Our Low Cost, No Fuss, DIY Money Management System
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.
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?
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 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.
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.
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
Since I am now self-employed, I’m going to set up a solo 401k in 2017.
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.
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.”
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.
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
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:
- 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.
- 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.
- 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.
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
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.
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?
After researching 529s (tax-advantaged college savings plans) in Vermont, we’ve decided not to open one for Babywoods for the following reasons:
- 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.
- The fees for management are higher than our low-fee index funds.
- 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.
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!
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.
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.
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.
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:
- Track your spending (using Personal Capital or a similar free service).
- 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.
- If you have non-mortgage debt, pay it off.
- Build your emergency fund.
- Contribute to your 401k or 403b.
- Invest the remainder of your money in low-fee index funds.
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:
- Unless you’re a billionaire with extremely complex assets, you can manage your own money.
- There’s no need to overcomplicate things with millions of different accounts.
- 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?
Never Miss A Story
Sign up to get new Frugalwoods stories in your email inbox.