Today, Megan and I discuss why we’re purchasing a home all in CASH! Whoaaaa! Crazy, we know. Did you know only 23% of people buy homes in cash; and only 6% of that 23% are first-time home-buyers! Wow!
This week we tackle our budget! There are many misconceptions about what a budget is and isn’t – we’re here to show you how we do it and hope to give you a fresh insight on personal finance.
Before we started budgeting, we wrongly thought its purpose was to restrict and punish you. That’s neither the purpose nor the goal of a budget. We learned the importance of creating a budget at the very beginning of each month. Here’s the method we use that has not only gotten us out of debt, but has led us into a life of true financial peace and security.
At the top of your budget, write your total income for that month. Under that, list all your obligations: bills, debts, and other expenses. Look ahead at the month and don’t forget to account for expenses that occur on an irregular basis (driver’s license renewal, quarterly payments like insurance, birthdays, holidays). Once your obligations are recorded, subtract any other reoccurring monthly costs such as groceries, fuel, and subscriptions. Don’t forget anything – the goal is to account for every last dollar. When you give every dollar you earn a name and a purpose, you are in control and free to spend without worry or fear that you could overdraft with that next swipe of the card. After going through this practice and subtracting your bills and expenses from your total income, you should end up with ZERO dollars! Congratulations, you just created a zero-based budget!
One more important part of the budget – the giving category. At the top of our budget, even before we list our bills, is the giving category. Before budgeting, this was an area that was seriously lacking for both of us. And to be honest, we’re still really working on it. No matter what though, we contribute to our giving fund each month. Some months the fund is not fully spent, but we let it build up so we can intentionally choose a cause we really care about. The giving category is an important aspect of being a good steward of your money, whether you are drowning in debt or have a wonderful net worth.
Full disclosure…even though we use the zero-based budget method, Michael and I usually leave a very small buffer at the bottom of our budget. For our peace of mind, we reserve no more than $50 a month for any unseen expenses that may pop up throughout the month. I will say though, I don’t remember a time that we actually had to use that buffer. When we carefully look through the upcoming month’s calendar, talk through it, and know what to expect, there is no reason why we would experience any surprises…we have intentionally planned and prepared for the month ahead and have confidence!
And that’s it folks – a budget takes some practice, but when it’s done properly, it’s very empowering. A budget doesn’t mean that you don’t have any money. A budget means you responsibly manage and care for the money you have earned. We like this analogy for budgeting: parents build a fence around their yard to protect their children from running into the potentially dangerous street. Although the children now have boundaries, they are still free to run and play anywhere they want in the fenced-in yard. That’s what a budget is – it gives you boundaries to keep you safe, but allows you the freedom to spend within the limits you set. And that is the equation for financial peace!
Handy links we like that will help you with budgeting:
- We never said you couldn’t have fun – why it’s important to have a fun money category on your budget: https://www.daveramsey.com/blog/fun-money-in-budget
- Let’s help you out with those excuses you make: https://www.daveramsey.com/blog/5-budgeting-myths-falling-for?ictid=aw15
- What the heck is an envelope system?! https://www.daveramsey.com/blog/envelope-system-explained?ictid=aw15
And…as promised, here is the link for our Financial Peace University class – all Pittsburgher’s are welcome!! Please message us for more details!
Today we talk more about our journey over the last 4 years. We talk about meeting while Salsa dancing and the time I broke up with her because I was emotionally immature and scared (and how finances started bringing us back together). We also outline buying a new car vs. an old car. “Alexa, please start playing the episode now”!
This Episodes Financial Scenario: 2 New Cars VS. 2 Used Cars
Scenario 1: Congratulations! You saved up $100k, but now have it sitting in a savings account at your local bank! Time to do something with that money. You and your spouse live in the city and have lived without a car up to this point. So, you buy 2 used cars, each are 5 years old and cost $7k.
Oh no! Over the next 5 years, your vehicles have each depreciated from around 22% to 7% of the vehicles’ original value! You loose around $5k per vehicle, and your net worth drops from $100k to $90k.
Oh no, again! Your used vehicles require more maintenance, over the next five years of ownership, than it would if you had just purchased brand new vehicles. Subtract $9.5k per each vehicle. Your net worth drops from $90k to $71k.
Congrats, you did at least decide to invest any money not tied up in vehicles. You invested in good Growth Stock mutual funds and made 8% each year for 5 years. Your money grew about $33k! Your net worth went from $71k to $104k!
Warp speed time! After five years of driving these 2 used vehicles, you and your spouse decide to trade-in your current vehicles for 2 newer, used vehicles (each are still around 5 years old). So then, after five years of driving these vehicles, we are ten years into the future and your net worth now is around $110k! Wow, your actually making money!
You actually ended up doing quite nice! Great job on continually purchasing vehicles that had already depreciated a great deal before you bought them. And way to keep more money for yourself so you could invest it and make money! Very smart!
Scenario #2: Congratulations! You saved up $100k, but now have it sitting in a savings account at your local bank! Time to do something with that money. You and your spouse make okay incomes and still have student debt, but you decide you’ve worked hard, you deserve 2 brand new vehicles. You buy these vehicles at an average price of around $31,500 (each) and at buy them in cash.
Congrats again! You bought 2 new cars, so over the first five years of ownership, you don’t spend as much on repairs as people who buy older, used vehicles. Subtract $5,100 per vehicle. Your net worth drops from $100k to $89,800.
Oh no, over the same first five years, your 2 vehicles depreciated substantially (around 63%)! Subtract $19k for each vehicle. Your net worth drops from $89,800 to $51,800!
Congrats, you did at least decide to invest any money not tied up into vehicles. You invested in good Growth Stock mutual funds and made 8% each year for five years. Your net worth rose from $51,800 to about $76k.
Warp Speed! Now, after five years of driving these new vehicles, you decide you again want to be driving brand new vehicles. So you buy them and drive these new vehicles for 5 more years. Now we are 10 years into the future and the whole process repeated itself again. Your net worth, even after investing again has sunken to around $40,900.
Well, you did get to drive fancy new cars with the latest bells and whistles (or thistles?)! But sadly, your overall net worth has been diminished by almost $60k! It turns out, new vehicles drastically depreciate in the first few years of ownership. Surely, your uncle has made the comment, “Your vehicles loose thousands the second you drive off the dealer’s lot!” Well, that has truth to it. Instead of tying your money up in investments that made money, you actually tied your money up in items that were loosing value. The more money you can keep in things like Good Growth Stock mutual funds or real estate, the better your overall net worth will end up being! Better luck next time.
In this episode, Megan and I talk about what it means to have gazelle intensity when getting out of debt! We also examine Christmas traditions as we’re thinking of starting a family soon. Stick around for a treat at the end of the episode.
And here, as promised are Elves, of Elf on the Shelf, working hard to play hard!
First, we’ll give you some updates going on in our lives (preview: I set off a fire extinguisher!). Then, we talk about communication when both spouses agree to a budget. We discuss gift giving while getting out of debt. And we finish our conversation from last week about Term Life Insurance.
Check out our Term Life Insurance Guide at WealthofMarriage.com
What is it?
In marriages, your spouse contributes a lot! They may bring home income, take care of children, run errands, etc. If your spouse passes away, it will be hard for you to continue raising a family with out their help. This is why you get Term Life Insurance. If your spouse does pass away, you’ll receive money to help you live life and take care of your family.
- Get a policy on each spouse.
- A great time to get it is when you start having kids.
- The policy amount should be 10-12 times annual income.
- A good term length can be from now until your kids head to college.
- Premiums are based on age, health, and life expectancy, so it’s cheaper when you’re younger.
Where to get it:
- Look for an insurance broker. They are able to search many different companies to find you the best rate. If you go with a captive insurance company (think StateFarm or Allstate), often the rates will be higher since they’re limited to selling their products only. We ended up giving Zander a try since Dave Ramsey recommends them; they were very informative and helpful to us. Also, be careful to find a reputable broker! You can request quotes from many broker’s websites on-line, but some will sell off your information and then you’ll start getting some unwanted phone calls.
- A mortgage broker will do a lot of the front end work for their clients, the insurance agencies. It’s their job to teach you about the products, fill out the applications with you, and give you great customer service.
- Term Life Insurance becomes unnecessary when you’re able to self-insure. This will be because your house is paid-off, you have money in investments (at least $500k to $1 Million), and your kids will be taken care of (don’t forget college). At this point in time, if you pass away, your spouse and family will be financially okay without you.
- Also consider that rates will jump up significantly when you’re in your 60’s vs. your 50’s. If your current term ends in your 50’s, you’ll be able to get a new plan at a cheaper rate than if you did this in your 60’s. Hopefully though, you’re self-insured by this point and won’t need to continue purchasing Term Life insurance.
- A Rider adds additional benefits to your policy, for an extra cost.
- Only a Child Rider is recommended. In the unlikely/unfortunate event your child passes away, the policy would give you money to cover funeral/burial expenses, and do other things like take an extended leave from work. You would get it on a child under the age of 17; it lasts until they’re 25, or when your policy runs out. Payout amounts are typically $5k or $10k. Additional costs to add this Rider are very low, and your cost to add one child vs. multiple children should be the same.
- Stay away from a Disability Rider (it may also be called a Waiver of Premium). If you become disabled, the insurance company will only pay you out if they truly think you can’t work ANYWHERE. If you’re still able to wobble down to McDonald’s and sit at the drive-thru window, you’re not getting paid.
- You can set up the policy to pay out a lump sum, or payments over a period of time. We recommend a lump sum. If you choose to receive payments, what ever monies are still held by the insurance company is often charged interest, their fee for handling the money for you.
Resetting your Policy:
- Since it’s recommended you have 10-12 times your annual income, you can contact your insurance broker to increase the amount of coverage at some point in the future when your income increases.
Stay at Home Spouse:
- You should get a policy on stay-at-home spouses. If you add up the value they bring to a family, you may quickly start to call them the Bread Winner!
- To keep things easy, the amount of Term Life Insurance on the stay-at-home spouse can be equal to that of the full-time working spouse (you can do less, but don’t go below 1/2 that amount).
If filing a Claim:
- Our condolences if your loved one has passed away. At this point, you’ll want to call your insurance broker. They’ll help you with the claims and usually get payments to you withing 30 days.
- If payment is going to a minor, it will take longer than 30 days to receive payment since Probate Court must be involved (and that can take years).
Annually Renewable Term Insurance:
- You’ll want to stay away from ART insurance as this is the most expensive way to possess Term Life Insurance. Since premiums are based off age and since the contract renews each year, you’ll pay higher and higher amounts each year.
Term Life Insurance at Work:
- Always get a Term Life Insurance policy independent of what you have at work. If you only have Term Life Insurance through your work and at some point, you become “un-insurable”, you won’t be able to get a new policy, easily, if you decide to switch jobs.
Whole Life / Universal / Cash Value Life Insurance:
- Are you looking to waste your money and pay big commissions to your insurance agent? Of course not! So stay away from these products. Anytime your insurance agent is trying to lump investments and insurance together means you loose. You will pay much, much more for these complicated and hard to understand products and receive horrendous returns on your “investments” after fees. Invest your money in actual investments such as good mutual funds with long track-records and 401k’s, and you will come out on top.
Today, we’re talking about Term Life Insurance since that’s what we’re currently setting up in our own lives! Enjoy!
Check out how much Term Life Insurance you need:
We’ll be discussing:
- How much you need
- When you should get it
- Why you need it
- (and of course, what’s going on in our lives!)
Wow, how many takes did we do in this episode! We’re talking about marriage preparation lessons we enjoyed learning during our own Engaged Encounter!
1st Pope Francis Link:
2nd Pope Francis Link:
Oprah’s 20 Questions to Ask Before Marriage:
Hello! This is Megan’s and my first episode. We believe marriage and love take work, and if done right, finances can actually make a couple stronger, not tear the relationship apart.
In this episode, we’re not getting into the meat just yet, because we’re talking about how we met!
Now don’t be too hard on us, this is our first episode ever and we’re a little nervous. But don’t worry, we are quick learners, and this podcast will only keep getting better and better.
Glad you’re here, you’re awesome!
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