Planning for the Life You Want Archives

Category: Planning for the Life You Want

How Much Money is Enough?

I’ve been thinking a lot about the concept of enough, and not just when it comes to money, but rather about how having a concept of enough is closely tied to the ability to feel satisfaction.

It has occurred to me that if we live in a world where we don’t believe we can have enough of certain things, that it robs us completely of our ability to ever feel fully satisfied with them.

Think about how often, and nonchalantly, phrases like, “you can never have enough _____________,” or “no such thing as too much/too many ________________,” get tossed around, like little landmines waiting to undermine our satisfaction with whatever word somebody dropped into those blank spaces.

A Constantly Changing Threshold

With money, enough can feel like a hard concept to pin down. For most of us, there’s always something we could imagine adding to our lives if we had just a bit more to spend. Or a ‘feeling’ of a certain level of security we believe that a certain dollar amount in the bank or stashed away for retirement might bring. But it’s a sneaky feeling to follow, because over the course of one’s lifetime, it’s not uncommon that we just keep moving the bar on that concept of enough.

The only thing that stays the same about the phrase, “If I only made (or had) this much… then I would feel more secure (or quit my job, take a little more time off, etc.),” is that we seem to keep saying it, but every time we say it, we’ve changed the bar so it always feels just out of reach.

There IS Such a Thing as Enough Money

But the concept of marginal utility applies to money, and everyone reaches a point at which more money and more stuff doesn’t actually add more comfort or happiness in the way that they once did. In fact, what research has found is that once a certain level of comfort is reached, money, like just about everything else, eventually reaches a peak where the pursuit and accumulation of more actually detracts from overall happiness and feelings of satisfaction.

And if we are stuck in a loop that says there’s no such thing as too much money, or you can never have enough money, it’s also quite easy to just accidently spend a significant portion of our lives on the downside of that marginal utility peak… pursuing more happiness through more wealth, when in fact, it may actually be starting to take away from our feelings of joy or satisfaction.

Which is why it’s essential to define this idea of enough for ourselves.

Without a clear definition of what is or is not enough, there are so many decisions that are impossible to make. How do we know if it’s worth it to take that higher paying job or work more hours? How do we know if it’s okay to take the dream job that pays half as much? How do we know if we can take a year (or five) off of work to stay home with our kids? How do we know when to stop accumulating money to fund our goals? How do we know when we can retire? How do we know if we can give more of our money away to the causes we believe in or people who have a greater need than ourselves?

Developing a Qualitative Definition of Enough

The first step in this process is to define what a satisfying life looks like for you, now and in the future. The important thing here is not that we all have the same definition of enough, but that we each work to define a life that feels like enough for us.

A good place to start is to think about the times/places you’ve felt happiest and most fulfilled.

What does your life look like?

Where do you live?

What are you able to do without financial worry or hardship?

How much do you work?

What are the things you spend money on that add great value to your life?

What are the moments, days, and times in your life where you felt fullest and most satisfied?

What did you need from money in those times, and what elements were unrelated to wealth or earning?

What does your life look like?

Where do you live?

What are you able to do without financial worry or hardship?

How much do you work?

What are the things you spend money on that add great value to your life?

What are the moments, days, and times in your life where you felt fullest and most satisfied?

What did you need from money in those times, and what elements were unrelated to wealth or earning?

That’s really job one – defining the parameters of a satisfying life for yourself and noticing what elements of those times were made possible by a certain level of earning or availability of funds.

Because if we try to start with the dollar amount, we’ve missed the entire point of money. Money is a tool to meet our needs and to increase the comfort and quality of our life.

A Scrooge McDuck-style roll in a pile of money never left anyone feeling anything but the need for a shower. It’s not the money itself that matters, but the life it allows you to live, and perhaps some feelings of security, flexibility or freedom that it allows you to have. Start by defining that. What are the non-monetary characteristics of a satisfying life for you? In what ways does money contribute to or allow you to pursue that life?

What Does Enough Cost?

Job two is to figure out what that life costs, now and in the future, and to figure out how much money you need to earn and save to have enough to comfortably live the life that gives you the best shot at feeling satisfied.

When it comes right down to it, this is at the heart of why a lot of people choose to work with financial planners. In a world that directs us to earn and save as much as we possibly can from the minute we start working, there becomes a point at which many of us actually need someone to help us decide when it’s okay to jump off that cycle – to get a professional opinion so that we know when it’s okay to work a little less or take a lower paying job; to know when we’ve saved enough and perhaps can think about spending a bit more, and when it’s okay to retire. Without that, we may find that we never know if what we have is enough. We may find ourselves working longer than we need to, or hesitant to say yes to an opportunity that could really add a lot of value to our lives just because of its cost. But what if we can actually afford it?

That’s really at the heart of what a good financial planner does. They don’t define the parameters of your most satisfying life—that’s up to you. But they realize that it’s not really about making you as wealthy as you can possibly be. If it’s done right, financial planning is about taking your definition of enough, your definition of a satisfying life, and helping you understand what money you need to earn, save, and invest to get there.

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Hero image and image of a hand holding cash by Kaboompics

Characteristics of Effective Money Management Programs

8 Reasons Your Money Management System Might Not Be Working for You

What works for one will not work for all

A lot of financial advice (and certainly most non-professional financial advice) falls into a category that can be best summed up as “this worked for me, so you should do it.” This isn’t unique to financial advice. As former math teachers, we could tell you a million stories about the specific ways in which every parent, English teacher, doctor, or supermarket clerk wanted to inform us about the best way to teach math. And we could also tell you that it’s all pretty much based on the notion that what worked for that individual person will work for everyone.

But when you spend hours and years teaching the same ideas to thousands of young people, what becomes readily apparent is that what works for one is not always what works for another.

In fact, what might be an impeccable, flawlessly designed lesson on any given topic will almost certainly leave a few kids completely in the dark. That’s not a failure of the lesson or the teacher, unless the teacher fails to realize that there’s actually no one activity or one way of teaching an idea that’s going to resonate with every single student. But very often when financial advice is delivered casually, it is claiming to do just that: give a single piece of advice that is going to work for everyone. But it won’t, so it’s a pretty hit or miss strategy to take advice from your uncle, father-in-law, or that person who has a show on MSNBC or a channel on YouTube.

And what it also means is essentially, even as financial advisors, we can’t actually, with 100% certainty, prescribe or teach a money management method that will work for all of our clients. We can give them things to try, things that can be tested and modified, but ultimately, what works for some will not work for everyone.

That being said, what we can do is talk about the elements that all effective money management systems have. Because without each of these in place, what can seem like a good management system, can end up leaving us feeling like a failure if/when it doesn’t work (maybe tomorrow, maybe a year from now, maybe 30 years from now), when in reality, it may have been that we missed some key elements of planning in our system, even if we implemented it with fidelity.

So, as you continue to work to find the money management system that works best for you, keep in mind that any system that’s going to work for both short and long-term money management needs to have the following characteristics:

It pays attention to what we can control, and it’s fundamentally simple.

There’s no magic in money or budgeting, it comes down to the same thing.

Two controllable components: What you earn, and what you spend. And a budget that’s not working has only two levers to make it work better – spend less or earn more.

It considers a bigger picture than just monthly expenses.

A simple list of your monthly bills is going to underestimate your cost of living.

It doesn’t account for expenses that occur irregularly, like once a quarter or once a year, or even once every three to five years. And though lists of expenses often account for things like gas and groceries, they often underestimate discretionary spending.

A money management plan that is going to be effective must account for all of your expenses, even those that don’t occur every single month.

It expects the unexpected
(and saves for it).

Life is full of unexpected expenses.

Even if you have done a great job budgeting for your irregular, non-monthly expenses, a budget that doesn’t have a category to save for unforeseen larger expenses (like unexpected vet or medical bills, or major home and car repairs) is going to come up short, it’s just a matter of time.

Murphy’s law is as applicable to your financial situation as it is to anything else – if it can go wrong, it will go wrong. If you’re pretending it won’t, you’re working with a money management plan that will ultimately come up short when it does.

It leaves room for flexibility.

This sounds like “expects the unexpected,” but it’s a little different. “Expect the unexpected” means regular and intentional savings for big expenses you do not see coming.

Leaving room for flexibility means not committing your spending down to the last dollar of your income. It acknowledges that some months you might have to put an extra tank of gas in your car, or perhaps just a fun thing comes up to do with friends that you weren’t expecting that costs some money.

If your income is committed down to the last dollar in terms of expenses, even a small unexpected expense breaks the budget.

Notice the difference here – it is fine to have a plan for all of your dollars – but you need to make sure you’re not committing each one to a specific expense. Some of your dollars need to be committed to flexibility.

Budgets need breathing room. How much breathing room probably depends a lot on how much of a planner and categorizer and tracker you want to be, but every money management system needs a way to roll with smaller expenses that you don’t expect, without having to tap into its savings or emergency system.

It is highly interactive and has regular opportunities for feedback.

If you are a person who gets to the end of a month only to realize you’ve once again not met the savings goals you have for yourself, or, worse yet, added more debt to your credit card – you need more regular check-in points.

A common thing to do in budgeting is to plan it, set it aside, and look at it again at the end of the month (or maybe many months later) only to realize it didn’t go according to plan. Money needs to be interacted with regularly. It’s impossible to believe we will be successful in money management and accomplishing our financial goals if we only take stock of them once a month or a few times each year.

This would be like expecting to transform our fitness by taking Zumba class once a month, or to improve our dental hygiene by flossing only once a year.

If you have a monthly budget but you only check it at the end of the month, how could you possibly correct for any overspending or missteps during the month?

And for those of you who may be clamoring that you are quite successful with money and staying in budget, even though you don’t budget or track regularly, I would posit that you have a lot of small, intuitive, subconscious, and/or casual interactions with your money regularly, and that you are not actually avoiding or ignoring it for months at a time. You may not need this level of intentionality in creating more regular check-in points, because you’re doing it on autopilot, but this blog post probably wasn’t written for you anyways.

The other reason this is important is because sometimes a system that worked for you at one point, may no longer be working for you, and it’s important to see that and make changes to it sooner rather than later.

The use of debt is minimal,
strategic, and intentional.

Debt – while not an enemy of a good money management plan, should only be included in ways that involve a full analysis of the costs and benefits of taking it on (say, for education, or a home purchase), because debt payments can severely limit your agency and flexibility to make and adjust your money management plan.

A person who carries very little debt can often, in a pinch, substantially reduce living expenses for a month or two if that is needed; a person who carries a lot of debt has no such option.

About 50% of Americans are currently carrying credit card debt (that doesn’t get paid off, in full, each month), and there is nothing that wrecks a money management plan faster than letting this be an okay way to deal with cost overruns.

It is not.

It is crippling, and it’s typically related to some type of avoidant thinking about money that allows us to believe that even though there’s not enough of it now, surely there will be so much more of it in the near future that we will be able to not only cover our future expenses, but also help pay for the ones we took on in the past.

Credit cards are also quite psychologically elusive. It’s easy to feel like the charges you put on them are not real, and not immediately taking away from your quality of life or other wants or needs that you have. But they are real, and in fact they are taking MORE away from those other things, since the 20-35% interest rates most of them carry mean you’ll be paying a lot more for that $500 charge than $500 of the real dollars in your bank account.

There is not a good money management system out there that uses credit cards in any way that doesn’t include paying them off, in full, every single month.

It hasn’t forgotten about
a future version of you.

In the hierarchy of needs, we all have a present bias (and should). After all, if we can’t survive in the present, it seems unlikely that we’ll need to plan for the future.

The problem is that we also tend to have present-bias for our current wants over our future needs. Once your current needs are met, the next critical step in a money management plan is to start putting money aside for those future needs.

Even an extremely effective current money management system will likely leave you feeling let down if it fails to consider how it needs to provide for a future version of yourself.

This is why underearning – even if you don’t have any credit card debt – can be so insidious for your financial health. If you’re able to live comfortably on your current salary but aren’t able to save for the future-you, then that is also setting you up for future failure. In fact, spending mindfully and within your means while also not being able to save is a sign that you might be underearning what you need to make to live comfortably.

The real magic is in your ability
to follow it.

Don’t get me wrong, having the plan is important.

And a plan that ignores any of the above items is likely going to leave you feeling unsuccessful and in a financially vulnerable position, even if you implement it with extreme fidelity. But the implementation, that’s where the actual magic happens (and where things tend to really fall apart) for a lot of people.

The magic of a plan that fits you – that works for you, is that it takes away a lot of the unnecessary barriers to your successful implementation.

Hate tracking?
If you hate tracking and can’t seem to do it, you need a money management plan that can keep you in budget without asking you to track or categorize your spending in an excessively detailed way.
Always have $0 in your checking account?
If you tend to spend down to the last penny available in your account, you need a plan that automatically takes those funds out of your account and puts them towards your savings goals (likely in a completely separate savings account you won’t see next to your checking account) so that you never see that money as “available” to spend.
Credit card debt keeps sticking?
If you just can’t stop building up credit card debt that you can’t pay off at the end of the month, you need a plan that doesn’t involve a credit card. At all – get rid of it.
Avoiding looking at your money?
If you simply have a hard time looking at your budget and your money regularly, and a daily or weekly calendar reminder isn’t getting you any closer to the regular interactions you need to have with your money, you may need an accountability partner or a coach.
Can’t find a plan that works for you?
If you’ve really struggled to find a plan that works for you, think about something unrelated to money that used to be extremely difficult to navigate, but that you have since set up the systems and processes in your life to make more functional. What systems or processes did you put in place to make that change? How can those be translated to your money management?

The beauty of a good plan is that it works for your brain and your way of living.

But no plan is going to go through the hard work of saying “no” to something you want to spend money on because it’s simply not in the budget, that’s on you.

GPS can only get you so far – the rest is on you, the driver

Yep – we’re repeating point 8, and giving it its own section – that’s how important it is.

The plan (aka your GPS) itself can’t go through the process of pursuing more or higher paying work because you’re simply not making enough to pay for what you need or want.

If you’re trying to spend less, but you haven’t found yourself in a situation where you, in the moment, make a conscious decision to turn down something that sounds good to eat or fun to do, the plan may not be the problem.

You need to put your attention and effort on implementation, on staying present in every spending decision and making them in alignment with your plan. A plan that is a good fit for you will remove unnecessary barriers to its success, but a plan that is a good fit for you won’t remove tradeoffs and hard decisions. You’ll still have to make those.

That might mean being honest with yourself about what contexts really push you to make spending decisions that actually aren’t in alignment with your budget or values, and avoiding those contexts where you tend to overspend – at least until you clearly develop the habitual ability to say “no” to items you never really intended to spend your hard-earned money on.

Here’s an example of how this has worked for each of us:

Being mindful of the fact that we’re not trying to say “what works for us will work for you,” we also think sometimes, examples of what this implementation and “setting yourself up for success” piece looks like in practice can be helpful. (And it’s good to have evidence that even your financial planners have to work hard to keep good money management plans and habits in place, and that each of us approach this a little differently.)

So here are a couple of examples of how we have created contexts that set us up for success.

First, become aware of these contexts.

I have realized that it’s never worth it for me to take a casual trip to Target or the mall because I always leave with something I didn’t intend to buy.

Second, put a system in place to stay away from the context that’s pushing you to spend when you don’t logically want to.

I learned to only go to Target or the mall if I have a specific need and to try to squeeze those trips in between other meetings/events. Why? Because I can’t spend an hour casually browsing (& finding fun things to spend money on) if I have to get to work in 20 minutes. I have to run in, grab my vitamins, and leave!

Third, keep getting back up.

The important trap to avoid here is to think “well I already messed up, what’s the point in continuing?” whenever I do end up going to Target for some mindless spending. I try a more compassionate, forgiving approach with myself and it usually works to think “I probably shouldn’t have gone to Target today and I plan to avoid it for the near future until I’m feeling more in control of my spending.” Basically “I messed up and I’m going to do better by avoiding it” (owning my mistake and committing to action to improve).

I definitely recognize that we’re not all going to be perfect robots sticking to our budgets and systems (remember the flexibility piece above??) – so I recommend working with your humanity to practice both radical honesty and accountability with yourself about messing up, but then taking action to do better. And again! I’m not saying this will work for you – it’s just an example to help give you more concrete detail on how you might translate it to fit you.

First, become aware of these contexts.

I place an extraordinary amount of value on spending quality time with my friends. What that means for me is that in times when I am earning enough to meet all my current and future needs, I budget a good portion of my discretionary funds for expenses related to this – I consider it to be very values-aligned, if all of my other needs and goals are being funded. But there have been many times in my life where my budget has simply been too tight to really spend money going out with friends, and I’ve had to be really careful of my tendency to overspend in these contexts.

Second, put a system in place to stay away from the context that’s pushing you to spend when you don’t logically want to.

I learned that it was unrealistic to think that I’d be able to go out and say, buy a beer, and not have a second beer and maybe get some food also if I was with good friends and having a good time. Suddenly an $8 outing has turned into a night where I spent $40-$50.

So, there have been many stretches of time in my life where I simply didn’t say yes to an outing that involved eating and drinking out with friends. I knew I simply wouldn’t be able to resist the urge to spend more than I had intended.

But I didn’t abandon my friendships entirely – they are, after all, very high value. Instead, there were more walks, bike rides, and backyard bonfire nights. Ways that we could connect and spend time together, without having to spend a lot of money to do so.

Another key piece of this for me was honesty. Though it’s hard to say to friends, “I simply can’t afford this right now.” I found that it has been critical to set that context with them right from the beginning, so that I didn’t have to come up with an excuse not to go out and eat and drink, and so that they knew I was not avoiding them or not wanting to hang out, but rather, I was just prioritizing not overspending.

Third, keep getting back up.

I like that Gabbi used the words “radical honesty and accountability” about messing up, and talked about taking action to do better. I have found that, when my budget is tight and lacks flexibility, a clear and immediate tradeoff is the key to making better decisions in the moment, and quickly getting back on track. I don’t like the feeling that things are spiraling, and I’ve had many times where even a penny over budget was more than I could sustain. I’ve learned that it’s important for me to make a quick correction so that my brain stops worrying about a past poor decision and how it’s going to impact my bottom line at the end of the month. The easiest way to do that is to find an immediate tradeoff for what I just overspent.

So, for example, if I went out intending to spend $8 on a single beer, and ended up ordering dinner and a second beer, and all told spent $40. That’s $32 I didn’t intend to spend. I may have a $30 weekly budget for groceries – and so the next day I might sit down and look at my budget and decide to skip a week of grocery shopping. In my case that doesn’t mean I won’t eat… it just means I’ll be living on peanut butter, and whatever random assortment of food that’s left in my house that won’t excite me, but will sustain me.

And while a diet of expired canned green beans, ramen noodles, and peanut butter may feel like “self-punishment” to some, it doesn’t feel that way to me at all–it feels like choice and agency. In fact, if I do find myself in the exact context I’m trying to avoid again, I can quickly and easily frame up the conversation with myself as “if you have another beer and order some dinner tonight, are you willing to eat oatmeal for every meal this week since you won’t have it in your budget to grocery shop?” and if the answer is yes, that’s great. I have full, guilt-free permission to spend and not feel bad about it. And that’s a form of self-care, because I have agency and flexibility in making that decision, and don’t have to feel bad about it if I do.

Have a question or want to reach out to Lorri or Gabbi?

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Using Difficult Financial Stretches as a Metric for Measuring Progress

Back when I was teaching, I used to have a lot of conversations with high school students about how we show up on our “worse than average” days as being far more important to the general trajectory of our lives than how we show up on our “better than average” days. That if they wanted to make substantial and significant changes in their lives, to their wellbeing and their success (however they chose to define it), that their energy would be best spent thinking about how to make small, incremental improvements to the 50% of days that were below the median.

Why?

It’s relatively easy for most of us to show up on our “better than average” days—to do what we need to do to progress. On the best of those days we might be hitting figurative home runs, and on the just slightly “better than average” days, we might just be getting on base because we got hit by a pitch. But hey, we’re still on base, making progress in meaningful ways towards a life that we want.

Then there are the days that ask a lot of us. And the truth is – financial days and financial stretches are no different. We will have days where it feels like the world has been generous with us and we are making great financial decisions effortlessly, and days when it feels like everything bad that can happen has happened to us, including some of the financial decisions we’ve made. And we will likely have a lot of ho-hum days in between.

And while I’ve talked about strategies for coping with and getting through the worst of these financial seasons in the post Getting Through A Money Slump, the topic of this post is a bit different. I want to talk about using our slumps as metrics of our progress. Because if we’re going to place a high value on improving the “worse than average” 50% of our financial days, we ought to have some way to acknowledge our progress.

The Problem with Best Day Metrics:

I love things that I’ve learned how to do as an adult because I have a much clearer memory of the trajectory of my progress. Skiing, golfing, playing guitar – these are all things I’m quite average at now, but I remember being quite bad at them. And unlike things I learned to do as a kid, I have a good memory of my learning curve and critical points along its path, including all those highs that came when I accomplished something that had at one time felt impossible.

Best day metrics are relative, depending on skill level, but I can clearly remember the first time I broke 110, or 100, or 90 on the golf course, the first (and, so far, only) time that I skied down a run with a black diamond on its sign, the first time I played a song all the way through with no mistakes on my guitar. It was a rush, a total high, and a pretty good recipe for a let-down because it usually brought with it the expectation that this was the new normal, creating a wildly unrealistic metric for the average and bad days that would follow.

Best days make good metrics for future best days. They make terrible metrics for the other kinds of days. It’s no different with money.

Consider this situation:

You’ve been working hard to manage your money and seeing incremental progress, saving each month and building up your emergency fund. You’ve almost hit your goal of $10,000. Then, you happen to coast through an inexpensive month with no unexpected bills, and you also get a bigger than expected tax refund. Then another month goes by, similarly, no major unexpected expenses. For the first time ever, in your whole life, you now have a $10,000 emergency fund—something that at one point felt like an impossible goal to achieve. Suddenly, everything feels like it’s starting to work for you, and you’re feeling great about your money management and all the hard work you’ve put into getting here.

But then, your water heater and your transmission go out the next month, $10,000 walks out the door, and your savings account is empty. And maybe nothing at all has actually changed about how you’re managing money (or maybe because you were tired and frustrated you did some online shopping and got some takeout, adding a little insult to life’s financial injury). But emotionally, you’re crashing—you were feeling so good you accidently created a new normal out of a best-day metric and now things feel really bad. In that moment it might even feel worse than if you had $10,000 of expenses come up and no money in your savings account, because at least then, you would have continued to believe that hitting that $10,000 goal was impossible.

And even though we instinctively can’t help but make that comparison… it’s a bit like comparing your personal deadlift record to the amount you can deadlift when you have the flu.

It doesn’t really make any sense.

The Case for Bad Day Metrics:

Bad days and how you progress through them are worth noticing. They will often tell you more about your financial progress than your best day metrics, AND without all the unrealistic expectations that best day metrics create.

Let’s go back to the scenario where your water heater and your transmission go out in the same month and that emergency savings account you had worked so hard to accumulate is back down to $0.

If you stop comparing that scenario to your recent best-day stretch, and instead think back to 2 years ago, when the only option you would have had to cover $10,000 of unexpected expenses would have been to put it on a credit card, you can suddenly see that you have made a substantial amount of progress in this area. At one time this scenario would have been a financial crisis, whereas now, while it feels like a really crappy punch in the gut, it is actually an incredible marker of the progress you’ve made.

If you’re having a hard time managing cash flow this month because of bad circumstances or impulsive decisions, but that just means you didn’t make a contribution to your savings, and 2 years ago it would have meant dollars onto credit cards, that’s a big deal.

And the truth is, we don’t generally need a reason to carry on and keep up the good habits we’ve worked so hard to develop on our best days. The best days are, in and of themselves, quite rewarding and motivate us to keep going. But for most of us, to keep from dropping into the depths of despair, we need a way to measure progress on our worst days, to put them into perspective, to remind ourselves of how far we’ve come, and the only way to do that is to compare our worst days to your previous worst days. Our worst day metrics can tell us a lot about our progress at a time when we need to hear it the most.

Setting Realistic Expectations for Good Day Metrics:

I want to be clear, I think there’s a place for best day metrics, they tell us something about our highest potential to achieve (in a given moment), but we over assign value to them, often to the detriment of our progress. It’s not actually motivating to most people to feel defeated or less than what we are capable of being (I do want to acknowledge that for a small, fairly vocal, group of people this actually can feel motivating, but for many, it’s actually highly demotivating).

So, if we take our best day metrics, and overgeneralize them to our average and worst days, for many people, it ends up creating a sort of self-defeating space, where a bad day tested against a good day metric takes us into the headspace that looks something like:

Well, I guess I’m not any good at this after all. It was too good to be true to think I could stay on budget and have an emergency fund. This is always just going to be a struggle and I’m never going to be any good with my money, and I guess I’ll go back to my old financial ways because at least I was having more fun then.

So, it is important to have some bad day metrics to compare those inevitable bad days against to avoid this type of spiraling.

But, for those of us who are reasonably average at many things (and most of us are) with effort and time, good day metrics can and often do become average day and sometimes even bad day metrics, we just can’t expect them to be right way.

The first time I broke 100 on the golf course, the problem wasn’t in thinking that I was a golfer who could break 100, the problem was in thinking I was a golfer who was going to break 100 all the time from there on out. The truth is it took me almost a year to get back to that score – A YEAR. And it was one of the most frustrating and least fun years of golf that I have ever played, because every time I went out thinking I could break 100, and every time it didn’t quite happen, and I left quite discouraged. But now, 100 is a “worse than average” day metric for me on the golf course (and yes, for those of you who play a lot of golf with a high level of skill, you’re correct in thinking I’m still not that good of a golfer). And the fact that 100 is a bad day metric but it used to be a good day metric is a useful thing to remind myself of when I’m starting to feel frustrated.

Good day metrics have their place, and it’s fun to historically compare their peaks, but if you put them into the wrong place, you really risk a level of discouragement that can be crippling to progress. And your money trajectory is too important to let it fail because you used the wrong benchmark to compare yourself to on a bad day.

So go back and make yourself a list of those financial low points in life and remember to pull it out when you’re having a bad financial stretch. Maybe 5 years ago it was credit card debt you used to bail yourself out of a jam, then 3 years ago you had to spend down every last dollar of your savings account, and today, when a major unexpected expense came up, you still had $1000 dollars left over, and that’s substantial progress, even if no one is giving out trophies for incremental improvements on our worst days.

It’s natural for all of us to want to live up to our peaks all the time, but it’s important to realize when that’s actually getting in the way of our progress rather than propelling us forward to new heights. In those times, it’s critical to find a piece of information, a realistic metric, that allows us to take the next smallest step forward when we’re feeling discouraged, unmotivated, or disappointed.

Is Washington’s New Roth Deferred Comp Option Right for You?

This fall, WA State Department of Retirement systems will be rolling out an option to make elective deferrals to retirement savings accounts (aka Deferred Comp, DCP, or 457(b) accounts) as after-tax, Roth contributions.

Prior to this, state employees and others served by the DRS Deferred Compensation Retirement plan have been limited to pre-tax (aka as traditional or tax-deferred) contributions to their retirement plans, and the change has many asking if they should utilize the Roth option or continue with their traditional contributions.

For a brief review of account types: traditional contributions are made pre-tax (so you don’t pay income taxes now). They are invested and are only taxed when you take account distributions in retirement. But when you do take distributions, you’ll pay income tax on both the original contribution amounts as well as the investment earnings. Traditional contributions are a great way to lower your current taxable income, but they aren’t tax free. They just defer your taxes to a later point in time.

Roth Contributions are made after tax, which means they don’t lower your current taxable income. But once the contributions are made, they are allowed to grow tax free from that point on until you access them in retirement. When distributions are taken from a Roth account, you don’t have to pay taxes on the distribution, so the investment growth is essentially yours, tax-free.

While there is no single right answer to the Roth vs. Traditional contribution question, there are steps to work through when trying to decide if the new Roth Deferred Comp option is right for you:

1

Establish a rough estimate of your post-retirement income and determine whether it will represent a change in tax-brackets.

1

Establish a rough estimate of your post-retirement income and determine whether it will represent a change in tax-brackets.

Most people served by the state administered DCP program will also receive a Plan 2 or 3 Pension, Social Security (with the exception of those served by the LEOFF program, many of whom are exempt from Social Security), and possibly funds from a Plan 3 TAP Annuity. The combination of these funds means that you will likely have a fairly steady source of taxable income in retirement. It’s a good idea to start by trying to anticipate how much, and if it will adjust/change your tax bracket at all.

A tax-rate calculator can help you get a sense of what income tax bracket you might be in at retirement so that you can compare it to your current tax bracket. If you’re not sure what your current tax bracket is, these days, when you finish preparing your taxes (or get them back from your tax preparer), they typically come with a summary comparison sheet for the last 3 years at the front of the document. At the bottom of that comparison sheet, you’ll be able to find your marginal tax rate to compare it to the projected marginal tax rate shown on the calculator above.

If your tax bracket looks like it will be drastically lower in retirement – that bodes well for favoring traditional, pre-tax contributions, when possible. But for many teachers, state workers, and other public servants who are also good retirement savers, it’s quite possible that your tax bracket may be equivalent to, or in some cases even higher, in retirement. And if it looks equivalent (and none of the other considerations below apply) it’s a good idea to consider using a Roth contribution method for at least half of your ongoing retirement savings. That being said, item 2 below might point you in the direction of directing an even higher percentage to Roth contributions, while item 3 might actually suggest it’s a good idea to wait a few years before starting to make retirement contributions as Roth contributions.

2

Determine how much tax-deferred savings you already have, and how that will impact your future, taxable income.

2

Determine how much tax-deferred savings you already have, and how that will impact your future, taxable income.

As I mentioned in this article on teachers who may have too much tax-deferred savings, it’s a real possibility for someone who has worked in a state or teaching job and who has saved aggressively for retirement to create a situation where, once Required Minimum Distributions begin, they are catapulted into a significantly higher tax bracket in retirement than they’ve ever been in before.

At that time, for teachers, I recommended considering a Roth 403(b) as a potential alternative savings method, but there really wasn’t a good alternative for state employees. The good news is that with the state’s adoption of the Roth DCP plan, teachers and all others served by DRS and the state DCP plan will now have the option to make some or all of their retirement savings Roth contributions, for many, eliminating the need to go the 403(b) route at all.

A great way to determine how impacted you might be by this phenomenon is to use an RMD Projection Calculator. This will allow you to see how much you will be required to start taking in Required Minimum Distributions in your early to mid-70s. You can add this to the taxable income you’ve calculated above in the tax bracket calculator and see how it impacts your tax bracket. If it looks like the existing savings you have is going to produce substantially more in RMDs than you need, and will drive your tax bracket up even farther, it’s worth considering a full switch to Roth contributions as soon as possible (provided you won’t be significantly impacted by the issues in point 3).

3

Determine whether increasing your taxable income now will have any unintended, drastic consequences on your tax deductions or credits.

3

Determine whether increasing your taxable income now will have any unintended, drastic consequences on your tax deductions or credits.

All other things being equal, I tend to favor Roth Contributions as at least an equal portion of retirement savings for most people, unless they are in a marginal tax-bracket higher than 30% currently, or they have a good reason to believe they’ll be in something like the 10-12% tax bracket through most of their retirement. If we pull financial planning out of the hypothetical spreadsheet world and look at it in real terms of real people retiring, I’ve rarely met a retiree who regretted the amount of Roth contributions they made along the way, while many are overwhelmed by the tax implications of large tax-deferred retirement accounts. The truth is, when you’re making money, paying taxes is a pain, but it’s not a source of great anguish for most people. But in retirement, when income is fixed and you’re no longer adding to your investments, bigger than normal tax bills can actually be a source of great mental stress for many retirees because they see the taxes they have to pay pulling from a fixed pot of income that they are not replenishing each year with a salary.

That being said, there are certain situations where your Taxable or Adjusted Gross Income may be just barely qualifying you for a lot of tax breaks (in addition to a generally lower tax rate) that you wouldn’t get if you suddenly started to show even a little bit higher Adjusted Gross or Taxable Income. This is a particularly relevant consideration when you’re getting big tax breaks related to your kids (for childcare, higher education expenses, etc.).

While the details of each of these are too much to get into here (these types of tax breaks phase out at all different income levels, so unfortunately there is no succinct way to explore them all), suffice it to say that it’s worth discussing with your tax-preparer or financial planner the consequences (and potential lost tax-advantages) if you’ve been making fairly substantial pre-tax contributions and suddenly start making those as Roth contributions. Besides just paying taxes on more income, are there other major advantages you might be missing out on if you make this switch from traditional to Roth contributions?

What Else Do You Need to Think About when Switching to Roth Contributions?

Once you’ve decided to make the switch, there are a few things that you may have questions about, or that you’ll want to keep in mind going forward.

1

If you’re switching from pre-tax to Roth contributions, but plan to contribute the same percentage or dollar amount as before, you’ll see a smaller paycheck due to the taxes taken out.

1

If you’re switching from pre-tax to Roth contributions, but plan to contribute the same percentage or dollar amount as before, you’ll see a smaller paycheck due to the taxes taken out.

For example, if you were making a $1000 per month contribution to a traditional DCP account before, and you decide to make that $1000 contribution to a Roth DCP account going forward, they’ll still only take out $1000 for the contribution, but they’ll have to withhold taxes on the contribution amount, since taxes will be owed this year. Depending on your tax bracket, you could anticipate that your monthly take-home pay on a $1000 contribution might be $100-$300 lower to account for this additional amount you have to pay in taxes now.

2

The total contribution limit hasn’t changed.

3

There is no income limit for Roth DCP contributions like there is for Roth IRA contributions.

2

The total contribution limit hasn’t changed.

In 2023, you can still make a total DCP Contribution of $22,500 (or $30,000 if you are 50 and older). Whether it’s all Traditional, all Roth, or a combination of both, this is still the maximum total amount you are allowed to contribute to DCP per year.

3

There is no income limit for Roth DCP contributions like there is for Roth IRA contributions.

This is a question I receive a lot, and it’s a great point to be aware of. For many folks who have been phased out of their ability to make traditional Roth IRA contributions due to the income limitations, it’s important to realize that these income limitations do not apply to Roth DCP contributions. So, income levels are worth considering because they impact tax brackets, but there’s no point at which you won’t be allowed to make Roth contributions to your Deferred Comp account should you want to do so.

Without knowing exactly what the future brings in terms of income, tax-brackets, and investment growth, it’s hard to know with 100% precision whether Roth Contributions will be the right call for you going forward. That being said, by considering all of the factors above, and working with your financial planning or tax professional, you’ll be able to make a reasonably educated guess about whether you want to take advantage of this new Roth Contribution option being offered by WA State Department of Retirement Systems.

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Image attribution: Header image by Sean Oneill via Flicker. Some rights reserved.

How much rent or house payment can you afford?

How Much Rent or House Payment Can You Afford?

This is a question I get frequently from clients, and there’s unfortunately no “one-size fits all” answer to this question. However, whether you’re considering rent or a mortgage payment, there are some key financial metrics and guidelines that can help you make this decision.

Conventional Rules of Thumb for Monthly Housing Costs

Most conventional recommendations advise limiting your total monthly cost of housing to 28% of your gross (before-tax) monthly income. So, for example, if your gross pay is $7000 per month, you’d be wise to shoot for a maximum housing allowance of about $1,960 per month for a rent or mortgage payment. And while this is a good rule of thumb to consider, there are other factors that may be at play in your personal financial situation that you want to take under advisement as well.

When considering the 28% recommendation for housing – look at how it factors into your other key financial ratios:

50/30/20 Ratio (For Renters and Home Buyers)

The 50/30/20 Ratio states that, as a general rule, 50% of your take-home income should be spent on non-negotiable needs (Rent or mortgage, utilities, groceries, insurance, and minimum debt payments), 30% on wants (Shopping, eating out, happy hour, concerts or sporting events), and 20% should go to savings, or to making additional debt payments if you are trying to get out of credit card or other non-secured debt. So, in the example above, if your $7000 monthly gross income results in $5,600 in monthly take-home pay, you would be wise to not exceed $2,800 per month in spending for necessities. And if the $1,960 per month that you’re spending on rent or a mortgage pushes you over that limit, you may want to reconsider whether it’s financially feasible for you to take on that payment or whether you need to look for a lower-cost housing option.

Overall Debt to Income Ratio (For Home Buyers)

Your total Debt to Income Ratio basically demonstrates to lenders what percentage of your total monthly income is going to pay off existing debts and is an important factor to consider if you are thinking of purchasing a home. Typically, a good or ideal debt to income ratio will have no more than 35% of your gross monthly income being spent on repaying debt (including the mortgage payment you’re intending to take on). So continuing with our example, if you were making a gross income of $7000 per month, ideally no more than $2,450 of that would be spent on paying down debt. That means that in order to afford your $1,960 per month mortgage payment, you’d need to have less that $490 in other monthly debt payments.

Don’t Neglect the Cost of Your Escrow Payment, Increased Utilities and HOA Fees

For first-time home purchasers, a major source of monthly-payment shock can come in the form of what you pay monthly to cover your escrow account payments. This amount essentially goes into an account that your property taxes and homeowner’s insurance are paid from. Because property taxes vary so widely, it’s hard to give an exact prediction of what this amount will be, but you can anticipate that it will typically be at least several hundred dollars, if not more in higher priced housing areas. When working with a lender on pre-approval, make sure they provide you with total monthly costs including escrow for different purchase amounts, and make sure to take that into consideration when evaluating the total cost of housing as part of your 50/30/20 Ratio. Utility costs often increase for homeowners as well because certain utility payments are factored into the cost of rent that will have to be paid separately when you own a home. And for condo purchasers, it’s also important to factor in the cost of monthly HOA dues.

Can You Cut Back Other Expenses to Commit to a Bigger House or Rent Payment?

If you were my client, I would advise against this as a plan without testing it first. If you were insistent and committed to it, I’d ask you to prove it to me. Prove to me that you can sustainably cut expenses elsewhere before you commit to a 30-year monthly payment on a home that exceeds recommended ratios. And the catch is, you can’t take it out of the 20% savings category. If you’re confident that you can reduce your “wants” spending to say, 15% so that you can afford more in the needs category, spend a year doing that before you commit to doing it for 30 years. And take that opportunity to save that extra 15%. After all, you’re about to embark on a purchase that will inevitably require a bigger buffer savings account than you needed when you were renting, so you might as well start now.

But if you’re already having a hard time meeting your 20% savings goal with your current monthly expenses or have already accumulated some credit card debt because you overspend monthly or when things come up, you are fooling yourself if you think that suddenly buying a home that increases both your monthly expenses AND your potential unexpected expenses for large-ticket items is going to fix this. It will not, no matter how alluring the idea of home-ownership is.

What If You Live in a Place with a Very High Cost of Living

This is very much a reality for many folks, and I’m not naïve to how variable housing costs are in different areas of the country. That being said, I think it’s important to have the conversation about the tradeoffs that come with being a lower-income earner in very high cost of living areas. Long-term, it is likely not going to be a sustainable way to live unless you are 1) actively pursuing a way to make more money, or 2) willing to explore alternative options for housing, like living with or renting to roommates, or possibly renting or purchasing a very small space. All of these are viable options, but otherwise, it just doesn’t compute. It’s not ever going to get easier to make ends meet living in an area where you can’t afford the cost of living unless you have a plan to either make more money or find creative ways to spend less. High cost of living areas are often filled with opportunities to make higher salaries, but if you are not pursuing those opportunities and are not willing to reconsider where you live, you may need to reconsider how you live and who you live with in order to make the available housing options affordable to you.

At the end of the day, there really is no one right way to do this. No exact rule that can answer this question for you. But ultimately, I’ve seen far too many people try and make high-cost housing options work that end in nothing but financial heartbreak and frustration. Keeping your housing choices within the realm of what you can afford is extremely important for your long-term financial health, and it also factors into preserving the life you want to live today (after all, for most people it’s a big tradeoff to let go of all their “wants” spending simply to buy the house they want… especially when considering how long the commitment to a mortgage is). But above all, I encourage you to avoid the trap of thinking you can make something work if you haven’t taken the time to prove to yourself that you can sustainably live on what’s left over after you’ve taken on the bigger mortgage or rent payment. That’s something to test before you make a life-changing financial decision, not after.

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What’s driving your impulse spending?

What’s Driving Your Impulse Spending?

Let’s face it. When it comes to spending, 99% of us are making choices that involve tradeoffs. More money spent today means less to save for the future. And even if we just consider the tradeoffs in our current lifestyle, more money spent in one category of our budget means less that’s available for another.

In one of the earliest Sustain Financial blog posts, I talk about using a question to help us evaluate these tradeoffs: In this more important than…? But in this post, I want to explore another tool or strategy to help you on the path to making more consistently aligned spending decisions: taking the time to think about what the underlying feeling is that’s driving your impulse to spend.

To make any of these strategies really work, the first thing to recognize is just how much of our spending is a choice. That’s not a criticism of unnecessary spending. I, too, enjoy spending money on things that are wants rather than needs. But many of the “essential” items on our lists: expensive groceries rather than budget-conscious groceries, cable and streaming services, new clothes, new phones, etc. are not exactly the necessities we sometimes make them out to be. That doesn’t mean it is easy or comfortable to get rid of them. But if we really are honest about what our families need to survive, it’s basic foods that can be prepared with inexpensive staples, a roof over our heads, clothes on our bodies (old clothes will do) and not a whole lot more. So, everything else is really a choice we’re making about what to spend money on.

And while it helps to weigh that choice in terms of whether it’s more important than another option or choice, sometimes if there’s a really pressing feeling under that impulse to spend, just asking the “is this more important than…?” question may not be enough to override that impulse.

This may seem overly simplistic, but I think a few concrete examples may be a good way to illustrate how there is often a lot more to this question than what meets the eye.

So, a great series of follow up questions are…

“What’s the underlying need
that’s driving this decision?

Will this spending even actually
meet that need?

Is there another way to meet it
that won’t blow my budget?”

The examples I’m going to explore here are:

1) The need to buy a new item for your home

(decoration, piece of furniture, storage containers, lawn chairs etc.)

2) Unplanned eating out

In my work with people around budgeting I find these two categories are really common places where people don’t plan for a lot of spending and often end up consistently over-budget. Which means that they are likely a place that a lot of unplanned, impulsive spending happens.

Let’s start with that new item for the home.

These purchases can seem like innocuously small things, often bought with no real forethought, but whose accumulation over time really adds up. The thought that goes into purchasing them is often something like, Wouldn’t that look nice or be nice to have in the house or yard, and it’s only $30. But then it’s $30 here and $20 there, and pretty soon it’s several hundred dollars in a month that you hadn’t planned on spending.

So, what would it look like to dig into what’s behind that spending desire. Really common underlying forces in this type of decision are a feeling that this item can fix or make you feel better about something you’re not fully satisfied with in your living environment or your life. Boredom with your current home environment, clutter, or jobs that need to be done around the house that you don’t really want to do, are all common reasons we seek to add something to our living environment. No matter what it is, it’s really important that you clearly identify the current problem with your home or your life that you think this purchase will fix. If I’m tempted to buy new plants or outdoor furniture, but when I really think about it, my yard has a ton of weeds in it. The plants and the furniture are a distraction. I should probably head home from Target (or get off Amazon) and start pulling some weeds.

If the current problem is a lack of seating, and you’ve landed on a $500 chair that you really can’t afford right now, then the next question would be, is there a way to fix the problem with a less expensive solution? But it’s highly probable that the need you’re trying to fill may not actually be quite so directly linked. For example, you may be feeling bored with your home. It might be that your house doesn’t look how you want it to – and rather than cleaning it, or sorting, organizing and donating items you don’t need any more to reduce the clutter that’s actually underlying your dissatisfaction, it’s easier to just simply buy an item that will add a little novelty for a little while until it, too, eventually becomes something you are bored with and/or adds to the clutter.

It may be that you’re missing backyard parties with friends or camping with family, so buying a new cooler or lawn chairs might make you feel excited about that being a part of your life again. It’s not that the cause will be the same for everyone, but rather, that it’s extremely important to identify the cause to evaluate whether the purchase you’re about to make will alleviate your underlying feeling of boredom, dissatisfaction, etc. for more than a few hours or a couple of days. And it will give you an opportunity to think about what will alleviate that feeling if this impulse purchase will not. Is there something you can clean, re-arrange, organize, donate, etc., or can you start planning the next camping trip or backyard barbecue? All of those are much more likely to create a more lasting impact on that underlying feeling than buying that item will.

Eating out, particularly unplanned eating out, is a trickier example, since it’s typically linked to hunger, and food is a basic human need

But like the $500 chair, it is a good example of where there are opportunities to assess whether the trip to McDonald’s, the café next to your work, or the local taco truck are really the only ways to address your underlying need.

The “underlying need” question is not really whether food is a way to satisfy your hunger – of course it is. But rather, it’s whether eating out is really the only way to meet the need and to assess the other underlying feelings that are leading you to convince yourself that it is. Just like in the first example, though, these are often decisions made at the last minute and impulsively.

And they are also ways that $30 here and $20 there can end up adding up to hundreds of unplanned and unbudgeted spending at the end of the month. In the moment, they never feel like that much, but they add up quickly.

For example, if I’m driving home from a long day at work and I’m hungry, and I don’t have a plan for dinner, or I have a plan for dinner that’s labor intensive or doesn’t really sound very appetizing, going out or picking up takeout may seem like an irresistible decision in the moment. It might even feel like a need. And your hunger will, in fact be satisfied by this purchase. But the importance of identifying the other feelings at play here, whether they be boredom, convenience, etc. is that you won’t be able to see another option to satisfying your hunger if you can’t first identify what’s driving the desire to eat out when you hadn’t planned to.

If you’re simply feeling too busy, hungry, tired, or overwhelmed to actually prepare food, the solution can be as easy as stopping by the grocery store for a less expensive, low-effort option – like a can of soup, or making sure to keep a snack handy that will satisfy your hunger long enough to give you the energy to make dinner when you get home.

But, if you’re feeling bored with the food options you have at home, it may be time to put some effort into re-thinking whether the meals you’re planning have become too routine, and to introduce some new recipes into the mix. And in the meantime, since that’s more of a long-term solution, is there something you already have that you could do tonight to change it up that won’t involve the expense of eating out, like making breakfast for dinner?

If a lack of time in the morning has you running out the door before you pack a lunch, you could prepare a lunch the night before. But if it’s really that you’re bored with the sandwiches you keep pulling out of your lunch box, that won’t fix the compulsion to eat out instead of eating your sandwich. So maybe it’s time to think about adding something new to the lunch menu.

No matter the driving force behind all this unplanned eating out, the importance in identifying what’s driving it can’t be understated. Because if what’s really causing you to eat out is boredom with your current food options, but you misidentify it as being too tired to prepare food, then any of the alternative options you explore that will cost you less likely won’t be appealing to you because they’re not addressing the underlying issue that you’re just kind of bored with the food you’re preparing at home. A good way to recognize that you haven’t quite hit the mark on identifying the underlying driver behind your impulsive spending is that none of the alternative sound appealing or satisfying.

Looking for alternative ways to meet what underlies impulsive spending is not always easy, and it’s not always comfortable.

In fact, at times, you can be led down a path of realizing that you might be rather bored or generally dissatisfied with life, and that your impulsive spending may be your way of trying to avoid or distract you from that feeling. After all, it does provide momentary relief. But at what cost? It’s temporary (sometimes so temporary that only minutes later, you find yourself looking for another way to alleviate that discomfort), and it’s harming your ability to care for yourself financially.

So, if your path to uncovering what’s behind your unplanned and impulsive spending is deeper than just meeting a more superficial level of dissatisfaction with your menu or your home or the cold weather, it might be worth it to seek help from a qualified therapist to work through some of these bigger feelings of dissatisfaction that your overspending might be trying to alleviate for you. And the sooner the better, because overspending, particularly if it involves accumulating debt, is a problem that will only get worse the longer you put off dealing with it.

Ultimately, it’s not about whether or not it’s okay to spend money on things that are not necessary.

If you can afford it, of course it is. But unplanned, impulsive spending that wreaks havoc on your overall financial health or actively works against your ability to prioritize saving for the things you really value is an extremely important thing to address. And in order to address it, digging down into the underlying motivation behind it can be a critical step in the process.

Is a Debt Management Plan right for you?

Is a debt management plan right for you?

If you’re struggling with debt, particularly credit card debt, it can seem like an almost
impossible hurdle to get over on your path to better financial habits. Continue reading to learn more about debt management plans

Whether you ended up in debt due to discretionary or impulsive spending, an emergency situation, or because someone once led you to believe that it was a good idea to carry some credit card debt (it’s not, by the way, but that myth is still pretty pervasive), doesn’t really matter. Once credit card debt is there, its high interest rates can often make it feel like paying it off is an impossible task.

While there are a lot of strategies out there to tackle credit card debt, this post specifically examines the debt management plan as an option for tackling your debt. Good debt management plans are offered by non-profit credit counseling agencies, and are designed to negotiate lower interest-rates on credit cards and/or personal loans to create a single fixed payment plan with the goal of eliminating this type of debt in 3-5 years.

As part of the plan, you’ll work with a credit counselor to develop a detailed budget that factors in what you can afford to pay monthly on your debt. This will then be shared with your credit card companies, who have to approve the plan before you can start. Once the plan is approved, you’ll make payments to the credit counseling organization, who will pay off your cards per the plan.

An important component of this plan is that it’s not a new loan. You haven’t taken out another loan to pay off your debt, the credit counseling agency is just a middle-person between you and your credit card companies in terms of both negotiating lower interest rates on your behalf and distributing your single payment to payoff multiple loans.

How will a debt management plan impact my credit score?

Without getting too much into the weeds of your credit score, a debt management plan will likely have both positive and negative impacts on your credit score initially, but the overall long-term impact if you follow through with the plan will likely be a positive one.

And, in terms of other debt relief options, like debt settlement, bankruptcy, or taking out another loan to pay off credit card debt, this option is typically going to be the best long- term option for your credit score.

For more information about the specifics of how debt management might impact your credit score, I encourage you to check out this article about the pros and cons.

Can I still use my credit cards while on a debt management plan?

While on a debt management plan, you’ll typically be required to close all credit cards and may not be able to qualify for new loans or lines of credit (it will depend on the exact terms of your plan).

While this can seem intimidating, in my opinion, it’s a huge positive of a debt management plan for folks who are struggling to curb their own credit card spending and who need a way to resist the temptation of financing new purchases. The truth is, if you’re in a situation where you’ve run up credit card debt and you can’t afford something without taking on more debt, then you likely just can’t afford it. Period. A debt-management plan will make this non-negotiable. You won’t have to decide anymore.

How do I get on a debt management plan?

A good place to start is to find a well-rated non-profit credit counseling agency to work with. Nerd Wallet maintains an updated list of recommended, non-profit providers. Stay away from for-profit companies who offer this service, as their fees can often be excessive.

To start the process of seeing whether a debt management plan is right for you, you can fill out the contact form that they have. At that point, you’ll typically meet with a credit counselor and from there, they’ll be able to work with you to determine whether you are a good candidate for this process. Though this won’t be the right fit for everyone, there is simply no harm in applying if you think it might be the right course of action for you. The process of applying will not impact your credit score at all, and even if you apply and are approved, you still have the final say about whether to enroll in the plan.

Participating in a debt management plan may have a few small administrative fees attached (typically a one-time setup fee and small monthly maintenance fee), but for lower-income participants these may be waived. If you find yourself meeting with an organization that requires an application fee, membership fee, upfront fee or per-creditor fee, this is typically a red-flag. You’re most likely at a for-profit agency, and I recommend going back to the list above and choosing to start with an agency on that list.

If I’m approved, what happens next?

If you are approved and do enroll, make it a priority to complete the plan. Make your payments to the credit counseling agency on time, and don’t overspend your budget. 55-70% of folks who start debt management plans see them through to completion.

As part of your budget, work to put some money away each month for unexpected expenses so you’ll have options besides credit cards if an unexpected expense comes up. Be open to suggestions that the credit counselor makes about budgeting. And remember it will likely be impossible to do this if you’re not willing to make some adjustments in your monthly spending.

Understand that this will not be an easy process, but if you’re going to get your financial life in order, tackling credit card debt and paying it off COMPLETELY, is an essential first step.

Resolutions Slipping? Techniques for Getting Back to your Money Goals for 2023

Techniques for Getting Back to your Money Goals for 2023

As a person who works closely with money, I know that on the journey to meeting one’s financial goals, there are many roadblocks, ups and downs, and that nothing ever goes quite as planned.

So, as we ease into and through the second month of 2023, as most new year’s resolutions (goals, intentions, whatever you want to call them) have slipped to the backs of our minds where they would like to hide out until next January 1^st, it’s a great time to think about some techniques we can utilize to get back to living our intentions around better money management. So, if it feels like your financial goals are slipping or have already slipped away from you, instead of writing those goals off for 2023, try working through the steps below.

Take a break from spending photo of a person with coffee while working on their laptop.

Step 1: Pause

Take a break from money for a few days or a week. If possible, try to take a break from even your non-discretionary spending. I understand that in some cases, it’s not possible to go a week without spending at all (after all, bills, groceries, gas, and a few other items exist, sometimes with pressing timelines). But give yourself a break from all but the most essential spending and money decisions. They can wait. And likewise, don’t think about your savings goals during this time either. Just pause.

So much of our behavior around money is habitual and compulsive. It either feels good and successful, or it feels bad and out of control. And when we’re trying to create new habits, it can be almost impossible to see our way out of the space we’re in if we can’t get a break from it. Try to think of it as a money fast – you may not be able to go a month without spending, but challenge yourself to a few days, just to clear the system and the head. Use this opportunity to find a neutral headspace to work from.

Assess. An image of a person working in a journal.

Step 2: Assess

We deviate from our saving and spending goals for a lot of reasons. Sometimes, those reasons are not entirely within our control and sometimes they are. Sometimes it’s kind of a mix. From your neutral headspace, sit down and assess (honestly, and without judgement if possible) why you feel like the last week or month or two or three months have not been as financially well aligned as you wanted them to be. A few common reasons (more than one of which may be true for you) are listed below.

Some small or large unexpected expenses came up

2. You got carried away with spending in one or more of the following categories

a. Eating or drinking out

b. Just general shopping for myself or others

c. Entertainment or travel

3. You had an unrealistic idea of you were spending when you made your budget

4. You have friends or family who rely on you or ask me for financial support and you feel unable to say “no” to them

5. Your kids have gotten used to a certain style of living and it feels impossible to explain to them why your family might need to make some changes

The important part is not to fix the problem at this step, it’s to be honest about what it is that’s causing you to deviate from your financial goals.

Step 3: Revisit Your Goals

Remind yourself of why you set these goals in the first place. Are you trying to improve your current life, your kids’ lives, care for your future self, get out of debt, just get a little more breathing room and control over your money so you feel less stress.

Don’t pretend like it’s just not that important, because you wouldn’t have set the goal (year after year, in some cases) if your current money situation wasn’t leaving you feeling a little or a lot less than great. Financial health is an important component of your overall health and self-care. And it’s important to acknowledge the impact improving (or not improving) your financial habits will have on your overall quality of life now and in the future.

Like any major change, you must constantly remind yourself of why this is important for you. How will it make your life better?

Changing habits is hard. Money habits are some of the hardest to change, and if you aren’t revisiting regularly why you are making these changes, it will be almost impossible to make them.

Revisit the plan. Image of a person sitting in a sweater, pondering while sitting on some stairs.

Step 4: Revisit the Plan, and Adjust if needed

The work you did in step 2 is important for this step, so if you haven’t done it yet, make sure to take the time to do it. If you don’t know how you got off track in the first place, you may not see where you need to adjust.

This is the time to put a clear plan in place to deal with the things that took you off course in the first place. How will you avoid being in a situation where you’re busy, hungry, and feel like you have no alternatives but to eat out? What systems do you need in place to curb excessive retail spending? What overall budget adjustments need to be made if this plan is going to be successful? (I challenge you to avoid the trap of thinking that everything in your budget is something that you and your family can’t live without). How will you practice prioritizing yourself and your family’s financial goals when others come to you with their financial needs? What conversations can you have with your kids to make them understand that for the financial well-being of your family, you may need to change some of the things you regularly purchase.

Step 5: Rinse and Repeat

Don’t fool yourself into thinking that this is a one-time thing. It’s not. I help people with this for a living, and even I go through these steps regularly. For me, they’ve become automatic, they’re built into monthly routines that make me take time out of my schedule to interact with my money, how I’m spending it, how I’m saving it, and how it’s helping me live my most well-aligned life. And yes, the routines themselves come with more automaticity over time, but the need for them does not go away.

One of the most important delusions to cure ourselves of is the one that suggests that if we just get the right plan in place, we won’t have to revisit and re-adjust. But we do, constantly. Financial progress is not about financial perfection. It’s about regularly interacting with your money and your spending, trying to minimize self-financial harm when you do get off course, and finding ways to course correct regularly, habitually, and sustainably, rather than making a grand gesture towards it once a year.

So, if you’re actually here to make a real change to your long term spending and savings habits – consider what you can do now, not a year from now, to get back on track with your money resolutions for 2023.

Connect with Lorri to discuss your goals today.

Schedule a call with Lorri

Making Your Financial New Year’s Resolutions Stick

Every year, about 50% of the new year’s resolutions that people make in the U.S. are related to money.

Whether we’re trying to save more, spend less, pay down debt, or simply get a better grasp on where our finances are, our relationship with money is one that we are often thinking about improving. But studies show that by the end of the year, only about 8% of all resolutions have been kept, and that most of us have given up long before that. So, what can we do to make our money resolutions stick?

Know your WHY

One of my favorite things to ask clients when they talk to me about WHAT they’d like to accomplish with money is “Why?” If you think you should be saving more, why do you think that? Is it related to a personal value, goal, or plan, like retiring at 50 or paying off your credit card debt, or is it something you feel you should be doing because of the general societal pressure we put on ourselves to always question whether we’re doing enough or the right thing with money?

Making financial change can be hard—it often involves delaying gratification, living with less, and having to bring your full brain and energy to thinking about your day-to-day financial decisions. If the only thing underlying your desire to improve your money game is simply a general sense that it could or should be better, sticking to your goals when times get tough will be nearly impossible.

So, before you sit down to write a new savings goal or debt payoff goal, figure out why it matters to you.

What is this change going to provide for you and your life that you don’t have now, and why is that important?

Take Stock of Where You Are

Trying to take on a new budgeting or savings goal without any current sense of where or how your money is being spent is typically a recipe for disaster. After all, without a clear sense of how much you spend or what you spend on, it will be nearly impossible to figure out ways to spend less.

Consider setting a new year’s resolution to carefully track your income and expenses all year, and to take a clear inventory of your net worth. Without this foundational piece in place, your plan for how to spend less or save more will likely run into all sorts of problems when it runs into the reality of your actual spending habits.

A commitment in the new year to simply getting a handle on and awareness of your income, expenses, and overall net worth may be the first step to setting a clear and manageable savings, debt payment, or retirement planning goal a year from now. But if you keep skipping this step, it’s likely that you’ll keep running into the same problems with follow through.

Have a Clear Sense of WHAT and a clear plan for HOW

Everyone likes the idea of saving more or paying down debt, but the idea itself is rarely enough to get us there. You need a plan tied to a clear objective. Finding an objective that’s just challenging enough to help you improve your behavior, but not so challenging that you’ll give up immediately, is the key to your success. This is why it’s so important to take stock of where you are. If you are overspending your income by several hundred dollars every month, setting a goal to save $500 is likely to leave you ready to give up by January 5th.

Find a manageable target, then go through your current spending and figure out how to hit that target. If you’re going to set up automated savings of $100 a month, you need to have a clear idea of how you’re planning to spend $100 less each month so that you don’t actually end up $100 short at the end of the month. Are you eating out fewer times? Cancelling or changing subscriptions? What change will you be making so that the extra $100 is there for saving.

If you’re planning to pay off debt, how much are you increasing your payments each month? Which debt are you paying down first? And how are you reducing your spending elsewhere to make sure you have that extra money to put towards your debt? Be as specific and realistic as you can.

It’s this step in the plan that will let you know if your goal is manageable and realistic. If you don’t have a clear plan for how it can happen, scale back, find something that is manageable, that you can build on over time. Small change, successfully carried out and scaled up over time, is going to be far more impactful than grandiose ideas of change, quickly abandoned.

For a lot of extremely good ideas on how to make these types of small but meaningful changes in spending habits, I highly recommend James Clear’s book, Atomic Habits.

Photo: Goodreads

Have a Clear Plan for Dealing with Pain Points

Anticipating the pain points in any plan is extremely important. Pretending that they won’t be there is no way of dealing with them. If money goals didn’t have pain points, we’d all be steadily improving our money game year after year without issue.

Where is it that you will get tempted to overspend? If it’s eating out for convenience because you are just too tired to cook – you need a plan for fast, inexpensive, and easy to prepare food at home or on the go. If it’s overspending on a trip to Target or Costco, what’s your plan for dealing with that? This goes back to taking stock of where you’re at. If you have a clear sense of when, where, and how you spend money, you will be better able to predict those pain points, and plan for them ahead of time, rather than dealing with them in the moment.

Set Up Periodic Check Ins

No improvement happens on a steady climb uphill without bumps along the road. It’s up to you whether a bump in the road is the end of the journey, or simply something to navigate around. If you’re stick-to-itiveness around money goals tends to wane after a week or a month, set up routine check ins for yourself along those timelines. For couples, this might mean scheduling a weekly or monthly money date. If you have a financial planner, maybe this is just a monthly email check in with them. If not, a friend or mentor can often serve as an accountability partner to keep you on track. The important thing is not to beat yourself up over a slip up, it’s to figure out how to course correct before it gets too out of hand.

One of our greatest fall backs in resolution setting is that we set resolutions with a sort of planning euphoria – one that ultimately leads us to ignore the fact that of course this isn’t easy. Instead, we love to make the plan imagining ourselves showing up to it energized and excited every day. But if we go into our plans fully acknowledging that that won’t be the case, we can both plan for how we stick to it even when we don’t feel interested in or excited about it, and plan for routine ways to check in and get ourselves back on track when we start to slip up. The next step up in your money game isn’t perfect money management, it’s getting a little bit better, every day, every month, every year. And having routine ways to reconnect with that is extremely important to sticking to that path of gradual improvement.

Creating Savings Targets that Work

Are you ready to give up aimless wandering towards uncertain financial ends, but frustrated with the endless cycle of setting financial goals that you constantly seem to abandon? You’re not alone. Recent research suggests that for many, our societal obsession with goal setting and goal achievement is leaving most of us feeling disappointed, frustrated, and unmotivated to continue working towards the life we want. However, there are some things we can do as we set savings targets that can significantly increase the likelihood of reaching our financial goals.

Targets vs. Goals

Before we get too far into this post, I want to distinguish between the goals we discussed in the previous post, and what I generally like to call savings “targets.” These targets aren’t goals, they’re a part of a plan we’re using to accomplish our goals. For example, saving an extra $500 a month is not a goal unto itself; it’s a target that’s part of a strategic plan to be able to afford an experience or possession at some point in the future. The goal might be retiring at 55, or buying a house in five years or taking a year off to stay at home with your new baby. That $500 a month is just a target you are using to help you achieve the goal.

Targets that Don’t Work for Us

It turns out that when it comes to our finances, we struggle to set effective targets for one of two major reasons:

They don’t realistically set us up for success in achieving our goal, or
They are way too difficult for us to reasonably achieve without sacrificing a lot of other things that we consider valuable. So, we quickly give up on them.

To illustrate, let’s say that I want to see the Grand Canyon, and I decide to get there by driving 30 minutes a day from my home in Olympia, in the direction of the Grand Canyon. I’m making a little progress every day, but this target of driving 30 minutes a day will probably not actually effectively help me reach my goal. After six days, I’ll still be in the state of Washington. At that point, I’ll likely feel like I’m getting nowhere towards accomplishing my goal, decide I can’t do it, and give up on it. I guess I wasn’t meant to see the Grand Canyon after all.

On the other hand, let’s say that after consulting Google Maps I determine the Grand Canyon is a 19 hour drive from my house. I decide I’ll drive to the Grand Canyon in one day, because a day has 24 hours in it. If all goes according to plan, I’ll have 5 hours to spare. I have a three-day weekend coming up, so I’ll drive down on Friday, spend a day at the Grand Canyon Saturday, and drive back on Sunday. Back to work on Monday. That works, right?

Those travel plans may sound absurd to anyone who has ever planned a trip. Yet we frequently do this with goals that involve money. Most people live in an endless cycle of setting and abandoning savings targets because we either feel like they are getting us nowhere, or they’re way too difficult to realistically achieve. For example, saving $200 a month toward a down payment on a $300,000 home is likely to leave you extremely disappointed when, after five years of saving, you’ve only saved enough to make a 4% down payment. On the other hand, if you’ve done the math, and determined that an appropriate savings target is $1000 a month to get that house you want, but your take home pay is $2000 a month, you’re likely to find yourself quickly frustrated at your inability to meet your savings goal.

Setting Targets that Work For Us

What can we do to ensure that our targets don’t end up leaving us feeling hopeless and frustrated?

First, make sure targets are realistic in terms of 1) What is actually needed to achieve the goal, AND 2) What you can reasonably contribute toward the goal. In order to do this, I recommend keeping three things in mind as you develop savings targets to meet your financial goals.

Know what you’re aiming for. If my goal is to retire at 55, or buy a three bedroom house in five years, or put both of my kids through college, I need to know approximately how much money it will take to do that, and how long I have to accumulate that. If I don’t, I could keep diligently saving a little bit every month, only to realize in five years, I have nowhere near enough to put a down payment on that house I really want.
Know your limitations. If you realize you’ll need to save $3000 each month to be able to retire at 55, but your take home pay is $4000 a month, setting a savings goal that out of reach will almost certainly result in disappointment and quick failure. This is likely to leave you discouraged about saving at all. Even though the problem is the opposite of setting a target that’s too low, it leaves you with the same feeling–that accomplishing your goals is impossible, that you’ll never get there. Instead, if meeting your goal on your desired time frame isn’t within your earning and savings capacity, and you don’t have a clear plan for increasing that capacity, it may be time to re-evaluate the goal to make either the timeline or the cost more realistic.
Use ranges for both goals and targets. One way to navigate the “too hard” vs. “too easy” target is to incorporate target ranges, rather than specific numbers. Research has shown that setting a goal range is actually a more effective way to set and achieve goals and targets then having a single number in mind. The attainability of the low end of the target keeps us from getting discouraged, while the high end motivates us to keep working on our goal, even after we’ve met the lower threshold we’ve set for ourselves.

A range also provides for flexibility that a specific number does not. If instead of $500 a month, I set a goal to save $300-$700 a month, then in months where I have unexpected expenses come up, I can still aim to meet my low threshold and keep my momentum going so I’m not tempted to quit. And in months where my earnings may be higher than normal (from a bonus or a tax refund), I’ll be able to put more money towards the higher end of my target. In this way, I’m more likely to stay engaged in the goal, and the targets I’ve designed to get me there, regardless of the circumstances that change around it.

It often makes sense to “pair up” your target ranges with goal ranges. If you want to retire 20 to 25 years from now, then make the low and high end of your savings target correspond to that range. That way you stay motivated to keep working towards the high end of your goal, even after you’ve met the low end because it means you’ll get to retire earlier.

Financial goals have to work for us, both now and in the future. That’s why we started with flexible goals in the first place, and it’s also why incorporating realistic targets (preferably target ranges) is an important step on the path to getting what we want. I encourage you to sit down with each and every one of the flexible goals you’ve written down for your financial future. What will it cost to fund them? On what timeline is it reasonable for you to save that much? Will it require a change in your income producing capacity or spending habits? Now is a time when goals may start to sort and prioritize themselves in terms of both when you want to accomplish them, and which ones you want to fund first. Let that process happen. It will give you a clearer picture of what is really important to you when it comes to money.

Finally, don’t think that we’re done with this yet. Targets are the intermediate step between our goals and the systems that turn dreams into realities. Systems are the most important thing you can actually create and change in your life to not just plan for, but to achieve the life you want. So, stay tuned for that in our next episode of Planning for the Life You Want, where we explore how to create the systems that help us meet our targets and turn our goals into realities.

This is the second post in the series: Planning for the Life You Want

How Much Money is Enough?

A Constantly Changing Threshold

There IS Such a Thing as Enough Money

Which is why it’s essential to define this idea of enough for ourselves.

Developing a Qualitative Definition of Enough

What Does Enough Cost?

8 Reasons Your Money Management System Might Not Be Working for You

It pays attention to what we can control, and it’s fundamentally simple.

There’s no magic in money or budgeting, it comes down to the same thing.

It considers a bigger picture than just monthly expenses.

A simple list of your monthly bills is going to underestimate your cost of living.

It expects the unexpected(and saves for it).

Life is full of unexpected expenses.

It leaves room for flexibility.

This sounds like “expects the unexpected,” but it’s a little different. “Expect the unexpected” means regular and intentional savings for big expenses you do not see coming.

It is highly interactive and has regular opportunities for feedback.

If you are a person who gets to the end of a month only to realize you’ve once again not met the savings goals you have for yourself, or, worse yet, added more debt to your credit card – you need more regular check-in points.

The use of debt is minimal,strategic, and intentional.

It hasn’t forgotten abouta future version of you.

In the hierarchy of needs, we all have a present bias (and should). After all, if we can’t survive in the present, it seems unlikely that we’ll need to plan for the future.

The real magic is in your abilityto follow it.

Don’t get me wrong, having the plan is important.

GPS can only get you so far – the rest is on you, the driver

Yep – we’re repeating point 8, and giving it its own section – that’s how important it is.

Here’s an example of how this has worked for each of us:

First, become aware of these contexts.

Second, put a system in place to stay away from the context that’s pushing you to spend when you don’t logically want to.

Third, keep getting back up.

First, become aware of these contexts.

Second, put a system in place to stay away from the context that’s pushing you to spend when you don’t logically want to.

Third, keep getting back up.

Have a question or want to reach out to Lorri or Gabbi?

Using Difficult Financial Stretches as a Metric for Measuring Progress

Why?

The Problem with Best Day Metrics:

The Case for Bad Day Metrics:

Setting Realistic Expectations for Good Day Metrics:

Is Washington’s New Roth Deferred Comp Option Right for You?

While there is no single right answer to the Roth vs. Traditional contribution question, there are steps to work through when trying to decide if the new Roth Deferred Comp option is right for you:

1

Establish a rough estimate of your post-retirement income and determine whether it will represent a change in tax-brackets.

1

Establish a rough estimate of your post-retirement income and determine whether it will represent a change in tax-brackets.

2

Determine how much tax-deferred savings you already have, and how that will impact your future, taxable income.

2

Determine how much tax-deferred savings you already have, and how that will impact your future, taxable income.

3

Determine whether increasing your taxable income now will have any unintended, drastic consequences on your tax deductions or credits.

3

Determine whether increasing your taxable income now will have any unintended, drastic consequences on your tax deductions or credits.

What Else Do You Need to Think About when Switching to Roth Contributions?

1

If you’re switching from pre-tax to Roth contributions, but plan to contribute the same percentage or dollar amount as before, you’ll see a smaller paycheck due to the taxes taken out.

1

If you’re switching from pre-tax to Roth contributions, but plan to contribute the same percentage or dollar amount as before, you’ll see a smaller paycheck due to the taxes taken out.

2

The total contribution limit hasn’t changed.

3

There is no income limit for Roth DCP contributions like there is for Roth IRA contributions.

2

The total contribution limit hasn’t changed.

3

There is no income limit for Roth DCP contributions like there is for Roth IRA contributions.

Have more questions?

Get in touch with Lorri today!

How Much Rent or House Payment Can You Afford?

Conventional Rules of Thumb for Monthly Housing Costs

50/30/20 Ratio (For Renters and Home Buyers)

Overall Debt to Income Ratio (For Home Buyers)

Don’t Neglect the Cost of Your Escrow Payment, Increased Utilities and HOA Fees

Can You Cut Back Other Expenses to Commit to a Bigger House or Rent Payment?

What If You Live in a Place with a Very High Cost of Living

Have more questions?

What’s Driving Your Impulse Spending?

So, a great series of follow up questions are…

The examples I’m going to explore here are:

1) The need to buy a new item for your home

2) Unplanned eating out

Let’s start with that new item for the home.

It expects the unexpected
(and saves for it).

The use of debt is minimal,
strategic, and intentional.

It hasn’t forgotten about
a future version of you.

The real magic is in your ability
to follow it.