Here’s a simple question most people can’t answer:

How much do you get paid?

If you answered your annual salary or hourly wage, you are (probably) wrong.

The amount of money you can extract from your employer goes well beyond your base pay. A report from the U.S. Department of Labor found that salaries and wages only accounted for 70% of the average worker’s total compensation.

The other 30% comes from employee benefits.

Translation: If you are not maximizing employee benefits, you are leaving money on the table.

You wouldn’t turn down a raise in your salary, but ignoring your employee benefits amounts to the same thing.

In this edition of Dollars & Decades, I provide a crash course on common workplace benefits available to U.S. & Canadian workers, how those benefits complement government programs, and provide some links for further reading.

The most important thing to remember is that if you want to learn more about your specific benefits, the #1 thing you can do is talk to your HR department to learn about the specifics of what your employer offers.

(Note: Most of the time, I go deep on a particular topic in finance; today I am going wide on a ton of topics. If there’s any topic you think deserves my typical deep dive analysis, let me know in the comments.)

Common Workplace Benefits (U.S Workers)

1. Health Insurance:

   • Provides coverage for medical, dental, and vision expenses.

   • Interaction with Government: Employer-provided insurance may affect eligibility for Medicaid or ACA subsidies.

   • For more information, visit the U.S. government website on benefits.

2. Retirement Plans (401(k), 403(b)):

   • 401(k) Plans allow pre-tax savings for retirement with employer matching.

   • Benefits include tax-deferred growth; drawbacks involve penalties for early withdrawal.

   • Interaction with Government: Contributions lower taxable income, influencing eligibility for some government benefits.

   • For more information, visit the National Council on Aging.

3. Flexible Spending Accounts (FSA) and Health Savings Accounts (HSA):

   • FSAs let employees set aside pre-tax dollars for specific expenses.

   • HSAs are savings accounts for high-deductible health plans with tax advantages.

   • Interaction with Government: Contributions can affect taxable income and eligibility for certain benefits.

   • For more information, read this post from Fidelity.

4. Life and Disability Insurance:

   Life Insurance:

   • Provides financial support to beneficiaries (usually family members) in the event of the policyholder's death.

   • Premiums depend on factors like age, health, and coverage amount. The policy pays a death benefit to beneficiaries upon the policyholder’s death.

5. Disability Insurance:

   • Offers income protection to individuals who are unable to work due to a disability.

   • Short-term disability insurance covers a brief absence from work, while long-term disability insurance covers longer periods.

   • Typically provides a percentage of the individual's salary during the disability period. Coverage terms vary based on the policy.

   • For more detailed information, the U.S. Department of Labor provides comprehensive resources on life and disability insurance as part of employee benefits.

6. Employee Assistance Programs (EAP):

   • EAPs are workplace programs designed to help employees deal with personal problems that might adversely impact their work performance, health, and well-being.

   • Services often include counseling, stress management, assistance with work-life balance, substance abuse programs, and mental health resources.

   • The U.S. Office of Personnel Management provides detailed information on EAPs.

7. Stock Options and Employee Stock Purchase Plans (ESPP):

   • ESPPs Allow employees to purchase company stock, usually at a discounted price, through payroll deductions.

   • ESPPs often have specific enrollment periods and set times when stock is purchased on behalf of the employees.

   • The discount on stock purchased through ESPPs can be taxed as ordinary income or capital gains, depending on the holding period.

   • The U.S. Securities and Exchange Commission provides additional information ESPPs

Here are a few quick tips to maximize employee benefits

• Understand your benefits and how they interact with government programs.

• Regularly review your needs and available benefits.

• Maximize employer contributions in retirement plans.

• Be aware of tax implications.

• Seek professional advice for personalized guidance.

Understanding Key Government Programs (U.S Workers)

1. Social Security:

   • Purpose: Provides retirement, disability, and survivor benefits.

   • Funding: Funded through payroll taxes under the Federal Insurance Contributions Act (FICA).

   • Benefits: Based on the individual's earnings record and the age at which they start receiving benefits.

   • Considerations: Full retirement age varies based on birth year, and benefits can be reduced if taken early.

   • For more information visit Social Security Administatrion.

2. Medicare:

   • Purpose: Health insurance program for people 65 and older and some younger individuals with disabilities.

   • Funding: Funded through payroll taxes and monthly premiums for certain parts of the program.

   • Benefits: Includes Part A (hospital insurance), Part B (medical insurance), Part D (prescription drug coverage), and Medicare Advantage Plans (Part C).

   • For more information, visit the Medicare website.

3. Medicaid:

   • Purpose: Provides health coverage to eligible low-income adults, children, pregnant women, elderly adults, and people with disabilities.

   • Funding: Jointly funded by the federal government and states.

   • Eligibility: Based on income and varies by state.

   • For more information, visit the Medicaid website.

4. Unemployment Insurance:

   • Purpose: Provides temporary financial assistance to unemployed workers who lost their job through no fault of their own.

   • Funding: Funded by employers through payroll taxes.

   • Benefits: Weekly payments to help with living expenses while seeking new employment.

   • For more information on filing for Unemployment Inusrance, visit the Department of Labor website.

5. Veterans' Benefits:

   • Purpose: Offers various benefits to military veterans, including healthcare, disability compensation, and educational benefits.

   • Funding: Funded by the federal government.

   • Eligibility: Based on service history and discharge status.

   • For more information on Vereran’s Benefits, visit the Department of Veterans Affairs website.

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Common Workplace Benefits (Canadian Workers)

1. Health Insurance:

   • Overview: Often includes medical, dental, and vision coverage.

   • Enrollment: Typically during an annual open enrollment period or upon qualifying life events.

   • Considerations: Plans may vary in terms of coverage, deductibles, and co-pays.

   • For more information on public & private health insurance in Canada, visit the Government of Canada’s website.

2. Workplace & Indiviual Retirement Savings Plans:

   • RRSP (Registered Retirement Savings Plan): A retirement savings plan that defers tax until withdrawal. Contributions can be deducted from taxable income. For more information visit the Government of Canada’s website.

   • TFSA (Tax-Free Savings Account): Allows savings or investments to grow tax-free. Contributions cannot be deducted from taxable income, but all investment gains can be withdrawn tax free. For more information, visit the Canadian Revenue Agency’s website.

   • Pension Plans: Defined Benefit or Defined Contribution plans sponsored by employers.

3. Disability Insurance:

   • Short-Term and Long-Term: Provides income replacement for employees unable to work due to disability.

   • For more information on the complex details of disability insurance, visit the Government of Canada’s website.

4. Life Insurance:

   • Coverage: Typically a multiple of the annual salary. Can include term or whole life insurance.

   • For more information Visit the Financial Consumer Agency of Canada.

Government Programs in Canada

1. Canada Pension Plan (CPP):

   • Purpose: Provides retirement, income as well as disability, survivor, and children's benefits.

   • Funding: Funded through mandatory contributions by employees, employers, and self-employed individuals.

   • Benefits: Depends on how much and for how long one has contributed.

   • For additional information on the CPP, visit the Government of Canada’s website.

2. Old Age Security (OAS):

   • Purpose: A monthly payment available to seniors aged 65 and older.

   • Funding: Funded through general tax revenues.

   • Benefits: Based on the number of years lived in Canada, after the age of 18.

   • For more information on OAS, read this overview.

3. Employment Insurance (EI):

   • Purpose: Provides temporary financial assistance for unemployed Canadians while they look for work or upgrade their skills.

   • Funding: Funded through premiums paid by employees and employers.

   • Benefits: Includes regular benefits, sickness, maternity and parental benefits, compassionate care, and family caregiver benefits.

   • For more information on EI benefits, read this overview.

4. Quebec Pension Plan (QPP):

   • Similar to CPP: For residents of Quebec.

   • Benefits: Retirement, disability, survivor, and children's benefits.

5. Workers' Compensation:

   • Purpose: Provides compensation and support to workers injured on the job.

   • Provincial Programs: Each province and territory has its own workers' compensation board.

   • For more information, visit the Government of Quebec’s website.

6. Provincial Health Care Plans:

   • Coverage: Varies by province, generally covering necessary medical services.

   • Additional Coverage: For services not covered by provincial plans, supplemental health insurance can be purchased or provided by employers.

7. Child Benefits:

   • Canada Child Benefit (CCB): A tax-free monthly payment made to eligible families to help with the cost of raising children.

   • For more information, read this overview from the Canadian Revenue Agency.

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This is by no means an “all you need to know” post. This is very much a “101” on workplace and government benefit programs. If there’s a topic not covered here—or a topic you’d like to see a deep dive on—let me know in the comments.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.

“Our goals can only be reached through a vehicle of a plan, in which we must fervently believe and upon which we must vigorously act. There is no other route to success.”

— Pablo Picasso

If you are living in debt and need a strategy to pay it all off once and for all, then you need to carve out five minutes right now to read this post to the end.

This is the third and final part of a mini-series on debt within the larger Dollars & Decades series, where I tackle how to handle money at every stage of life.

Read to the end of this post for a detailed breakdown of the two most effective strategies to pay off debt. I will also give you a preview of a course I am creating on paying off debt, including a spreadsheet that will tell you exactly how much to pay on each of your loans every month.

Let’s go.

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The Two proven strategies will help you pay off debt fast

1. The snowball method.

2. The avalanche method.

What is the snowball method?

The snowball method is a debt repayment strategy in which you focus on paying off your debt with the small­est outstanding balance.

It’s a four-step process.

Step 1: List your debts from smallest to largest.

Step 2: Make minimum payments on all your debts except the smallest.

Step 3: Pay as much as possible on your smallest debt.

Step 4: Repeat until each debt is paid in full.

Why people love the snowball method

The snowball method is the most popular debt repay­ment strategy because it leans into a simple truth about personal finance: habits and actions are more important than technical knowledge.

The psychology behind the snowball method is that paying your loan with the smallest balance first enables you to get your first loan paid off as quickly as possible. Once you pay off that first loan, you gain confidence and begin to believe that you can pay the rest of your debts. This provides you with energy and gets you excited to keep going.

I like the snowball method because it gives people hope. Many people believe that their current circumstances are “how it will always be.” Having an early win and seeing a loan completely paid off can change someone’s belief about what is possible for them to accomplish.

What is the avalanche method?

The avalanche method is a debt repayment strategy in which you focus on paying off the loan with the highest interest rate first.

Here are the four steps to paying off your debts using the avalanche method:

Step 1: List all your debts from the highest interest rate to the lowest interest rate.

Step 2: Make minimum payments on all your debts except the debt with the highest interest rate.

Step 3: Pay as much as possible on your debt with the highest interest rate.

Step 4: Repeat until each debt is paid in full.

While the snowball method is about psychology, the av­alanche method is about efficiency.

Why the avalanche method is effective

If the psychological aspects of paying off debt aren’t a concern for you, and you don’t need to have that feeling of a quick win, the avalanche method might be a good fit for you.

The avalanche method will allow you to pay off your debt as quickly as possible while paying the least amount of interest.

Snowball vs. Avalanche methods: A detailed breakdown

I’ll use a hypothetical example to demonstrate precisely how to use the snowball or the avalanche method to pay off debt.

Let’s pretend you have the following debts.

Credit card 1: $20,000 balance at a 22% interest rate.

Credit card 2: $6,200 balance at a 16% interest rate.

Credit card 3: $7,600 balance at a 17% interest rate.

Student loan: $44,000 and 8% interest rate

Line of credit: $3,500 balance and 7% interest rate

Total debt: $81,300

Your goal: Pay off all debts in six years.

How to pay off $81,300 in six years using the snowball & avalanche methods

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“If you don't take good care of your credit, then your credit won't take good care of you.”

― Tyler Gregory

This is the second post in a special three-part mini-series in the larger Dollars and Decades series. Last week, I reviewed the eight most common forms of debt that every young adult must navigate throughout their life.

Today, we talk about one of the more confusing—but important—aspects of managing debt: your credit score.

Read to the end of this post to learn how credit scores impact your financial life and how to improve yours.

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The importance of a good credit score

Your credit score has a massive impact on your relationship with debt. The better your credit score, the more likely you are to get approved for a loan, and the lower your interest rate will be.

In the U.S., credit scores range from 300–850, while in Canada, they range from 300–900. Here is what is considered a good and bad credit score.

• 300–649 is considered a “bad” credit score.

• 650–699 is considered a “fair” credit score.

• 700–749 is considered a “good” credit score.

• 750+ is considered an “excellent” credit score.

Let’s consider the example of three people who have the same job, make the same income but have different credit scores, and are all applying for a mortgage.

1.     James has a credit score of 450, which is considered bad.

2.     Jill has a credit score of 678, which is considered to be good.

3.     John has a credit score of 808, which is considered to be excellent.

They all apply for a mortgage with the same bank.

• James is declined and unable to buy the home of his dreams.

• Jill is approved for a $400,000 mortgage at a 5% interest rate.

• John is approved for a $400,000 mortgage at a 4% interest rate.

Jill is clearly in a better position than James. The difference between a fair credit score and a bad credit score could be the difference between getting approved for a loan or not.

But how much better off is John compared to Jill? How much will he save on interest due to his excellent credit score?

John will pay $284,746 in interest over the next 30 years.

Jill will pay $368,515 in interest over the same time frame.

In this example, the difference between an excellent and fair credit score is $83,769. That is additional money that John could be using to either invest or make additional principal payments against his mortgage, saving him even more in interest and having his mortgage paid off sooner.

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How to improve your credit score

Clearly, having an excellent credit score should be everyone’s goal. But what if your credit score is terrible right now? How does someone improve their credit score?

Your credit score is primarily determined by the following factors:

1.     Your history of paying bills on time.

2.     How far back your credit history goes.

3.     The amount of debt you are currently carrying.

4.     How much of your credit limits you are cur­rently using.

5.     The mix of credit accounts on your file.

6.     The number of credit inquiries/applications you have made.

So, if you want to begin improving your credit score, the first step is to simply pay all your bills, including your loan payments, on time. Make a promise never to be late on a bill payment again. This is both the most critical factor in improving your credit score in the long run and the action that is most in your control.

The length of your credit history also plays a role. If you don’t have any history of credit use, applying for a credit card (that you will use responsibly) might be an excellent way to establish a credit history.

Another important factor impacting your credit score is what is called your “utilization ratio”. This is a measure of how much of your available credit you are currently using.

Let’s say you have a credit card and a line of credit.

• The credit card has a $10,000 limit, and you have a $7,000 balance.

• The line of credit has a $50,000 limit, and you have a $10,000 balance.

• That makes for a total of $60,000 in available credit and a combined balance of $17,000

• That works out to a 28.3% utilization ratio. A low utilization ratio has a positive impact on your credit score.

To improve your utilization ratio, you can do two things:

1.     Begin paying off debt.

2.     When you pay off debt with a revolving balance, don’t close the account—so long as you can avoid abusing revolving debt.

In the above example, if you could pay off the balance on your credit card and your line of credit but you did not close either account, it would bring your utilization rate down to 0%. You would have a total of $60,000 available to borrow, and you aren’t using any of it. That shows lenders that you know how to manage credit responsibly.

You also want to make sure that you aren’t applying for too many credit products. If you get denied a loan due to low credit, the worst thing you can do is turn around and make five more applications at different banks. The more credit inquiries (loan applications) you make, the worse it will be for your credit score.

You shouldn’t be afraid to apply for credit when you need it, but be careful not to make too many applications in a short period.

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Next week, we wrap up this three-part mini-series on debt by breaking down in great detail the two most effective strategies to pay off debt as quickly as possible.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

Paying off debt is the top financial priority of anyone living in debt.

Long-term goals like investing and retirement planning are so far into the future that they feel abstract. You won’t feel the benefits (consequences) of investing (not investing) for decades down the road.

But debt?

Anyone who has lived with debt knows the crushing feeling of that debt every single day. This makes getting out of debt the financial goal that people are most motivated to achieve.

Debt is also unavoidable—especially for young people who have to grapple with the historic costs of education and housing.

Rather than subjecting you to a 10,000-word post, I’ve broken the topic of debt into three parts, which we will cover in the coming weeks in the Dollars & Decades series:

• In this first part, I explain why debt is not evil and how to navigate the eight most common forms of debt.

• In part two, I’ll review the importance of your credit score, how debt impacts your credit score, and how to repair it.

• In part three, I break down the most effective strategies to pay off debt and give you a spreadsheet that will tell you exactly how to pay off your debt ASAP.

At the end of all this, I’ll provide a PDF/E-Reader file combining all three posts that can serve as your ultimate resource to navigate debt.

Debt is not evil. It’s a tool to use with caution

Many people think that debt is evil. When you think of the millions of people who have declared bankruptcy and have spent the majority of their lives living in debt, you can understand why people believe that debt is evil.

Debt is simply a financial tool that allows you to buy something if you don’t have enough money available to make the purchase using cash.

Debt is no more “evil” or “bad” than a physical tool like a hammer. It is the misuse of this financial tool that causes pain and suffering to so many people.

If you use debt in the right way, it has the potential to increase your wealth and improve your life.

If you use debt in the wrong way, it will take you down the path to financial misery.

Let me be clear on what I mean when I say, “If you use debt the right or wrong way.” Four factors will determine if you are using debt properly:

1.     The type of debt you are using.

2.     The purpose for which you are using that debt.

3.     How much debt you take on.

4.     The interest rate and repayment terms of that debt.

The 8 kinds of debt you need to know about

This ranking is my opinion, starting with the worst kind of debt and ending with the least bad.

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Before you remodel your kitchen, you must ensure your house is on a sound foundation.

The same is true with your finances; you need to do the tedious work of building a strong foundation before moving on to financial goals you’re likely more excited about, like paying down debt or investing.

In this edition of Dollars & Decades, I will provide a comprehensive overview of the importance of building an emergency fund and how to do it as quickly as possible—even if money is tight.

Your emergency fund is the foundation you build your financial house upon

First, let’s discuss why an emergency fund should be prioritized over debt repayment and investing.

Paying off debt—especially toxic consumer debt like credit cards—will probably feel more urgent to young adults than having a bit of cash set aside in an emergency fund.

But remember, the goal is not just to pay off your debt as quickly as possible—It’s to pay off your debt and ensure you never fall back into debt again.

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Success is neither magical nor mysterious. Success is the natural consequence of consistently applying the basic fundamentals.

—Jim Rohn

When I was in grad school studying economics, we had a guest speaker who was an alumnus from the University I was attending who was a big-shot economist at one of Canada’s top banks.

The only thing I remember from that day was during the Q&A session, one of my classmates asked him what was the most important economic concept he learned during school that was most helpful in his career as an economist.

He answered: “Supply and demand.”

I recall my 23-year-old self rolling my eyes at that. Supply and demand is what you learn on day one of Econ 101 in undergrad. Surely, the advanced formulas in grad school econometrics or game theory must be more useful. After all, these are much more complicated, and few people have these tools in their toolbelt.

At the time I write this, I am 10 years into my career as an economist, and if I were asked which economic concept has been most useful, I might very well answer supply and demand.

Mastering basic—but essential—concepts that you use every day will get you further in life than knowing advanced strategies that few people know—but are hardly ever needed in the real world.

In every arena of life, to be great, you need to master the basics.

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Budgeting is the most basic concept in personal finance

It’s also one of the most important.

A 2019 survey measuring the financial capabilities of Canadians found that those who use a budget are in a much stronger financial position than those who don’t.

• Budgeters are half as likely as non-budgeters to fall behind on their bills and debt payments.

• 18% of budgeters spend more than they earn, compared to 29% of non-budgeters.

• 31% of budgeters use credit cards and other forms of debt to cover day-to-day expenses, compared to 42% of non-budgeters.

• 35% of people who use a budget make additional payments to pay off their mortgage quickly compared to 24% of non-budgeters.

• 57% of budgeters take action to pay down their other forms of debt quickly compared to 47% of non-budgeters.

Given all these statistics, it should be no surprise that budgeters felt less stressed about money and less time-crunched than non-budgeters.

A budget is simply a declaration of your financial priorities.

My friends and family know I write about finance and money, so they are often eager to talk to me about money. Many of them tell me that traveling is very important to them—but very few of them set aside money every month to pay for future travel costs.

If you say you love to travel but don’t have a line item for travel in your budget—it’s not a priority; it’s a pipe dream. Anything you want to have or do that requires money should be in your budget.

A boilerplate budget that millions of people have used

If you type “budgeting rule” into Google, almost every article on the first page will recommend the same budget template known as the ‘50/30/20 rule.’

According to the 50/30/20 rule, here’s how you budget your money:

• 50% on needs—necessities like housing, groceries, and transportation.

• 30% on wants—variable spending like on entertainment and travel.

• 20% goes to savings and debt repayment.

In the last post in the Dollars & Decades series, I discussed the importance of tracking your spending and evaluating whether you are happy with where your money goes each month.

Tracking your spending is a helpful exercise before creating a budget because it lets you get an idea of how close you are to your ideal budget before making any changes to your spending habits.

But, tracking your spending is most valuable in the first several months after creating a budget. A budget is a “soft commitment”—nothing or no one is forcing you to stick to your budget. That’s your job, and tracking your spending is how you ensure your actual spending lines up with your budget.

Like every rule of thumb, the 50/30/20 rule simplifies a complex issue—in this case, how to budget your money. But there is nothing magical about this allocation—you need to adjust your budget to match your preferences and your current economic reality.

If money is tight, you might be forced to spend more than 50% of your take-home pay on needs. As your financial situation improves, you can allocate more towards savings and wants.

When cutting expenses, work big to small.

Many best-selling personal finance authors make you feel like a failure with money if you buy a latte or go out to dinner.

This kind of small, variable spending is a perfect example of a low Return On Investment (ROI) issue that does not deserve (much) of your attention.

These are small purchases that happen every day.

Remember that attention is a finite resource.

Dedicating your attention every single day to a $3 problem like a cup of coffee is a quick way to burn through our attention. It’s not that these expenses don’t add up or that you shouldn’t worry about them—but most people would be better served prioritizing high ROI spending issues before moving on to the small purchases.

A high ROI issue to focus on is your fixed and recurring spending.

Examples include:

• Housing costs

• Transportation costs

• Internet

• Cell phone

• Gym memberships

• Netflix and all other subscription costs

There are two reasons why fixed and recurring expenses deserve your attention:

1. This is where the lion’s share of your money goes.

2. Cutting these costs requires a one-time investment of your attention.

That second point is critical to understand.

Let’s say you cut out $350 in recurring or fixed expenses. That likely required a lot of your attention to track and prioritize your spending and find places to make cuts.

But, once you’ve made that upfront investment, you continue saving $350 every month without investing another second of your attention on the issue.

Compare that to focusing your attention on cutting out your daily latte. That requires your attention every single day to save yourself $3-$5.

By focusing on fixed and recurring spending, you invest your attention once and reap the financial rewards every month going forward.

Once you make the initial investment of your attention and cut your fixed and recurring expenses to where you want them, then it makes sense to review your small, daily purchases to ensure they are within reason—but as a rule of thumb, focus on your fixed costs first.

When it comes time to focus on your small variable spending, the goal should be to cut out your impulse buys, which are purchases you never intended to make and provide no value.

Think of the $15 magazine you throw in your cart while waiting in line at the grocery store checkout. You went to the store to buy groceries—not a magazine—and odds are you read less than half the articles in the magazine.

It’s worth noting that impulse buys are a specific and harmful subsection of your variable spending or ‘wants.’ If you are a coffee lover, buying your daily latte should not be considered an impulse buy but a deliberate use of money to buy something you enjoy.

When cutting expenses, work big to small and practice mindful spending.

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The sneaky expenses that kill most budgets

A 2012 study identified why so many generic budgets fall apart when used in real life:

We vastly underestimate how often and how much we spend money on “one time” purchases that aren’t accounted for in our budget.

The paper's opening paragraph gives concrete examples of spending that we tell ourselves is rare and worth splurging on.

• Your favorite musician is in town for one night only, and tickets are $500. So, you buy two tickets even though your monthly entertainment budget is $250.

• Next month is your 1st/5th/10th/20th/25th/50th wedding anniversary, and you and your spouse want to celebrate with a 5-star vacation that costs three years’ worth of budgeted spending on travel.

• Your phone dies—or, more likely, is just out of date—and you spend $750 to buy a new one. The problem? You budget $100 monthly for your cell phone bill but don’t include the cost of replacing that phone every two years.

• Your inlaws are staying at your house for a week over the holidays, so you need to stock up on additional groceries and alcohol.

You tell yourself that these are all “exceptional circumstances,” so even though you haven’t budgeted for these expensive events, it’s okay because “you’re not going to make a habit of it.”

Except, you are going to make a habit of it.

While it may be true that any one of these expenses is unlikely to repeat itself anytime soon, there is always another exceptional circumstance that will require you to spend more money.

That’s just life. Random events are always happening that don’t fit neatly into a generic budget template.

If you base your financial plan around the 50/30/20 budget, your financial future relies on the idea that you will save and invest 20% of your income, which is easy enough to do on paper.

But when you fail to budget for these “one-time” expenses like the $750 to buy a new phone, that money has to come from somewhere. It might mean cutting back on spending in other areas, but let’s be honest; it often means saving less money.

What happens if your budget allocates 20% of your income to saving, but after paying for various “one-off” expenses throughout the year, you only save 10%?

For a 30-year-old, clearing $50,000 per year after taxes, a savings rate of 10% instead of 20% adds up to $367,671 less money saved by the time they are 65—assuming only a 4% average return on their savings and investments. The higher you assume your return on savings/investments, the greater the shortfall in final expected savings.

Why does it matter?

Saving less than half of what you planned for means delaying retirement, working part-time in retirement, reducing your standard of living in retirement—or some combination of these three options.

A budget you stick to is a powerful tool—a budget you don’t stick to can trick you into thinking your finances are stronger than they really are.

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How to budget for “one-time” expenses

Budgeting is simply an act of what economists call “mental accounting.”

Mental accounting refers to how people organize their financial lives by operating their savings, investments, and spending into different categories, each serving a different purpose.

Often, these different categories are divided into separate accounts, such as;

• Emergency fund

• Retirement fund

• Vacation fund

• House repair fund

• Car repair fund

• Kids education fund

• Accounts to cover healthcare costs

These are typical examples of using mental accounting to segregate our money from one big pile in our checking account into smaller piles, each earmarked for a specific purpose.

Mental accounting is helpful for expenses that remain top of mind, like groceries.

We make up a rule that we will spend $500 per month on groceries. As a result, when shopping, we are very aware of how much we spend. But when we have a “one-time” expense like hosting a dinner party, we are more likely to overspend because we don’t view that exceptional spending as part of our general grocery budget.

The research shows that most people can use mental accounting to accurately forecast these “normal expenses” but fail miserably at forecasting the “one-time” expenses like buying a new phone or concert tickets.

One-time expenses are difficult to categorize and don’t fit neatly into our mental accounts, aka our budget.

This also explains why we never learn from our mistakes; we always face one-time purchases but never include a line item for these expenses in our budget.

If an item doesn’t fit into one of our narrowly defined budget categories, we deem it unimportant and ignore it, causing us to spend more and save less than we planned.

The researchers of the study I referenced above found that budgeters spent less money on “one-off expenses” when they were reminded about how often these “one-time” expenses come up while creating their budget.

They use birthday presents as an example.

Participants in the study were split into two groups. Each group was assigned the hypothetical task of buying a watch for their friend’s birthday.

Group 1 was given the additional context for their task:

“In the space below, please list the times last year when you gave people presents. For example, a friend’s birthday, an anniversary, or a holiday.”

This simple task forced people to stop thinking of the cost of giving gifts as a “one-off” expense but as a recurring expense. This subtle reminder that giving gifts is not as rare as we think caused people to spend 16% less on a watch for their friend’s birthday. There needs to be money left over for your anniversary and holiday gifts!

If you don’t have a line item in your budget for gift-giving, the natural tendency is to think of these as one-off purchases and simply go over budget. You don’t see this as a problem because it’s a “one-time expense,” but as different one-time expenses add up, you consistently overspend your budget and fall behind on your financial goals.

The way to stop overspending on one-off expenses is to remind yourself that there is no such as thing as a one-off expense.

The lower-effort way to do this is to remind yourself that these expenses are not as rare as you think.

Next time you host your inlaws for a week over the holidays, ask yourself, “How many times in the past year have we hosted people for meals at our home?” That includes dinner parties, birthday parties, backyard BBQs, and holidays. Reframing these “one-off” purchases as part of a regular spending category means you’ll spend less.

Do you need to buy the $75 bottle of wine to impress your father-in-law? Remind yourself that you are hosting a dinner party next month, so you can’t spend too much right now. Your father-in-law will survive if you buy the $10 bottle.

If you want to go the extra mile, you can create new line items for these exceptional expenses in your budget.

Here are a few examples:

• A sub-category under groceries could be “hosting” expenses, where you allocate money for hosting friends and family for special events.

• A sub-category under your cellphone accounts for the fact that you buy a new phone every two to three years.

• A line item that reads “bucket list” plans for the fact that sometimes you will do seemingly crazy things like spend $750 on a Taylor Swift concert because it might be the only time you get to see her live.

It’s not a financial crime to spend big on special occasions.

But, if your budget is to be of any use, it needs to accurately reflect how you spend your money. Reframe every “one-time” expense as part of a broader category in your budget and remind yourself that the next “one-time” expense is just around the corner.

The simplest way to stick to your budget? Automate as much as possible

I’ll repeat this because you can’t afford to forget it; you are the only person who can force you to stick to your budget.

Budgets are like fitness plans—they are easy to start, but few people stick with them past the first month.

The good news is that, unlike fitness plans, much of the work of budgeting can be automated.

Most of your bill payments, recurring expenses, debt payments, and savings goals can be automated—meaning the money is automatically taken from your checking account and used to pay a bill, make a debt payment, or moved to a savings account.

The more line items you automate in your budget, the fewer times you need to make an active decision to stick to your budget.

When automating your savings and expenses, leaving a buffer in your checking account is important. You'll get hit with penalties and overdraft charges if you don’t have enough cash in your account when an automatic bill payment is due. Leaving an extra cushion of cash in your checking account can help reduce the stress many people feel when automating their budget.

Automating your finances removes human error and is a powerful tool to ensure you stick to your budget in the long run.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any significant financial decisions.

You can't really know where you are going until you know where you have been.

—Maya Angelou

If you want to build wealth and spend money on the things that actually matter, you need to answer two questions:

• Question 1: Where does your money go every month?

• Question 2: Are you happy with the answer to question one?

This article is the fifth entry in the Dollars & Decades series, your guide to making smart financial decisions throughout your life.

Today, we tackle another essential form of money management that should be mastered as a young adult: tracking your spending.

Tracking your spending is a four-step process

1.   Gather all your bank account statements, credit card statements, and receipts for cash purchases. You’ll need at least 30 days’ worth of expenses.

2.   Categorize your spending.

3.   Use either an expense tracking app or a spreadsheet template to list your spending.

4.   Evaluate where your money is going and use that information to change your saving and spending habits.

Step 1: Gather all your receipts and account statements

The first step to tracking your expenses is to gather the records of all your monthly expenses. There are three places you will find these records:

i.   The monthly statements for all your bank accounts.

ii. The monthly statements for all your credit cards.

iii. Receipts from any cash purchases.

These records will give you all the information you need to track your spending, including the following:

• Date of each purchase.

• Price.

• Details of each transaction, such as the name of the store and the items purchased at the store.

It’s important to remember that you are not only tracking your spending on things you buy, but you are also tracking every penny. That means any fixed costs like rent or insurance and any money put toward paying off debt or saving.

The goal is to know where every penny goes.

Step 2: Create spending categories

Tracking your spending is something that should be done before finalizing your budget. So, creating categories while tracking your spending that fit your budget makes life easier.

If you want to simplify things, people often use three broad categories to categorize their expenses.

1. Needs. This includes the things you can’t avoid spending on, like food, shelter, transportation, and childcare costs, to name a few. If you can’t live without it, categorize it as a “need.”

2. Saving & Debt Repayment. This includes building an emergency fund, retirement savings, and paying off consumer debt like credit cards. If it helps increase your net worth, it should be categorized here.

3. Wants. This covers everything else you spend money on, from clothes and jewelry to travel. If it isn’t something you absolutely must have and isn’t saving or debt repayment, it should be categorized as a “want.”

Step 3: Use an expense tracker app or spreadsheet

If you Google “free expense tracker app” or “free expense tracking spreadsheet,” you will likely find many great options.

If you want something a little different, you can also use the expense tracking spreadsheet I created here:

Expense Tracker (5)

67.8KB ∙ XLSX file

Download

Download

This spreadsheet has a particularly unique feature: it tells you how many hours you had to work to pay for each expense. Thinking about the true cost of the things you buy in terms of time instead of money might help to clarify if you are happy with where your money is going.

Here’s a crash course on how to use that expense tracker:

If you want to keep things as simple as possible, you don’t need to use the spreadsheet I created; any generic expense tracker should do the trick.

Step 4: Evaluate where your money is going

Once you have inputted all your spending into your expense tracker, you’ll have a running list of where all your money goes in a given month. You will have answered question 1 posed at the beginning of this article: “Where does your money go every month?”

Most people fail with expense tracking and budgeting because they forget to ask themselves question 2: “Are you happy with the answer to question one?”

Tracking where your money goes is not supposed to be busy work; we aren’t doing this just to create a list of your expenses. You need to look at each line item of spending and ask yourself, “Am I happy I spent money on this?”

• If the answer is yes, then odds are you are pretty happy with the current state of your finances.

• If the answer is no, then it’s time to identify the source of the problem.

If you’re looking for where to easily cut spending, the low-hanging fruit is usually in the “wants” category. Within your “wants,” try and separate spending on things you value and make you happy from “Stuff,” where you’ll typically find mindless impulse purchases and subscriptions for services you don’t use enough to justify the cost.

However, if you want to get serious about saving more money, the odds are that you’ll need to reevaluate how much money you are spending on needs, particularly the “Big 3| expenses of housing, transportation, and food, as they account for the majority of your budget.

The money you save from stuff and the Big 3 can be redirected to things you value, like travel or hitting financial goals like paying off debt or building an emergency fund.

If you’re only spending a fraction of your income on things you value, you are not living an intentional life. The goal should be to align your money with your values as much as possible.

In the next entry of the Dollars & Decade series, I’ll discuss how a budget should be viewed: which is your roadmap for living a happy and wealthy life.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

Get your concrete mixed and put your hard hat on.

Today, we are building the foundation upon which every successful personal finance story is built: the ability to pay your bills on time and in the most cost-efficient manner possible.

If you've ever wondered what’s the first step a person can take to be great at managing money? It’s paying your bills.

Is it the most exciting topic in the world?

No.

But it’s the very first financial task every single adult must learn if they want to be successful with money, so it’s worth the 3-minute investment you are about to make.

By the end of this short article, you’ll know why people fail to pay bills on time and how to put a system in place to ensure you never miss a bill payment again.

Why do people fall behind on their bills?

A Bureau of Consumer Financial Protection report provides a solid list of reasons people fail to pay their bills on time.

#1—They don’t have enough money.

This should surprise no one; the lower a person’s income, the more likely they are to struggle to make bill payments.

You can’t draw blood from a stone.

#2—Their income is unpredictable

Not everyone is fortunate enough to have a salaried job that pays them well and pays them consistently.

In addition to not being paid enough, low-wage and hourly workers often have highly variable incomes. If you’re piecing together multiple hourly waged jobs, how much you get paid and what days of the month you get paid can change month to month.

If money is tight, and you’re not sure how much you’ll get paid this month, paying the bills on time becomes a challenge—particularly for younger people without experience managing money and paying bills.

#3—Knowing which bills to prioritize

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In the first two entries in the Dollars & Decades series, I reviewed why both young and older people struggle with money.

The young are at their peak cognitive functioning but lack real-world experience managing money—while the old have all the experience but have to grapple with more complex problems and declining cognitive abilities.

In today’s post, I’ll build a roadmap of many important financial decisions you will face throughout your life. The list will be in chronological order, starting with the issues most pressing for young people and ending with the financial decisions facing people in their post-retirement years.

The most important financial issues at every stage of life

The following chart is from an exceptionally well-written paper titled “Financial Decision Making across the Adult Life Span.”

Here’s how to understand what’s happening in this chart.

• On the right-hand side is a measure of your age, starting with “young adulthood” at the bottom and “old age” at the top.

• In the middle is a list of important financial issues. Notice that they are matched to the age most people start making these decisions. For example, paying bills on time is something you should learn as early in life as possible, while estate planning is an issue that is more pressing for older people.

• The left-hand side of the chart measures three things;

• How well structured each financial decision is. Are the steps needed for a successful decision obvious or not?

• How complex each financial decision is. How much cognitive ability is needed to make the right decision?

• How uncertain each financial decision is. Is there any way of knowing how things will turn out before taking action?

Paying your bills on time is something you need to learn early in your financial life, and it’s also well-structured, simple, and has a certain outcome. You are told how much you need to pay and when and the consequences of failing to do so.

On the other end of the spectrum, you have the issue of assessing whether you are on track for retirement. This issue is poorly structured and depends on many unknowable factors, like how long you’ll live, which makes it hard to be 100% confident if you are on track or not.

Generally speaking, financial decisions that young people need to make tend to be well-structured, simple and have easy-to-predict outcomes. While financial decisions that older people need to make tend to be poorly structured and complex, and the outcome is often unknowable—even a great decision-making process can result in a bad outcome.

That’s why what young people need most of all is financial literacy, and what older adults need is a financial advisor.

The chart above provides a helpful framework to improve financial decision-making at every age and a road map for where we go from here with the Dollars & Decades series.

Over the coming weeks and months, I’ll be compiling research on each financial issue listed above to help you improve your financial decision-making.

I’ll start in chronological order, which means the first issue we’ll discuss is paying bills on time. After that, the issues I cover in this series will quickly get increasingly complex—but don’t worry, I am here to make it all make sense.

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I need your input

I am building this resource for you, and to make it as helpful as possible, I need 20 seconds of your time. Could you quickly scan the table above and let me know if there are financial issues that you need help with that, you don’t see listed?

Let me know in the comments if there’s anything missing, and I’ll be sure to add it to the list.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

Psychologists have found there are two primary forms of intelligence that impact our ability to make financial decisions throughout our life; fluid and crystallized intelligence

In this second entry in the Dollars & Decades series, I’ll explain these two forms of intelligence, how they change as you get older, how they help you make financial decisions, and provide research-backed tips on how to increase each to make better financial decisions.

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What are fluid and crystallized intelligence?

Fluid intelligence: Your ability to process new information in an unfamiliar situation to make the best decision possible.

Crystalized intelligence: Knowledge you have accumulated over time to help you solve problems you have already encountered.

How do fluid and crystalized intelligence relate to financial decision-making?

The TLDR Version:

In entry one of the Dollars & Decades series, I discussed why the young and old struggle with financial decisions because the form of intelligence they excel in doesn’t match the type of money decisions they need to make.

Young people have more fluid intelligence but lack the crystallized intelligence to deal with repetitive and relatively simple decisions like budgeting and saving. As we age, we lose fluid intelligence but gain crystallized intelligence—which is unfortunate because fluid intelligence is what’s needed for the complicated financial decisions older people make, like estate planning.

The detailed explanation:

Read more

Young people need financial literacy, and older people need financial advisors.

That is one of the primary takeaways from this first entry in the Dollars and Decades series, where I’ll dive deep into the research to help you make better financial decisions at every age throughout your life.

Read to the end of this post to learn:

• What strengths and weaknesses the young and old have when it comes to financial decision-making.

• Why the strengths of each age group are of little help with the financial priorities they have.

Why so many feel ill-equipped to manage money

The young and old each have what the other needs and it’s why people struggle with money regardless of age.

Young people have higher cognitive functions—Meaning they have a superior capacity to process information.

When you buy a new laptop, everything loads instantly. But over the years, your hard drive gets filled to capacity, and the processing power of your laptop doesn’t keep pace with the increasingly complex software and apps you’ll use in the future.

Your brain is the same way—The older you get, the lower your ability to process and make sense of complex tasks.

But older people have what the young don’t have: experience. A lifetime of making financial decisions and learning from mistakes allows older people to effortlessly make decisions around spending and saving money that younger people struggle with.

The cruel irony in life—and the reason we all struggle with money—is that the strengths of the young and old don’t align with the financial decisions they need to make.

Young people have relatively simple financial tasks like learning how to manage a credit card or create a budget. Their high cognitive functioning is wasted on these tasks. Most people need to learn the basics of personal finance by gaining experience—often through making and learning from mistakes.

The old have much more complex issues, like estate planning or how to turn retirement savings into retirement income. Although they have a lifetime of managing the types of financial issues young people struggle with, they likely have no experience with the financial decisions that come when transitioning from the accumulation phase (building wealth) to the decumulation phase (living off wealth). They are once again inexperienced in these new tasks, and their reduced cognitive capacity impacts their ability to handle these issues on their own. 

Youth is wasted on the young, and the benefits of experience have limitations.

Young people need the wisdom and experience that older people have, and old people need the health and sharp minds given to the young. Put another way, “young people need financial literacy, and older people need financial advisors.”

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Where we go from here

The Dollars & Decades series will focus on three primary topics:

1. The strengths and weaknesses that younger people and older people have when it comes to managing money

2. Practical considerations on the financial issues which are most pressing at each age

3. The “Rational way” to manage money at your current age

This first post sets the table for the first topic. Over the next several weeks, I’ll review the research on a number of topics:

• The exact impacts of declining cognitive capacity on financial decision-making.

• Exactly how “experience” helps you make better financial decisions and the concepts of “fluid” and “crystalized” abilities.

• Practical advice for how old and young people can play to their strengths, minimize their weaknesses and make better financial decisions.

Before we dive into the evidence, I want to know what you think; which is more important, to be great at managing money, cognitive ability, or experience?

Want to read the entire Dollars and Data series and learn to master money at any age? Join Making of a Millionaire as a paid subscriber.

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This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be accurate. Consult a financial professional before making any major financial decisions.

What’s your time horizon?

That’s one of the most important questions to answer to make smart decisions with money.

• How much should you save?

• How aggressive should your investment portfolio be?

• How much—and what type of—insurance do you need?

• How much—and what type of—debt should you take on?

• Rent or buy?

• 9-5 or start a business?

These are all issues that are heavily influenced by what stage of life you are in. Someone in their 20s not only has different financial priorities than someone three months from retirement but how they manage common financial issues will also be different.

The problem is that most personal finance content is generic in nature and pays little attention to the different financial needs of people in various stages of life.

That’s why I created a new ongoing series called “Dollars and Decades: Mastering Money at any Age. This series will help you make the best financial decisions possible, given your current age.

The series will focus on three broad themes:

1. The strengths and weaknesses that younger people and older people have when it comes to managing money—Research has shown that our cognitive abilities decline with age, but our knowledge and lived experiences increase with age. How can you play to your strengths and minimize your weaknesses at your age?

2. What financial issues are most pressing at each age—For example, paying off student loans for those in their 20s/30s and navigating retirement for older readers.

3. The “Rational way” to manage money at your current age—What does the research say about how much insurance you need, what portfolio allocation is right, and what amount of debt you should take on at a given age?

About 50% of this series will be available to free subscribers, so if you want to get the whole series, I’d ask that you become a paid subscriber to Making of a Millionaire.

Paid subscribers will also receive free books and resources summarizing the findings for each decade.

For example, by the end of this series, a 20-something paid subscriber will receive a book that summarizes how a typical 20-something can set themselves up for a lifetime of financial success, and paid subscribers in their 60s/70s will receive a book outlining how to nail the “Decumulation” phase of their financial life and live with less money stress.

If you’re not a paid subscriber yet, you can get 10% off your first year by clicking here or the green button below.

Get 10% off for 1 year

If you feel this series will benefit you, but you simply can’t afford to pay anything right now due to financial struggles, email me at info@benlefort.com, and I’ll comp your first 6-months of paid subscription.

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