Saving

Do the math

HSA and FSA

Money Maroon

As we come to the end of the year, based on your health insurance, some are rushing to the doctor to use their use it or lose it funds, while others are making appointments for the next year. The group that you are in depends on your health insurance coverage. Do you have a Health Savings Account (HSA) or a Flexible Spending Account (FSA). While similar in some aspects, FSAs and HSAs are very different. However, both HSAs and FSAs are tools for your financial independence toolkit. Take advantage of these plans if you can. 

HSA

HSAs are savings accounts that are available to those covered by a high-deductible health plan. A high-deductible health plan is defined by the government, but is typically an insurance plan that only covers preventive services before a deductible is charge.

Minimum Deductible For HSA Account
Year Single Family
2019 $1,350 $2,700
2020 $1,400 $2,800

For 2019, the minimum deductible for a high-deductible health plan is $1,350 for an individual and $2,700 for a family. For 2020, the minimum deductible for a high-deductible health plan is $1,400 for an individual and $2,800 for a family. If your health insurance plan meets the minimum deductible noted above, you qualify for a HSA account.

In view of the deductibles associated with HSAs, outside of preventive services, the amount you pay for covered health care services before your health insurance plan kicks in is high when compared to other plans. However, HSAs allow those eligible to save on a pre-tax basis to pay for qualified medical expenses, for example deductibles, copayments, coinsurance, and other expenses.

Contributions
Year Single Family
2019 $3,500 $7,000
2020 $3,550 $7,100

With an HSA account, both you and your employer will contribute to the account.  In 2019, you can contribute up to $3,500 for self-only coverage and up to $7,000 for family coverage into a HSA. For 2020, you can contribute up to $3,550 for self-only coverage and up to $7,100 for family coverage into a HSA. Importantly, HSA funds roll over year to year if it is not spent. Further, an HSA may earn interest or other earnings, and can be invested. As such, a HSA account can be used to grow  your money tax free. As an additional benefit, after age 65, your contributions can be used for non medical expenses without penalty.

HSA is said to provide a triple tax advantage:

  • Contributions are tax-deductible;
  • Withdrawals are tax-free if used to pay for qualifying expenses; and
  • Once you reach age 65, non-medical withdrawals are taxed at your current tax rate

FSA

FSAs come as part of a benefits package from an employer and can be used to cover medical expenses. FSAs allow you to set aside money, on a pre-tax basis, for certain health care and dependent care expenses.

Contribution Limits

Like HSAs, the government determines the limits of FSAs. For 2019, FSAs are limited to $2,650 per year per employer. Your spouse can also contribute up to $2,650 in an FSA with their employer as well.

Once you have elected to contribute a certain amount into a FSA, the amount is incrementally taken out of your paycheck. Interestingly, the amount you elect to contribute in a FSA account is available following enrollment for use. As such, if you elect to contribute $2,650, and have $2,500 in qualified expenses, that expense will be covered immediately. However, if you leave your employer in the middle of the year, you will likely need to pay back the funds that you have spent that was not yet taken out of your pay check.

Further, unlike HSAs, contributions to a FSA are typically use it or lose it. Meaning, if your contributions are not spent in that  coverage year, that amount does not roll over. However, employers are allowed to:

  • provide for a roll over of at most, $500; or
  • provide an additional two and a half months to use the money.

Therefore, if you have a FSA, it is important to select a correct contribution limit.

Conclusion

While similar in some aspects, FSAs and HSAs are very different. However, both HSAs and FSAs are tools for your financial independence toolkit. Take advantage of these plans if you can.


HSA FSA
EligibilityHigh deductible health planEmployee benefit package
Minimum Deductible2019 Single: $1,350
2019 Family: $2,700
2020 Single: $1,400
2020 Family: $2,800
Use It Or Lose ItUnused balance rolls over to the next yearUse it or lose it, unless Employer allows at most 500 to roll over to the next year
Taxes & Contributions Contributions are Tax deductible and Pre-Tax when taken out of payContributions are Pre-Tax
Taxes & Disbursements Disbursements and growth are untaxedDisbursements are untaxed
Contribution Limits2019 Single: $3,500
2019 Family: $7,000
2020 Single: $3,550
2020 Family: $7,100		2019 Single: $2,650
2019 Family: $2,650 per account
Determine Contribution AmountYou can change amount to contribute within the contribution limits at anytimeYou can change amount to contribute at open enrollment, a change in employment, or a change in family status

Use the tools available to your advantage on your journey to financial independence.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Money Mindset

Money Mindset

Money Maroon

Money & Human Nature

When we have painful decisions, it is only normal to delay. It is human nature. For you to journey to financial independence, you must change your money mindset. You must be aware of your default reaction and consciously make a change. Change how money decisions are made.

Think of your last painful or difficult decision. Whether it was a decision that would have resulted in conflict or one that would have caused you to make a sacrifice, it is only natural for you to delay. Our first reflexive action is to avoid making difficult decisions. This reflexive action typically results in employing a delay tactic where other decisions are made but not the ultimate decision. We make difficult decisions only when we must make the decision.

With money decisions, the same occurs. The science behind it all is undeniable. Let us use the example of shopping vs saving. 

Shopping

The neurotransmitter dopamine surges when you are considering buying something new. This dopamine surge is a result of purchasing the new item and the anticipation of getting that new item immediately. With online shopping, the dopamine surge is on another level. For online shoppers, there is the joy of making the purchase, the anticipation of getting the new item, the built up anticipation of receiving that item and receiving that item in the mail. Shoppers are therefore more excited when their online purchases arrive in the mail than when they buy things in store. As such, online shopping can be as exciting or more exciting as in store shopping.

As you can guess, the retail industry is acutely aware of this effect and take the necessary steps to exploit our biology.

Saving

When saving for a long term goal or financial independence, we do have some dopamine release related to attaining that financial target. However, saving falls into the category of delayed gratification. For delayed gratification,  dopamine signaling declines as the delay to the large reward increases. As such, the thought and planing related to having financial independence is gratifying. However, because of the long time period  between the thought of financial independence and having actual finical independence, we typically do not carry through on our plans. 

This is why we spend so easily but find it so difficult to save. We all know that we should save and invest for the future, but very few do.

Saving for the long term is counter to our biology.

Remedy

Change Your Money Mindset

In view of our natural reaction to delayed gratification, to achieve financial independence, we must consciously realize our default actions and change our mindset.

Based on the science of our reward system, we are more likely to succeed on our journey to financial independence if we have a long term goal (financial independence), intermediate goals, but also short term goals. The short term, intermediate and long term goals allow for short term, intermediate and long term dopamine fueled rewards.

Conclusion

When we have painful decisions, it is only normal to delay. It is human nature.

For you to journey to financial independence, you must change your money mindset. For a more successful financial journey, create and achieve your short term and intermediate goals on your journey to financial independence.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Video Summary

Stacking Money JoToFi.com

High Earners And High Debt

Money Maroon

When we see someone driving a nice car or living in a big house in the nicest of neighborhoods, we often assume that these individuals are for better or worst higher earners living the dream, living the easy life. But are they?

Stressed

Many high earners spent years in school to get where they are. Most high earners work in high pressured professions and live in broken homes as a result of the long hours required to advance their careers. No wonder high earners tend to have high rates of suicides and elicit drug use.

Pay Check To Pay Check

This may be surprising to many, it is not atypical for high earners to live pay check to pay check. Simply put, those nice cars carry a nice car payment and a nice cost for insurance coverage. Those nice homes comes with a nice mortgage and nice costs of up keep (insurance, heating, cooling, landscaping, house keeping).

What about the family? Private schools for the little ones, those lavish family vacations and those social expenditures. You must keep your social status if you want to be in certain social circles.

 But with those high salaries, they can afford it, right? As we tend to do at JoToFI.com, let us use examples. 

Doctor And Lawyer

University

Let us look at the financials of a doctor and a lawyer. At about the age of 22, both our future lawyer and doctor will graduate college. 

For all costs, let us use 2019 numbers for a rough estimate. Again for simplicity, we will use the average costs of public and private education. We will also assume only public or only private education from university to professional school for our estimates.

  • Average public university cost per year: $10,116 
    • Average public university cost to graduation: 4 x $10,116 = $40,464
  • Average private university cost per year: $36,801
    • Average private university cost to graduation: 4 x $36,801 = $147, 204

Interest

Let us assume that our doctor and lawyer took out loans for school, for simplicity we will use the cost to graduation as their debt. For simplicity, we will not include interest charges. However, keep in mind that typically, interest accrues from the day the loan  is disbursed. Interest continues to accrue until the loan is paid off. Further, this interest is capitalized. Currently, the interest rate is about 5% annually.

Professional School

After obtaining top grades and racking up debt at university, our future doctor and lawyer must now attend professional school. 

For our lawyer, that is three additional years of law school education:

  • Average private law school cost: $49,095
    • Average private law school cost to graduation: 3 x $49,095 = $147,285
  • Average public law school out-of-State cost: $40,725
    • Average public law school out-of-State cost to graduation: 3 x $40,725 = $122,175
  • Average public law school in-State cost: $27,591
    • Average public law school in-State cost to graduation: 3 x $27,591 = $82,773

Our doctor on the other hand has four additional years of medical school:

  • Average private medical school cost: $52,515
    • Average private medical school cost to graduation: 4 x $52,515 = $210,060
  • Average public medical school cost: $32,495
    • Average public medical school cost to graduation: 4 x $32,495 = $129,980

Now, keep in mind that this debt accrues interest at about 5%-8%

Employment – Lawyer

For most lawyers this is it, at the age of about 25, they must now find a job. If you are aware of this profession, you will understand that the legal profession is bimodal. Meaning, at the top, a select number of law school graduates from top schools can earn a starting salary of $190,000 per year. Whereas at the bottom, the vast majority of lawyers earn a starting salary of less than $50,000 per year. In fact, the average salary for law school graduates is $72,500.

We will assume that our lawyer had amazing test scores, attended one of the top law schools in the country and was able to obtain a position with a starting salary of $72,500.

Employment – Doctor

For our doctor, residency follows medical school. Residency is a minimum of 3 years (based on your speciality) and an average salary of about $57,000 is paid.  During residency, our future doctor will toil day and night. For many residents, the salary provided during residency is simply not enough. As such, our doctor’s loans will continue to accrue interest during this period

Following residency, let us imagine that our doctor foregoes a fellowship, it is time to find a job at about 30 years of age. With an average salary in the range of $160,000 – $200,000, absent the present debt load, our doctor has a bright financial future.

The Math

For our lawyer, with a starting salary of $72,500, without counting the accrued interest, if he attended: 

  • Private schools, he owes about: $147, 204 (University) + $147,285 (Law School) = 294,489
  • Public schools, he owes about: $40,464 (University) + $122,175 (Law School – in State) = $162,639
  • Public schools, he owes about: $40,464 (University) + $82,773 (Law School – out of State) = $123,237

For our doctor, with a starting salary of between $160,000 and $200,000, without counting the accrued interest, if he attended:

  • Private schools, he owes about: $147, 204 (University) + $210,060 (Medical School) = $357,264
  • Public schools, he owes about: $40,464 (University) + $129,980 (Medical School) = $170,444

With the accrued interest added, these numbers would be significantly inflated. This is especially true for our doctor due to the added year of medical school and added years of residency.

Now, is our doctor and lawyer living the dream, living the easy life? If anything, they have loan payments added to the lifestyle that they are expected to lead. Professional Stress + Financial Stress.

High Earners, High Debt

For high earners starting their careers, the debt loads are high. As high earners navigate their way through their careers, in addition to student loans, add the added cost of purchasing a home, getting married, having a family, life style inflation, and our consumerism culture. It should now be clear why so many high earners live pay check to pay check.

We are not telling you to feel sorry for high earners, especially those who live above their means to maintain social status. Our aim with this article is to give you an insight into the life of those who we typically view as “rich.”

Conclusion

Whether you are a high earner or not, your journey to financial independence includes living below your means, saving and investing. Journey on.

In this article, the use of “he” is intended to be gender neutral.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Video Summary

Surprised Santa

Holiday Sales Are Here

Money Maroon

Holiday Season

It is that time of the year again, where we spend money for the sake of spending money. Yes, it is that period between halloween and the new year, the holiday season with the requisite holiday sales.

Some may disagree with the time span, and argue that the holiday season begins after Thanksgiving. For those individuals, Christmas carols and decorations are on display before Thanksgiving. But the time span is not the point.

Holiday Spending

During the 2018 holiday season, Americans spent over $717 billion. Americans spent over $3.5 billion online on Thanksgiving day. On Black Friday, over $6 billion online. On Cyber Monday, over $8 billion and over $18 billon on Small Business Saturday. In total, in 2018, over 174 million individuals shopped over the Thanksgiving weekend from Thanksgiving through Cyber Monday. Many of these individuals were motivated by holiday sales. However, do you really need that new phone, TV, computer or gadget? In the time of covid-19 and related variants, should you be so focus on material things?

Sales?

If you are motivated to spend based on the holiday sales, those big signs with percentages off, I have some sober news. Retailers have figured out that those big signs can lead to sales. Lots of sales. As such, instead of actually lowering the sales prices, many may instead  increase the listed price. Therefore, there is a larger gap between the sale price and the list price.

That big sale may not be as big as you think.

Holiday Spending And Your Financial Future

Now that your euphoria of large savings have been normalized, have you considered how spending in the holiday season will impact your financial bottom line. Of the 174 million Americans who spent over $717 billion during the 2018 holiday season, how many are financially independent? How many are on track to retire early or living pay check to pay check? How many could have contributed to their savings, 401K, IRA or personal investment account? What about paying down debts  from the previous year’s holiday spending?

Extravagant spending during the holiday season occurs yearly. Let us assume that the retirement age is about 65, and conservatively, careers begin after college at age 22. Based on this estimate, about 43 years of spending occurs during your working years. How could saving during the holiday season have impacted the average American’s bank accounts? How many could have retired early or at least struggle less financial?

Stay On Your Journey To Financial Independence

While the holiday season is branded as the season for spending, take stock of your financial situation and how your holiday spending will impact your journey to financial independence. 

Collect moments not things

Conclusion

Your family is important and we are certain that they would rather you be in a better financial situation than purchasing gifts that will put your financial future in jeopardy. If you are planning on making small or large purchases this holiday season, keep in mind your financial goals. Stay on your journey to financial independence.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Lessons of a Pandemic

Upward Mobility

Money Maroon

For some, no matter how hard they try, they cannot escape their financial orbit. This is the concept of upward mobility. For most countries or groups, upward mobility has remained stagnant. In this department, the United States lags behind other developed nations.

Have you ever wondered why is it so difficult to move up the socioeconomic ladder. It does not matter the class that you are currently in, to break into the next class is difficult. 

Let us take a look at why it is so difficult to move from a lower financial orbit to a higher financial orbit. For simplicity, we will break the different financial orbits into lower class, middle class and upper class. Let us use moving from the lower class to the middle class as an example.

At Birth

When a child is born, many in the middle and upper class receive monetary gifts, parents/grandparents open 529 accounts, and the child is enrolled in a reputable daycare. On the other hand, the average child that is born into the lower class remains at home with family and rarely do the parents begin saving for college in the early years. Before these children enter elementary school, they are on completely different arcs. 

Elementary To High School

By the time these two children enter elementary school, the middle class child has had years of daycare and pre-kindergarten training. On the other hand, the child from the lower class  family has had some home schooling but not to the level of the child in the middle class. Further, based on where they are living, the child in the middle class will attend a higher ranked elementary school, middle school and high school, if not a private school. Now, look not only at the quality of education but also the type of connections that are being made and the circle of friends. There is no comparison.

Post Secondary Education

Let us assume that the child from the lower class family overcomes the barriers and attends the same university as the child from the middle class family. The child from the lower class family, on average, will take out more student loans and will almost always work during school. This inevitably means that students from the middle class and upper class are able to spend more time studying and participate in activities that potentially enhances their resume. Recall the students who are able to participate in unpaid internships. 

Although some middle class and upper class students work while in college, the type of work tends to be different. These jobs tend to offer more connections and access. Recall the friends working in the cushy white collar jobs that give access to upper level management.

Even if students of middle class families do not spend their times studying and instead attend parties while in college, these social events are more than simply drinking. College parties are social events where relationships are being build. Bonds are being formed with like peers (other middle and upper class families).

Professional Life

Based on their background and experiences, realistically, who do you think will on average get the higher paying job? Recall those friends from high school, those parties where social relationship were being build, and those internships? Who will on average will have a more secure financial future? 

The answer is clear. On average, the child from the middle class will be able to maintain their financial orbit and unfortunately, so will the child from the lower class family.

Why Is Economic Mobility Stagnant

Let us assume that the child from the lower class family overcomes all the barriers and manages to be in a high paying profession. Let us assume that he does everything correct (according to societal norms) and enters middle class orbit. Even with this great achievement and entrance into the middle class, individuals born into lower class families are less likely to build on this platform and exit the lower class permanently. Here, family and community plays a huge roll.

Family And Community

Consider the following factors:

  • How does the child from the lower class family handles and interacts with family and friends who are not as well off? 
  • Are they seen as a sellout when they move to a better neighborhood or speak with a different vernacular? 
  • Are they at risk of being robbed when they return to the neighborhood? 
  • How about the envy and jealousy of their closest family members and friends?
  • Do they succumb to the constant request for money or help?
  • Do others in a lower financial orbit influences their activities and decision making?

If you are able to move into a new financial orbit, the above are all factors that individually you may be able to handle. However, these factors cause financial death by a million cuts. Over time,  these different factors can have a detrimental effect on your financial future.

Have you ever wondered:

  • Why do some professional athletes make the decisions they do? 
  • How do some individuals earn so much money and fall back into poverty?
  • Why do some individuals who achieve success get involve with unscrupulous individuals?

If you have asked these questions and have yet to find an answer, you must look back to the community where these individuals were grown. Who were their friends? What influence does this community or members of this community have on them? And if this is still not clear, does Aaron Hernandez come to mind?

Escape Your Birth Financial Orbit

For most, to escape your birth financial orbit, you must first overcome all the odds and push on into the next financial orbit. Second, you must move away from your community. Moving away allows you to escape the potential negative influences and the mindset of your birth financial orbit.

Are you willing to take these steps? Are you serious about attaining financial independence and maintaining this status? Only you can take the steps necessary to achieve and maintain financial independence.

Upward Mobility

For some, no matter how hard they try, they cannot escape their financial orbit. Escape your birth financial orbit and continue on your journey to financial independence.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Holiday season

Holiday Season Tips For Saving

Money Maroon

Each year, Americans spend an inconceivable amount of money during the holiday season. As we approach the holiday season, be conscious of your spending. Financially, do not undo your hard work and the sacrifices of the year. Do not veer off your path to financial independence. Be intentional in your spending.

Holiday Spending

The holiday season is the one time of the year where culturally, it is acceptable to spend what we do not have. In some cases, we are spending on people we do not like, and people we do not like to be around. 

Studies have shown that it is not uncommon for a large percentage of people to not only overspend during the holiday season, but to spend to such an extreme that they are not able to pay off their sending in the month following the holiday season. In many cases, payment of the debt generated in the holiday season is carried over for a year or more.

Worst yet, much of the accumulated debt is on credit cards. According to wallet hub, the average credit card interest rate is 19.21% for new offers and 15.10% for existing credit cards. 

Holiday season
Happy Holidays!!

Holiday Saving Tips:

Have a plan

Treat your holiday shopping like every other spending occasion. Evaluate where you are financially, know how much you are willing to spend, make a budget and stick to it. 

Where Are You Financially

As the end of the year approaches, evaluate where you are. Do you have a savings or an investment goal? Did you plan to pay down debt? Are you planing to make a big purchase in the next year? These are all factors that should impact your spending. If you have goals, and you are on track, keep moving forward toward your goals. If you are off track, get back on track. Do not allow the holiday season to impede your progress.

Budget How Much You Are Willing To Spend

Once you have evaluated your financial position, determine how much you are willing to spend. Do not underestimate your possible budget, be realistic. Are you traveling for thanksgiving? Are you traveling for the winter break? Do your family members expect gifts? Have you set expectations? Are you hosting? Are you hosting a party? Budget accordingly.

It is not uncommon for us to not include the cost of travel in our budgets for the holidays, however, the vast majority of us travel during the holiday season. This is an important consideration especially with the increasing cost of air travel. Consider the cost differential of traveling to Time Square for new years eve vs watching the ball drop at home.

Whether for thanksgiving or later in December or for new years, consider the cost of travel, cost of gifts and any related recreation activities. Further, set expectations based on what you can afford.

Stick To It

Once you have reviewed your financials and made a budget, stick to it. Make travel arrangements early, take advantage of sales, set expectations and spend within your means.

Conclusion

As the holiday season approaches, continue on your journey to financial independence. Evaluate where you are financially, know how much you are willing to spend, make a budget and stick to it. 

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

First Generation Immigrant: Guide To Financial Independence

First Generation Immigrant: Guide To Financial Independence

Money Maroon

Journey to Financial Independence

Financial independence is predicated on the simple formula of money in vs. money out. If you have more money in (salary, passive income, gifts, investments etc.) than money out (bills), you have discretionary income. With discretionary income, you may save, invest or spend. When you invest and save, you are moving forward on your journey to financial independence. Spending most or all of your discretionary income hinders your march toward financial independence. In the first generation money guide to financial independence, whether you have expenses in home country or new country, move forward on your financial journey by ensuring that your financials are secured.

Challenges

For first generation immigrants, the journey to financial independence can be daunting. When a family immigrates to another country, they typically do not have the family or community support they had in their home country. This exposes first generation immigrants to a number of new financial challenges. These financial challenges include financially supporting family members both in new country and home country.

Lack Of Community Support

For most first generation immigrants, with regard to childcare, there is no grandparents, sisters or brothers to help. Natives also encounter this issue, however, to a lesser extent. Natives have family in country, whereas immigrants may not. On the financial front, for immigrants there is no or very little inherited land, business or assets in new country. Immigrants, especially those who are the first to enter a new country, have to build wealth from scratch. 

Immigrant Money: Remittance

A more challenging issue is remittance. Many first generation immigrants have or feel obligated to send money back home to support family members. It could be to support studies or general home life. Remittance represents a large transfer of funds each year. For example, according to The World Bank, in 2017, individuals sent over $689 billion to their home country. 

Immigrant Money: Hyper Savers

To financially support multiple households (new country and home country), immigrants tend to be hyper savers. As such, although in the aggregate, immigrants may have a lower amount of money in (salary) than most natives, many immigrants are hyper savers and have a higher savings rate than natives. This does not mean that immigrants have more saved. As noted above, immigrant salaries tend to be lower than natives and immigrants may have more financial responsibilities as compared to natives. This hyper saving tendency may result at least in part on circumstances and necessity. However, because of financial constrains, in most cases, hyper saving does not lead to financial independence for many immigrants.

The Journey To Financial Independence

To move forward on the journey to financial independence, one must save and invest. While we are not advocating that one should not support family in home country, cutting back on the amount sent must be considered. It is important to ensure that your financial situation is secure before aiding others, yes, including family. Think back to the safety instructions given before a plane takes off.  In an emergency, put on your oxygen mask before your child’s.

If your financial situation is not secure at home, your family’s (home country and new country) financial situation will also not be secure. 

Consider the following: 

  • (1) you save very little while supporting your family in home country and loose your job. In this situation, not only will you be in a bad situation, but so will your family in home country. 
  • (2) you cut back on the amount of support you provide to family in home country and save a small sum in your emergency fund. If you loose your job, both you and your family in home country have a bit more runway to deal with issues that appear. This is the same principle that should be applied if you have adult children. First, address your financial situation and where there is addition or left over funds, aid your adult child.

Conclusion

In the first generation immigrant money guide to financial independence, whether you have expenses in home country or new country, move forward on your financial journey by ensuring that your financials are secured.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Video Summary

Recession Proof With An Emergency Fund

Recession Proof With An Emergency Fund

Money Maroon

Recession fears are always just around the corner.  Financial fears typically grow when volatility increases and consumer confidence falls. With memories of the 2008 financial crisis just below the surface, many Americans are wondering, how do I recession proof my journey to financial independence? To recession proof your financial situation, reinforce your emergency fund.

Cash And Your Emergency Fund

During any financial downturn, cash is king. Therefore, it is important to begin reinforcing your emergency fund. Most experts recommend having three months of living costs saved in a liquid account. This total is simply three times your average monthly costs (includes housing, dining, transportation, servicing debt and other monthly expenses). Consider keeping your emergency funds in a savings account, more preferable a high yield savings account or any account wherein you will have easy access to your money.

However, one size does not fit all.  As such, a question to ask yourself is: if you lose your job, how long will it take for you to find a new job? If you are in a profession where the vetting period is in excess of three months, consider increasing your emergency found to at least six times monthly costs.

However, for comfort and piece of mind, consider having twelve times monthly costs. By having a years total costs, such a financial cushion will allow for flexibility if the unexpected occurs.

Most Americans Cannot Afford A $500 Emergency Without Going Into Debt

Taking into consideration the fact that most Americans cannot afford a $500 emergency without going into debt, if you are unable to achieve three times monthly cost, save whatever you can. The more you are able to save, the better prepared you are for any financial roadblocks.

Saving is an essential feature of financial independence. Saving takes patience and consistency, but provides peace of mind. After having a comfortable emergency fund, begin paying down your debt. If you lose your job, having to service debt during this period can detrimentally affect your situation. Therefore, where possible, pay down debt.

Conclusion

Recession fears are always just around the corner.  Financial fears typically grow as volatility increases and consumer confidence falls. With memories of the 2008 financial crisis just below the surface, many Americans are wondering, how do I recession proof my journey to financial independence? To recession proof your journey to financial independence, reinforce your emergency fund and pay down debt.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Keeping Up With The Jones Your Goals

Keeping Up With The Jones Your Goals

Money Maroon

To achieve financial independence, you must be comfortable with yourself and not be concerned with others. You must be focused on your financial situation, and your goals. Forget about keeping up with the Jones.

A Wealthy Display

I was in high school when I began noticing a few trends with regard to wealth. Have you ever noticed that the wealthiest among us wears the most basic of shoes, clothing, and drives an average car. In high school, the students with the regular but quality shoe happened to be from wealthy households. Here, I am using regular to mean “not flashy”. These are the friends who lived in the best neighborhoods with parents who were executives and/or held secure positions. These friends did not care to draw attention based on what they could afford.

On the other hand, friends with flashy high priced shoes, book bags, and hairstyles tended to have parents who were less well off.  These friends wanted to show everyone that they had the most expensive you name it. These friends were not secure financially.

The wealthiest among us does not care what others think, and their children do not either. When you are financially secure, you care a lot less what others think. You also have a bit more confidence because you are secure and you are less dependent on others for your well-being.

Stop keeping up with the jones - keep up with your goals

Group I /Group II

Think about this now in adult life. Think of your friends in two basic groups, Group I and Group II. The below (Group I/Group II expenditures) are only a generalization and does not include additional costs such as food, entertainment, student loan payments and other monthly costs. The below serves as a simplified example.

Group I

Keeping up with the Jones - cars JoToFI.com
  • Group I
    • Leases their vehicle. Typically a luxury car: Mercedes, Porsche, BMW or a Tesla;
    • Lives in a McMansion/junior McMansion;
    • Takes lavish vacations;
    • Post their activities frequently on social media; and
    • Sends children to private school

On average, Group I are high earners, but are they wealthy? If Group I loses their jobs, could they survive? For how long?  By leasing a car, Group I will carry car payments for the foreseeable future. However, as a benefit, Group I will always have the newest model car. 

The junior McMansion’s mortgage is typically above average and comes with the associated expenses for heating and cooling such a large home, landscaping, and the inevitable general up keep and repairs. This adds up very fast.

Private school can cost tens of thousands of dollars and in some cases hundreds of thousands of dollars, per child.

Let’s face it; Group I’s monthly expenditure is very high. Any lost of income can have a dramatic effect on the well being of Group I.  From this basic analysis, it becomes very clear why so many families earning six figure incomes are living paycheck to pay check. High earners losing their jobs played out for all to see during the last financial crisis. Stories were abound of those with household incomes of close to $500,000, who had large debts, and following the lost of a job eventually lost their homes. 

Consider the following, if you lost your job but had $100,000 in savings, a $600 per month car payment, a $5000 mortgage, and $4000 monthly tuition for one child. How long could you keep up? Not long at all. Your savings would be depleted fairly quickly.  The depletion of savings would be further accelerated by the payments associated with any outstanding credit card debt or student loan payments.

Group II

Keeping up with the Jones - homes JoToFI.com
  • Group II 
    • Owns their vehicle. Typically a an average car: Toyota, Honda, or Nissan;
    • Lives in an average sized home;
    • Takes vacation on a budget, use AirBnB;
    • Does not frequently disclose their activities on social media; and
    • Sends children to good public school/dabbles in private school.

Group II include high earners, but also those who earn an average salary. Unlike Group I, because the monthly expenditures are lower, interruptions in income will not be as dramatic. Group II tend to have more of a buffer.

Group II are the millionaires next door and typically do not care what others think. These folks do not know the proverbial Jones and if Group II did, Group II do not want to keep up with them because Group II are preoccupied with building wealth.

It is highly likely that Group II earns more than Group I, but simply lives below their means. Group II could be earning six figures and multiples thereof but will stay in the same home, drive the same car for 10 years and take advantage of good public schools. Even if Group II loses their jobs, because their expenses, on average, are lower than that of Group I, Group II are able to whether such a change in better shape than Group I.

The Unknowns

We all know folks who live in the largest homes and drive the newest cars. What you do not know is their financial situation. You do not know if they are in debt. Do you know if they have an inheritance? You do not know if they are behind on car payments or mortgage payments. What about credit card debt, or student loans. You just do not know.

With all the unknowns, focus on what you know. You know your situation, your goals, and your financials (savings, expenditures, investments). Instead of keeping up with the Jones, keep up with your goals.

Who would you rather be? Group I or Group II? In the end, the choice is yours.

Which door will you walk through?

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Video Summary

Keep up with your goals
Saving To Financial Independence Today

Saving To Financial Independence Today

Money Maroon

For many, the path to financial independence begins with saving. No matter if you are a high earner or earning minimum wage, saving is a primary driver of financial independence.  The earlier you begin to save, the better your financial outlook.

Start Now

When should you start saving? The answer is an obvious one, NOW! The earlier you start saving, the more time you will have for your savings to compound. If you have not heard the gospel of compounding interest, I will give you an introduction.

Compound interest is interest calculated on the initial principal and the accumulated interest of previous periods. As such, this is a cycle of earning “interest on interest.” Compound interest will make a deposit grow at a faster rate than simple interest, which is interest calculated only on the principal amount. As such, the earlier you begin, the longer your savings + interest compounds, the harder your money works for you.

Automate

This easiest way to ensure a consistent savings rate is to automate your savings. The typical employee receives a paycheck twice per month. Start saving slowly at a rate that is acceptable for you, and increase the amount over time. Further, have a portion of one or both of your paycheck automatically deposited to a savings account. By automating your savings, you never see the money. Additionally, to save takes no action on your part once automation is in place. But where should you save your money?

High Yield Saving

All saving accounts are not created equal. The average interest rate is 0.09% APY. Banks such as Bank of America has an interest rate of 0.03%. On the other hand, online banks pay a significantly higher interest rate. For example, online banks Marcus and Ally offers 2.0% APY and 1.90% APY, respectively. As you can see, having a high yield online bank account is the way to go when saving for financial independence. The higher the interest rate, the faster your savings will grow.

While saving is an important part of the journey to financial independence, unless you are a very high earner, saving alone will not get you to financial independence. Saving is a tool to be used in combination with other methods discussed here. Save, invest and grow.

Conclusion

For many, the path to financial independence begins with saving. No matter if you are a high earner or earning minimum wage, the earlier you begin to save, the better your financial outlook. Journey to financial independence today.

Follow me on Twitter @JoToFI_com

Follow me on Instagram @JoToFI_com

Video Summary