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

Conclusion

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 Balance	Int. Rate	Min Pymt	How Long to Pay Off	Total Paid (Int.+Card Balance)
$500	18%	$25	2 yrs	$599
$2,000	18%	$75	2 yrs, 11 mo.	$2,573
$5,000	18%	$125	5 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 Balance	Int. Rate	Min Pymt	How Long to Pay Off	Total Paid (Int.+Card Balance)
$500	29%	$15	2 yrs, 4 mo.	$691
$2,000	29%	$75	3 yrs, 8 mo.	$3,247
$5,000	29%	$125	11 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	Gain	Total
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 1	0.02
End of Day 2	0.04
End of Day 3	0.08
End of Day 4	0.16
End of Day 5	0.32
End of Day 6	0.64
End of Day 7	1.28
End of Day 8	2.56
End of Day 9	5.12
End of Day 10	10.24
End of Day 11	20.48
End of Day 12	40.96
End of Day 13	81.92
End of Day 14	163.84
End of Day 15	327.68

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

End of Day 16	655.36
End of Day 17	1,310.72
End of Day 18	2,621.44
End of Day 19	5,242.88
End of Day 20	10,485.76
End of Day 21	20,971.52
End of Day 22	41,943.04
End of Day 23	83,886.08
End of Day 24	167,772.16
End of Day 25	335544.32
End of Day 26	671,088.64
End of Day 27	1,342,177.28
End of Day 28	2,684,354.56
End of Day 29	5,368,702.12
End of Day 30	10, 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.

	Earl	Paul
Age 32	$111,837	$0.00
Age 42	358,764	139,796
Age 52	906,902	448,455
Age 62	2,123,675	1,133,627

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.

Conclusion

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.

How To Pay Off Credit Card Debt In 6 Steps

At A Glance – Long term credit card debt is the enemy of your financial well-being. It is like a black hole – sucking everything in and leaving you empty-handed. Paying off your credit card debt will break the chains of that bondage.

6 Steps To Pay Off Your Credit Card Debt

1. Have An Emergency Fund

Why am I starting with an Emergency Fund (EF) and not paying your cards? Because the minute you decide to pay off your debt, you will have an emergency! Your car will break down or your water heater will blow up. If you don’t have an EF, you will have to put this crisis on your credit card and the problem will get worse.

If you already have an EF, great! Skip to Step 2. If not, stop what you’re doing right now and work on this. It’s critical! Not only for debt reduction but just for life. An EF puts a cushion between you and life. When you have a flat tire, it’s not a crisis. You buy a new tire, restock your EF and move on.

How much do you need? A fully funded EF is 3-6 months of expenses in cash. If you don’t have any cash saved, then start with $1,000. This is your Baby Emergency Fund. I don’t want you to wait until you save 3-6 months saved before you start working on your debt. After your debt is gone, go back and finish the EF.

How do you get $1,000 quickly? Sell something on Marketplace, have a garage sale, or take a part-time job. Look at where you can cut spending. Do it quickly and do it now. You should be able to come up with $1,000 quickly. Dig all the loose change out of your car seat.

2. Stop Taking On New Debt

To get rid of this debt, you need to commit to no new spending! You can’t make headway with your cards if you keep putting purchases on them. This will be the hardest step for most people. Spending is what got you here. (How’s that working for you, by the way?) New habits and a new mindset will get you out.

If you can’t pay cash for something, you can’t afford it. Reduce your spending (for a season) to necessities only. And no, getting your nails done or a new car magazine is not a necessity! I know this will be painful, but it won’t last forever.

Start using a budget and track your expenses. Budgeting and tracking will show you where you are overspending and getting off track. If you haven’t used one before, here is a link to an article about Budgeting and an article about Tracking Your Spending. They include simple spreadsheets you can use. They are free for you to download, or you can find many others on the web. There are also apps you can load to your phone that make tracking simple. Give yourself some grace with these tools if you’ve never done this before. It usually takes about 3 months to get the hang of budgeting.

After you have put your expenses down on paper (or an app), do you see areas where you can cut? For now, cut your spending to the bone. The more you can cut, the faster you will get out of this pit of debt.

3. Use Cash

As I said above, if you don’t have the cash for a purchase, you can’t afford it. I know using cash these days is archaic, but it works. When I was in the pit of debt and fear, I switched to cash. Using cash for a purchase keeps you from overspending by letting you feel the emotional pain of spending. When you have to hand over a couple of Ben Franklins to buy the groceries, it makes you think about everything you put in your basket!

I literally had cash in envelopes in my purse. I can hear your question now…No, I wasn’t afraid to carry that much cash with me. I didn’t have ALL my envelopes in my purse. Just the ones I needed for the errands that day. And I get it, going to the bank to get cash and doling it out to the envelopes is a pain. That’s the point. You want to get that debt paid off and get out of this mode of operating AS SOON AS POSSIBLE.

I understand we are in the 21st century and…”There’s an app for that”. There are lots of apps you can use to help with your spending. Some of the more widely used budgeting apps are Mint, YNAB and Every Dollar.

4. Reduce the Interest Rate Or Transfer The Balance To A 0% Card

Call your current credit card companies and ask for a reduction in your interest rate. This may be a long shot, but the worst thing that can happen is they say no. This will depend on your payment history and your credit score.

Another way to reduce your interest rate would be to transfer your balance to a card with a 0% offer. (You may not be able to do this if your credit is trashed). Some cards offer a 0% interest rate for a period of time. Say 12-18 months. You can transfer your balance and pay the card down while the interest meter has been turned off. This will give you a bit of breathing room. If you are able to do this, push through the pain and pay everything you can find on the balance before the interest starts running again.

Special Note: There is normally a fee to transfer your balance onto a new card. Do the math and be sure you’re not paying more in fees than you will save in interest.

This tactic is a form of debt consolidation, and I’m not usually a proponent of debt consolidation. Let me say that again. I DON’T like Debt Consolidation. Why? Because it won’t work without a behavior change. You must change your behavior with spending and saving. Otherwise, you will consolidate your debt, clear your credit cards and start filling them up again. Not a good plan.

If you can transfer your balance to a 0% card, you should CLOSE the cards you’ve emptied to eliminate the temptation to spend on them.

5. Start Paying Off Your Credit Card Debt

Here’s the real meat of the article! Let’s get those cards paid off!

There are 3 main ways to pay off your credit card debt. They are the Snowball Method, the Avalanche Method and the Hybrid Method.

I will explain them here. Also, here is a link to an article about paying down any kind of debt and includes further descriptions of these methods. How To Pay Off Debt.

Snowball Method

This method is fairly simple. List your balances starting with the smallest balance down to the largest. Ignore the interest rate, just rank them by balance amount. Make minimum payments on all but the smallest card and throw everything you possibly can at the small one until it is paid off. This means any extra money you can get your hands on goes to this debt. This could be money from a side job, overtime, or by selling something.

After the first card is paid off, take all the money you were paying on it plus the minimum payment you were making on the second card and put it on the second card. You keep doing this for each credit card until all are paid. Each time adding the money from the payments on the previous card. This is the snowball and it gets bigger as it rolls to each card.

The snowball method gives you an emotional boost with a quick win. This Atta-Boy can help you stay focused and keep going. The downside is because it does not take interest rates into account you could pay more in the long run.

Avalanche Method

The Avalanche Method is similar to the Snowball, but it considers the interest rate instead of the card’s balance. In this method, list your balances starting with the highest interest rate down to the lowest. Pay minimum payments on all but the first card on the list. Throw all the money you can at the first card until it is paid. Then, like in the Snowball, you add what you were paying on the first card to the minimum payment of the second and keep going till all credit cards are paid.

The avalanche method can save you some money in the end. If you focus on your highest interest card, you can save some money by eliminating that debt first. The downside of this method is it may take months to slog through the first card’s balance.

Hybrid method

The Hybrid Method combines the pros of the Snowball and the Avalanche. Using this method, pay off one or two small cards first for that quick win to get you motivated. Then, as you feel you have the discipline, start working on the card with the largest interest rate.

Last thought about payment method

Which method should you use? My normal advice about debt repayment is, it’s really up to you. Choose what will work better for your situation and temperament. In the case of paying off credit card debt, I would suggest the Avalanche method if you can bear it. Why? Credit card debt carries such high interest that, if it were me, I’d attack the highest interest card first.

6. Track Your Progress

Make yourself a visual. A chart or graph. Put it on your phone and your computer. Put it on your refrigerator. Make sure you squeeze every bit of feel-good from your progress. Give yourself a pat on the back for every little win.

This whole credit card payoff process won’t be easy. And it won’t be quick. As Dave Ramsey says, “You might have wandered into debt, but you can’t wander out”!

It may help to have an accountability partner along this journey. Find someone who will walk this road with you and say hard things because they love you.

Go to my Started At 50 Facebook group and let us know how you’re doing. We would all love to celebrate your progress!

I’ve Paid Off My Credit Cards, Now What?

First, WOOHOO!! Congrats on making this major milestone in your finances and your life. Doesn’t it feel good?

Now it’s time to put your big-girl pants on. FROM NOW ON AND FOREVERMORE, if you put purchases on a credit card…PAY THEM ON TIME AND IN FULL every single month. This is the only way to use these beasts. Now, you can be in control of your credit rather than being at the mercy of the bank!

I would suggest that you also continue to budget and track your spending. You may not need to do this forever, but it is a good way to put guard rails around your finances.

What Does The Bible Say?

Conclusion

“Why go through all this pain”, you may ask? Carrying continuous, strangling debt is no way to live. It sucks the joy out of life, creates stress and will eventually affect everything.

When you work through the process of paying off your credit card debt, you will have freedom and control. Freedom from fear and anxiety and control of your future. You may have other debt in your life that needs to be addressed. If you do, you 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 – Long term credit card debt is the enemy of your financial well-being. Paying it off will break the chains of that bondage.

Assignment 1 – Commit to STOP using your credit cards TODAY!

Assignment 2 – Look at all your credit card statements. Make a list of all the balances and interest rates. Decide which payoff method you will use.

Assignment 3 – Pay them off as aggressively as possible

Coming Soon – The Power of Compound Interest

If you need any help or encouragement in your debt pay-off journey, use the contact form to contact me 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.

How To Pay Off Debt

At A Glance – Debt is NOT your friend. It robs your future, and more stuff won’t make you happier. Pay off your Debt as quickly as possible. It won’t be easy, but it will be worth it! Then you can start to design the future you’ve always dreamed of.

Accumulating debt has become an American past-time. Everything we want comes with “easy payments”, so why not buy it? Often-times we don’t realize how deep we’re in until we realize we can’t get out.

How many of us find ourselves thinking things like:

I don’t want to buy some else’s car problems, so I need to buy a new car.
My new baby needs the best and safest equipment, so I’ll just put her cute new stuff on my credit card.
My boss was really unreasonable today, so I’ll go to that new bar for a happy hour with my friends.
I need all this stuff to keep up. I wouldn’t want my friends to think I’m not doing well.

It feels normal because it’s what everyone else is doing. We have become professionals at retail therapy.

We’ve created a lifestyle that’s impossible to maintain. And we fund it all with debt. Take my word for it – this will NOT bring us joy. It only brings us bondage. Debt is a mental, emotional and financial drain that robs your future.

Debt Is A Product

Did you know debt is a product? Just like your favorite candy bar or the shampoo you use, debt is a product we buy. And just like the other products, it is heavily marketed to us.

Debt is sold to us in the form of credit cards, car loans and mortgages.

You Can’t Borrow Your Way Out

The only way to get out of debt is to quit borrowing. Taking out one loan to pay off another is just moving the debt around.

If you are serious about wanting to get out of debt, you have to stop taking on new debt. You can’t get out of the hole by digging it deeper.

What Does The Bible Say About Debt

The Bible has a lot to say about money. That is one of the things I explore here at Started At 50. If you study God’s word, it doesn’t take long to see that debt is not part of His plan for us. He knows it’s not good for us. Here’s a couple of examples.

Proverbs 22:7 – The rich rule over the poor, and the borrower is slave to the lender.

Romans 13:8(a) – Let no debt remain outstanding, except the continuing debt to love one another.

What Is Debt?

What is considered debt? The definition of debt is simple…Debt is anything you owe to anyone. Having debt means you are funding today’s life with tomorrow’s dollars. When does it end?!!!

It can end here and now. You CAN get out from under the stress and the bondage of debt. It won’t be easy, but it is possible. You can do it with a few simple tools and a plan.

Let’s talk a bit about the different kinds of debt and the effect debt can have on your life and then we’ll dive into the nuts and bolts of Debt Payoff.

Kinds Of Debt

Credit Cards
Student Loans
Car Loans
Mortgage
Personal Loans
Medical Debt
Payday Loans
HELOC
401k loans
Loans from Your Parents
“90 Days Same As Cash” Purchases
Financing Your Kids Braces

Did you see anything on this list you had not previously considered debt? Many of these types of debt are common in our culture. It’s normal to have a Car Loan or Student Loans. Other types of debt such as Payday Loans are truly insidious, but they are all damaging to our financial well-being.

How Can Debt Affect You Emotionally?

Frustration – It can be frustrating to have an unexpected expense that has to go on the credit card. Just when you thought you were making headway! Frustration can lead to giving up.

Denial – Do you shove unopened bills in the drawer? You just don’t want to know how bad it is! Denial could lead to unhealthy coping habits like drinking in an effort to forget.

Stress – Do you have more month than money? How can you juggle all these bills. Even with making minimum payments, you don’t have enough to go around! Stress could lead to weight gain or relationship problems.

Fear and Panic – Do you let all your calls go to voicemail because you’re afraid it’s a collector. Are you fearful your credit card will be denied while you are at a restaurant with your date? Fear and Panic could lead to feeling anxious all the time and not enjoying life.

Shame – Do you hide your spending or the amount of debt you have from friends, family or co-workers. You don’t want anyone to know how deep in debt you are. I mean, what would they think! Shame can lead to living an inauthentic life.

Anger – Are you having money fights with your spouse? Are you yelling at your kids or your co-workers because you can’t quit thinking about your money problems? Anger can lead to relationship issues.

Depression – You have just shut down. You can’t see a way out and your spouse doesn’t understand the pressure you’re under! You can’t deal with it anymore. Depression can lead to a whole list of mental, emotional or spiritual issues. Deardebt.com is a one of many resources for someone who is struggling with depression and mental health problems due to financial strain.

I experienced a lot of these emotions when Stephen and I were having our money issues. We had dug such a deep hole, I didn’t think we would EVER climb out. We couldn’t talk about money without getting into an argument. I was frightened and he had shut down. We were going nowhere.

The stress was unbearable and I became hopeless. This is no way to live.

You’ve Got This!

I want you to know that no matter where you are starting, YOU CAN DO IT! Your self-worth is not your net worth. Your past mistakes do not define your future. Forgive yourself and let go of the past! If you are starting your Debt reduction journey, let us know in my FB group, Started At 50. We are all there to support and encourage each other. We will not judge!

Getting back to Zero is a great feeling. You will be starting your Financial Freedom clock. This is where I was at 50 years old!

First Things First – Your Emergency Fund

Before you start to pay down your debt, you need to build a baby Emergency Fund. If you already have one, great! If not, you need an EF of $1000 in the bank. Why would I ask you to save $1000 when I’ve just spent pages telling you to pay off your debt? Because you need a safety net. Some cushion between you and life. As soon as you commit to paying off your debt, your car will break down or your refrigerator will go out. You don’t need to go deeper in debt while you are trying to pay it off.

This was one of the big problems I experienced in our dark days. We had no safety net and when life threw us a curveball, it sent us over the cliff financially.

Try to save your $1000 quickly. Have a garage sale, sell stuff on Marketplace, work some overtime or declare a “No Spend Month”. Find any way you can to get this first $1000. Then when you have a flat tire, it’s not a disaster!

How To Pay Off Your Debt

There are 3 commonly accepted methods for paying off debt. The Snowball Method, the Avalanche Method and the Hybrid Method. Let’s look at how they work and the pros and cons of each.

Snowball Method

This method is fairly simple. You list your debts starting with the smallest balance down to the largest balance. Ignore the interest rate, just rank them by balance amount. You make minimum payments on all but the smallest debt and throw everything you possibly can at the small one until it is paid off. This means any extra money you can get your hands on goes to this debt. This could be money from a side job, overtime, or by selling something.

After the first debt is paid off, take all the money you were paying on it plus the minimum payment you were making on the second debt and put it on the second debt. You keep doing this for each debt on the list until all are paid. Each time adding the money from the payments on the previous debt. This is the snowball and it gets bigger as it rolls to each debt.

Snowball Pros and Cons

The advantage (or pro) of the Snowball Method is it gives you a quick psychological boost. Paying off all your debt is not going to be a piece of cake. You didn’t get into debt overnight and you won’t get out overnight. It takes time, discipline and it will probably take some sacrifice. The Snowball Method gives you a quick win and helps you feel like you are making headway. This can give you motivation to stick to it.

The disadvantage is the Snowball Method does not take math into consideration. You may pay your first debt off quickly, but that might be a loan with a small interest rate. Meanwhile, the loan with the large interest rate, say your credit card, is treading water and accumulating interest while it waits for you to get to it.

Avalanche Method

The Avalanche Method is similar to the Snowball, but it considers the interest rate instead of loan balance. In this method, list your debts starting with the largest interest rate down to the smallest. Pay minimum payments on all but the first debt on the list. Throw all the money you can at the first debt until it is paid. Then, like in the Snowball, you add what you were paying on the first debt to the minimum payment of the second and keep going till all debts are paid.

Avalanche Pros and Cons

The pro for the Avalanche is you are considering interest rates. You save money as you pay down the loan with the largest interest rate first. As the loan balance decreases, the amount of interest being charged decreases also.

The con for the Avalanche is emotional. The loan on the top of your list may have a large balance and take months or even years to pay off. This can be discouraging to see all your other debt treading water while you work on the one.

Hybrid Method

The Hybrid Method combines the pros of the Snowball and the Avalanche. Using this method you can pay off one or two small debts first for that quick win to get you motivated. Then as you feel you have the discipline to “Stick To It”, start working on the debt with the largest interest rate. This method is a hybrid of the other two.

One note about credit cards. Your credit card debt may have the largest interest rate of anything on your list. Check into transferring your CC balance to a zero-percent card. If your credit score is high enough, you can open a card with a zero percent interest rate for a period of time (6 or 12 months). This may save you some money as you pay down your debts. WARNING: Don’t do this if you have not changed your spending habits. It will only make your problem bigger!

Choose What Is Right For You

Is there a right or wrong way to pay your debts? Probably not. As with other financial tools like Budgeting or Expense Tracking apps, pick the one that works for you. If sticking to your payoff plan may be hard for you, choose the Snowball. Pick the Avalanche if you think you can stay with it and don’t need the “pat on the back”. Not sure, try the Hybrid.

You can accelerate your journey to being debt free. You can Earn More or Spend Less. Better yet, do both.

One note about interest rates – If you have anything with a greater than 10% interest rate, this is “Hair On Fire”. Address this loan as soon as possible. If you have anything worse, like a payday loan at anywhere from 200 to 2400%, this is “Nuclear Armageddon”! Do Not pass GO, Do Not Collect $200…borrow the money from your brother if you have to. Pay this thing off TODAY!

Conclusion

No matter which method you choose, the much BIGGER point here is to Get Out Of Debt! As I said earlier, these methods are simple. The execution of the plan will take grit. It won’t be easy to turn down that invitation to go out for dinner or forego a vacation. Life may feel very restricted…for a while. Remember, this is a season. It won’t last forever and it will be SO worth it.

Exercise Your Frugal Muscle

One unexpected benefit to the hard work of paying off your debt is you are building your frugal muscle. You will need to really think about every purchase while you pay off your debts. Then when the debts are gone, you will have created your frugal muscle. You will know how to pay attention to your spending. You will be in the perfect position to start saving! And saving money is what sets you up for a great future of financial freedom.

Key Takeaway – Debt is NOT your friend. It robs your future, and more stuff won’t make you happier. Pay off your Debt as quickly as possible. It won’t be easy, but it will be worth it! Then you can start to design the future you’ve always dreamed of.

Assignment 1 – Accumulate your $1000 baby Emergency Fund if you don’t already have one. Do it NOW!

Assignment 2 – Pull out all your debts. I mean ALL of them. Make a list of loan balances, minimum payments and interest rates. Decide which pay off method is right for you. List the debts in the order needed for the pay off method you have chosen. Smallest to largest balance for the Snowball. Largest to smallest interest rate for the Avalanche or your choosing for the Hybrid.

Assignment 3 – DO IT!!! You have a plan, so NOW is the time to get started. If you have trouble starting or you just need help from a real person, email me at becky@startedat50.com. Also, don’t forget the FB group Started At 50. We can crowd-source any question you have.

Coming Soon – Managing those Credit Cards

Tracking Your Spending and Why You Should

When Stephen and I first started trying to manage our finances, we used three basic tools. One was to create a Budget. We had never used one before. In fact, I had never seen one. It took a few months of tweaking to get one that worked for us, but we got there. Click here for my article on how to put a budget together. Included in the Budget article is a Budgeting Spreadsheet.

The second was to use Envelopes. That’s right – I actually had white envelopes with cash in them in my purse. I would use envelopes for some of the categories in our budget, like groceries. It was an easy way to see how much I’d spent and what was left.

The third tool was to Track Our Spending. That process was scary! I was afraid to see where our money was going, and it seemed so tedious! But tracking our spending turned out to be a great tool for us. In fact, I still track every penny I spend. Why? We have transitioned from the accumulation phase to the drawdown phase where we are living off our investments. Tracking our spending kept everything in focus while we were saving and now it helps us not overspend. I’m hoping to graduate from tracking every penny, but it gives me a level of comfort I like. Maybe after we have a year or two of history with our retirement spending I will feel comfortable to not track it all.

If numbers and spreadsheets make your head spin, you’re probably cringing at the thought of tracking your spending. But instead of focusing on the how, let’s talk about the why. If you’re willing to recognize the benefits of tracking your spending, you’re more likely to do it. Here are six benefits of tracking your spending to get you motivated to start.

6 Benefits of Tracking Your Spending

(1) Helps You Make a Better Budget

In order to create a meaningful budget, you need to understand where your money goes. You probably know how much your rent or mortgage is. It’s a budget category that shouldn’t fluctuate too much. But how about your grocery bill? How about car repairs?

Many areas of your budget will fluctuate weekly, monthly or seasonally. If you only look at your last grocery receipt, you might overlook the fact you purchased extra food because of house guests or that you bought less because you were on a business trip. Depending on where you live, your utility bills may fluctuate wildly from season to season.

It’s important to track your spending over time in order to build a better budget. And when you build a better budget, you’re more likely to stick to it.

(2) Combats Mindless Spending

From what I have observed and experienced, impulse spending is the enemy of wealth. You’ve probably heard the story where someone making six figures a year is broke. How does that even happen? It’s because they spent, spent, spent and never had a plan for where the money was really needed.

That’s why having a budget is so important, but it’s not enough. If you’re spending way off plan, you’ll find yourself in the hole every month. On the other hand, if you track your spending, you might uncover a few shocking numbers.

Did you think you were spending $100 a week on groceries only to realize the figure was more like $300? Did you assume you spent $500 a year on clothes, only to see that you spent that amount each month? Or maybe you mindlessly spend money at the vending machines at work. That might not seem like a problem until you tally up the expense and realize what else you could have done with the money.

As you compare your spending to your budget, you might realize some areas need to be trimmed. You might also decide the excess money you’re spending is better off going toward debt or savings.

Tracking your spending puts your expenses in black and white. There’s no denying your problem areas anymore. Knowing is half the battle.

(3) Helps Get Your Spouse On Board

Finances are one of the biggest causes of stress and tension in long-term relationships. That’s more likely to be the case when neither party has any idea what the other party is doing with their money.

The very act of tracking spending together as a couple makes it more likely that you’ll coordinate with your spouse ahead of purchases. You can check to make sure all your expenditures align with the priorities you have as a team.

I can’t stress enough how important it is to be on the same page with your spouse financially. When you’re not, it’s like being in the same boat, but rowing in opposite directions. You’re together, but you spend a lot of energy and go nowhere. Click here for my article on Being on the Same Page With Your Spouse.

(4) Catches Expenses You Forgot About

When you’re tracking your spending, go through your bank accounts and make sure you capture everything. Many people will find there are a few charges they forgot about (umm, iTunes anyone?) These charges are often subscriptions you signed up for a long time ago, and you might not have used the service in years.

People are especially prone to signing up for a “free” service that’s actually only free for a few months. Then it begins to charge you. You probably told yourself you would cancel the subscription before the charges kicked in but then forgot.

As you run through these charges, promptly cancel all subscriptions you no longer need or want. For the remainder of the charges, make sure they find a place in your budget.

(5) Confirms If Your Spending Aligns With Your Values

Are you in debt payoff mode? Are you saving for a house down payment or retirement? We all have some long-term financial goals. The ultimate goal of your budget is to make those long-term goals happen. However, your spending puts the pedal to the metal. Your budget means nothing unless you abide by it.

Let’s say you’re in debt payoff mode and you’ve budgeted $300 a month for it. However, each month you find you’re short of making that happen because you spent too much on entertainment or eating out. Tracking your spending allows you to start questioning yourself. Are these expenses really in line with your priorities?

One special note here: you are allowed to change your priorities. Debt payoff might be your priority today, but tomorrow it could be different. Make sure you know what your top priorities are by reviewing them monthly. Don’t allow your spending to control them. (This is what we did for years!)

(6) Simplifies Your Life

Let’s say you decide to track your spending. You pull together all your receipts and arm yourself with a glass of wine to tackle the mountain of receipts before you.

The first month, there are 75 receipts to examine, plus additional charges in your bank statement you had forgotten about (oops). You stopped at the grocery store several times, had three different Amazon orders and paid daycare each week. You got gas several times – not because you had to, but because you didn’t really plan your trips well.

As you move forward, you might find ways to simplify your life. Like planning better for grocery shopping so you don’t have to run back to the store. You might force yourself to wait a few days on Amazon purchases. Check with daycare to see if you can pay once a month, instead of weekly (and maybe get a discount).

A natural outcome of simplification is experiencing a small amount of savings. Fewer trips to the grocery store means less opportunity for impulse buying. Delaying Amazon purchases might be enough to make you decide against that purchase all together. Some places offer price breaks if you pay in advance (insurance is one notable area that gives breaks like this)(get in the habit of always asking about discounts for paying up front). Combining trips means savings on gas, plus less wear and tear of your vehicle.

The first few weeks of tracking your spending will be the hardest, but have no fear! It will get easier, and the benefits of tracking your spending will outweigh any negatives. The sooner you get started, the sooner you’ll experience these benefits.

Methods For Keeping Track of Expenses

Tracking spending can be done manually by writing down every purchase you make. Or you can use apps such as Mint or YNAB that link to your credit cards and bank accounts to make the process easier. Whatever approach you choose, it may seem like a hassle – but it’s well worth it in the end. The best approach is one that you feel comfortable enough to stick with every day.

(1) Record Expenses With Pen and Paper

If you prefer a tech-free solution for tracking your expenses, write down every penny that you spend and where you spent it in a notebook. Consider reserving a page for each spending category in your budget, or use one page and simply note the category next to each expenditure. This no-frills approach can tell you at a glance where your money is going. Although it may be more difficult to identify spending trends on paper, this method at least makes you more aware of your spending.

(2) Make It Easier With an App or Software

A more modern and convenient way to track your expenses is in a spreadsheet or an app. Online apps may even offer colorful graphs and charts to illustrate your spending habits, but both options allow you to quickly and easily enter your purchases in a spending category on the same day that you incur them.

I have created a very basic spreadsheet for expense tracking. You can get a copy for yourself by clicking the link below. (As with all my spreadsheets, be sure you save a copy for yourself before making any changes.) The first tab is the instructions, the second is a sample month and the fillable template for each month is in the following tabs.

To get your own copy of this Spreadsheet click here.

Work Together as a Couple

If you are married, you will both need to track your expenses. With an app, you can sync your spending with your spouse’s so that you don’t blow your budget. If you use a spreadsheet, make sure each of you logs their expenses for the day.

Keep Going Even When You Overspend

If you discover that you overspent in a few categories, don’t just stop and wait for next month. It’s important to continue to track your expenses throughout the month so that you can identify what you need to change and by how much.

Conclusion

This activity shouldn’t take more than a few minutes each day if you adopt an expense tracking approach that works for you. If you consistently track your expenses, you will be able to save more, spend less, and make necessary changes to your finances that will allow you to build wealth.

Key Takeaway – Tracking your spending will help you/spouse get a handle on where your money is going so you can be in control of your future and not let it “just happen to you.”

Assignment 1 – Select a method for tracking your expenses. Pencil/Paper, Spreadsheet or App. If you don’t like your choice after a month or 2, pick a different method.

Assignment 2 – Start at the beginning of the next month and start tracking you expenses. I know this may feel time consuming or useless, but DON’T GIVE UP!

Coming Soon – In my next post we will tackle DEBT. How does it affect you and your financial stability and strategies for paying it off.

Benefits Of Using a Budget

In a previous post titled How To Do A Budget, I showed you the How of doing a budget. How to identify what categories need to be included, the basic math used and a spreadsheet to start creating your own budget. You can use this spreadsheet, a pencil and paper, or one of several apps for budgeting. Some of the more popular are YNAB, Mint, and Every Dollar.

This post talks about the Why of Budgeting. A budget is just a list of categories with math behind it, but the emotions and decisions that are wrapped up in putting together your first budget can be overwhelming. This post will help you work through your own Why as you wrestle with these concepts.

Budgeting can be a scary word. Many people approach budgets with fear, especially if they don’t have much experience with them. But budgeting does not mean you will have to start scrimping and living like a miser. It just means you understand your finances and have control over them.

It’s stressful not knowing what money is coming in, what’s going out and what our obligations are. No matter how big our checking account is, we can feel stressed.

Budgeting is creating a plan to help you get your finances where you want them to be. A budget is the ideal way to get an understanding of the way you spend, the way you save and then identify ways to improve. A budget also helps define your values. Look at where you spend your money. Does that align with your goals and values? If not, changes can be made.

9 Benefits of Budgeting

(1) Gives You a Framework for Money Conversations:

There was a time in my marriage when money conversations almost always fell off the cliff into the abyss of arguing, pain, and indecision. We couldn’t agree and the conversations led us nowhere. I talk about this in the post Being on the Same Page With Your Spouse.

If you’re married, don’t start the conversation by talking about money. Start by talking about your WHY. Talk about your wants, dreams, and goals. Why are you saving , why would you care about how much you’re spending? Will it relieve stress in you life and your relationship? Will it allow you to go on that vacations you’ve been dreaming of? What’s your WHY?

After you’ve had a few of these conversations, THEN you can talk about money. Working on your budget together can become the basis for many interesting and productive money conversations. Make the decisions together. Compromise together. No matter where you are starting…have patience with each other.

(2) Provides Control Over Your Money:

You have total control over where you spend your money. If you choose to spend money on A, then you may not have as much for B. If you want a latte three times a week, put it in the budget. If getting a babysitter once a month is important, put it in the budget. If there’s not room for those discretionary items, cut back somewhere else.

What if there’s not room for any of those things? If your finances are a dumpster fire, cut everything you can! Just remember, it won’t be like this forever. There was a time when I told my kids, “If you can’t eat it, we’re not buying it.” These times were not pleasant, but they were temporary. We dug ourselves out and you can, too!

(3) Let’s You Track Your Financial Goals – Saving, Long-Term Spending, and The Emergency Fund:

A budget will not only help you plan for this week and this month, but it will also help you with long-term goals. Do you want to take a big vacation in five years? Will you need a roof or major car repair next year? Do you need to beef up your Emergency Fund? A budget can help you find and accumulate cash for these kinds of issues.

(4) Budgeting Will Open Your Eyes. It Helps Shed Light on Bad Spending Habits:

Do you get to the end of the month and think, “Where did all my paycheck go?!” Does it feels like it disappeared? Once you really start looking at your spending, you will be able to identify where it’s going.

You may have large medical bills that you just have to gut through till they’re paid. Or you may find that you’ve got some bad spending habits that need to be reigned in, like going to the drive-thru too often or all those Amazon boxes! How about bank fees? If you are paying the bank for overdraft fees, this needs to stop now!

(5) Helps Create a Cushion for Unexpected Expenses – Emergency Fund:

Do you have an emergency fund? If not, you need to start working on that today. We all have emergencies! No one is exempt. For some people, a flat tire or car repair is a real emergency. An illness or a broken heater can be financially devastating.

The lack of an emergency fund is what caused most of mine and Stephen’s financial hardships earlier in life. “Stuff” happened and we had no safety net.

Could you cover a $500 emergency without going into debt? $1000? $5000? How about a job layoff? You need 3-6 months of living expenses in an emergency fund. This needs to be kept in an easily accessible place. But not too easy. A savings account or money market fund will do nicely for now. Remember, this is not a new couch fund!

(6) Helps Identify Money for Paying Down Debt:

If you are paying down debt like credit card or student loan debt, a budget will help you identify cash you can send toward that debt. Any extra cash you can use to pay down debt will get rid of it sooner and save you money in interest payments. If you’re having trouble making your minimum payments…see dumpster fire above!

(7) Helps Identify Money for Investing:

If your Emergency Fund is in place and you are paying on your debt, you may be able to identify some extra cash to start investing. If you can identify money to invest, I would start with your employer’s 401k and get the match. I will talk more about investing in a future blog post, but for now, do everything you can to get your employer’s match if you have one. Don’t turn down free money!

(8) Helps Ensure You Don’t Spend Money You Don’t Have:

You may be in a place where you are spending more money than you make. Stephen and I did that for a while when he had no income. It felt terrible! We were living on credit cards and digging a bigger hole with our debt every day. Again, this is a dumpster fire. You may not realize you are doing this. One reason would be because this is “normal” in our culture. A budget can help you identify the problem when more money is going out than coming in.

(9) Helps Keep Your Eyes on the Prize (Motivation):

After Stephen and I put out our dumpster fire and got on track with a budget, it helped to keep us motivated. If you’re paying down debt or just starting to invest, the numbers don’t seem to change very quickly. It takes some time to get traction. The budget helped us to “Keep Our Eyes on the Prize!”

Assignment 1 – Evaluate your budget WHY. Where do you find yourself with your money right now? Are you in a dumpster fire or are you ready to start investing?

Assignment 2 – If you haven’t done a budget yet, start working on you first draft. There is a spreadsheet template in Personal Finance Basics Part 3: Let’s Do A Budget.

Key Takeaway – A budget is the ideal way to get an understanding of the way you spend, the way you save, and then identify ways to improve. A budget also helps define your values. Look at where you spend your money. Does that align with your goals and values?