FW gets a 5% match, and Frugal Hound gets nothing but looks great while doing it.
- Taxes. We don’t have a philosophical beef against taxes, but we’re happy to take advantage of the great tax benefits that a 401K provides. At our current income level, combining Federal and MA income taxes, we’re saving nearly 40% in taxes by stashing part of our income in a pre-tax retirement account. We spend money like we’re in the 15% tax bracket so when we’re homesteading, we can cheaply move money to a more accessible location.
Where Yo’ Money At?
Every cent of our combined income that doesn’t go into our 401Ks or to taxes is direct deposited into our joint checking account, which we have through Fidelity.
We then make a determination of how much to keep liquid in that checking account and how much to put into our taxable investments account (see below). At any given time, our checking account has a minimum of 3 months of living expenses. This allows us to not micromanage our cash flow and easily deal with unexpected expenses without needing to liquidate assets in the taxable account.
We’ve never had segregated “savings” or “emergency fund” accounts, because we consider everything we don’t HAVE to spend as savings. We’re not fans of scattering money across multiple accounts, it’s just easier for us to pool it all together.
Credit Cards: Pro or Anti?
We are a pro-credit card family. Mr. Frugalwoods and I have just two joint cards, which allows us to maximize the rewards points we receive from each.
There are two vital caveats to credit card usage:
- Only have cards with rewards points/bonuses that you will actually use.
- Only have a credit card if you can pay the balance in full every single month. If you are concerned about your ability to do this, and think you might be tempted to spend more than you can truly afford, don’t get a credit card. We use our credit cards because we get rewards, not because we buy things we can’t afford. Every purchase we make is 100% backed by Frugalwoods cash.
- If you pay an annual fee, do the math to make sure the benefits of the card are worth the costs.
There are as many different credit cards as there are opinions about their efficacy and their place in your wallet, so please, do your own research and due diligence. Since you’re reading Frugalwoods, we’ll assume you’re just dying to know which cards we use. Right?! Ok brace yourselves.
After extensive investigation into various different rewards and cash back programs, we’ve settled on the following:
- American Express Starwood Preferred Guest: The best, bar none, hotel rewards points. As I’ve shared in our travel logs, we use Starwood points to stay in free hotels worldwide. Mr. FW also travels for work and is often able to stay at Starwood properties, which racks up points for us.
- Amazon.com Cash Rewards: This thing is amazing (no pun intended). We rack up free Amazon purchases every month! Amazon rewards points are as good as cash to us, since we buy a bunch of household supplies from Amazon.com. Mr. FW also buys a bunch of stuff for his office from Amazon, which means he gets reimbursed for cash-back eligible purchases. Further, the card yields 2% back at gas stations, restaurants (pointless since we never go), & drug stores and 1% back on everything else.
We don’t have enough spending to facilitate rewards spread across more cards. We’re able to maximize our points on each of these cards by using them exclusively. The Amazon card is our primary and the American Express is secondary. If you’re trying to rack up rewards points, it’s wise to consolidate your family spending to the same account. Scattering purchases across 10 cards (unless you’re a dedicated card churner) won’t yield much in the way of rewards.
Our accounts are joint for both of these cards, as are all our other finances. We did initially sign up for the American Express Starwood independently since they offered a signing bonus, which was worthwhile. However, since this card has an annual fee, it only made sense for us to keep one account open.
We also keep our eyes out for specific rewards cards and we do just the smallest amount of churning to take advantage of great deals (we opened an account, which we’ve since cancelled, to get super cheap flights for our trip to Hawaii last year). Mrs. PoP at Planting Our Pennies wrote this great post on why she and Mr. PoP don’t churn cards, which pretty much sums up why we don’t either. On the other hand, if churning it your thang, there are many resources available on how best to do it.
Our investment portfolio is remarkably straightforward and invested with a very long-term perspective in mind. We’re in a diversified portfolio that’s quite aggressive. Both of our 401Ks are in low-fee index funds as we’re staunch believers in avoiding fees whenever and wherever possible. Again, we don’t pay anyone to do this for us. Mr. FW manages our portfolio and, to his credit, it has performed quite well over the years.
Mr. FW here. It has performed well not because I am smart, great looking, and have a beard that would make Paul Bunyan feel insufficient (does that make Frugal Hound an ox?…). We’ve done well because we invest in boring index funds and we don’t sell when the market is down.
Our taxable account is invested fully in the low-fee total market index fund (FSTVX). Our overall portfolio is weighted 90% total market index fund and 10% bonds, with the bonds being held in our 401Ks in order to maximize tax efficiency.
We think it’s prudent not to keep too much excess cash in hand. After all, money sitting all by its lonesome in a savings or checking account isn’t going to make you more money. To make money from money, you’ve got to invest. We choose to invest in index funds, some people invest in real estate, some people invest in inventing greyhound roller skates. The important part is to invest period (and to diversify–don’t put it all in the greyhound skate venture!).
How Many Accounts Do You Have?
Very few. They’re all listed above, but here’s the quick rundown:
- 401K for Mrs. Frugalwoods (Fidelity)
- 401K for Mr. Frugalwoods (Fidelity)
- Checking (Fidelity)
- Taxable Investments (Fidelity)
- American Express credit card
- Amazon.com credit card
Notice a trend? We keep things simple by having most of our accounts with Fidelity. It just so happens that both of our employers use Fidelity for 401Ks, so it made sense for us to do our checking there too. Fidelity has no ATM fees (they reimburse for any ATM you use!) and you can deposit checks via phone (very convenient). By also having our taxable investment account with Fidelity, we get the nice side benefit of free, same day transfers of funds between accounts with no need to wait for an ACH clearing period.
So there you have the Frugalwoods methodology.
I’ll reiterate that everyone’s situation is different, but if you read this post and were like “dang, I would like to get a greyhound and get a better handle on my money,” here are my top recommendations:
- Identify your long-term goals (with your partner if you have one). What do you hope to do with your lives? What do you hope for your kids (if you have them)? Early retirement isn’t everyone’s goal (and neither is moving to a rural homestead)! Thus, I think it’s paramount to figure out what you want first.
- Review your expenses (in a non-judgmental way; if you have a partner, see my post on Behind The Scenes of a Happy Frugal Marriage). By review, I mean seriously review every single purchase for at least the past several months. Calculate how much you’re spending vs. your take-home pay. Are you spending consciously and on things that add value and meaning to your lives? Or are there some things you see and think “I didn’t even know we were paying for that!”–trust me, it happens to all of us!
- If after you review your expenses you decide you want to save more, I recommend trying out our Uber Frugal Month Challenge. You can also check out my post on How We Save 65% Annually for tips.
Don’t stop the conversation here! Send me your questions, suggestions, curiosities, and advice either below in the comments or via email (firstname.lastname@example.org).
I really appreciate all the questions and emails I’ve been getting here in the frugal woods–keep it coming, Frugalwoodsians!