Category: Personal Finance

Investing In Your Home

Home ownership is on my list of life goals so it’s something I try and read up on as much as I can before my wife and I dive into it. In this video, I share two recent article that I thought were important to consider for anyone in my position.


Gross Income vs Net Income

For most people, thinking about cost-of-living expense ratios is about as fun as reliving their root canal. But when it comes to keeping yourself on budget each month, they’re one of those necessary evils that need to at least be understood.

One of the easy points of confusion that I want to discuss here is the difference between gross income and net income and how a variance in these two numbers can have a sizeable impact on what’s actually affordable each month.

The Basics
Gross income is what you make before taxes, social security, medicare and other withholdings. In the US, this equates to a median family income^ of $52,250 or $4,019 per month*.

Net income, on the other hand, is what your employer actually deposits into your bank account every other week — after taxes, social security, medicare, etc. have all been taken out. Considering the previously stated median income, this would put you the 25% tax bracket and give you roughly $39,188 per year or $3,014 per month*.

How does this difference effect cost-of-living expenses? Most significantly in our rent or mortgage payments.

A Tricky Numbers Game
In my experience, it’s standard practice that rental offices and mortgage lenders allow monthly rent/mortgage payments to equal up to 33% of your gross income. Using the median household income above, that means they’ll let you pay $1,326 each month. Unless you live in NYC or San Francisco, you should be able to find a pretty nice place with that, right?

The problem, though, is that $1,326 per month is equal to 44% of your net income a.k.a. the bacon you’re actually bringing home each month! And that’s a big chunk of your paycheck to have tied up in one expense. Here’s the math on it:

gross income v net income_updated
You can see in this image the difference in an “affordable” monthly payment when calculated on gross vs. net income is over $330. If you’re a single-income home, have kids, can’t seem to save for retirement or wish you could go on vacation more often…$320 a month can make a pretty big difference when planning your monthly budget.

Living Conservatively
If you’re currently in an apartment and feel like rent is getting a little too high, check this ratio for reference. It’s not easy to do, but it could be time to give up the prime location or the granite counter tops and stainless steel appliances to be able to have a little more cushion in the budget and put money toward savings.

If you’re looking to buy a home anytime soon, please take this ratio into consideration. I feel like the No-Fun Police when my wife shows me homes on Zillow and I have to agree that it’s an awesome house, but a little out of our price range given our currently saved down payment and affordable monthly (net income) payment.

And if you’re already a homeowner and feel like things are a bit more of a pinch than you thought they’d be, this could be one of the reasons why. If you plan on moving in the future, keep these numbers in mind (or see what you can do to raise your income enough to get your ratio back in your favor).

Remember: Just because a landlord or mortgage lender is willing to let you put a certain amount of your money in their hands each month doesn’t mean you have to (they’re so generous aren’t they?). We don’t have to spend 33% of our net income on our monthly payment. If fact, you could go super conservative and shoot for Dave Ramsey’s suggestion to stay at 25% because it frees your money up for so many different things.

A Tough Balance
Is keeping your monthly housing payment low an easy thing? Definitely not. My wife and I’s current rent takes up 29% of our budget (which I’m happy with) but we’re not obsessed with where we live. There’s not a lot of natural light, the kitchen is a little smaller than we’d like and we have two random pillars in our living room that I still haven’t figured out a functional purpose for…but the freedom that comes in other areas of our lives because we’re disciplined in our finances is well worth the “imperfect” temporary living space.

In my next post, we’ll look further into the long-term implications of various mortgage decisions (and I promise it’s good stuff worth sticking around for!). But until then, have you ever struggled to find the balance between finding a decent place to live and keeping your monthly payment in check? What trade offs did you have to make?

*Based on receiving 26 paychecks per year, assuming two pay checks per month and does not take into account the two months per year that you would receive three pay checks (which always feel like a bonus, don’t they?!)

How To Get Rich Quick

It’s only the start of football season and I’m already nauseous from all of the one-day fantasy league commercials on the radio promising payouts of $1M or more each week.

According to a study by American Express, Americans are expected to spend $4.6 billion on fantasy football this year.


Or if I don’t like my odds of fantasy football, I could always give that automated number on my voicemail a call back and “earn five figures per week, guaranteed!” 

Sure I can, buddy…

Get rich quick schemes and gambling got their names for a reason.

Wealth rarely happens overnight (and when it does, lottery winners habitually seem to spend it overnight, too). Wealth is built by budgeting, saving and investing. These are the x’s and o’s of long-term financial success.

If you’re looking for a good place to start understanding these concepts, check out the Total Money Makeover. It’s practical. It’s easy to understand. It lays a groundwork to be able to support the necessary long-term view to building financial stability.


Budget Like A Millioniare

Wouldn’t life be easier if we were all millionaires?

Every financial woe would disappear.

We could eat Twinkies out of 24k gold wrappers.

Just imagine!

But – truth be told – no matter how much money you make, if you don’t budget it well you won’t have it for very long. Which is why guys like Ryan Broyles of the Detroit Lions deserve a huge pat on the back.

He’s a third year wide receiver that signed a 4-year, $3.6 million contract with $1.42 million guaranteed (a.k.a. he got $1.42 million on the day he signed a piece of paper). But what’s he done with the money since then?

Set himself up for life.

It turns out, since making it to the NFL in 2012, he and his wife have lived on an annual budget of $60,000 — just $9,000 more than the US median household income.

The reason?

He knows his time in the league may be limited and he doesn’t want to squander the monetary benefits. He even talked about having to learn to set and keep a budget for the first few months, but once he got the hang of it, it was easy to maintain.

What Not To Do
Now contrast Ryan with the recent news of 50 Cent’s bankruptcy filings and let the head scratching begin. 50 Cent makes a reported $185,000 a month off of royalties and investments – i.e. that money is working for him, so he’s not lifting a finger to bring it in.

But even on a passive $2.2 million income, 50 can’t pay his bills. He’s spending $108,000 a month…$5,000 of which is for his gardening! (And he also has a sizable lawsuit filed against him…but that’s a blog for a different topic on self discipline…)

My point is, you get the feeling that 50 is all about spending whatever money he makes with little concern for the future (he still likes to parrrty like it’s your birthday).

My goal, and hope for anyone that reads this, is to not be like that, regardless of income level.

Take time to make a budget. Live below your means. Have an emergency fund. It’s practical stuff that can remove a lot of headaches down the road (or right now). And in the end, you could very well be a millionaire instead of just looking like one.

In Case of Emergency

Pop quiz. How would you answer the following question?

When an unexpected vehicle breakdown, water heater blow-out or other major life event occurs, costing $1,500, I will:

  1. Put myself on a payment plan with the repair company/my credit card
  2. Pay for it in cash and be done with it
  3. Move to a bungalow in Mexico because I can’t handle another financial issue right now

The reason most financial emergencies cause stress is that there are no means by which to handle them – they’ll stretch an already thin budget to its brink.

The best way to avoid this is to start building an emergency fund.

The Reality                 
Twenty six percent of people have no emergency fund in the US. In total, 67% of people have less than six months of expenses saved.

emergency fund amounts

This means, when an emergency strikes or a job is lost, the heat from the kitchen gets real hot real fast.

How different would it feel if there were $1,000 in the bank? What about $2,500? Maybe $10,000? All of a sudden, the need to create more payments in times of emergency disappears. It hurts a little to see that money go, but now our budget just has to be adjusted to replenish money in a personal savings account — that monthly budget line item doesn’t have to be dealt out to some other person taking your money.

Defining an Emergency
The important thing to remember is that the last-minute opportunity to go on vacation with friends for $1,000 does not constitute an emergency. Nor does needing a new wardrobe for the spring season when you learn that Aquamarine is the “it” 2015 Pantone color (it is, you know). Those are wants, not needs.

Emergencies should deal only with things that keep you safe, healthy and afloat: i.e. a car to get you to work, a home foundation that needs repaired or medical bills after a freak accident. You don’t want to have to use the money, but life happens to people every day, so having it on hand is a must.

It’s About Peace of Mind
It’s often said that money can’t buy you happiness, and the truth is, an emergency fund won’t do that. What it should do is become an asset that provides peace of mind where (oftentimes) stress wins the day.

Total Money Makeover recommends starting with $1,000. Long-term, most financial experts recommend having three to six months of expenses set aside. This way, even if a job is lost, the mortgage, utilities and groceries are all covered. What a relief!

So take a look at that monthly budget and see if there’s any room to start creating (or continuing to build) an emergency fund. It should be a specific amount of money set aside in every month’s budget. It takes time, but the peace of mind that follows is worth the effort.

Book Review: Total Money Makeover

If you’re looking for a true plan to follow to transform your financial situation, I would highly recommend checking out Dave Ramsey’s Total Money Makeover. It walks you through Dave’s Seven Baby Steps…a process that will make you “live like no one else, so that later you can live (and give) like no one else”, as Dave says.

total money makeover

I was given the book almost two and a half years ago, and it changed the way I think about money!

The 7 Baby Steps are as follow:

  1. Save $1,000 As A Starter Emergency Fund
  2. Use The Debt Snowball To Pay Off Your Debts
  3. Have A 3-6 Month Emergency Fund
  4. Invest 15% of Your Income For Retirement
  5. Save For Your Kid’s College
  6. Pay Off Your Home Early
  7. Build Wealth And Give

The biggest thing to know about this process is that it’s just that, a process. It takes time. The primary goal is to truly change your habits. With your newfound habits, you end up building momentum that has the power to change your financial direction.

The book contains information on everything from saving, budgeting, investing and giving. You learn how to begin a financial plan, which is huge for building confidence in any endeavor. It also has inspirational anecdotes to motivate and inspire you; stories from real people who have made the same decisions and faced the same struggles as millions of others. It’s relatable, personable and a quick read — I got hooked and finished it in less than 24 hours (it was a lazy weekend).

The one area I’m not 100% sure about is his insistence in step four that an abundance of mutual funds can be found averaging a 12% to 15% return year after year. I’ve only done a limited amount of research, but mutual funds with that type of track record weren’t exactly falling out of the sky. (And in my google searches of Dave, that’s the one area of his plan that many people tend to balk at.) So I still need to get with a financial advisor and get some professional guidance, but outside of that I fully intend to keep walking the baby step trail to lucky number seven.

One of my favorite parts of Dave’s philosophies is that it’s scripturally based. He doesn’t say that we should build up a pile of money in order to hoard it and say “look at me”. The goal is to keep our house in order and be able to give our money away to help others, but the only way to do that is to live a life with financial self-discipline, taking one baby step at a time.

I would highly recommend this book to anyone that is unsure of how to start getting out of debt or simply looking for guidance on how to successfully manage your income on a day to day and month to month basis. Check it out and let me know what you think!

3 Benefits of Budgeting

Last week, we talked about the importance of using a zero balance budget and said we’d come back to discuss some less-than-obvious benefits of budgeting (you know…besides staying on budget). So here we go.

3 benefits to keeping a budget


  1. Improved communication
    If you’re married/have a significant other/someday want a significant other, being able to co-manage and discuss money fairly is imperative. In fact, money issues are a leading reason for divorce in the US.

    In my marriage, we sit down at the first of each month and discuss where exactly we’ll spend our money. It forces us to plan and think ahead, to be intentional with our spending and to set honest expectations with one another when it comes to making purchases. You build trust knowing that you’re each on the same page, and some months, you end up working through unexpected problems that (inevitably) pop up – which is what marriage is all about!

  1. It gives you a clear goal to dream about
    I haven’t done extensive research on the subject, but I’m pretty sure most people fall into one of two money categories: those with debt and those without debt.

    Regardless of which category you’re in, let your money goals motivate you!

    If you have debt, let your budget get you excited about paying it off and finally getting the monkey off your back! With a budget, you’ll be able to extrapolate out how much time you have until you’re set free from those payments. So even if it’s just a small light at the end of the tunnel, use that end-date as motivation to stay on track.

    If you’re debt free, dream about what you want to do next. Set a budget to save for a new car, a vacation, a puppy or whatever! Delayed gratification is the key here. Use your budget to pay for things with cash. These goals are obviously a little more fun to dream about, but being rid of debt helps them come to fruition so much faster.

  1. It’s personally empowering
    When you have a plan, you feel more prepared. When you feel more prepared, you have more confidence. And I don’t know about you, but having confidence is a pretty critical element to anything I do.

    Even if you’re projecting to be short on your budget for the month, you’ll know it on day one. That means you have 30 more days to put in hard work and find enough money to make ends meet. You won’t be caught off guard with three days left in the month to pay a bill.

    If you have a surplus, that means you have the chance to give and make a difference in someone’s life. Or you can go shopping knowing that your budgeted “free spend” money can truly be spent on anything you want. It takes the guilt out of purchases. And that’s equally as liberating.

So how about you, have you been able to tackle budgeting? Have you seen any benefits of budgeting in your own life? I’d love hear about your experience in the comments below.

Using a Zero Balance Budget + A Free Download

Do you make a budget for your monthly spending? Or does that thought suddenly remind you that you need to go clean the kitchen grout?

Photo by Waag Society
Photo by Waag Society

While it’s definitely not fun, planning where and how you’ll spend your money is probably the most fundamental element of being disciplined with your spending (and adding a little self-discipline to our lives is what we’re all about here!). So what’s the best way to make a budget? Mathematically speaking, a zero balance budget will make sure that you have a plan for every dollar you earn.

Here’s how it works:

  1. Start with your monthly take-home pay at the top of a page.
  2. Write down every expense you’ll have that month. First, the necessities: rent, utilities, groceries, debts, etc. Then move on to the extras: savings, new clothes, eating out, Starbucks…
  3. Plan every dollar until you have $0 left.

For only a three step process, it’s kind of crazy that budgeting gets so much resistance, isn’t it?

Maybe it’s because people don’t like doing math on paper – it’s feels so 3rd grade, right? But I’m the same way, that’s why I made this downloadable budget spreadsheet to do the work for me.

A few things to note:

  1. Cell names are totally customizable – I tried to be thorough but realize it’s not all-encompassing.
  2. If you don’t have access to Microsoft Excel, I’ve uploaded the spreadsheet to Google Docs, so you can access it by signing into a Gmail account.
  3. If you accidentally delete a function, feel free to come on back and re-download.

Here’s the important part:

Once you’ve filled out the spreadsheet, give your keyboard the ‘ol “Ctrl + P” to send that bad boy to the printer and make yourself a hard copy!

It’ll be tangible. Real. You’ll literally have to throw your budget away if you don’t want to reference it the rest of the month! The goal is to have a plan for your money, so when some sort of temptation or “great deal” crosses your path, you can honestly tell the salesman, “Sorry, my budget’s already set for the month” and walk away.

Try it for a month. See what you think.

We’ll discuss further benefits of having a budget at another time, so until then…

Do you have budgeting questions or tips you’d like to share? I’d love to hear them! Please leave a comment below.