What Is A Sinking Fund and How To Use It

At A Glance – a sinking fund is a way to save ahead for large purchases and smooth your monthly cash flow.

What Is A Sinking Fund?

A sinking fund is a way to save for a future purchase or bill by setting aside a little money in your budget each month. It can allow you to make a large purchase with cash.

An example would be to set aside some money each month to pay for a large dental bill that you know is coming. Or you could save some money each month to purchase a couch without putting it on a credit card.

Sinking funds are great for things that don’t come out of your regular monthly budget, like:

  • Vacation
  • Large home repair that you know is coming soon, like a roof or air conditioner
  • Wedding
  • Tuition/Books
  • New tires or brakes for your car
  • Yearly bills like insurance, property taxes or income taxes
  • Furniture
  • Kids athletic fees

Sinking Fund vs Emergency Fund

A sinking fund is different from an emergency fund. An emergency fund is to cover the unexpected. Those things you don’t know are coming, like a flat tire. A sinking fund is for something planned. You know the approximate cost and when you will need the money.

Benefits of A Sinking Fund

There are several benefits of using a sinking fund.

A sinking fund smooths out your budget and monthly expenses. If you know you are going on vacation next summer or the water heater is about to go out, you can smooth your cash flow by saving a little each month. This is easier on your finances than paying a big bill all in one month.

You can avoid fees or interest. Saving the money ahead and paying cash won’t cost any credit card interest. That saves you anywhere from 18-29%! And the “90 days same as cash” almost always costs you something. Either because you don’t pay it in 90 days, or because the price has been inflated to cover the cost of financing.

Planning purchases ahead sets you up for wiser spending. If you are saving for an item over several months, you have time to evaluate if you REALLY want that item. Or maybe you can find it cheaper in the meantime.

You can spend without guilt! If you have evaluated what, when and how much you are spending on an item, then you can purchase with no guilt. There shouldn’t be any buyer’s remorse!

Cash gives you the power to negotiate. If you are paying cash for a large item, ask for a discount. Many businesses, including doctors’ offices, will give you at least a small discount for paying cash. They don’t have to pay the credit card transaction fee.

How To Create A Sinking Fund

A sinking fund is easy to set up and use. You can set up a sinking fund for anything you like, and have as many as you like. The money can be kept in cash or in a savings account. I put mine in a savings account and then use a spreadsheet to keep track of what is in each fund. You could also just use a pencil and paper.

First, decide what item or bill you want to save for. In the sample chart below, I am saving for 3 things. The next car I will buy, a vacation and a roof.

Next, determine their price and how long you have to save. In the example, I’m planning on spending approximately $20,000 on a car in 6 years (72 months), $2,000 on a vacation in 12 months, and $5,000 on a roof. I’m guessing the roof will need to be replaced in about 5 years.

Then divide the price by the number of months you have to save. In my example, I will need to save $275 per month for the car, $165/mo. for the vacation and $140/mo. for the roof.

I have a line in my spreadsheet for each fund to keep track of how much I have accumulated. In the example below, I have been accumulating for the car for 15 months, the vacation for 3 months, and the roof for 6 months.

ItemMonthly depositTotal So Far
Car (20k, 3 yrs)$275$4,125
Vacation (2k, 12mo.)$165$ 495
Roof (5k, 3 yrs)$140$ 840

Be sure to put the monthly amount you are saving for each sinking fund in your budget. If it is for a one-time item, delete the line item when you are done. If it is for something like Christmas, determine how much you want to spend, divide by 12 and add it as a permanent budget item.

My First Sinking Fund

The first time I used a sinking fund was years ago for my car and homeowners’ insurance. My insurance company let me pay by the month but charged me $5/mo. to do so. At that time I didn’t have several thousand dollars to pay it in full. So, I made the monthly payment and then set aside a little more. It took a few years for me to accumulate enough, but eventually, I paid the bill in full for the whole year and have been doing so ever since.

As an example, let’s say the policy costs $2,400 per year. I paid the bill of $205 ( 1/12th of the policy + $5 charge) and also saved back an extra $50/mo. It took 4 years of saving, but I was eventually able to pay in full. I had “caught up” with the extra. During those 4 years, I paid the extra to the insurance company at the beginning of each policy period and shortened the time it took to pay the policy off. That way I eliminated a few of those monthly charges as I went.

Key Takeaway – A sinking fund is a great way to save for future items or bills. This allows you to pay cash, avoid interest or fees and smooth your monthly cash flow.

Assignment – Look at any large purchases you have coming in the next few months. Selecting one of them to try out a sinking fund. Determine the price, the number of months till purchase, and the amount per month you need to save. Try this on one upcoming item and see how good it feels to pay cash for something large!

Coming Soon – My Recent Used Car Purchase

Where To Start With Your Money

At A Glance – Are you feeling stuck with your finances? Do you wonder where to start with your money? Here is a step-by-step guide to help get your finances in shape. No matter where you’re starting, this guide will help.

Getting your finances in order can be a scary task. Where do you start? Who do you trust? What if you get it wrong?!

Don’t worry, I’ve experienced all these emotions, and I did sometimes get it wrong! After all, most of us weren’t taught any of this personal finance stuff.

So, I’ve put together a step-by-step guide to help you get on track with your money. This is based on my own experiences and what I’ve learned. It’s not complicated and it is totally doable.

For me, the first step was changing my mindset about money. I learned to be in control of my money decisions and not let my money control me. I learned to be intentional. Every dollar that left my hands was scrutinized. Now, most of my money decisions are on automatic.

There are stand-alone articles related to most of the steps below. If you’d like to dive deeper into any of these topics, just click the link.

Step 1: Evaluate Where You Are Right Now

The best place to start managing your money is to evaluate where you are now. No guilt, no shame. Just look at where you are. This involves adding up all your debt (what you owe) and all your assets (what you own). The difference between those two numbers is your Net Worth. This gives you a feel for where you stand.

Here’s a guide and spreadsheet to help you determine your Net Worth: Figuring Out Where You Are Right Now.

Step 2: Track Your Spending

Your next step in evaluating your current situation is to track your spending. You need to know where your money is going. Every dollar that leaves your hands needs to be looked at. Track your spending for at least 3 months. Six would be even better. Life is lumpy and no two months will be exactly the same.

This article includes a spreadsheet to show you how to Track Your Spending: Tracking Your Spending And Why You Should.

Step 3: Use A Budget (At Least For A While)

I know, I know! For some people, budget is a dirty word. But it sets up your mindset and your money for success! You don’t have to use it forever, but for a season, it’s a good plan. There are many good reasons to use a budget. I still use a budget and track my spending. For me, it puts guardrails on my decisions so I don’t lose focus. Put together a budget that you will actually use. It can be pencil and paper, a spreadsheet, or an app. You choose.

Budgeting articles with spreadsheet: 1. How To Do A Budget and 2. Benefits Of Using A Budget.

Step 4: Set Up An Emergency Fund

An emergency fund is essential for you to be successful with your money. At first, it can be a baby Emergency Fund of $1,000. Then later your can fully fund your 3-6 months of living expenses in your EF. How good would it feel to have $1,000 in the bank!

Most Americans cannot handle a $400 emergency. If your car breaks down and you have to put the repair on a credit card, you have just unwound all the good you’ve been working for. An EF helps you get through life’s bumps.

This explains the Emergency Fund: Why You Need An EF And How To Get One

Step 5: Get Your Employer Match

If you have an employer plan, like a 401k, you need to get the match. Deposit enough money in this fund to get whatever match your employer offers. This is free money!

Step 6: Get Out Of Debt

All your non-mortgage debt needs to be paid off. Debt is the enemy of wealth and you will not be successful with your money if you are paying out 10, 20, or even 30% interest on your debt. It needs to be paid as quickly as possible. This is a Hair On Fire situation!

Debt Pay-Off Articles: 1. How To Pay Off Debt, 2. How To Pay Off Credit Card Debt, 3. How Credit Card Debt Can Get Out Of Control

Step 7: Start Saving Money

After all non-mortgage debt is paid, look at your budget and see how much you can save. How aggressively you save is up to you. The higher your savings rate, the faster you will reach a place of comfort with your money. How much you do or don’t sacrifice now is up to you. Put your savings on automatic whenever possible. That way you’re not tempted to spend the money on something else.

A getting started guide to Saving Money: How To Save Money

Step 7B: Save For Large Purchases

Along with saving for retirement and your awesome future, save for large purchases and pay cash. This is another tactic for financial success. Save up for the next car, set of furniture, or home remodel and pay cash.

The Sinking Fund: Coming Soon!

Step 8: Don’t Buy New Cars

A new vehicle depreciates dramatically in the first few years. According to industry experts, the value of a new vehicle drops by about 20% in the first year of ownership. Over the next four years, you can expect your car to lose roughly 15% of its value each year – meaning the average car will be worth just 40% of its purchase price after five years.

Buy a good, clean, and well-maintained used car – for cash. Let someone else take the depreciation hit!

Step 9: Start Investing

Your money can grow and work as hard as you do. The most common places for investing your saved money are in the stock market or rental real estate. I personally invest 100% of my retirement savings in stocks, bonds, and treasuries.

Investing: How To Start Investing – A Beginners Guide

Step 10: Keep Learning!

Keep learning. I do. Read books, listen to podcasts, and get an accountability partner. You know, that person who is willing to say the hard things because they care about you.

One great resource for someone just getting started is the ChooseFI Foundation’s FI 101 course. It is a self-paced online course that covers the basics. The best part is you’re not alone. There is a great online community where you can ask questions and share your wins.

If you haven’t already, please consider signing up for my monthly newsletter. It includes tips, life hacks, info about my latest articles, and a frugal and healthy recipe. I promise your email address will not be sold and I will not spam you!

What Does The Bible Say?

Here are a few examples of verses on frugality, saving, Emergency Funds, and wise money management.

When they were filled, He said to His disciples, “Gather up the leftover fragments so that nothing will be lost.” John 6:12

Then let them gather all the food of these good years that are coming, and store up the grain for food in the cities under Pharaoh’s authority, and let them guard it. Let the food become as a reserve for the land for the seven years of famine which will occur in the land of Egypt, so that the land will not perish during the famine. Genesis 41:36-36

There is precious treasure and oil in the dwelling of the wise,
But a foolish man swallows it up. Proverbs 21:20

She looks well to the ways of her household,
And does not eat the bread of idleness. Proverbs 31:27

Key Takeaway – Use these 10 Steps to help get a handle on your money and build a better future for you and your family.

Assignment – Start with Step 1 and work your way through Step 10. Your future self will thank you!

Coming Soon – The Sinking Fund

What Is FI or Financial Independence?

At A Glance – Financial Independence gives you freedom and options. FI can mean work is optional and YOU choose how to spend your time and money.

Definition of FI

FI or Financial Independence means having enough money saved and invested to cover your living expenses without having to work again.  This means your assets and investments are generating enough income that you are no longer dependent on a paycheck.

These assets could be one or more of the following: money that is invested, passive income from a business, or rental real estate.

Why Would You Pursue FI?

Being financially independent means you have choices. It means the freedom to pursue your dreams. To spend your time the way YOU choose.

FI could mean traditional retirement, but it doesn’t have to. FI can provide a multitude of options.

Having the ability to pursue a passion project. You might have a hobby, charity or project that lights you up, but you don’t have enough margin in your current life to pursue it.

Having time to spend with your family. I don’t think anyone ever reaches the end of their life and says, “I wish I’d spent more time at work.”

Having the freedom to travel. Are there places you’d like to visit, but you can’t fit it into your limited vacation time at work? How would you like to spend a month living like a local in your favorite destination?

Being able to take a job you love, but with lower pay. Is there a job that you know you’d love, but you can’t take it on because it won’t pay enough? With financial independence, you can have a job you love no matter the pay scale.

Being able to walk away from a toxic job, or not being afraid of the next layoff. If you are living paycheck-to-paycheck, a layoff is a catastrophe. If you work in a toxic situation, you might feel you have no choice because you NEED the job. Fi gives you some cushion to find another job or negotiate a better situation at the one you have.

How Does FI Compare To The “Normal” Path?

The Normal Path

Most of us have drifted into the “normal” path for our lives. It’s what society expects and what everyone around us is doing.

Here’s the scenario. Get good grades so you can get into college. Get the college degree that will usher you into a good job – along with the five or six figures of student loan debt. Get the big house, buy 2 new cars, and trade those cars up every few years. Then remodel the house to be HGTV worthy. Buy the boat and the toys, but you won’t use them much because you’re working 50-60 hours/week. Work for 40 years and retire.

It’s the American Dream, right? But with the payments and stress that comes with that lifestyle, it can easily become the American Nightmare! I know – been there, done that. Read my story here.

Stephen and I started our lives on the typical consumer treadmill. We had good jobs with middle-class pay. We immediately bought a house and a car. Then a boat and a yacht club membership. Because we started out with a card table and a hand-me-down loveseat, we thought we were being frugal!

Everyone around us was in the same consumer trap, so we didn’t think there was a problem. We were like the frog in the boiling water – we didn’t notice we were getting cooked.

The FI Path

What if you could turn the “normal” path into one where you are in control of your destiny? What if working was an option. What if vacation was on your terms?

Financial independence offers you SOOO many options. In addition to those stated above, it brings peace and joy. You have the time, the mental bandwidth, and the resources to pursue your dreams and your goals. You can align the way you spend your time and energy with your values.

How Do You Calculate Your FI Number?

As I mentioned above, being FI is when you have enough money saved and invested to cover your living expenses without having to work again. So how much money is that? How do you calculate your “FI Number?”

There is a rule of thumb that is generally accepted as the way to calculate your FI number. It’s called the 4% Rule. The 4% Rule says if you withdraw approximately 4% of your invested assets per year, you will not run out of money. You can calculate the amount of money needed in investments by multiplying your annual expenses by 25.

Annual Expenses x 25 = Amount needed in savings


Savings x 4% = Amount you can withdraw per year

For example, if you have annual expenses of $40,000, you will need $1,000,000 in savings. Or, stated another way, if you have $1m in savings, you can withdraw approximately $40,000 per year and not run out of money.

Calculating Annual Expenses

This means you need to know what your annual expenses are. If you already know what you spend per month or per year, Great! If you don’t, you will need to look at your spending to find out.

One way to get this number is to Track Your Spending for a period of time. You really need to track your spending for more than one month to get a good feel for what your life costs. Life is lumpy and no two months will be exactly the same. I would suggest you track for at least three months. Six would be even better. Then you can catch big things like insurance premiums or property taxes.

Another way to get a feel for what your life costs is to look back at your expenses. Look through your checking account and credit card statements. Any place that shows where money has left your hands. Add it up for a period of time and then see what that would be for a year. For example, if you have tracked or looked back for a six-month period, multiply that number by 2 and you will have what an entire year costs.

Now, take that yearly number and multiply it by 25. This gives you your FI number!

If this is a much larger number than you were expecting, you may need to evaluate your current situation. Can you cut back on your spending? Can you increase your savings rate? Either of these tactics will help get you to FI faster. For every $100 you can cut out of your overall spending, you will need $2,500 less in your investments.

How Do You Achieve FI?

Reaching FI is about your mindset and your savings rate. You can increase your savings rate by increasing income and/or decreasing spending. If you are young, you can manage with a lower savings rate and take a little more time. Or, you can increase your savings rate and get to FI sooner. If you’re not so young, like me, you need a hefty savings rate to get to the goal line. Either way, YOU choose, because YOU are in control.

Be aware, I am NOT suggesting that you live a life of depravation to get to FI. That is not the point. I don’t want you to be miserable for the next 10 years while on the path to FI. Enjoy your life as it comes. But with a few modifications and some intentionality along the way, you can optimize your life now in order to build a prosperous and meaningful future.

There is a cornerstone article I’d like you to read on the Mr. Money Mustache blog that explains how your savings rate and FI are related. It’s called The Shockingly Simple Math Behind Early Retirement. The first sentence in this post says, “This is the blog post that shows you how to be wealthy enough to retire in ten years.”

Again, FI is not necessarily about retirement. It can be, but it’s more about choices and freedom.

Types Of FI

There are as many different types of FI as there are people in the FI community. Here is the description of a few.

Half FI

Half FI is just what it sounds like. This would be your yearly expenses x 12.5. Congratulations! You’re halfway there.

Lean FI

Lean FI is when you have 25 times a “lean” budget saved. You could stop working, but you would be living lean.

Coast FI

Coast FI is defined this way. You have enough in savings that if you never added another dollar to it, you could retire at a normal retirement age. This means you have enough to “coast” into retirement. You only need to earn enough to cover your current expenses without saving any more.

Barista FI

Barista FI loosely means you have enough money to be “mostly” FI. It could mean you work a part-time job to have something to do or to supplement the amount of money you are withdrawing from your investments. That way you could withdraw something less than 4%. Along with your part-time pay, it will provide enough income to give you the lifestyle you desire.

Another reason for pursuing Barista FI is health insurance. Some folks have enough in savings to retire to the lifestyle they choose but would like help with their health insurance. There are a few companies that provide healthcare insurance coverage to part-time employees. In the past, one example of this has been Starbucks. I believe this is where the term “Barista” FI came from.


Regular FI is our normal definition of 25 times annual expenses saved. You don’t have to work again if you don’t want to.

Fat FI

Fat FI is when you have more than you need for regular FI. This would be defined as, say 30 times annual expenses, instead of 25 times. You have enough saved to have a life full of richness and generosity.

What Does The Bible Say?

God calls us to be good stewards of all He has given us. The bible tells us God loves a cheerful giver. It also says we are to be wise managers. I don’t want you to think I’m endorsing accumulating wealth just for the sake of wealth. Or that we should accumulate wealth only for our own comfort and pleasure. How much can you do for the Kingdom if you have the freedom to use your resources and your time for Him? How much can you do for the Kingdom when you are free of debt and financial burdens? We can’t do much for God if we are living paycheck-to-paycheck. That is bondage that affects our family, our witness, and our own relationship with the Lord. God wants us to give generously. Not only of our money, but of our time, our resources, and even our skills and talents.

Reader Responses

I recently asked my Started At 50 Facebook group, “What does FI mean to you?” Here are a few reader responses.

Randall: Freedom to live and give. I’ve discovered that giving to worthy causes and individuals in need is a lot more fun and fulfilling than spending.

Ashley: Having enough money that I don’t have to work if I don’t want to.

Brenda: I had time to enjoy my newborn grandchild this week, without thinking about a work schedule.

BL: Freedom and peace of mind.

Diana: Able to book one-way ticket to help someone and not worry about having to be somewhere to cut stay short.

Michelle: Being able to retire and not have to worry.

Key Takeaway – Financial Independence gives you freedom and options. FI can mean work is optional and YOU choose how to spend your time and money.

Assignment 1 – Calculate your annual expenses. Then find your FI Number. Congratulations! Now you know where you’re headed. You have a goal to work towards.

Coming Soon – What To Do If You’re Just Getting Started

How To Start Investing – A Beginners Guide

At A Glance – Learn how to start investing and growing your money. Investing in the stock market is easier than you think.

What Is Investing?

Investing is when you purchase assets that you expect to earn a profit in the future. These assets could be anything you believe will rise in value, such as a home or collectible. Although investing commonly refers to buying stocks and bonds.

The goal of investing is to put your money to work today so it will grow your money over time.

What Is The Stock Market?

First, let’s define a stock. A stock is a type of asset that represents fractional ownership in a company. When you buy stock in a company, you own a piece of that business. If you own a share of Amazon, you are a part-owner of Amazon!

Publicly traded companies are companies that issue stock that can be purchased by individuals or organizations. The stock market is made up of all publicly traded companies.

A stock market or stock exchange is a place where people buy and sell stocks. There are several of these in the U.S., but the two best known are the New York Stock Exchange (NYSE) and the Nasdaq.

There are “indexes” that give you a feel of how the overall market is doing. These indexes are a basket of stocks that are averaged to indicate overall performance. The most popular indexes are the Dow Jones Industrial Average, The Nasdaq Composite, and the S&P 500. The Dow Jones tracks 30 large, significant U. S. stocks. The S&P 500 is a much broader base of 500 large companies. The Nasdaq is more oriented towards tech companies.

Why Invest In The Stock Market?

What we all hope to gain with our investing is more money over time. Since our investing plan should always be long-term, our money will be invested for decades.

Because of our long investing time horizon, we must consider inflation. Inflation is like a termite that eats away at your wealth. If you bought $100 worth of groceries 10 years ago (2011), they would cost you approximately $120-130 today. You can see that taking your hard-earned savings and putting it in the mattress is not a good plan! Also, the current (2021) interest rates on savings accounts or money market accounts will not keep up with inflation. So, savings accounts are not the place for money invested long term.

We need an investment that will do better with our dollars. The stock market is one of the best wealth-building tools we have available. But many new investors are afraid of the stock market. Is the stock market volatile? Yes. Is it still the best place to invest my money to grow my wealth? Again…Yes.

The stock market goes up and it goes down, but over time the market always goes up. There has been disaster after disaster that has caused the market to go down – sometimes significantly. But over time, the market always goes up. If you look back over its history, the market has averaged roughly between 8% and 10% per year. You can see this is significantly better than most other investing choices.

Let’s look at two examples of how your money can grow. The first chart shows three different investment amounts with no additional money added. We will use an average return of 8% per year for 30 years. Say, age 30 to age 60.

Amount InvestedMarket GainTotal
$ 10,000$ 99,357$ 109,357
$ 50,000$496,786$ 546,786

The next chart shows a more real-life example. We will start with $0 and add money every month from savings. Again, the money is growing at 8%.

Amt Invested/mo.Time PeriodAmt InvestedTotal
$ 10030 years$ 36,000$ 150,030
$ 25030 years$ 90,000$ 375,074
$1,00030 years$360,000$1,500,295

These examples assume that any interest or dividends your stock receives is reinvested and not withdrawn. This shows how compounding works for you over time. You can see from these examples the stock market is a much better way to grow your money.

Can I Lose My Money?

Returns in the stock market are not guaranteed like the interest rate on a savings account. There is risk associated with investing. So the short answer to the question “Can you lose money?” is yes – over the short term.

Can you lose money if you leave it in for the long haul? Unlikely. Don’t forget, your stock market investments are long term. This is a marathon, not a sprint. This is not get rich quick. History has shown if you save, invest and leave it alone, you will build wealth.

What Are Stocks, Bonds, Mutual Funds And ETFs?

Stocks – As stated above, a stock is fractional ownership in a company. Money is made with stocks in two main ways. One, the price of a stock can go up as the company does well. You make money if you sell the stock for more than you paid for it. Second, the company may pay dividends. This is how the company shares profits with its stockholders. Dividends are typically paid once a quarter. The dividends can be left in the investment account to buy more shares.

Bonds – When you buy a stock, you are buying part ownership in a company. When you buy bonds, you are loaning money to a company or government agency. A bond could be thought of like an IOU. Bonds are used by companies, municipalities, states, and governments to finance projects and operations. A bond issuer promises to pay the bond or loan back in a specified time at a specified interest rate. An example would be bonds issued by your local school district for a new building.

Mutual Funds – A mutual fund is a basket of stocks. Mutual fund managers decide what and how many stocks to buy. These funds come in all flavors. It can be, for example, a basket of all large companies, small up-and-coming companies, or all healthcare sector companies. There are thousands of mutual funds to choose from. The major advantage of a mutual fund is diversification. You don’t have to decide which individual stocks to buy, you just pick the flavor you want. The disadvantage is they can have high fees attached to them. There is a person managing the buying, selling and decision making and they aren’t cheap. Their fees will eat away at your profits, but the diversification that mutual funds bring to the table is a good thing.

ETFs – an ETF or Exchange Traded Fund is very similar to a mutual fund. Their main difference is the way they are bought and sold during the hours the stock market is open.

How Can I Invest In The Stock Market?

Choose An Investment Firm

So you’re ready to invest some of your savings. Now what?

You will need to open a brokerage account. To trade on the stock market, you will need an account at a brokerage or investment firm. There are many brokerage firms out there, but the ones I would recommend are Vanguard, Fidelity, and Charles Schwab. I personally use Vanguard. You can open an account online in a matter of minutes.

When you first open your account, you will be asked how you will initially fund this account. You can send money from your bank, rollover money from an employer retirement account like a 401k or transfer money from another brokerage firm.

After setting up your account, you can tie your brokerage account to your checking or savings account. This allows you to move money back and forth online. One huge advantage of this connection is making your savings and investing automatic. You can decide how much money is going to investing each month and have it sent there automatically. Your emotions and temptation to spend it just got removed!

Choose The Type Of Account

You can set up different types of accounts. The main types of accounts are a taxable brokerage account, a retirement account such as a Traditional IRA or ROTH IRA, or a 529 Educational account. IRAs and 529s are tax-advantaged accounts. A taxable brokerage account is a plain investment account with no special tax treatment. Stephen and I have a joint taxable account and we each have Traditional and ROTH IRAs.

Choose The Type Of Investment

Here is the big question! And I really can’t tell you what to do – partly because I’m not licensed to do that nor am I an expert. But, I can tell you what I do.

I like to KEEP IT SIMPLE. As J. L. Collins says, “Simple is good. Simple is easier. Simple is more profitable.”

I invest in low-cost index funds and bond funds. Index funds track a particular index, like the S&P 500.  There are many advantages to index funds like high performance, low cost, and very low volatility. 

The index fund I use is a Vanguard Total Stock Market Index Fund or VTSAX. It tracks the entire stock market. This means I own a small piece of every publicly traded company in the stock market. This is where the majority of my investments are – 70% currently. Index funds have extremely low costs because they are not actively managed. They just track the market. They are high-performing because those active managers cannot consistently “beat the market.” And their fees eat away at your returns.

The bond fund I invest in is the Vanguard Total Bond Market Index Fund or VBTLX. Just like VTSAX, the Total Bond Fund is a broad base of bonds. This fund includes investment grade (top quality) bonds with widely differing maturity dates and a broad range of terms.

Why hold stocks and bonds? Stocks provide the best returns over time and serve as a protection against inflation (inflation hedge). Bonds provide some income and serve as a deflation hedge. Also, bonds are less volatile than stocks. They smooth out the wild highs and lows that can be seen in the stock market. You won’t make as much money from bonds as you do stocks, but they make the roller coaster a little easier to ride.

TIP: I like to keep things simple and I have only given you the very basics when it comes to investment info. I would HIGHLY recommend you read J. L. Collins book, The Simple Path to Wealth, Your Road Map to Financial Independence and a Rich, Free Life. It helped us when we didn’t know what we were doing or where to turn. Jim explains the stock market, how it works, how to use it to grow your money, and how to not be afraid of it. Buy the book, check it out from your library or you can check out his Stock Series on his blog jlcollinsnh.com. Do it! His book helped us more than any other one thing we have done for our finances, short of getting our mindset changed.

How Much Should I Invest?

In my article, How To Save Money, I talk about your short, medium, and long-term needs. Everything you are putting in long-term savings should go into investments. This is the money you will want working for you for decades.

If you are starting late as I did, you need to be saving aggressively and investing wisely. The number of years before retirement may be short, but even in retirement, you could have a 20 or 30-year investing horizon.

When Should I Invest?

Now! Don’t wait for the market to drop or wait until you understand every nuance about the stock market. Formulate your simple plan and get started.

If you have a company match with your 401k, BE SURE you are getting the match. That’s free money! Also, look at the investing options in your employer’s plan. Do they offer low-cost index funds? You might check into making a change.

TIP: Your taxable brokerage account, 401k, IRA, HSA or 529 plan are just buckets to hold your money. Just because you or your employer deposits money into those accounts does NOT mean it’s invested. It might just be sitting there in cash until you tell them how you want it invested. YOU have to make the choice of investments. Check every account you already own and make sure the money is invested.

What If The Market Goes Down Or Has A Crash?

Don’t panic! And don’t sell! The market will go down and it will come back up. The market is higher today (June 11, 2021) than it has ever been. This includes all those ugly events. The Wall Street Crash of 1929, Black Monday (1987), Dot.com bubble (2000), 911 (2001), Financial Crisis (2008), and the latest and shortest-lived crash of 2020 – thank you COVID! The market goes down and it always comes back up.

This chart shows the cumulative returns from the S&P 500 from 1960 to 2021. There are a few significant dips in the line, but the overall trend is up.

If you are in the wealth accumulation stage, these downturns are your friend. Stocks are on sale, and besides, you don’t need the money right now anyway.

Remember, we’re investing for the long haul. Most people treat a stock market downturn like going to your favorite store, everything is on sale, and the customers run out of the store screaming! Don’t panic. Be calm. And don’t pay attention to all the “noise” from the media.


If you want to grow your wealth for the future, the stock market is one of your better choices. Consider low-cost, broad-based index funds. If you choose the “Simple Path” to grow your money, you can almost put your investing on auto-pilot.

Key Takeaway -Learn how to start investing and growing your money. Investing in the stock market is easier than you think.

Assignment 1 – Read The Simple Path to Wealth

Assignment 2 – Check any existing investment accounts like 401ks, HSAs or IRAs and make sure the money is invested and not sitting in cash.

Assignment 3 – If you don’t already have one, open an account at an investment firm. Decide how much you can send to it automatically every month. Choose the funds you want to invest in and start buying shares.

Coming Soon – What is FI?

The Three Bucket Strategy

At A Glance – Planning your savings for short, medium and long-term goals helps you build stability for your financial future.

In my article, How To Save Money, I talk about saving for short, medium and long-term needs. This strategy for your savings goals helps you build stability in your financial plan for future needs. It gives you tools in your toolbelt to meet the ups and downs of life.

Here is an article written by a friend of mine, Randall Neighbour of Kingdom Wealth Management. He addresses this topic in his Three Bucket Strategy for savings.

The Three Bucket Strategy

The Three Bucket Strategy is a great tool for preparing for your future and thinking about money. It’s a common practice in the financial planning world because it has the potential to foster healthy investment attitudes.  

First Bucket – Operating & Emergency Fund

In this first bucket, you should keep enough cash for 3-6 months of living expenses. This money should not be invested but kept in a money market or a checking/savings account. While this bucket’s contents won’t earn much these days, if we experience inflation—and we will experience it sooner or later—then it should start earning more.

Tip: If you need to dip into this first bucket for a genuine emergency (a washing machine repair or an auto repair), imagine you’ve borrowed that money from a loan shark and he will break your kneecaps if you don’t pay it back as soon as possible. Cut back on eating out and expensive coffees or clothing or however you like to spend discretionary money and “top up” your first bucket as soon as possible. Draining it makes this strategy a worthless exercise.

Second Bucket – Near Term Spending Fund For The Next 2-9 Years

In this second bucket, you’ll want to invest money for upcoming needs such as a new roof or replacing a vehicle. Because the timeframe for the investment is relatively short, the money in this bucket should be invested conservatively.

Tip: Fixed instruments such as bonds and CDs could be considered for the second bucket. These investments probably won’t double your money in five years, but that’s OK. If you invest it conservatively, you won’t put yourself in an emotional quandary when a withdrawal is necessary. A conservative investment approach works here because the balance on the account is more predictable and the time horizon is not long enough to recover from a big drop in your investments.

Third Bucket – Long Term Savings For Retirement

In this last bucket, you want to invest for use in ten to thirty years. This is not money you touch unless you are forced to drain the first two buckets due to a financial catastrophe. Because of the duration of the investments in this bucket, you can afford to take more investment risk. After all, there’s time for it to recover if the investments drop in value for a season.

There are bull markets when most investments appreciate and bear markets when many depreciate. Historically, the bulls run longer than the bears and that’s what you’re hoping to achieve with long-term investing. The target use for this bucket’s contents is retirement withdrawals, healthcare costs, long-term care, charitable giving and inheritance.

Tip: Higher future tax rates are a big consideration. For this reason, using a Roth IRA may be an excellent choice for this bucket if you don’t make too much money to max out an annual contribution. However, if you only have Traditional IRA money or 401k money for this bucket today, that’s ok! It’s better to have a big third bucket of taxable money than no third bucket at all.

Which Bucket Should I Fill First?

You need an emergency fund. Build up a month’s worth of your expenses and fund the first bucket with it. If you have consumer debt, then attack your debt with every dollar you can find and get out of debt. When everything but your mortgage is paid off, go back to bucket one and finish filling it with your 3-6 months of living expenses.

Which Bucket Should I Fill Second?

The third bucket needs attention next, but you may not be able to completely fill it before you add to your second bucket. You just need to make sure that when you have to take withdrawals from the third bucket, you won’t run out of money. A good rule of thumb is to make sure you are contributing at least 15% of your take-home pay into your third bucket. If you haven’t been saving for retirement and you’re in your fifties, then you’ll need to save a higher percentage.

“Let’s Go Back To That Second Bucket. Now I Have Questions.”

Everyone has questions here. This second bucket is where you must first consider your NEEDS in the next three to five years and first save for those needs (new roof, replace a car) and then save for your WANTS on top of that amount (European Cruise, taking grandkids to Disney, update the kitchen). And always keep in mind that saving for things you WANT must never reduce the amount you should be putting in your third bucket. Remember this: I have never heard someone say, “I saved and invested too much money when I was in my 50s and 60s.”

But What About My Mortgage?”

This is a tough question to answer and it’s different for everyone, but there’s a good rule of thumb to follow here: Pay off your mortgage and any other debt before you stop working. Millions of Americans are forced into retirement earlier than expected due to their health or the health of their spouse. For this reason, living lean in your 50s and 60s to pay off all debt is a wise long-term move even if you remain healthy and want to keep working.

In Summary…

I’ve been using the bucket approach with clients for a decade. This approach will help you mentally segment your savings and invest it appropriately.  It also helps put both spouses on the same page when it comes to money, spending, and investing.

Now get busy!

Sit down with a paper, pen and calculator. Or, bring up a spreadsheet on your computer. Total what you need in each bucket and why it belongs there. If you need help or have questions, visit with an advisor. Don’t let anything stop you from charting a financial course for your future.

Randall Neighbour is the founder of Kingdom Wealth Management in Houston, Texas. He holds the designations of Retirement Income Certified Professional® and Accredited Portfolio Management Advisor®. To read the original version of this article, follow this web link: https://kingdomwealthmgt.com/the-three-bucket-strategy

Key Takeaway – Planning your savings for short, medium and long-term goals helps you build stability for your financial future.

How To Save Money

At A Glance – Developing the habit of saving money is the key to your financial stability. It is your SuperPower. Even if you’re not a natural saver, it is a skill you can learn.

What Does It Mean To Save Money?

Saving money is living on less than you earn. It’s setting aside some money from every paycheck. It’s building an Emergency Fund. It is being intentional now to secure your future.

Why Do You Want to Save Money?

Saving Money Is The Most Important Step In Building Wealth

Let me say that again…It is THE MOST IMPORTANT step in building wealth. Your future financial stability and your retirement depend on it. Every dollar you save now could keep you from being the greeter at Walmart when you’re 75!

Becoming a saver will be the key to your financial stability and financial independence. Some of us are natural savers, and some are not. I am NOT a natural saver, but I have learned how to be a saver. It is like a muscle you need to work out. You keep exercising and over time, it gets easier

Save For Short, Medium And Long-Term Needs

The money you save can be earmarked for short-term, medium-term and long-term needs. Short-term would be any money you need in the next 1-3 years. This could be your Emergency Fund, money for next year’s property taxes/insurance or a vacation.

Medium-term savings is for 3-6 years. This could be saving to pay cash for your next car, the down payment for a house or the AC/Heater that will need to be replaced.

Long-Term savings, 6+ years, would be for things like your child’s college expenses, a new roof and retirement.

Having Money Saved Smooths Out Your Cash Outflow

Having money saved allows you to pay for large expenses without using credit. If you know you will need a replacement car in 5 years, you can create a sinking fund to pay for the car. Save 1/60th (5 years = 60 months) of the car’s expected price per month into your sinking fund. In 5 years you can purchase the car with cash and avoid all loan charges and interest.

Do the same with other large purchases like insurance, taxes or car repairs. If you save a little every month for those items, you can smooth out the cash outlay. That way you don’t have to come up with thousands of dollars all at once for a major purchase or repair.

I use this strategy to pay for our car and homeowners insurance. I save 1/12th of the insurance cost every month and then pay cash for the new policy. I don’t have to pay any extra fees for them to bill me monthly. It took a while to collect the money when I started using this method. At first, I paid that month’s bill and set aside a little extra. Over time I was able to collect enough to pay the entire policy at once.

How to Save Money?

Spend Less Than You Make!

It’s so easy to say and so hard to do sometimes! This is an area where I failed when things got bad for us. Sometimes we weren’t spending more than we made, but we were surely spending it ALL. You have to spend less than you make. The difference is ‘The Gap’. The bigger the gap, the more you can save.

Track Your Spending

Tracking your spending is one way to discover if you have any gap. If you track your spending, you can see where your money is going. Tracking helps you see where you might be overspending and where you can cut.

I recently read a story of a person who discovered they were overspending their income by $3,oo0 a month! You might be thinking, “How can that happen!” The answer is easier than you think. Remember my mantra…Pay Attention! This simply happens because we don’t pay attention.

Use A Budget

Using a budget puts guardrails on your spending. Once you get a picture of your spending by tracking it, you can create a plan for your money with a budget.

A budget helps you to grow the gap. Include your savings in the budget as a line item and then increase it every chance you get. Set a goal to save at least 15% of your income and increase it as you can.

Pay Off Your Debt

If you are carrying any debt other than mortgage debt, it needs to be eliminated. You cannot make headway with saving if you are weighed down with debt. You don’t have any control of your life when all your money is spoken for before you even earn it.

Check out my debt payoff article, How To Pay Off Credit Card Debt In 6 Steps.

Use Your Employers Free Money

One of the best ways to boost your savings rate is to use someone else’s money! If you have access to a retirement plan at work, such as a 401k, see if your employer matches. Most employers will match your contributions up to a certain amount. If you have a 401k with a match, be sure you contribute at least up to the match. That’s free money!

Tip: A lot of people think if they get the match, they have maxed out their 401k contribution. You can likely contribute far beyond the match. The max contribution to a 401k for 2021 is $19,500. If you are 50 years old or older, you can add a catch-up contribution of $6,500 for a total of $26,000. And these limits do not include the employer match. Check with your plan administrator and tax professional for details about your plan and your tax obligations.

Where To Put Your Saved Money?

Short-Term Savings and Emergency Fund

Any money you will need within the next 3 years is short-term savings. This includes your Emergency Fund. You do not want this money to be at risk. Therefore, a savings account or money market account is a good choice. These can be found at your local bank, an online bank or an investment firm such as Vanguard, Fidelity or Schwab.

Interest rates for savings accounts are next to nothing these days, but you don’t expect to earn a lot on short-term savings. You just want to make sure your money will be there when you need it.

Medium-Term Savings

Money needed in the 3 – 5 or 6 year time frame is medium-term savings. This money can stand a small amount of risk in order to realize some gains.

For this fund, we personally keep our money in a conservative bond fund. This fund does fluctuate up and down, but only in small amounts.

Long-Term Savings

Any money that is not needed for 6 or more years is long-term savings. This money can stand the most risk in order to enjoy the most gains. It can be invested in a variety of ways. A balanced fund, equities such as low-cost index funds or rental real estate are some of the choices for your long-term savings.

Tip: Look for a future post on investing. In the meantime, check out J. L Collin’s book, “The Simple Path to Wealth.” If you’re new to investing, this is a great place to start. It helped me understand the stock market, how it works and how to not be afraid of it.

When investing, remember that at any one time your investments might have gained or lost money, but over time, they usually gain. It’s time in the market that counts. I am retired and 65 years old, but I still have the possibility of a 30-year investment horizon.

The most important tactic for your long-term savings is this…DON’T TOUCH IT!

When To Save Money?

Early And Often

Save as much as you can as often as you can. Every dollar you can squeeze out of your budget will make your future more comfortable and less stressful. Especially if you are starting late like I did.

I’m not saying you need to live on beans and rice until you retire. Strike a balance between a life you enjoy now and a life that will be what you dream of in retirement. To read how one dollar today can turn into many in the future, check out my article on the power of compounding

Pay Yourself First

When I first started getting my finances in order I heard people say, ‘Pay yourself first.’ I didn’t even know what that meant.

Paying yourself first means to set aside your savings BEFORE you pay your bills. You are paying your future self.

If you were to look at my pre-retirement budget, the first line item was Tithing/Giving and the next was Savings. Pull out your savings first, then live on the rest. You Can Do It!

Automate Your Savings

Brad Barrett on the Choose FI podcast says to get your ‘Lizard Brain’ out of it. What does that mean? Automate everything you can. Especially your savings. That way you don’t have to think about it. You won’t forget to send your extra dollars to savings, and you won’t be tempted to spend it on that new couch.

You can do this by setting up an automatic transfer from your checking into the account where you keep your savings. This can be from checking to a savings account or checking to an investment firm like Vanguard.

If your paycheck is an auto-deposit, you may be able to set up an automatic transfer to savings from your paycheck.

So automate your savings already!

What Do Our Readers Say?

I asked my Started At 50 Facebook group to share their money-saving tips. Here are a few of their responses.

  • Always shop with a list – Ashley
  • Cut the cable – Jack
  • Use envelopes, track cash flow and net worth – Diana
  • Auto transfer savings to an account at a different bank so you don’t see it – Kristy

What Does The Bible Say

God calls us to be good stewards of everything we have. A steward is one who manages the property, finances or affairs of another. Everything we have comes from God, and He expects us to manage it well. Saving some of today’s earnings for the future is a way to manage well.

Precious treasure and oil are in a wise man’s dwelling, but a foolish man devours it.

Proverbs 21:20

Go to the ant, O sluggard; consider her ways, and be wise. Without having any chief, officer, or ruler, she prepares her bread in summer and gathers her food in harvest.

Proverbs 6:6-8

Key Takeaway – Developing the habit of saving money is the key to your financial stability. It is your SuperPower. Even if you’re not a natural saver, it is a skill you can learn.

Assignment 1 – If you have non-mortgage debt, devise a plan now to pay it off.

Assignment 2 – Check with your employer for the matching rules on your 401k and get your match.

Assignment 3 – Make a list of the short, medium and long-term items you need to save for. Then look at your spending/budget and determine how much money you can send to savings.

Coming Soon – A primer to investing

Why You Need An Emergency Fund And How To Get One

At A Glance – An emergency fund is a financial safety net for future mishaps and/or unexpected expenses.

What Is An Emergency Fund?

An Emergency Fund (EF) could also be called a “Rainy Day Fund”. It is a stash of money, usually cash, that is set aside for an unexpected event, such as a medical emergency, a large car repair or a job loss.

Why Do I Need An Emergency Fund?

Life Happens. Things break, accidents happen, or there is, say, a global pandemic! An EF can keep you from taking on debt while you work through your emergency.

And don’t emergencies seem to happen at the worst times! The water heater breaks right after you had to get a new transmission. With an EF you won’t have to take on more debt to keep life going.

Without having some cash set aside, you might have to put your emergency on a credit card or take out a personal loan. Both of these options come with high interest rates that set you back even more than the emergency did.

One of the main reasons Stephen and I had such financial woes in our earlier life was because we did not have an EF. We had just drifted through life with no safety net, and when the BIG unexpected event happened we fell off the financial cliff! It affected our marriage and our family. Life was very unpleasant. Now we have enough cash to handle almost any emergency.

How Much Do I Need?

If you don’t have any cash on hand right now for emergencies, you need to start with a Baby Emergency Fund of $1,000.

Your Baby Emergency Fund is your first line of defense against a dumpster fire event in your life. It keeps you from getting off track and taking on more debt when you have a small to medium-sized emergency. If you have a flat tire or the washing machine quits, you can handle it.

The typical advice about how much to keep in your fully-funded Emergency Fund is 3-6 months expenses. This will handle larger events like a large medical bill or job lay-off. Your fully-funded emergency fund keeps you going without adding additional debt and stress. Having 3-6 months of expenses saved can give you the peace and confidence to face almost anything life can throw at you.

Here’s another advantage of having a fully-funded EF. If you have a large emergency or a job lay-off, you can temporarily cut back on your spending. Three to six months of savings can be stretched to last even longer as you cut back on discretionary spending. Eating out and vacations can wait.

How Do I Build It?

You can build your Emergency Fund by saving, selling something or a part-time job. If you need to build your Baby EF, the fastest way to accumulate that first $1,000 is to sell something. Have a garage sale or sell some stuff on market place. You probably have enough stuff around your house you could sell to stash away that first $1,000.

The rest of your 3-6 months of EF can come from saving money from your monthly paycheck or by taking on a part-time job or side hustle. It will take some time to accumulate 3-6 months of living expenses, so be patient, but be diligent. The more you are willing to sacrifice, the faster this will go.

If you don’t know how to save any extra money from your paycheck, take a look at your budget and see where you can temporarily cut something. If you aren’t using a budget, this is a good time to start. Here is my article, How To Do A Budget. It explains how to set up and use a budget, and includes a spreadsheet you can download. Or you can use an app like YNAB and Mint.

Where Do I Keep My Emergency Fund?

You want your emergency fund to be accessible, but not TOO accessible. In other words, you don’t want to be tempted to use your EF for that new big screen you’ve been wanting.

Since your EF will probably be cash, you could keep it in a savings account or a money market account. These can be held at your bank or a brokerage firm. You might even want to open a separate account at a different bank. This does two things. You know exactly how much you have, and you can’t do an online transfer into your checking account. This will keep you from being tempted to use it for something else.

As you are deciding where to put your cash, you will probably think, “This is boring. It’s just sitting there. I could do better than this piddly amount of interest it’s earning.” And you’ll be right. It is boring. It’s not making anything. But the point is not for it be a great investment, it’s meant to be a safety net. It’s what lets you sleep at night without worrying about Murphy knocking on your door!

When Should I Use My Emergency Fund?

This is an Emergency Fund…use it for emergencies!

What’s an emergency? Let’s start with what is NOT an emergency. A new couch is not an emergency. A vacation is not an emergency. A nicer car is also not an emergency.

Your EF should be used for things that are truly emergencies. As mentioned above, a large unexpected medical bill or job lay-off are true emergencies. Another example is paying an insurance deductible for something like a hail storm or a car wreck.

Also, keep in mind that not every large expense is an emergency. A new roof or a vehicle will be a large expense, but they are not a surprise. Large purchases or repairs can be planned for. You know they are coming eventually. These large purchases can be handled with a sinking fund. A sinking fund is where you set aside money each month in preparation for a large purchase.

For example, if you need to replace your car in 5 years and you think it will cost about $15,000, set aside $250/month. In 5 years you will have the cash to pay for the car. It won’t be an emergency.

When you need to use your emergency fund, you will need to replace what you spent. Start saving again until your emergency fund is fully funded.

What Does The Bible Say

There is a great example of an EF in the Bible in the book of Genesis. Pharaoh has a dream which Joseph interprets. The dream tells him there will be 7 years of abundance and then 7 years of famine. Pharaoh puts Joseph in charge of building Egypt’s “Emergency Fund” so his people will not starve during the famine. Read about it here.

Let Pharaoh appoint commissioners over the land to take a fifth of the harvest of Egypt during the seven years of abundance. They should collect all the food of these good years that are coming and store up the grain under the authority of Pharaoh, to be kept in the cities for food. This food should be held in reserve for the country, to be used during the seven years of famine that will come upon Egypt, so that the country may not be ruined by the famine.

Genesis 41:34-36


Having an emergency fund keeps life’s mishaps from turning into stress and drama. After you have lived with one for a while, you will discover that you don’t have as many emergencies. If something unexpected happens, you handle it, replace what you spent out of the fund and move on.

Key Takeaway – An emergency fund is a financial safety net for future mishaps and/or unexpected expenses. Having one will keep you from going into debt to handle an emergency.

Assignment 1 – Build your Baby Emergency Fund of $1,000. Sell something or take on a part-time job.

Assignment 2 – Look at your current budget and make adjustments to temporarily save as much as you can to build your fully-funded Emergency Fund.

Assignment 3 – Decide where to put your Emergency Fund.

Coming Soon – My first real retirement trip!

Have there been times in the past when you could have used an EF? Do you have an example of when having an EF kept you out of the ditch? Share your story in the comments below. I love hearing how our members are navigating our “strange new world”!

How Credit Card Debt Can Get Out Of Control

At A Glance – Out of control credit card debt is the enemy of your money and your future. Discovering your purchasing patterns will help break the cycle of debt.

Have you ever looked at your credit card statement and thought, “How the #@%$ did I get here?!” Or watched it inch up every month thinking it’s not THAT bad, only to realize it’s gotten bigger than the neighbor’s dog!

If you can identify, you’re not alone. Credit card debt is massively out of control. But what to do?

Here are a few thoughts on how credit card debt can balloon out of control and what to do about it.

How Did We Get Here In The First Place?

1. The Buy It Now Mindset

Credit card debt can get out of control because we have a “buy it now” mindset. Our culture has become one of instant gratification. If you want it, need it, or even think you need it, you should get it! Right? Your friends will tell you, “You deserve it!” If you don’t have the money today…No Problem…put it on the card. The only problem is all that “deserving” has to be paid for. Unfortunately, you are using tomorrow’s dollars to fund today’s lifestyle. This mindset will get you in trouble before you even realize what’s happened.

Keeping up with friends or family causes problems also. It’s hard to say no when everyone is going out for drinks after work. What about that new grandbaby across the country you want to go see? Or how about the latest iPhone? We want to appear we have it all together, and that doing what everyone else is doing is no problem.

What to do: Plan ahead for large purchases, save up and pay cash. Establish a 72-hour rule. Wait 72 hours before making any major purchases. You may discover you really don’t want it that bad.

2. Pay Attention!

Our credit card debt can also get out of control because we just don’t pay attention. We’re in a hurry, so we put it on the card. We mindlessly buy things and realize later that we really didn’t get any joy from that purchase.

Stephen and I dug a huge hole in our early years because we didn’t pay attention. There are still times when we have to unwind mistakes.

What to do: Pay attention! Don’t make purchases because you are in a hurry, or because you haven’t planned ahead.

3. Making Only Minimum Payments On Your Credit Cards

Credit card debt gets out of control when we only make minimum payments. Credit card companies make it easy to buy what you want and only make that small minimum payment. Lots of folks think the minimum payment is all that’s required. The problem is the balance will increase faster with spending than it will decrease with minimum payments. You’ll never get ahead like that.

Credit cards carry some of the highest interest rates in the lending industry. They are probably the highest rates of any loan you have. I received an email from my credit card company last month (February 2021) that informed me the rate on my card has changed and could go as high as 29.99%! What! This is a premium card and I have good credit.

Here are some examples of what minimum payments can do.

The first chart shows how long it would take to pay off $500, $2,000 and $5,000 balances with minimum payments and 18% interest. This assumes adding no new purchases to the balance.

Card BalanceInt. RateMin PymtHow Long to Pay OffTotal Paid (Int.+Card Balance)
$50018%$252 yrs$599
$2,00018%$752 yrs, 11 mo.$2,573
$5,00018%$1255 yrs, 2 mo. $7,692

This next chart shows how long to pay off the same $500, $2,000 and $5,000 balances with minimum payments and 29% interest. Again, this assumes adding no new purchases to the balance.

Card BalanceInt. RateMin PymtHow Long to Pay OffTotal Paid (Int.+Card Balance)
$50029%$152 yrs, 4 mo.$691
$2,00029%$753 yrs, 8 mo.$3,247
$5,00029%$12511 yrs, 11 mo. $17,804

Do you see the last one? If you bought a nice leather couch and put it on a credit card at 29% interest, you would pay over $17k for it in the end!!!

The reason these balances go up so quickly is that credit cards accrue compound interest and not simple interest. This is where compounding can work against you. If you don’t know how compounding works, read my article What Is Compounding And How To Harness Its Power. This explains what compounding is and when it works for you and against you.

What to do: Pay as much as you can each month to eventually pay off the balance. Once your balance is $0.00, pay the balance in full and on time every month.

4. Skipping Payments Or Paying Your Credit Card Bill Late

Credit card debt gets out of control if we miss the payment or pay it late. On most cards, the interest rate automatically increases if you are late with a payment or miss it altogether. If several payments are late the rate will go up to that 29.99% I talked about earlier. No thank you!

Also, don’t forget about the late payment fee. On top of the ridiculous interest rate, you will be charged a late fee. Right now my card is charging $40. This adds to your balance AND will also start to accrue interest.

This habit of making minimum payments and paying late sets up a downward spiral that can be devastating to your finances and your emotions. Many people wake up one day and find they are so deep in a hole, there’s no way out. I have been there, done that! It’s a hopeless and helpless feeling.

I’m not going to sugarcoat this. If this is you, then you need to take action. NOW! It won’t be fun, but YOU CAN DO IT! I’m here to help you through this. I’ve got your back!

What to do: Plan ahead so you have the money to make the payment and set an alarm on your calendar, or set up automatic payments.

What Does The Bible Say?

God calls us to be good stewards of everything we have. All we have comes from Him and belongs to Him. “…for every animal of the forest is mine, and the cattle on a thousand hills.” Psalm 50:10

Having large amounts of debt brings disorder and chaos to our lives. “For God is not a God of disorder but of peace.” I Corinth. 14:33

We are not prepared to join in on God’s plans or opportunities if all our money is spoken for before we even earn it!

What do you do now?

If you have discovered that you have too much credit card debt, there’s only one thing to do. Stop using them and pay them off. It won’t be easy, but it will be the best thing for your future self.

The entire process of how to pay off your credit cards is explained in How To Pay Off Credit Card Debt In 6 Steps. When you work through the process of paying off your credit cards, you will have freedom and control. Freedom from fear and anxiety and control of your future.

You may also have other debt in your life that needs to be addressed. After paying off credit cards, you will have the skills and the mindset necessary to attack the rest of your debt. You are now in a position to create the amazing life you want.

Key Takeaway – Out of control credit card debt is the enemy of your money and your future. Discovering your purchasing patterns will help break the cycle of debt.

Assignment – Look at each transaction on your last one or two credit card statements. Do you see a pattern? Do you see unnecessary purchases? Commit to using cash and paying off your credit cards.

Coming Soon – The Emergency Fund

If you need any help or encouragement along your journey, use the contact form to contact me, leave a comment below or go to the Started At 50 Facebook group.

Have you been able to pay off some of your credit card debt? Great! Leave a comment so we can all celebrate with you.

What Is Compounding And How To Harness Its Power

At A Glance – Harnessing the power of compound interest or compounding is probably THE most important factor in becoming Financially Independent.

What Is Compound Interest or Compounding

Compound Interest is the eighth wonder of the world. He who understands it, earns it…he who doesn’t… pays it.

Compound interest is the most powerful force in the universe.

Compound interest is the greatest mathematical discovery of all time.

Albert Einstein

Those are powerful quotes from a powerful mathematician! Why would Albert Einstein say that about compound interest? Because it can mean the difference between barely having enough money to get by in your retirement or being quite comfortable.

Let’s look at what compounding is and what it can do for you.

Definition of Compounding

Here’s a textbook definition of compounding. Compounding is the process in which an asset’s earnings, from either capital gains or interest, are reinvested to generate additional earnings over time. This growth occurs because the investment will generate earnings from both its initial principal and the accumulated earnings from preceding periods. Compounding, therefore, differs from linear growth (simple interest), where only the principal earns interest each period.

In plain English, compounding is interest on interest which magnifies returns over time.

Here’s an example. Let’s say you deposited $1,000 in a savings account and the bank will pay you 10% interest per year. (I know you can’t get 10% right now, but I’m just using round numbers).

In year One, you would earn $100 in interest (1,000*10%). Your account would then total $1100.

In year Two, your $1100 earns 10% interest or $110. Add that to your principle and you would have $1,210.

In year Three, you would earn 10% on $1210 or $121. This would total $1,331.

Each period that the interest is added to your account, it is calculated on the total amount in the account. Not just the original deposit of $1,000.

$1,000 Invested at 10% Comp. Interest per Year GainTotal
Year 1 (1,000*0.10)$100$1,100
Year 2 (1,100*0.10)$110$1,210
Year 3 (1,210*0.10)$121$1,331

Compound Vs Simple Interest

Simple interest can be defined as interest paid only on the original principal, not on the accrued interest. In other words, the interest will be calculated each period on the original deposit.

In our example above, simple interest would only be calculated on the original deposit of $1,000. So, each year the interest paid would be $100. With simple interest, at the end of 3 years, you would have $1,300.

$1,000 Invested at 10% Simple Interest per Year Gain Total
Year 1 (1,000*0.10)$100$1,100
Year 2 (1,000*0.10)$100$1,200
Year 3 (1,000*0.10)$100$1,300

Let’s look at the totals for these two examples side by side for 1, 5, 10, 20 and 40 years.

$1,000 Invested at 10% Simple Interest Compound Interest
Year 1 $1,100$1,100
Year 5$1,500$1,610
Year 10$2,000$2,594
Year 20$3,000$6,727
Year 40$5,000$45,259

You can see why compounding is described as a Mathematical Explosion! The difference is small in the beginning, but as the interest compounds over many years, the difference in your total investment is massive.

The Magic Penny

Here is a fun riddle. Would you rather have a penny that doubles every day or a million dollars? Interesting question. Let’s see…

Start of Day 1$0.01
End of Day 10.02
End of Day 20.04
End of Day 30.08
End of Day 40.16
End of Day 50.32
End of Day 60.64
End of Day 71.28
End of Day 82.56
End of Day 95.12
End of Day 1010.24
End of Day 1120.48
End of Day 1240.96
End of Day 1381.92
End of Day 14163.84
End of Day 15327.68

Which did you choose? Want to change your choice? That penny’s not looking very appealing, but let’s continue.

End of Day 16655.36
End of Day 171,310.72
End of Day 182,621.44
End of Day 195,242.88
End of Day 2010,485.76
End of Day 2120,971.52
End of Day 2241,943.04
End of Day 2383,886.08
End of Day 24167,772.16
End of Day 25335544.32
End of Day 26671,088.64
End of Day 271,342,177.28
End of Day 282,684,354.56
End of Day 295,368,702.12
End of Day 3010, 737418.24

As you can see, the effect of compounding is slow as molasses at first, but then later, takes off like a rocket! Your investments can make more money than you do. The effect of compounding on investments has been described as a perpetual money machine!

What does this mean for you? Invest early and invest often. And leave it alone. Don’t sacrifice your future for something you think you can’t live without today.

A Real-World Example

So far I’ve given you hypothetical examples in order to show you how this works. Let’s look now at a real-world example.

I’m going to use 2 people, Earl the Early Bird and Paul the Procrastinator. Earl starts saving and investing 20% of his $36,000 salary at 22 when he starts his career after college/trade school. This means he has $600/month to invest. He can invest 20% because he has not let his lifestyle creep until it takes all his income. Earl invests his money in low-cost, broad-based index funds that have returned an average of about 8%/year for the last 60 years.

Paul has graduated college with a great starting salary of $90,000/year. He has set up his life to reflect his hard work and good fortune. In other words, he has allowed his lifestyle to creep up to meet his income. He really can’t save much at first because he needs to buy a house and he has a hefty car payment. Ten years later at 32, he decides he should probably start saving for retirement. He saves and invests 10% of his salary which he feels good about. This means he is investing $750/month. Paul is putting his money into the same low-cost index funds as Earl.

Let’s see how they do at age 32, 42, 52 and 62.

Age 32$111,837$0.00
Age 42358,764139,796
Age 52906,902448,455
Age 622,123,6751,133,627

Earl is only ahead of Paul by a little over $100,000 when Paul starts to invest, but ends up beating him by $1M! Even though Paul is investing more per month and has a much higher salary, the value of time was in favor of Earl.

What Does This Mean For You And What If You’re Starting Late?

The answer to this is simple, but not always easy. It means save everything you can as often as you can. You can see in the examples above that time and interest rate make a big difference in the end result. Compounding works FOR you as you grow your savings. The longer your money is invested, the more effect compounding has. Starting as early as possible will give you more time to save. Also, the rate affects the outcome of compounding. The higher the rate, the more your money will earn. As interest is added on top of interest, your money will grow faster over time.

What if you can’t save 10% or 15% of your salary? You might have money that is not working as hard for you as it should, you just need to find it. If you don’t know where to start, check out my other articles on Calculating Your Net Worth, Tracking Your Spending and Budgeting. These should give you a place to start looking for extra money to save.

What if you’re not 22?!!! I feel your pain. Remember the name of my website…Started At 50. That’s because I was 50 years old when I started saving. Literally, my Net Worth was Zero at age 50. If you are late to the game, first you need to know it’s not TOO late. You have time, just not as much time. Start saving everything you can get your hands on NOW. Don’t wait another day. Everything you can do today will make your future more comfortable and less stressful.

Can Compounding Work Against Me

Compounding can also work AGAINST you. The same power that allows your investments to grow will also cause your debt to march relentlessly upward. Some types of debt like credit card debt are calculated with compounding interest and not simple interest. As your credit card balance grows with purchases, the interest on interest calculation causes the balance to grow even faster.

If you do not pay your credit card bills in full every month, you are paying the bank a huge premium for the privilege of carrying their card. At the time of this writing, interest rates on savings accounts are below 1% per year, whereas credit card rates are anywhere from 16-30%. The first step in boosting your savings rate is to pay off your credit cards!

Credit cards are not the only type of loan that is calculated with compound interest. If you have other types of loans, check to see what kind of interest they carry.

Where Can I Find Compounding?

Compounding happens in several places. The most obvious would be at your bank with a savings account or CD. Usually, the bank guarantees a rate of interest for a period of time. Unfortunately, interest rates are very low right now (March 2021) and have been for a while.

Compounding also happens in the stock market. Investment vehicles such as mutual funds, stocks, bonds, and T-bills are some examples. The compounding happens when interest and dividends are paid and with increases in the share price. (You must remember the stock market will go up and down on any given day, month or year. The point is over time, stocks go up)

The way to ensure you enjoy the effects of compounding is to leave your interest and dividends in the account to compound into the future.


Compounding is a force you want working for you and not against you. This means saving early and often. It also means pay off your credit cards.

Here’s another quote for you. This time from Warren Buffet.

My wealth has come from a combination of living in America, some lucky genes, and compound interest.

Key Takeaway – Harnessing the power of compounding is probably THE most important factor in becoming Financially Independent. Save early and save often.

Assignment 1 – Look at how much you are saving today. Can it be increased?

Assignment 2 – Are you carrying a balance on your credit cards? Look at their current interest rate. Try to reduce the rate or pay it off. (Here is an article about paying your credit cards off)

Coming Soon – How credit card debt can get out of control.