Today, by popular demand, I bring you a comprehensive rundown of how my husband and I manage our money.
Before we dive in, I want to point out that your money management strategy will likely differ from mine, and that’s ok! Your financial situation will also likely differ from mine, and that’s ok too! There’s no one right way to do money, although there are definitely some wrong ways. What I hope is that by sharing how I manage my money, you’ll be enfranchised to organize, manage, and set goals around your money too.
A disclaimer that I am not a trained financial professional and I encourage people not to make serious financial decisions based solely on what one person on the internet advises.
I encourage everyone to do their own research to determine the best course of action for their finances. Here’s a boring (but important) explanation of how Frugalwoods makes money.
It’s OK To Not Know Everything (or anything) About Money
Too often, money is discussed in hushed tones, behind closed doors, underneath covers, or, more likely, not talked about at all. A lot of us (me included) feel stupid if we don’t know what a financial term means and we aren’t sure if it’s ok to ask questions. As (relatively) mature adults, we feel we should intuitively KNOW how to manage our money, but that’s like saying a person should intuitively KNOW how to bake a soufflé or drive a car or hang glide as soon as they turn 18.
We need to learn how to do these things and, while there are cooking and driving and hang gliding classes, there aren’t many financial education opportunities for adults. So consider yourself opportunitied today.
Ask questions in the comments section–there are no dumb questions and, chances are, it’s a question I once wondered myself! In fact, it’s totally possible I won’t even know the answer to your question, but I’m willing to bet another reader will. So ask away! Alright, that’s enough introduction, let’s get to the goods.
PART 1: Income.
Net versus Gross. Gotta know the Nothing But Net.
You’ve got to know how much money you earn. Sounds obvious, but bear with me: your salary is not your income. Your salary is a gross figure, but what you actually make every month is called your “net” income, meaning your salary MINUS taxes and any other withholdings (such as health insurance, retirement contributions, employee parking, etc).
Your pay stub will provide this information for you, handy little thing. If you work multiple jobs, or have a partner who works, or own a rental property, those totals should be added in too.
My family’s sources of income:
- Mrs. Frugalwoods’ job (this is non-W2–or freelance–income because I work for myself)
- Mr. Frugalwoods’ job (this is W2 income–in other words, income paid to him by a traditional employer)
- Our rental property (this is the house we used to live in and that we now rent out in Cambridge, MA)
FIRE side note: we are FI, but not RE (since we both work) and so we do not draw down on our taxable investments at this time. That might change in the future, but for now, we utilize the above three income streams to pay our bills and add to our investments.
Summary Of Our Accounts
Here’s where all of our money is kept. I’ll expound on each category in a momentito:
- Checking accounts
- Retirement accounts
- Taxable investments
- Donor Advised Fund (for charitable donations)
- 529 college savings plans
PART 2: Savings and Checking Accounts: Make Sure Yours Is High-Interest
We have three high-interest checking accounts to keep us organized (one for my business, one for our rental property, and a general family account). Although we have checking accounts, the vast majority of checking accounts don’t earn interest (which is bad). We happen to bank with Fidelity, which offers a 0.82% interest rate on checking accounts (which is good).
Using a high-interest savings/checking account is one of the easiest ways to earn extra money.
Also, your checking and savings accounts should be fee-free.
Let me say that again: do NOT pay a fee for a checking or savings account and do NOT settle for low (or no) interest!
Here’s a list of high-interest accounts you might consider:
Here’s my full write-up on high-interest savings accounts: The Best High Interest Rate Online Savings Accounts
***Takeaway: use a high-interest checking/savings account that doesn’t charge you a fee. If your checking/savings account doesn’t earn interest–or earns very little interest–consider switching to a high-interest account.
Have An Emergency Fund
Our family checking account serves as our emergency fund, which means it’s there for us if a large, unexpected expense crops up. An emergency fund exists so that you don’t have to go into debt or liquidate investments at an unfavorable moment.
Our emergency fund is the money we’d spend if something cataclysmic or bizarre or unexpected happened: If we both lost our jobs, if our cars both died, if our roof caved in, if a moose ran through our front window (stranger things have happened to people), we have easily accessible money to cover us and keep us out of debt. The rest of our money is tied up in less liquid assets, including: retirement accounts, taxable investments, and real estate. All of that can be liquidated and turned into cash, but not quickly or easily.
Our emergency fund is our readily-available cash on hand. Ideally, you keep enough–but not too much–money in an emergency fund. You want enough money to cover any calamities (cars, moose-through-windows, etc), but not so much that you’re losing out on investment opportunities (see below). The basic rule of thumb is to keep three to six month’s worth of your spending in an emergency fund. For example, if you spend $1,000 per month (on everything: rent, groceries, clothing, medicine, entertainment, dog food, etc), you should target an emergency fund in the range of $3,000 to $6,000.
***Takeaway: have an emergency fund of three to six months’ worth of your spending saved in a high-interest checking/savings account. Replenish this fund anytime you spend it.
Track Your Spending
Of course, in order to know how big your emergency fund should be, you need to know how much you spend every month, which means you need to… track your spending!!! I use and recommend the free service from Personal Capital. Here’s my full write-up on why I like Personal Capital and how it works.
***Takeaway: keep track of how much you spend every month. And actually track it–no estimations allowed!
PART 3: Retirement Accounts
Traditional retirement accounts are tax-advantaged and designed to help you save for traditional retirement. These accounts have restrictions on when you can access the money (usually not until age 59.5), but they can provide a significant tax benefit if used properly. Some employers offer retirement accounts (such as 401ks, 403bs, or 457s) and some employers even match the money you put into your account. If your employer offers a retirement plan–and especially if they offer a match–that’ll probably be your best bet. If your employer doesn’t offer a retirement plan, there are a number of different accounts you can open on your own (such as an i401k or an IRA). Retirement accounts are invested in the stock market and, in most instances, you’ll have an opportunity to select how your account is invested (more on that in the investing section below).
Our retirement accounts:
- Mrs. FW’s 403bs: I have two of these from two different former employers:
- As long as your former employer doesn’t charge a fee for keeping an account open, there’s no need to roll these accounts over. The money you contribute to a 403b/401k is yours, even when/if you leave your employer (note: be sure you know your employer’s vesting policy).
- Mr. FW’s 401k: from his current employer
- Mrs. FW’s i401k: my individual 401k for my current self-employed work
Other common retirement accounts:
- Roth IRAs
- SEP IRAs
More about IRAs here: Reader Case Study: Medical Student and Software Engineer Dream of a Homestead
More about 401ks/403bs here: 401ks Are Your Friend: Demystifying Personal Finance Part 3
***Takeaway: saving into a traditional retirement account–either on your own or through your employer–can be an excellent, tax-advantaged way to save for retirement.
PART 4: Taxable Investments
The term “taxable investment” refers to non-retirement accounts that are held in the stock market. A “brokerage” is a bank that invests this money for you. For example, Fidelity and Vanguard are brokerages and an index fund is a type of taxable investment.
Investing in the stock market is one of the most common ways to build wealth. If you keep all of your money in savings or checking accounts (even high-interest accounts), you’re not leveraging your money to make you more money. Conversely, if you invest your money in the stock market, you have the potential to gain tremendous amounts of money over time. Of course, you also open yourself up to the risk of losing money.
When you hear of people losing all their money in the stock market, it often means that one (or more) of the below mistakes occurred:
- They panicked during a market downturn and sold all of their investments at a loss
- They weren’t diversified enough
- Their investments weren’t properly calibrated for their age and life stage
- They had all of their money invested in the market and no other assets
The stock market goes up and down–that’s pretty much the definition of the market. It will go up, it will tumble down, it will wobble and fluctuate. You will gain and lose money. But the reason so many of us invest in this mercurial market is that historical data demonstrate: if you keep your money invested for decades and decades, you will see a return. I like this article and graph by CNN, showing how quickly the market bounced back from major downturns, including the Great Depression and the Great Recession (spoiler: quicker than you probably think).
Buying and selling stocks on a whim and as the market undulates is dumb: you will lose money. Buying stocks and holding them for a long time is smart: you will make money. That’s essentially investing 101 and, boring as it sounds, the best thing to do is buy and hold stocks and resist the urge to mess with them. This isn’t to say you never do anything with your stocks, but you don’t continually buy and sell.
Risk Versus Reward: Investing In The Stock Market
A common phrase in investing theory is that return is directly correlated with risk. What this means is that, when you’re young (and have a long time before retirement), having additional risk in exchange for additional reward is advantageous.
The broad strokes, very basic idea is that while you’re young and far from traditional retirement age, you keep your investments in what’s termed an “aggressive” position, which means you’re in the highest risk/highest reward investments. Your money has the potential to make–and lose–a lot.
Then, as you near retirement age, you gradually rebalance your portfolio and move your investments into a less risky, less aggressive, more stable portfolio that won’t lose (or gain) as much. This is sometimes called a “target date fund,” and the whole idea is to gradually reduce your risk over time until you hit retirement age, at which point your investments are in stable, not-very-risky holdings. That way, if the market experiences a major downturn right as you retire, you won’t lose as much money as you would if you were still in high-risk, high-reward investments.
Side note: For you extreme financial geeks out there, I will note that there’s some emerging research suggesting a slightly different approach. I link you to Michael Kitces’ article The Portfolio Size Effect And Using A Bond Tent To Navigate The Retirement Danger Zone for further reading.
Diversification In Investments
Diversification means you’re invested in a wide variety of stocks, which ensures your fortunes aren’t tied to a single company. Fortunately, diversification is super easy to accomplish through total market index funds. I invest in total market, low-fee index funds, which means I’m invested in every stock across the entire market. This means that I get to take advantage of any and all gains (and losses) in the market. If I were instead invested in a single company, I’d be sunk if that company went out of business or took a massive hit.
Total market index funds are the investing version of not putting all your eggs in one basket. If you drop that one basket? You are egg-less and alone. If you instead have one egg in every basket available, you stand to lose far fewer eggs in the event of a basket-dropping-calamity. It spreads out the risk in a way that’s advantageous for you and your eggs (or money, as the case may be).
Don’t Invest Money You Need Right Now
Don’t invest money you need to pay your rent or buy your groceries. Don’t invest money you’ll need next year to buy a house or a car. Ideally, investments should be made for the longterm and you don’t want to tie up money you envision needing in the near future. Money you’re likely to need in the near future should go in a high-interest savings account (see above).
Avoid Fees On Your Investments
High fees are bad, low fees are good. Fund managers charge fees for the service of investing your money. The problem with fund managers is that you stand to lose a lot to fees and not gain much (if anything) in return. Passive funds–funds you manage yourself such as total market index funds–usually outperform actively managed funds.
Why? Because no one actually knows what the stock market is going to do. Ever. No one. If anyone did know that, they wouldn’t be wasting their time managing your money, they’d be mega billionaires sipping cocktails on a beach they own.
This 2019 CNBC article sums it up well:
For the ninth consecutive year, the majority (64.49 percent) of large-cap funds lagged the S&P 500 last year… After 10 years, 85 percent of large cap funds underperformed the S&P 500, and after 15 years, nearly 92 percent are trailing the index.
In plain English, this means that actively managed funds (funds you pay someone to manage for you) did worse than passive index funds (which are low fee and that you manage yourself) for NINE years in a row. NINE, people. Furthermore, after 15 years, “nearly 92 percent” of actively managed funds are doing worse than index funds. That means index funds do better than all but 8% of actively managed funds.
To recap: passive index funds do better than active funds, by, like, a lot. Passive index funds can be low-fee and self-managed whereas active funds are high-fee and you pay someone to manage them for you.
With stats this compelling (and obvious), why don’t more people talk about this?!? Because it’s boring and confusing and frankly, kind of weird to bring up at a dinner party (unless you’re having dinner with me!). But HERE, we will talk about it. Here we will discuss the genius of passive, low-fee index funds and your ability to invest in them on your own.
Here are the fees we pay on the funds we’re invested in:
- FSKAX (total market index fund): expense ratio of 0.015% (this means they charge us a mere $0.15 per $1,000 invested)
- FTIHX (total international index fund): expense ratio of 0.06%
All (good) brokerages have something similar: a total market index fund and a total international index fund offering. Compare their expense ratios with Fidelity’s to ensure you’re getting a good deal.
More about investing here: For the Love of Frugal Hound, Manage Your Money Yourself! (by following The Simple Path to Wealth)
For even more about investing, I recommend these two books:
- The Simple Path to Wealth: Your Road Map to Financial Independence And a Rich, Free Life, by: JL Collins
- Broke Millennial Takes On Investing: A Beginner’s Guide to Leveling Up Your Money, by: Erin Lowry
***Takeaway: The keys to successful investing are:
- Invest in diversified, total market index funds
- Keep your money in the market for a long time (often termed “buy and hold”)
- Make sure your fees are low
- Decrease your exposure to risk as you near retirement
PART 5: How We Spend Money
Even when we spend money we’re looking for ways to optimize the experience. We buy everything we can with credit cards so that we earn credit card rewards. Right now, we’re focused on cash-back rewards cards because they’re the easiest to manage and they give us cash back for making purchases we were going to make anyway. Travel rewards are the other major category of credit card rewards and, if you travel a lot, these can deliver fabulous returns (these are affiliate links). More on how to use credit cards to your advantage here and here.
PART 6: The Cascading Priorities Of Financial Management
Most of us don’t start off with all of these accounts in place. Most of us–unless you receive an inheritance–have very little money at the outset of our adult lives. Mr. FW and I started off with a combined $8,000ish (and no debt) when we got married in 2008 at age 24. We didn’t own a house, we didn’t own a car, we didn’t have kids or pets, we didn’t have a set of matching dishes, or even a bed (we bought one, don’t worry). My husband and I are very fortunate, and I’m extremely cognizant of the role that privilege played in our journey, a topic I address in depth in my book and also in this post.
Since 2008, we’ve increased our incomes, saved more, invested more, increased our incomes, and opened different accounts to reflect and manage our long-term priorities. But we started–as many people do–with a simple checking account. That’s it. I had so little money I didn’t even have a savings account.
Here’s how we prioritized saving and wealth-building these past twelve years:
- Create an emergency fund.
- Pay off any high-interest debt (note: we didn’t have debt but if you do, paying it down should be a high priority).
- Open and utilize credit cards responsibly to build credit and earn rewards.
- Invest for retirement.
- Save up a downpayment for our first home.
- Invest in non-retirement taxable investments.
- Save up a downpayment for our second home and turn our first house into a rental property.
- Continue investing in our retirement and taxable investments.
- Open a Donor Advised Fund for tax-advantaged charitable giving.
- Open 529 College Savings Plans for our two children.
- Continue investing in our retirement and taxable investments.
A lot of this happened consecutively, not in parallel. While it would’ve been ideal for me to open a retirement account at age 22, when I started my first job, I didn’t because I was scraping by. And while it would’ve been ideal for us to buy our first home sooner, we didn’t because we needed to save up a downpayment, and maintain an emergency fund, and invest for retirement.
Managing your money over a lifetime is a question of managing competing priorities.
Right now, my husband and I balance saving for retirement (be it early or traditional–jury is still out), saving for college for our two children, and saving for more extensive traveling once our kids are a tad older.
Most of us balance divergent goals and the key is to understand what’s mandatory versus nice-to-have. This is why I think the above list can be helpful in determining where something falls on the financial priority list. For example, while it’s awesome to invest in the stock market (step number 5), that should not happen before you build an emergency fund (step number 1). This list isn’t perfect and it’s not going to make sense for everyone to follow to the letter, but it provides a basic guideline for how to think about your money as you age and your life circumstances change.
CONCLUSION: Put Yourself First
Financial management is one scenario where it’s appropriate to put yourself first. That’s why in the above list, saving for our kids’ college is the last step. It’s not out of greed or selfishness that we put this last, it’s out of personal responsibility. No one else will be responsible for us in our old age. My husband and I do not want to saddle our children with our financial care and so, we’re setting ourselves up to have plenty in our retirement accounts to see us through all our days. I am a strong advocate for putting your own oxygen mask on first: save for your own retirement, then pay for your kids’ higher education. You can take out loans for college, but you cannot take out loans for retirement.
Putting yourself in a position of financial strength bears fruit over time and is often a question of waiting: waiting until you have a downpayment saved up so that you can qualify for better mortgage loan terms, waiting to save for your children’s future once you’re sure you won’t be a burden on them in your old age, waiting to buy things until you can afford to pay for them in full. Putting yourself first financially isn’t selfish, it’s responsible, pragmatic, and up to you.
How do you manage your money? What questions do you have?
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