Our Favorite Methods for Tracking your Expenses

“Can I afford it?” is a question you may find yourself asking more often than not, especially if money is a constant stress in your life. In this post, we narrowed down three approaches that we have found to be effective in knowing how much money is coming in and how much money is going out each month. However, we encourage you to experiment with different methods (even the ones not listed here) until you find the one that works best for you. 

Managing your money on a consistent basis is crucial for your financial well-being. It’s not just about budgeting, but rather understanding your lifestyle expenses, spending habits, and financial priorities. By gaining clarity on where your money is going, you can make informed decisions about:

    • What you can and can’t afford.

    • How much to allocate to paying down debt. 

    • How much to save and invest to reach your current and future wants. 

Where to Begin

To gain clarity on your lifestyle expenses, start by examining your current spending habits. Avoid guessing and take a close look at your bank transactions and credit card statements. Don’t forget about Venmo or other payment app transactions. While going through your spending you may feel some discomfort and even shame. That’s normal but don’t get discouraged. Even though you can’t change the past, you do have control over the decision you make going forward. The goal at this point is to have an awareness of where your money is going. With that information you can begin to make small adjustments to get closer to living the life you want. Read on for our recommended systems to track spending.

Method #1: Year-End Credit Card and Bank Statement Review

This is the least time consuming method. Gather all your year-end credit card and bank statements (note: many credit card providers will create a year end summary of your annual spending). Then, total up all the expenses for the year to come up with an average monthly discretionary spending number. For example, if you spent a total of $54,800 on your credit card for the year, plus an additional $10,000 paid by Venmo and cash/check, your total spending for the year is $64,800 or $5,400 per month. Now, take a close look at the categories on the year-end summary to gain awareness of where your money is going. Are you surprised by any particular category? Are there opportunities for adjustments?

Method #2: Manual tracking and budgeting apps

While this method may require more effort, it can be highly effective, especially if you struggle with impulse spending or tend to overspend. You can start by using a simple cash flow spreadsheet to manually track your spending and plan for the months ahead. Alternatively, you can utilize budgeting tools like Mint, which automatically syncs your bank accounts and categorizes your transactions. Another option is known as the envelope method, where you assign every dollar a specific purpose. Apps like You Need a Budget (YNAB) replicate the envelope system to help you plan ahead. It allows you to allocate a certain amount to each envelope or category, such as bills, groceries, savings, and entertainment. YNAB is the system I use and can say from personal experience, there is a learning curve in the beginning when using the app. Once you get the hang of it, it really can keep you on track with your spending. Whether you are doing it manually or using an app, consistently looking at the numbers and planning ahead can aid in maintaining discipline and awareness of your spending limits.

Method #3: Pay Yourself First

If you already have a good understanding of how much you should be saving, consider the “pay yourself first” method. Automatically contribute a certain percentage of your income to savings before allocating the rest for spending. You can set up automatic transfers from your paycheck to separate accounts, such as checking and savings, to ensure consistent savings. Once you’re confident you’re saving “enough”, spend the rest as you wish.

Don’t Forget About Non-Monthly and One-Time Expenses

Remember to account for non-monthly and one-time expenses in your lifestyle costs. These may include vacations, car maintenance, kids’ summer camps or other inconsistent items. Plan ahead and set aside funds in a separate high-yield savings account to cover these expenses without disrupting your monthly budget.

Stick to Your Plan

Creating a budget is not a one-time task; it requires ongoing commitment and discipline. Schedule a money date with yourself- we recommend once a month or once a quarter- to check in on your spending regularly and make adjustments as needed. 

It’s common to feel overwhelmed or guilty about past spending habits, but remember that no spending is inherently good or bad. It’s about understanding where your money goes and making adjustments moving forward. Experiment with different methods until you find what works best for you, whether it’s manually tracking your expenses, using budgeting apps, or some combination of the above methods. Be patient with yourself and stay consistent, as you work towards better managing your lifestyle expenses.

 

The FIRE movement: what is it, and is it achievable?

If you’re on the 9-5 grind at a point in your career, you’ve likely pondered retiring early and whether or not that was attainable. Perhaps you’ve stumbled upon the FIRE movement (financial independence, retire early) yourself, whether on social media or through a friend. It certainly sounds appealing to be financially independent at an early age. As a millennial, I watched my parents’ generation work hard for decades and by the time they reached their 60s, they had little energy left to enjoy retirement.

What is FIRE, and how did it begin?

The movement first began in 1992 when Vicky Robin and Joe Dominguez published the book “Your Money or Your Life.” The book was centered around achieving financial independence ​​by changing your relationship with money in order to live a more meaningful life. Then, in the early 2000s, with the help of the internet, blogs like Mr. Money Mustache popularized the FIRE movement even more. When the 2008 recession hit, many people were looking for ways to change their lifestyles. The traditional way of doing things became less appealing in modern America; working for 40 years, saving some money along the way, and then having a nice nest egg to retire and begin living your “dream”. 

Today, there are several influencers online who teach and discuss how to achieve FIRE by spending less and increasing your savings and income via podcasts, blogs, and social media. Some popular sites include Rich & Regular, Our Next Lives, and Yo Quiero Dinero, to name a few. 

Is it achievable? 

One of the main premises of the FIRE movement is to cut back your spending and be more intentional with purchases. Many proponents of FIRE attempt to save aggressively, sometimes as much as 50-70% of their income.  In order to save at this rate, you have to be hyper-aware of the things that you spend on. 

Try to hypothetically apply this practice in your life:

  • Take half of your yearly take-home pay, divide by 12, and that’s what you have to work with every month to pay all of your bills and living expenses. 

Could you pull it off? Perhaps. Surely others have been successful in doing so. But I think we can all agree that it takes time, self-awareness, and a lot of dedication to be able to dramatically cut back your expenses. It’s a good exercise, though, to be more aware of how you spend your money. Others that have done this successfully have moved to less expensive cities and replaced going out to new restaurants with inexpensive activities like hiking and beach days. 

We live in a consumer culture where we’re bombarded with messages to “buy” all day long.  It’s easy to get wrapped up in mindless spending. The FIRE movement makes you question your current spending habits and whether you’re spending money on things that you actually value or just filling a void. 

Finding a balance

This hyper-vigilance on where we spend our money is a bit extreme and may lead to depriving yourself now and waiting to enjoy your life later. In a way, it reminds me of dieting culture, and we all know dieting never truly works in the long term because it is simply not sustainable. 

You also have to envision what retirement looks like for you. At Xena FP, we think of retirement as more of an evolution to a new chapter of your life rather than the destination. Retiring in your 30s or 40s may sound blissful now, but what are you going to do with the remainder of your life? Achieving financial independence at a young age gives you the luxury of making work optional. In return, you have the freedom to explore new careers or projects that you’ve had an interest in. 

Financial independence gives you options; no longer needing to rely on how much you make, and I can get behind that. 

The work that we do with our clients at Xena FP emphasizes intentionally living a life that you’re proud of today while saving for your future. Finding a balance between the two takes work through careful planning. If you’re interested in achieving financial independence and retiring early, we encourage you to have a conversation with your financial planner and start thinking about what kind of lifestyle you would want to maintain during retirement. 

Prioritizing Company Savings Options

If you’re lucky enough to work for one of the many tech companies that offer multiple ways to save, you may be wondering which programs to prioritize. For instance, Microsoft employees have the good fortune of having access to a pre-tax/Roth 401(k), after-tax 401(k), ESPP and HSA. If you can afford to maximize them all, well that’s fantastic. They all offer their own unique advantages. But if you can only afford to save to one or two of the above, how do you decide? Which is most important? Which one makes the most sense for you?

You will undoubtedly get sick of me saying this, but like most things in your financial life, it depends. What I’ll offer here is some general advice, but it will likely vary depending on your unique circumstances.

An overview on the options:

401(k) – either pre-tax or Roth

In 2023, you can save up to $22,500 to a pre-tax or Roth 401(k). If you’re over 50, you can save an additional $7,500, called a catch-up contribution. I typically recommend you at least take full advantage of your employer match. That may or may not mean deferring the full annual contribution. In the case of Microsoft, they match 50% of your total contribution (up to the annual limit). If you defer the maximum amount, they will match $11,250. That’s HUGE. On top of your salary, bonus, and RSUs, you’re getting another $11,250 from Microsoft. This is a no-brainer (assuming you can afford to save $22,500 per year). Whether you save those dollars pre-tax or Roth is highly individual; I suggest you work with your financial advisor to determine what makes the most sense for you.

OK, so you’re saving $22,500 per year and you still have “extra” cash- what’s next?

I’m a big fan of Health Savings Accounts (HSAs). That’s a blog post for another day, but in short, an HSA offers incredible tax benefits that you cannot get from any other account type. You can contribute to an HSA on a pre-tax basis, the earnings grow tax-free AND all withdrawals are tax-free. That’s a pretty incredible combination.

In order to contribute to an HSA you must be enrolled in a High Deductible Health Plan (HDHP). If you are, you can contribute up to $7,750 for a family and $3,850 for an individual in 2023 to the HSA. Unlike a 401(k), that total actually includes the employer contribution. Again, we are talking free money here! Microsoft will contribute up to $2,500 to a family account or $1,000 for an individual (in 2022). 

If you still have room for extra savings:

After-tax 401(k)

In addition to the pre-tax or Roth 401(k), some companies, like Microsoft, also offer the after-tax 401(k), also known as a Mega BackDoor Roth 401(k). With this option (and continuing the Microsoft example), once you have maxed out your 401(k), plus Microsoft’s $11,250 match, you have the option to defer another $32,250 to an after-tax 401(k). (The total IRS annual limit for all contributions in 2023 is $66,000.) 

There are a lot of great things about a Mega BackDoor Roth, not least of which is that if you’re very high income, you don’t have that many savings options that are tax-advantaged. This allows you to save aggressively into an account that won’t be taxed in the future. Note: it’s important to make sure your after-tax contributions are automatically being converted to Roth. 

Employee Stock Purchase Plan (ESPP)

Finally, at Microsoft you can save to an Employee Stock Purchase plan (ESPP). The federal limit for an ESPP is $25,000 of the un-discounted stock, which with a 15% discount means you can save $21,250. I’ve also written about the specifics of Apple’s ESPP plan here. There are some definite benefits, though the tax implications can be complicated and you have to manage the selling and reinvesting process. It may still be worth doing, but generally lower on my list of savings options.

If you happen to make enough money to save $22,500 to your 401(k), plus $7,750 to an HSA, plus $32,250 to your after-tax 401(k), plus $21,250 to an ESPP, by all means!

For many people, that’s just not realistic and they must prioritize. Broadly speaking, my order or preference is:

  1. Pre-tax or Roth 401(k)
  2. HSA
  3. After-tax 401(k)
  4. ESPP

As mentioned above, this may not be the best order for your situation. For instance, if you plan to retire very early (say, age 50), you might not want to tie up too much in a 401(k) and would rather save to a taxable account. In that case, maximizing the ESPP (then selling and diversifying out of company stock) would make more sense than filling up the 401(k) buckets.

It’s a highly individual decision, but this framework applies in many situations. As always, I encourage you to work with your financial advisors to decide what’s best for you.

Should I still participate in my company’s Employee Stock Purchase Plan- Even When the Stock Price is Trending Down?

Tech stocks have had a terrible year thus far. So far this year, the tech-heavy Nasdaq Composite Index is down 23%. Among the worst-hit have been Amazon.com (-25%), Tesla (-32%), Meta (-42%), Zoom (-40%), and Shopify (-74%). We’ve been hearing from so many of you about whether to continue to participate in your company’s employee stock purchases plan (ESPP) when the company stock is declining.

Using the Apple ESPP to illustrate how it works

Essentially, a company that offers an employee stock purchase plan is giving its employees the option to buy the company stock at a discount. Let’s use the Apple ESPP as an example. Suppose your base salary is $200,000. You can contribute up to 10% of that salary – in this example up to $20,000 (ESPP contributions are capped at $25,000 per year, based on the full fair market value of the stock). 

At the start of each purchase period, which goes for 6 months, Apple will withhold the percentage you elect. At the end of each purchase period, they will use the funds withheld over the prior 6 months to purchase stock at a discount. The amount you pay for the shares is the lower of two prices—the offering date price or the purchase date price—plus an additional 15% discount. Apple has their 2 purchase dates as January 31st and July 31st. 

The amount you pay for the shares is the lower of two prices—the offering date price or the purchase date price—plus an additional 15% discount.

Here is an illustration that shows what the timeline for Apple’s ESPP looks like.

Note: Apple’s offering period and purchase period are the same, though that’s not always true. 

In this example, if you had participated between August 1st, 2021 and January 31, 2022, you would be purchasing at a discount on the lower price from August 1st. On January 31, Apple would use the $10,000 withheld and purchase Apple stock at 15% less than the August 1st price of $145.52 (80 shares of AAPL. Note: Apple does not allow the purchase of fractional shares in their ESPP). 

If you sell immediately, at the market value on January 31st ($174.78), you gross roughly $14,000. You’ve immediately gained almost $4,000, which will be taxed at whatever your ordinary income tax rate is. For the sake of simplicity, I’ll assume you’re in the 35% tax bracket, so you’ve netted a little more than $2,500. Not bad!

Money withheld from your paycheck$10,000
Share price on August 1, 2021$145.52
Share price on January 31, 2022$174.78
# of shares purchased on January 3180
Sales proceeds (80 shares x $174.78)$13,982
Gain$3,982
Estimated tax @ 35%$1,394
Net proceeds$2,588

What if the stock price had actually gone down from August to February? 

You would still get a discount on the lower stock value, but it would be worth less when you sell and you would only gain the 15% discount. Let’s imagine the stock prices were reversed- $174.78 on August 1st and $145.52 on January 31st. You would still receive 80 shares of AAPL stock, but you would only be able to sell it for about $11,600. Again paying 35% tax on the gain, you would net about $750. Still better than nothing but quite a bit less than the first example.

Money withheld from your paycheck$10,000
Share price on August 1, 2021$174.78
Share price on February 28, 2022$145.52
# of shares purchased on March 180
Sales proceeds (80 shares x $145.52)$11,642
Gain$1,164
Estimated tax @ 35%$407
Net proceeds$757

In a market where your company stock is trending down, the maximum gain you would realize over a 6-month period is $12,500 (50% of the annual IRS limit) less $10,625 (50% of the maximum annual contribution, assuming a 15% discount) or $1,875- and that’s before you pay taxes.

Tax Implications: Selling the shares immediately

In the above examples, I assume you sell the shares as soon as you’re able (which is very close to immediately after the end of the offering period). This is considered a non-qualifying disposition, and you’re required to pay ordinary income tax rates on whatever the discount amount is. 

Tax Implications: Holding onto to the stock for more than a year

If you hold the stock for a full year from the purchase date, and 2 years from the beginning of the offering period in which you purchased shares, then the stock would be eligible for a qualifying disposition. In this instance, any gain would be taxed at long term capital gains rates, which are more favorable than ordinary income tax rates. Many people are enticed by the possibility of paying lower taxes, but holding the stock for longer is risky, and you might have no gain at all, or even a loss.

There is very little risk involved in participating in an ESPP if you sell the stock right away. If you hold the stock, your risk increases significantly.

Factors to consider

One of the most relevant issues here is- can you afford to have that reduction in every paycheck for the 6 month period before reaping the benefits at the end? For some folks, this is a fantastic way to automate savings. It enforces a certain behavior and then at the end of 6 months you can sell your company stock and invest how you see fit. In other cases, you just can’t afford to take a reduced salary. Given the limited benefit when the stock is trending downward, if the regular paycheck deductions present a challenge, I would likely not participate in the ESPP.

The other consideration is having too much exposure to your company stock. If you’re already receiving Restricted Stock Units or stock options, you may have a large portion of your portfolio in one stock. Add to this the fact that your salary and benefits are tied to this same company, it can get pretty risky.

How should I decide?

To recap, some pros of participating:

  • Enforced savings
  • Free money! Admittedly, LESS free money when the stock price is on a downward trend.

And cons:

  • Concentration risk
  • Increased tax complexity
  • Reduced cash flow
  • Potential volatility if you hold the stock
  • The manual process of selling and then reinvesting into some other vehicle (or as I like to call it, the “hassle factor”).

I have a bit of a love-hate relationship with ESPPs, but they are often worth doing, even in a down market. The potential benefit is quite small, but if you can afford to participate, it might be a good idea regardless of the way the stock is trending.

What Should You do with Extra Cash?

One of the questions we get asked all the time is “where should I keep my emergency reserve (aka rainy day fund)?” or “What should I do with my extra cash?”

How Can I Get My Cash to “Work for me?”

If you haven’t already, I suggest setting an emergency reserve target. I generally recommend establishing a target of 3-6 months of living expenses. Although, like with all things related to personal finance, this is a highly individual decision and there is no right answer. There are many factors that can influence the target, including whether you are a single-income household or have highly variable income.

Before we move on, let’s establish up front that you’re already in good shape with regards to consumer debt (i.e. you don’t have significant credit card bills). That said, it bears mentioning that it is possible to build your emergency reserve and pay down high interest debt at the same time.

Where to keep your emergency reserve

High Yield Savings

My top recommendation for an emergency reserve (as of this writing) is a high-yield savings account. I always check bankrate.com for the best rates and as of April 2022, most banks are offering something like .60% – .70%. I prefer this account being separate from whichever bank you use for your checking account; I like the idea of it being ever so slightly harder to access these funds. Please do not be fooled by Bank of America (and some of the other big banks) whose “high yield” savings account actually only earns .05% interest. Don’t get me started on the inaccuracy of that claim!

CDs

In the past, CDs were a reasonable option for an emergency reserve. I, myself, used to have laddered CDs that came up each quarter, which I would then renew. Based on the current rates, CD rates are only fractionally higher than high yield savings accounts, so there’s no compelling reason to have your money “tied up” in a CD.

I Bonds

I bonds are all the rage the past few months. Rates are at 7.12% through April 2022 and will increase to an estimated 9.62% in May which is frankly jaw-dropping! 

There are a few stipulations that you should be aware of: 

  • The rates reset every 6 months. The current rate is good on new I bonds purchased through April 2022. 
  • You can only buy $10,000 in I bonds per individual, per year. Depending on how much your emergency reserve target is, there’s a good chance you won’t be able to buy enough I bonds to hit that target, but you could always supplement with a regular high-yield savings account.
  • Note: You can cash the bond in after 12 months. However, if you cash it in before it is five years old, you lose the last three months of interest. So it’s not quite as liquid as a traditional savings account. 

Finally, in my opinion, it’s quite a bit of work! But if you’re up for the extra logistical steps required, you can buy bonds directly from the US Treasury.

Beyond the emergency reserve

Ok so you have a high yield savings account set up for your emergency reserve. Go you! What about any extra cash? How and where should you keep it?

Cash for short-term needs

Here’s where we start to talk about timing. Let’s take a step back and revisit your goals. What is that cash for? Are you earmarking it for something in the next, say, 3 years? (Think new car, big vacation or significant house project). If so, you should probably keep it in cash. The above ideas are still great options for anything you’ll need in the next 3 years. I know, I know, you really don’t want your cash “just” sitting there. I get it. However, this is where I get to put on my financial planner hat and remind you that investing in the stock market is inherently risky. If you invest excess cash (which you know you’ll need in the short term) and the market takes a nosedive, you could be in a real bind. In other words, you may have to sell for less than what you put in and/or less than you need.

FDIC Insurance

I’d be remiss if I didn’t also mention FDIC insurance, and the importance of making sure your emergency reserve (and other cash) is fully insured. Federal limits provide FDIC insurance of up to $250,000 per individual, per institution. If you’re single, that’s pretty straightforward: $250,000 per bank. If you have more than $250,000, be sure to open an additional account at a different bank to make sure all your funds are insured.

If you’re married, you can have up to $500,000 per bank (assuming joint accounts). As above, if you’re keeping more than $500,000 cash, spread the money across banks to make sure you’re fully insured.

Cash that you don’t need within 3 years (long-term needs)

For cash that you don’t need in the next three years, you’ll definitely want to have a conversation with your financial advisor. Depending on your risk tolerance, goals, etc. it’s likely that investing anything “extra” makes good sense. If the cash is for very long-term goals (such as retirement), you could invest and there are a variety of account types that may or may not be available to you (such as a brokerage account or Roth IRA).

There are also options like paying down your mortgage or other debt (I’ve already assumed you don’t have significant consumer debt, such as credit card debt). Using a combination of several strategies mentioned above will help you make the best use of your cash. There are so many factors at play here, it’s impossible for me to give a general recommendation. The good news is, if you have your emergency reserve fully funded and still have extra cash, you have plenty of options!

Organizing your financial life: Beginner’s guide

Last month on our IG Live, Danika and I talked about negotiating job offers, why you should do it, and how to go about it. In case you missed it, you can view it here.

Now that you’ve landed your dream job, advocated for yourself, and got the salary you deserved, what now? First off, way to go. Great job!

Take some time to celebrate your success in a meaningful way and set aside some time to organize your finances. Yup, you read that right, celebrate and finance in the same sentence. 

Getting your financial house in order is an act of self-love. What better way to celebrate than setting yourself up for long-term success? It’s not going to happen overnight. So give yourself some grace, and if you’re reading this, you’ve already made that initial step of seeking guidance. Below, is a 6 step guide to begin organizing your financial life.

How to get started:

Step #1: Know your financial flow

“Budgeting” gets a bad rap, but we think it’s vital whether you’re just scraping by or earning six figures. If you don’t know where your money is going, how can you make the most informed decision with everything else? 

I’m not going to sugarcoat it. Budgeting is a huge challenge for most people. Danika writes about this phenomenon and how to handle cash flow here. You may also find it surprisingly empowering to know exactly where your money is going.

Be kind to yourself. Don’t judge yourself for the financial decisions you may or may not have made. Instead, ask yourself if your past holds you back from building healthy financial habits moving forward? If someone ever does shame you about how you spend your money, especially if it’s a financial professional, it’s time to reassess that relationship.  

Action steps:

Have a recurring money date (alone or with your partner if you have one). Set an hour aside. Pour the tea. Pick out the playlist. Spend time looking over your spending history from the last few months.

Ask yourself these questions:

  • Is there anything you spent money on but don’t enjoy?
  • Is there anything that looks off (i.e. an amount that is too high/low or doesn’t make sense)? 
  • What is one small thing that you can do today to improve my spending picture?

Step #2: Take advantage of your employee benefits

If you’ve just started working at a new company, you’ll be eligible to choose your benefits. However, keep in mind that after the initial 30 days or so, you can’t make any changes until the next enrollment period; pick wisely. 

Action steps: 

Obtain your employee benefits booklet and all necessary information to make an informed decision. Don’t hesitate to reach out to your employer for clarification or seek out professional advice. 

  1. Enroll in the 401(k) and contribute at least as much as the company matches (free money!) One of the fastest ways to build wealth is by taking full advantage of your company’s match. 
    1. If you have a 401(k) from a previous employer, consider consolidating it into the current 401(k). See Step #6. 
  2. Evaluate the health insurance options. If the plan offers an HSA, consider choosing a High Deductible Health plan. Why? Read here. 
  3. Opt into life insurance, short-term disability (STD), and, most importantly, long-term disability (LTD). 
  4. Check to see what other perks you’re eligible for. Some companies offer access to legal help and even financial planning! Other unique perks we’ve seen include reimbursements for fertility treatment, health club costs, and travel stipends, to name a few. 

Step #3: Build a rainy day fund

Emergency savings is a must-have and is non-negotiable. It can make a big difference in handling life’s unexpected moments without moving further away from your financial goals.  

The rule of thumb is to set aside between 3-6 months worth of living expenses. However, if you’re single, we recommend aiming for the 6-month mark as you don’t have the buffer of a partner’s income. 

You don’t have to fund an emergency reserve all at once. Start putting aside a small amount each month until you hit the target. If you have high-interest debt, you should still fund your emergency savings. The last thing you want to happen is an unexpected expense where you don’t have the cash on hand and have to put it on your credit card, resulting in more debt payments. 

Action steps:

  1. Open a high yield savings account earmarked for emergency savings. Then, start putting aside as much as you’re able to until you hit your target.  
  2. Automate savings. Consider setting up an automatic transfer to the emergency reserve each month.

Step #4: Break the debt cycle

If you have significant credit card debt or other consumer debt, you’ll want to devise a plan for paying it down. There are multiple ways to go about paying off credit card debt. Some key ways include: 

  • Stop using your credit card(s). Shred it if it’s too tempting seeing it in your wallet. Use debit cards for purchases moving forward until you get a handle on your debt. 
  • Come face to face with your debt by making a list of the account(s) that carry a balance. Note the balance, minimum payment, and interest rate. 
  • Look at your budget and determine how much more money you can allocate towards the monthly payments. Ideally, you will pay off anything with high interest as aggressively as possible.

Action steps:

  1. If you carry a credit card balance, stop using your card. 
  2. Make a plan to pay off your high interest debt. If you don’t pay more than the minimum, your debt will only increase. 

Step #5: Set your money intentions

You can afford anything but not everything. Get clear on what you want and why you want it. It’s okay if you don’t know precisely what you want yet. Be flexible and understand that goals change all the time. Values, on the other hand, tend to change less frequently. Start by deciding what truly is essential to you. 

Action steps: 

  1. Write down what your goals are. Be specific and determine whether they are short-term (less than 5 years) or long-term (5 years+) goals. Ask yourself these questions: 
  • What’s important to you? 
  • What do you value?  
  • Where do you want to be in 5-10 years?
  1. Make a plan to invest towards your goals. Whether it’s buying a house, starting a side hustle, or simply growing your net worth, start saving as soon as your emergency reserve is fully funded. 

Step #6: Keep track of your account(s) 

Making sure you know where all your accounts are might be an obvious point. However, life gets busy, and before you know it, thirty years have passed, and you can’t recall where that 401(k) from your first job out of college is, or that you even had one to begin with. If you get into the habit of organizing your finances now, your future self will thank you. 

One easy step you can complete today is to start a finance folder (physically or electronically). Label it however you want; Finances, My Rich Life, Financial Stuff. I labeled mine S.H.I.T.: Salary, Home, Investments, Taxes. The point is to have fun with it. Finances don’t have to be boring unless you want them to be. Store any financially related document in there. Think tax returns, insurance policies, estate documents, budgeting worksheets, etc. 

Action steps:

  1. Set up a secured online folder to store all your financial information.
  2. Know where all your accounts are and make sure you have access to them. I strongly suggest using a password manager like 1Password or LastPass to keep track of login and passwords. 
  3. Consolidate 401(k)s from former jobs into your current 401(k) or a rollover IRA. 

Getting your finances in order is an excellent way to set yourself up for future success.

Getting a handle on cash flow, and why it’s so important

Cash flow, or budgeting, is one of the biggest challenges facing both financial planners and their clients. How can you get a handle on your spending needs, and why does it even matter?

I have conversations with my clients all the time about this topic and it is of somewhat universal frustration. Why is it so hard to understand our spending? What is the best method for tracking? How useful is tracing to begin with? And what difference does it make if I spend $6,000 per month or $8,000 per month?

Why should you care?

As a financial planner, I am here to tell you IT MATTERS. How much you spend is one of the single biggest factors in your control. Whether you spend $6,000 or $8,000 per month might mean the difference between retiring at 60 vs. 65. It might mean your money easily lasts to age 90 or that you run your savings down and have to subsist on Social Security income only.

Knowing how much your lifestyle costs is an extremely important variable in terms of long-range planning. When I work with clients on determining what the figure is, I find people chronically underestimate their spending. It’s very much like the experience of tracking what you eat; if you’ve ever used an app to track your intake, or followed a weight loss program like Weight Watchers, you’ll know what I am referring to. You may think you eat about 2,000 calories a day, but as soon as you start tracking and writing things down, more often than not the number is much higher. 

This phenomenon holds true with spending. When I ask clients how much they spend each month (I’m looking for discretionary spending, not things like your mortgage payment or car insurance), I will often get an answer that is, by the client’s own admission, “a bit of a guess”. 

The client may tell me their spending is about $8,000 per month. If I see that their take-home pay is closer to $10,000 per month, but their savings account balance hasn’t increased in the last year, I can logically conclude their sending is probably much closer to $10,000 per month. Most of the people I work with are not terribly intentional about their spending. I frequently hear clients say something like “I really love not having to worry about money and being able to afford the things I want to do.” I get it, I really do. That said, it is a very rare situation where a clients’ spending level isn’t important. In other words, even if you have $10 million dollars, you likely still need to keep an eye on spending. It’s very easy for lifestyle creep to occur, and as nice as it is “not to worry”, I strongly encourage people to have a reasonable idea what their spending level is, and then work with their planner to ensure that level is sustainable.

OK, OK, so it’s important to track, but HOW?

Way back in the days before I became a financial planner, and before I had kids, I used to track every. Single. Penny. Spent in our household. I used Quickbooks at the time, and I would go through and manually enter every credit card transaction (with detail!). I can tell you every restaurant I ate at in 2003, and every cup of coffee I bought in 2006. Honestly, I found it endlessly fascinating but it was incredibly time consuming. Once we had our first daughter, I abandoned the practice.

As much as I loved having that level of detail, my approach now is far simpler and, while not as detailed, still incredibly informative. This is what I do:

  • Once per year (that’s right, just once!) I sit down with my husband and our year-end credit card statement. Most companies provide this and some call it something slightly different. We use Chase and they call it a “year end summary”.
  • I print it out and then pull out my checkbook/bank statements to make sure I’m factoring in anything that wasn’t paid by credit card. Note: in our house we use credit cards to pay for almost everything (and pay the full balance each month). But there are some things I pay for by check (i.e. house cleaners) and still others that get paid by Venmo or similar.
  • Once I have all that data, I take the TOTAL. Let’s say $72,000 spent on our credit card for the year, plus another $12,000 paid by check or Venmo (I’m using these numbers for simplicity). That gives me a total of $84,000 per year or $7,000 per month.
  • While it’s not necessary for the sake of this exercise, I still look at the categories on my year end summary. Chase does a pretty good job of categorizing things, but there’s an awful lot of “miscellaneous” charges (i.e. everything we order off of Amazon.com). I think it’s incredibly important to know where your money is going. But that’s another conversation. For now, I am looking simply for your discretionary spending number.

Many clients do something like this, but they pull out larger expenses. They might say, oh, well we did a bigger trip last year or one of our cars needed some major work so I excluded that. I would caution you not to do that for almost all cases. There is always going to be an unexpected house/auto repair or other one-time expense.

The main exception to this would be expenses related to a wedding or moving houses. There truly are some major items you likely purchase once when you have a child or relocate, and it’s reasonable to exclude these things.

What about Mint or You Need a Budget (YNAB)?

I am all for tracking more regularly then my once/year style. If you have a system that works for you, stick with it! Whether it’s an excel spreadsheet or a software program, the method itself doesn’t matter. If you have the time and inclination, I find this level of detail to be very informative. Is it necessary for you to track on a regular basis? No, but helpful, yes. And I certainly wouldn’t recommend you stop if you’re already doing it.

For those people who are less interested in tracking, something like my system is adequate. An even simpler version would be to look at your savings account balance 1 year ago and compare it to your savings account today. Has it increased or decreased? Compare that with your take-home pay over the past year and you’ll have a very rough estimate of spending. 

For example, your savings account balance on February 15, 2020 was $20,000 and one year later it’s $30,000. Let’s say your take home pay for the prior 12 months was $100,000. You’ve effectively spent $90,000 of that (as your savings account grew by $10,000), thus your average monthly spending is $90,000/12 or $7,500.

But there are so many fluctuations! And my RSUs make it so confusing!

One of the biggest issues around tracking cash flow is that it is always changing. The pandemic has had a tremendous impact on people’s spending habits. Things like travel and entertainment are way down, but home improvement and “toys” (i.e. paddleboards and bikes) are through the roof. Pandemic aside, your spending changes every single month. 

Add to that things like vesting RSUs, which you may be selling to support your lifestyle, and the process gets a whole lot trickier. In addition, if you use credit cards to pay for things and don’t pay the balance in full each month, it’s very hard to keep track of things. I definitely encourage looking at a minimum of 6 months of spending, and ideally 12. Looking at any one month really isn’t terribly informative. Having a strategy around RSUs can also make this process more straightforward. 

Getting on the same page as your partner

One of the things I love about sitting down with my husband and reviewing our spending, is that it usually invites quite a conversation about what we did/didn’t do over the prior year. How much money did we give away to charity? Is there any number we’re surprised about? Is there anything we spent a lot of money on, but don’t enjoy? One of our conversations several years ago was on the cable bill. We looked back over the prior year, realized we’d spent upwards of $1,000 on cable and noted we almost never watch it (and certainly don’t enjoy it). We’re just not big TV watchers. It was a pretty easy decision to cancel it. We’d much rather spend our money on travel.

Having a conversation about what’s important to you and then seeing if that’s where you actually spent money is a vital exercise to help you remain cognizant and intentional about your spending. The vast majority of couples that I work with have slightly different (or significantly different) ideas about how much to spend and on what. This is totally normal. The key is to set some guardrails around spending that each person is comfortable with.

It may sound silly, but I actually like the idea of an “allowance”. Each partner has the ability to spend X dollars per month without having their spouse’s approval. Alternatively, I also love the idea of each couple determining a spending limit whereby each person can spend up to X dollars without running it past the other partner. For example, you might set a limit of $500. If you want to go out and buy some fancy shoes or stereo equipment, you are free to do so within that limit. But if it’s over $500, you would have a conversation together prior to making the purchase.

Takeaways

I could talk about cash flow endlessly. It causes a tremendous amount of stress and anxiety for people. Just the sheer fact of knowing how much you spend is powerful. Once you have that information, you can choose to make modifications, if necessary. Or maybe you’re one of the lucky few whose spending is sustainable. I’ve worked with a handful of people that spend almost nothing and I have to encourage them to spend more! 

The first step is knowing where you are. By working with a financial planner, you can then evaluate any changes that need to be made. Should you be saving more? How much can you afford to spend on house projects? Those are questions that a professional can help you answer.

Breaking down the Mega Backdoor Roth contribution

You may or may not have heard of a Mega Backdoor Roth, but they are becoming increasingly common, especially in the tech world. It is often confused with a Backdoor Roth IRA contribution (which is similar) or a Roth 401(k) contribution. It shares some similarities with both of those terms but is somewhat unique for a few reasons. 

Standard 401(k) Review

First, let’s review 401(k) contributions in general. Many of us are familiar with a 401(k) plan, sponsored by an employer, which allows you to defer up to $22,500 in 2023 (and a catch-up contribution of $7,500 if you are over 50). An employer may contribute a match on top of this, but employees are limited to the standard IRS annual limits. In a pre-tax 401(k), you are able to put your contribution into the plan and not pay any federal income tax on those contributions.

A relatively recent newcomer is the Roth 401(k)- added in 2006- which allows you to put money into your 401(k) on a post-tax basis. It doesn’t help reduce your taxable income now, but withdrawals in retirement are tax-free. The Roth 401(k) is subject to the same limits as a pre-tax 401(k); you can even do some of your contribution on a pre-tax basis and some as Roth.

So that’s the 401(k) structure most people are used to seeing at their jobs. The Mega Backdoor option allows you to save IN ADDITION to the normal limits. Say you’re already maxing out your regular 401(k) contributions at $22,500. The Mega Backdoor allows you to put additional money into the account on an after-tax basis (note: this is NOT the same thing as the Roth contribution). Then within the plan, you make an election for the contribution to be automatically converted to Roth. NOW you have funds in a Roth 401(k) which function like the Roth 401(k) contributions above (in other words, you do not pay taxes when the funds are withdrawn). 

Here’s an example. 

Let’s say you work at Microsoft, which was one of the first companies to offer this option. You’re maxing out your pre-tax 401(k) at $22,500 this year. Microsoft matches 50% of this for $11,250. You are now able to contribute another $32,250 to the after-tax 401(k)! This gets you to the annual IRS limit of $66,000 TOTAL contributions to your 401(k) account. That’s:

  • $22,500 pre-tax 401(k)
  • $11,250 employer match
  • $32,250 after-tax 401(k)

After you contribute the after-tax dollars, the plan allows for an automatic in-plan conversion to Roth. In the case of Microsoft they do this conversion daily, but in some cases it may be monthly or even quarterly. Note: the conversion itself may generate a small tax liability as you are required to pay tax on any growth from the time between contributing and the conversion itself.

And why does this help you?

There are a couple great things about this option. First, if you happen to make too much money to be eligible for a Roth IRA contribution, this is a great way to save money on a tax-free basis. Second, it greatly expands the amount you can save in a tax-advantaged manner. 

The Mega Backdoor Roth is the latest in a series of benefits that tech companies are offering to lure top talent. As mentioned, Microsoft has had this option for years, but Facebook, Google and Amazon have all jumped on the bandwagon in recent years. 

So if you have enough income to be able to afford to save that much to your 401(k), should you do it? The answer is quite likely yes, but there are certainly other factors to consider. In the case of Microsoft you also have the option to save into a Health Savings Account (HSA) or Employee Stock Purchase Plan (ESPP). Determining which of these to take advantage of can be a complex process. As with most things it’s wise to work with a financial planner who can help you determine if this is the right option for you, in light of your unique situation

Should I refinance my mortgage?

Xena Financial Planning blog refinance

It seems like everyone I know is asking this question right now. Mortgage rates are at an ALL TIME LOW As of July 2, 2020, Freddie Mac reported that 30-year mortgage rates are at 3.07%, on average, the lowest rate since they began tracking in 1971.

As you can imagine, there are a lot of people scrambling to buy or refinance while rates remain this low. How do you know if it makes sense for you?

Like most things, it really depends on your situation. The absolute most important question to ask is how long you plan to stay in your home. If the answer is less than 3 years, there’s a good chance that refinancing won’t make financial sense.

If however, you plan to stay for several years, it’s probably worth looking into. Some of the other questions to consider are:

  • What is the main objective? Is it to lower payments? Pay off the loan faster?

  • What is your current rate? If you’re already in a mortgage with 3.5% interest, lowering it to 3.25% probably isn’t worth it. There’s no hard and fast rule here, but I wouldn’t consider refinancing unless the rate is at least .5% better than what you currently have.

  • How much are closing costs? And how soon would you “break even”?
  • How far into your current payoff period are you? If you’re 20 years into a 30 year mortgage, you’re well into the stage of paying more principal than interest. I would not jump into starting that clock over again.


Refinancing may be a great option for many people during this time. Keep in mind that it may be even harder to get approved, especially if you (or your partner) have had a change in your income due to the pandemic. Check out the refinance calculator at bankrate.com. And as always, feel free to schedule time to chat with me if you have any questions.

How much emergency reserve do I really need?

Xena Financial Planning blog rainy day fund

The conventional wisdom for an emergency reserve is about 3 to 6 months of living expenses, typically kept in a liquid, FDIC-insured account. So just how do you calculate “living expenses” and what exactly is “essential”?

In the current global pandemic environment, most of us have noticed a shift in our spending. Travel budget: $0, eating out: minimal. Your spending now is probably fairly representative of the minimum needed to survive. Things like your rent/mortgage, basic transportation expenses, food & utilities should absolutely be included. Now take that minimum monthly number and multiply it by 3. This is the smallest number you should target for an emergency reserve.

If anyone in your household is self-employed or has variable income (i.e. a real-estate agent, or an artist), you will want to target the higher end of the 3-6 month range. COVID and its effects have hit certain industries particularly hard. Even professional athletes are facing a significant cut to their expected income. Given the circumstances, it’s understandable to lean towards caution and keep as much as you can.

That’s a reasonable strategy for the short term, but don’t sacrifice saving for retirement or other goals in favor of sitting on oodles of cash.

On the flip side, if you’re just starting to save, these amounts may seem daunting. At the very least, aim to have a couple thousand dollars set aside in the event you have a major house repair or other unexpected expense. It won’t get you too far but it’s a great start. Plan to set aside a little bit from each paycheck until you reach the goal.

One of the benefits of working with a financial planner is that they can help you prioritize saving for an emergency reserve, paying down debt and saving for other short and long-term goals. All of the recommendations here are simply that.