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“How much house can I afford?”

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“How much house can I afford?” Answering this question correctly is one of the keys to building a happy, wealthy life. Unfortunately, there's a vast housing industry in the U.S. that's geared toward providing the wrong answer.

You see, housing is by far the largest expense in most people's budgets. According to the U.S. government's 2016 Consumer Expenditure Survey, the average American family spends $1573.83 on housing and related expenses every month. That's more than they spend on food, clothing, healthcare, and entertainment put together!

Too many folks struggling to make ends meet focus their attention on fine-tuning their budget. They try to save big bucks by clipping coupons, growing their own food, and/or making their own clothes. While there's nothing wrong with frugal habits — I applaud everyday thriftiness! — all of these actions combined won't (and can't) have the same impact on your budget as keeping your housing payments affordable.

Part of the problem is what I call the Real-Estate Industrial Complex, each piece of which has a vested interest in convincing consumers that bigger, more expensive homes are better. Real-estate agents, mortgage brokers, home-shopping shows, and glossy magazines all encourage folks to buy at the top end of their budget. But buying at the top end of your housing budget is dangerous.

Buying a home is a huge decision, financially and otherwise. If you're going to purchase a place, it's important to know how much house you can truly afford.

How much house can you afford?

Debt-to-Income Ratio

Economists have used decades of financial stats to create computer models to predict how much people can afford to spend on housing and debt. Banks use these models to figure out how much they think you can afford to spend on housing.

Traditionally, lenders use what's called a debt-to-income ratio (or DTI ratio) — a measure of how much of your income goes toward debt every month — to estimate how much you can afford to pay for a home without risk of defaulting. This might sound complicated, but it's not.

To find this ratio, divide your monthly debt payments by your gross (pre-tax) income. So, for example, if you pay $400 toward debt every month and you have an income of $4000, then your DTI ratio is 10%. If you pay $800 toward debt on a $4000 income, your DTI ratio is 20%. The lower your debt-to-income ratio, the better.

Banks and mortgage brokers look at two numbers when deciding how much to loan:

  • The front-end DTI ratio (sometimes called the housing expense ratio), which includes only your housing expenses: mortgage principle, interest, taxes, and insurance.
  • The back-end DTI ratio (also known as the total expense ratio), which include all of the above plus other debt payments like auto loans, student loans, and credit cards.

The key thing to understand about debt-to-income ratios is that they're used to estimate the lender's risk, not yours. That is, your mortgage company uses them to check whether they think you'll be able to make the payments — not whether you can comfortably make the payments.

If you want room in your budget for fun, you should opt for a lower debt-to-income ratio than your real-estate agent and mortgage broker say you can use.

If you're a money nerd, you can read more about debt-to-income ratios at Fannie Mae's website.

How Much House Can You Afford?

During the 1970s (before credit-card debt was common), DTI wasn't split between front-end and back-end. There was only one ratio, and it was 25%. If your mortgage, taxes, and insurance costs were less than 25% of your income, people assumed you could make the payment.

This is still an excellent rule of thumb: Spend no more than 25% of your budget on housing. (In fact, this is the number that money guru Dave Ramsey advocates.)

That said, debt-to-income guidelines have relaxed over the years.

  • When my ex-wife and I bought our first home in 1993, our mortgage broker told us that our front-end DTI ratio had to be 28% or lower, meaning we couldn't pay any more than 28% of our gross income toward housing. The back-end DTI ratio was capped at 36%, which meant that our housing expenses and other debt payments combined couldn't be more than 36% of our income.
  • When my ex-wife and I bought a new home in 2004, the accepted DTI ratios had grown by 5%. “That 28% figure is outdated,” we were told. “Most people can go as high as 33%.” The back-end ratio had been raised to 38%.
  • According to the Fannie Mae website, in 2018 maximum back-end DTI ratios are up to 45% (and sometimes even 50%). These numbers are insane. Nobody should be spending half of their gross income on debt — not even mortgage debt! That's a recipe for financial disaster.

Here's a little table I whipped up to show what sort of housing payment you'd be looking at based on your pre-tax income (the left-hand column) and various debt-to-income ratios (the header row):

Debt to Income Ratios for various levels of income

A 5% increase in your debt-to-income ratio might not seem like a big deal. But when you're talking about a house payment, it's huge.

In 2016, the average American household earned $74,664 before taxes. Using this, a 5% change would be $3733.20 per year or $311.10 per month. Many folks lost their homes during the housing crisis because they took on mortgage payments that were just $300 more than they could afford each month. [Read more…]

Spare change: Awesome articles from elsewhere

"My emergency fund isn't just money."

How to lower housing costs

Donna Freedman: Don't throw it out until you've smelled it

A financial planning calendar for 2020

You are more than a consumer

"How I built a mildly successful six-figure business in seventeen years."

The ultimate productivity hack is saying no

Gretchen Rubin on how money can buy happiness [hour-long video]

Six things that nearly all parents do to set their kids up for financial failure

"Help! I think I'm a bad tipper."

Find an archive of all past spare change links on Pinboard.

April 2018 spending update: Did moving to the suburbs save me money?

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When Kim and I moved last summer from our riverfront condo to this country cottage on the outskirts of Portland, one of my primary aims was to slash our spending on both housing and food.

Although we owned our condo free and clear, living there still cost us roughly $1200 per month. Plus, there were the added costs that came from living so close to bars and restaurants. Sure, we didn't have to eat out as often as we did — we understand that was a choice — but we enjoyed exploring what the neighborhood had to offer.

Well, I've now had time to gather enough data to determine whether we were able to achieve this goal, to cut our monthly costs. I'm pleased to say the answer is “yes”! But for a few years, this gain is going to be completely negated by our massive home remodeling project.

Let's look at some numbers.

Saving on Housing

To start, here's how my monthly housing costs have changed:

  • During the first four months of 2017, we paid an average of $1169.91 to live in our condo. Of that, $644.65 went to our HOA and utilities. The remaining $525.27 was spent on taxes and condo insurance.
  • During the first four months of 2018, we paid an average of $472.55 to live on our house. Of that, $187.91 went to utilities and $284.64 went to taxes and insurance.

Before we made the move, I estimated that it'd cost us about $500 per month for housing expenses. That was a good guess. My expenses are actually a little lower than that. And because Kim is paying me $500 per month to “vest” into ownership of the house, my net monthly housing costs are actually minus $21.45. I'm making money by living here! (Haha. I wish.)

Food for Less

Meanwhile, our eating habits have also changed. We don't go out to eat nearly as much as we used to. When we do dine out, we choose cheaper places. (Our current neighborhood isn't quite as hip as our old neighborhood.) Last night, for instance, we hit up our favorite pub. It cost us $54, and that's expensive for this neck of the woods. In our previous neighborhood, we'd often hit a hundred dollars when dining out.

Here's how my food spending has changed:

  • During the first four months of 2017, I spent an average of $568.42 per month on groceries and $554.14 on restaurants. That's a total of $1169.91 per month on food. Holy cats! (And that doesn't include money that Kim paid for groceries…)
  • During the first four months of 2018, I spent an average of $477.33 per month on groceries and $332.01 per month on restaurants. That's a total of $809.34 per month on food.

Let me be the first to point out that I spend a lot of money on food. I acknowledge that. This wasn't a weak spot in my budget back when I started Get Rich Slowly in 2006, but it certainly is today!

That said, moving to the suburbs did indeed help me spend less on food. My grocery bills aren't down as much as I'd expected — only about 16% — but that's still saving me nearly $100 per month. Meanwhile, my restaurant spending has been cut nearly in half! Overall, my monthly food budget has declined by 28% (which is more than $300 per month).

Creating Cash Flow

When we were planning for our move last spring, I wrote that I hoped my cash flow would improve by $1200 to $1300 per month. With the reduction in housing and food spending, I've saved an average of $1010.58 per month so far in 2018. When you add in Kim's monthly $500 “mortgage” payment to me, my cash flow has improved by $1510.58.

That's outstanding!

“But wait, J.D.” you may be saying. “Have other aspects of your budget ballooned because of the move? Are you driving more, for instance? And what about your outlandish home improvement projects? You've already admitted that you've spent roughly $100,000 on renovations since moving in!”

I am spending about twice as much on fuel as I was before. During the first four months of 2017, I spent an average of $25.79 per month on fuel. So far in 2018, I've averaged $56.69 per month on fuel. Other than that, however, the move has had no adverse effect on my finances…except for the very expensive remodeling projects we've been doing.

The Big, Fat Elephant in the Room

I haven't included the remodeling costs in the above numbers because they're not a regular expense. Trust me: I'm perfectly aware of how much I'm spending on home improvement, and it's caused me plenty of anxiety. But those costs aren't recurring, so I don't include them when calculating average monthly expenses.

What I have been doing is some mathematics gymnastics:

  • My cash flow has improved by $1510.58 per month.
  • Our pre-deck (and hot tub) home improvement costs totalled $92,934.61. Of that, $59,000 came from selling the condo, which means we've had $33,934.61 in un-budgeted home improvements since moving in.
  • We don't have a final tally on the deck and hot tub project (and won't for several weeks), but I expect it to be close to that $33,934.61.

Based on these numbers, we can calculate how long it will take to recover the remodeling costs (compared with having remained in the condo). Dividing our $33,934.61 excess costs by my $1510.58 per month improved cash flow, we find that it'll take 22.5 months — just under two years — to compensate. And, of course, it'll take roughly the same amount of time to compensate for the deck and hot tub.

Translation for non-nerds: Moving from the condo to this house saved me just over $1500 per month. This savings has been temporarily negated by all of the home projects. But after about four years — assuming we find no further problems — we'll pass the break-even point. At that time, the move will become a financial win!

Fingers crossed, my friends. Fingers crossed.

Quick money wins to help you feel more in control of your finances

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I cringe when I remember learning to drive. At fifteen-years-old, I was impatient, full of nervous energy, and so short that I could barely reach the steering wheel. (Which is still kind of a problem, but I digress.)

My parents were backseat driving, of course, instructing me on how to drive the rural, dirt road just outside our neighborhood. “Let off the brake,” they said, and the car began to coast, slowly. Cool, I can handle this, I thought. “Hit the gas,” they said. Chaos ensued.

I swerved into the other lane, and when I yanked the steering wheel to straighten out, the car jerked in the other direction and I almost hit a fence post. My parents shouted. I screamed. All of us were terrified. I felt completely frazzled and out of control. It was like the car had a mind of its own.

For many of us, managing money feels something like this. We try to make a budget and set some limits for our spending, but our financial situation always seems to have a mind of its own: your bank account overdrafts, you get a pay cut at work, your vet bill is considerably higher than you expected.

But just as when you were learning to drive, developing a sense that you're in control can make a huge difference. When I finally felt like I was the one controlling the vehicle, driving became second nature.

Research, like this 2014 study, shows that simply feeling powerful inspires people to make better financial decisions. They develop financial confidence. For this reason, I’m a fan of quick money wins — small achievements that may not make a huge difference on paper, but which do wonders for how you feel about your financial situation. These quick wins won’t make you a millionaire overnight, but they can empower you, and that’s everything.

Quick wins give you financial confidence, and that helps you make better money decisions in the long run. (As the study put it, “feeling powerful increases saving.”)

In other words, change your attitude about money and you can change your behavior with it, which can lead to actually being in control of it. Try your hand at a few of my favorite money wins.

[Read more…]

Advice for a young adult learning to manage money

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Note: Today's post is a little different. It's a letter to a young friend, who asked to remain anonymous. She's 21 and just landed her first job. Now that she's bringing home a regular income, she wanted advice on what to do with her money. Here's my response.

First up, I think it's awesome that you asked me for advice. That took guts! Plus, it's a sign that you're already making good decisions. You're being proactive, taking charge of your own life. I like that.

Like you, my parents didn't teach me how to handle money very well. They did their best, but it's tough to teach what you don't know. I've had to figure a lot of this stuff out on my own, and I've made a lot of mistakes along the way.

You'll make mistakes with money too, I'm sure. They key is to not let these mistakes compound. Don't let one mistake lead to another mistake. When something goes wrong, pause. Take a deep breath. Don't panic. Call me for advice, or ask somebody else who seems to have things figured out. Okay?

I have so much I want to share with you, but I'm going to hold back. I don't want to overwhelm you with stuff that you don't need to know right now. Do me a favor, though, and read that book I mailed you: I Will Teach You to Be Rich. There's a lot of good info in there. Some of it won't apply to you yet, but it doesn't hurt to read the whole thing so that you can know what's coming in the future.

For now, let's focus on the fundamentals.

First Things First

After thinking about this for nearly a week, I think that your focus should be setting up what I call your basic “financial infrastructure”, then creating three buckets for your money.

To start, you need two bank accounts: a checking account and a savings account.

You told me that you already have a Capital One 360 checking account, which is awesome. That account has no fees. (Some banks, like Wells Fargo, charge an outrageous $10/month fee for checking. This is insane. There's never a good reason to pay a bank for the privilege of having an account with them.)

[Read more…]

The best way to spend less? Cut back on the big stuff!

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You don't need a high income to achieve Financial Independence.

Making more money helps, sure, but if you're diligent about cutting costs, it's possible to reach financial freedom on even an average salary.

I want you to meet my friend, John. John is an 81-year-old retired shop teacher. He's a millionaire — but you'd never know it.

John Little and Prime Time

John started life as a carpenter. In his thirties, he went back to school to become a teacher. He spent the next twenty years teaching shop at a junior high school in a poor part of town. He retired to financial freedom at age 58. He never had a huge income and he didn't inherit a fortune.

So, how'd he get rich? He pinched his pennies and doted on his dollars. John achieved Financial Independence by ruthlessly cutting costs.

  • John doesn't live in a mansion. He lives in the same small ranch house he bought for $10,500 in 1962. He paid off his mortgage early, and has now lived in the place for 53 years!
  • John doesn't drive a brand-new Mercedes or BMW. He drives a 1998 Chevy minivan he bought for cheap five years ago. It's ugly, but he doesn't care. It meets his needs and he has no plans to upgrade.
  • John doesn't take lavish vacations. He spends his summers in southeast Alaska on an old 38-foot fishing boat that he bought with cash in 1995. He spends his winters doing volunteer work on farms and ranches in New Zealand.
  • John doesn't like to dine in fancy restaurants. He'd rather make his own meals at home. “For me, restaurants are a waste of money,” he says. “I don't appreciate them.”

Does John sound like a typical millionaire to you? If you were to believe TV, movies, and magazines, you might think most millionaires live like this:

Trading Places

We're constantly bombarded by messages that wealthy people enjoy lavish lifestyles filled with luxury. From my experience meeting with dozens of millionaires over the past decade, this kind of lifestyle is the exception not the rule.

Most wealthy people I know are like John. They're quiet millionaires. They practice stealth wealth.

But don't just take my word for it. Let's look at what the experts say. [Read more…]

Case study: Analyzing an average person’s budget and investments

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Here's a new thing for me: Yesterday, I met with a friend to give her financial advice. Believe it or not, in the twelve years since I started Get Rich Slowly, nobody has ever asked me to sit down with them and review their budget and investments. Pamela is the first. (And because I forgot to ask her permission to share this info, for this article I am totally changing anything that might identify Pamela.)

I've known Pamela for almost six years. She cuts Kim's hair, and sometimes she cuts mine. She knows I write about money, but I don't think she's ever read anything I've written.

Pamela is 41. She's single. She owns her own business. She loves her work and she's happy with her life, but she's starting to think about the future. Is she saving enough? Will she have enough for retirement? What if she wants to buy a home? Is there anything about her budget that seems out of line? When she cut my hair last month, she asked if I'd be willing to sit down with her over coffee to look at her numbers.

“Sure,” I said. Yesterday, we spent ninety minutes going through her budget and her investment accounts. Because I feel like Pamela's situation is very typical of the GRS audience, I want to talk about

Pamela's Budget

Pamela doesn't keep detailed records of her earning and spending. “Once a year, I take a month to log everything. I want to make sure I'm not out of control,” she told me. “I'm tracking my money this month, for instance. The numbers I have here are rough estimates.”

Pamela earns about $3940 per month cutting hair, or about $47,280 per year. Her business expenses — including taxes — run about $1100 per month. These are fixed, and nothing about them seems out of the ordinary to me. The remaining $2840 per month represents her “take-home pay”.

Of that, $650 goes toward rent. This is a really good number for Portland, and she knows it. She's not happy with her roommate situation right now, but she finds it tough to move because her rent is so low. Anyplace else would probably cost at least $950 per month, and $1200 per month is probably more realistic. For now, she's willing to put up with roommate issues in order to save $300 to $500 per month.

Pamela's second-largest expense is food, which costs her $600 per month. “I could cut that if I had to,” she told me. “I like to eat well, and I know that costs me.”

Her other expenses — clothing, utilities, therapy, and so on — total about $900 per month. (I didn't think to take detailed notes on Pamela's situation because I didn't realize I'd be writing about her.) So, her monthly expenses average $2150, which means she has a surplus of roughly $690. That's awesome!

The bottom line: Pamela earns $3940 per month, or about $47,280 per year. Her expenses (including business expenses) total $3250 per month, or about $39,000 per year. Her saving rate is roughly 17.5% if you include the business expenses in the calculation, or roughly 24.3% if you don't.

I think Pamela's budget is entirely reasonable, but she could always choose to cut spending a little more.

Note: I want to tie this back to my criticism of the Frugalwoods book earlier this week. In my review, I noted that the author was able to achieve financial independence quickly not because her family's spending was $37,000 per year, but because she and her husband have high incomes. Pamela's spending is roughly the same as that of the Frugalwoods, but because her income is in the average-normal range, her saving rate is much lower. This is an example of why income is such a vital piece of the puzzle.

Pamela's Investments

Of the $690 that Pamela sets aside each month, she routes $200 to an Edward Jones brokerage account. This account currently has a balance of just over $42,000 spread across nine different mutual funds. (Pamela really likes her Edward Jones financial advisor.) She also has $11,000 in a credit-union checking account, and another $3000 in miscellaneous investments.

Pamela's advisor has invested her money in the following funds. (I didn't write down fund balances. Sorry.)

  • American Funds AMCAP Inc. (AMCPX) – 5.75% load, 0.69% expense ratio
  • American Funds High-Income Trust (AHITX) – 3.75% load, 0.69% expense ratio
  • American Funds Capital Income Builder (CAIBX) – 5.75% load, 0.59% expense ratio
  • American Funds Capital World Bond (CWBFX) – 3.75% load, 0.97% expense ratio
  • American Funds Fundamental Investors (ANCFX) – 5.75% load, 0.62% expense ratio
  • American Funds Income Fund of America (AMECX) – 5.75% load, 0.56% expense ratio
  • American Funds New Economy (ANEFX) – 5.75% load, 0.78% expense ratio
  • American Funds New World (NEWFX) – 5.75% load, 1.04% expense ratio
  • American Funds SMALLCAP World (SMCWX) – 5.75% load, 1.07% expense ratio

Pamela also owns roughly twenty shares of Square Inc. (SQ), which she purchased because she uses and loves their technology in her business. Her $200 initial investment is now worth $800. Plus, she has about $1000 in the T. Rowe Price Science and Technology Fund (PRSCX), which has no load and an expense ratio of 0.83%. (This fund is in a Roth IRA.) These are investments she's made on her own and they have nothing to do with her Edward Jones portfolio.

My initial thoughts on seeing Pamela's portfolio? HOLY SHIT! I'm not joking. I can't help but curse at this asset allocation. I cannot believe that in 2018 a financial advisor would have their client invested like this. It's baffling.

What's the issue? On average, Pamela's $42,000 portfolio carries a staggering 5.31% front-end load and a 0.78% expense ratio. When she sends her $200 to invest each month, roughly $10.62 of that is going to initial fees, leaving her with $189.38 invested. Then, she's losing at least another 0.50% (or $210) per year to expense ratios (when compared to index funds).

All told, Pamela is investing $2400 per year, but paying $337.44 to expenses. That's 13.64% of what she's putting in — not to mention any future earnings that money could have produced. That's great for Edward Jones, but not for her.

Here's another way to look at it (using a new metaphor I'm inventing for this article). It's like Pamela and I are going to race one mile around a track. We know in advance that both of us average the same speed: about 6.8 miles per hour (or about 8:49 per mile). The race should be a close one. Or it would be, except that each of us is handicapped.

  • I'm required to carry an extra nine pounds of weight (representing the the 0.09% expense ratio for my Fidelity S&P 500 index fund).
  • Pamela has to carry an extra 78 pounds (representing her average 0.78% expense ratio) and she has to start 280 feet behind me (about 5.31% of a mile).

Assuming we're otherwise physically equal, who do you think is going to win this race? It doesn't take a rocket surgeon to see that Pamela would have to expend Herculean effort to catch me. And the longer we run, the more the difference in the weights we're carrying will begin to tell.

The bottom line: Pamela's budget is great. Her investment portfolio is not. She's losing a ton of money to “drag” each year — and each time she makes a monthly contribution to her portfolio.

My Evaluation

“I'll be honest,” I told Pamela after reviewing her numbers. “I feel like you're doing fine. You don't have debt. You spend on the things that are important to you, but you're not materialistic. You like your work. You don't have a driving desire to retire early.”

“So, you wouldn't change anything?” Pamela asked.

“Well, you could always spend less, right? You don't need a smartphone. You don't need to spend $600 on food every month. Plus, if you took on more clients, you could boost your income.”

“Right,” Pamela said.

“But again, based on what I know of you and your goals, you're doing a great job of balancing tomorrow and today. If there were one change I'd make to how you're handling money, it'd probably be to save more — and to change how you're investing.”

“What do you mean?” she asked.

“You don't want to make things too complicated,” I said, “but if I were you, I'd consider four buckets for savings. First, set aside an emergency fund. You already have $11,000 in a checking account. That's perfect. But I'd also have a savings buckets for short-term goals like your new cell phone and for long-term goals like buying a house.”

“That makes sense,” she said. (I didn't tell Pamela during our meeting, but if I were her, I'd use an online savings account to get better interest rates.)

“Your fourth bucket is for retirement. You're off to a good start there, but you might consider saving even more. And really, I don't like how your money is invested.” I spent five minutes explaining my philosophy of how to invest and describing why I prefer index funds to standard mutual funds.

It didn't occur to me during our conversation, but in retrospect I think Pamela needs to be using tax-advantaged accounts to save for retirement, such as a Roth IRA and/or a 401(k). (The Roth IRA is probably the simplest thing to set up, so I'd recommend that.) Right now, she's putting her money into a regular taxable account. When I next see her, I'm going to recommend that Pamela set a goal of maxing out her Roth IRA. That'd bump her retirement savings from $2400 to $5500 every year. I think that's both smart and doable (even if it might seem like a bit of a stretch).

Overall, I think Pamela makes wise decisions, both with her business finances and with her personal finances. She's smart and level-headed. And again, I feel like she typifies the average Get Rich Slowly reader — or at least where the average Get Rich Slowly is starting from. My hope is that with just a few tweaks, she can give her retirement savings a turbo boost!

How one young couple budgets and plans for the future

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This month's theme at Get Rich Slowly is relationships. All month long, we're focusing on how money affects our interactions with family and friends — and how family and friends affect our interactions with money.

A couple of months ago, I shared a series of career interviews that the Khan Academy has been producing on an ongoing basis. Each interview consists of three or four separate videos exploring what it's like for different people from different fields to manage their households.

Last week, the Khan academy published a joint interview with a married couple: Julia (a registered nurse) and Michael (a construction business owner). They interviewed each partner separately, then brought them together to talk about how they budget and plan for the future.

When Julia and Michael got together, Julia was the sole breadwinner for the family. Michael was still going to school and he was trying to start his construction firm. When they learned Julia was pregnant, they shifted gears. Julia went on maternity leave and Michael found a job at an auction house. They've been living on one income their entire marriage, but that will soon change as Julia gradually re-enters the workforce.

Julia and Michael used to live in Boulder, Colorado, but city life didn't agree with them. Plus, costs were too high. They chose to move in with Julia's parents in the country, which gave them a lifestyle they preferred and allowed them to save money.

In the interview, Julia and Michael break down their income and expenses. (Their largest expense — by far — is $600 per month for transportation!) They also describe why they've made certain decisions

“We wish we knew how expensive life was. Having a kid is very expensive,” Julia says. “Rent is expensive. When we didn't live on the farm, it was unaffordable for us. One of the most important things we've learned is to invest in yourself. It's okay to invest in your education because that's improving you down the road, improving your financial outlook.”

If you want to see more from this couple, here's Julia talking about what she does (and how much she makes) as a registered nurse and here's how she got her job (and what she plans to do in the future). Here's Michael discussing what his job is like and how he got his job.

As I said in December, I think this library of videos is an excellent resource, especially for kids who might be trying to decide which career to pursue.

Ask the readers: How do we start over?

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As relationship month continues at Get Rich Slowly, I'm getting lots of questions from readers about how to handle money when other people are involved. It's a difficult subject!

For instance, here's an email I recently received from LM, who is looking to convince her husband that they need to change how they're handling money:

We've been happily married now for almost ten years. We have two kids (aged five and six). I'm a stay-at-home mom. My husband is an engineer with an above-average salary (about $80,000 per year). We have two cars. We have no debt except for our mortgage. (We have about ten years left on that.)

I feel like we need to totally revamp our finances because we've lost our way. We've slowly fallen off our budget and started to spend money we shouldn't. What should we do? How do we start over? How do I convince my husband we should re-evaluate our finances?

Before I begin, I want to point out to LM that it sounds as if she and her husband have made some smart choices in the past. She may be unhappy with their present course, but she should be proud of what they've accomplished so far. Debt-free except for ten years left on a mortgage? That's great!

The challenge now is to build upon that solid foundation, to continue making smart choices with money.

To that end, I think LM and her husband are perfect candidates for conducting a family goals conference, which I wrote about earlier this week. They should set aside a couple of hours — maybe on a date night? — to seriously talk about their shared vision and how they can work together to achieve it.

This doesn't need to be overly complicated. I think that if LM and her husband were to set maybe three or four goals for their family — not financial goals, but general goals — then they could begin to make decisions in support of those goals. They'd have a better idea of how they should be spending their time and money.

Once they've agreed upon some long-term goals, then I think LM and her husband need to conduct a budget review. Where have they been spending money? Is that spending aligned with their stated goals? If not, what changes can they make so that their money habits and mission match?

Note: I think it's important for LM to approach this as a team thing, as a shared project. She shouldn't set out with the idea that she's trying to change her husband's mind or habits. It's tough to change anyone. And if they know you're trying to change them, it just creates resentment and resistance. Instead, this should be a collaborative effort, filled with the words “we” and “us” instead of the word “you”.

If they're not already tracking their spending, they should start. For a minimum of three months, they should track every penny they earn and spend. During this time, it's less important that they judge their habits than that they document them. The goal with this exercise is to get an accurate assessment of how they handle money. If I were in LM's situation, I'd probably learn to use You Need a Budget. (Actually, I think the You Need a Budget book [my review] would be excellent for LM's family.)

In short, I don't think LM is in a terrible position. My impression is that sure, maybe she and her husband have drifted off course but they have not yet run their financial ship aground. There's still plenty of time to make a course correction so that they can reach their destination. (Wow, what a labored metaphor!)

What do you think? What would you do if you were in LM's shoes? Are shared goals a good thing? Is returning to a budget the right step? Are there other things that she and her husband should be doing to stop spending? And, most importantly, how does she get him on the same page with her?

Your Thrift Habits — Budgeting tips from 1948

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Long-time readers know that I love old instructional films — the kind of thing we older folks used to watch in high school. (“Play it backwards!”)

Because the previous owners of Get Rich Slowly “unpublished” all of the old films I once shared, I get the joy of sharing them again with a new audience. Today, we start with a gem: “Your Thrift Habits“, a film designed to teach teenagers how to budget.

Produced in 1948 by Coronet Instructional Films, this 10-minute short is filled with great advice — and it's fun to watch too.

“Your Thrift Habits” highlights some important aspects of budgeting and thrift:

  • “If you can do without extravagances, you can save regularly.”
  • Be aware of your budget-breakers and try to avoid them. In the film, Jack's budget-breakers are movies, candy, and peach super-delights. Yours might be Starbucks or iTunes. In the past, comic books were my budget-breaker.
  • “Buying cheap, unsatisfactory products is never thrifty.” When you can afford it, purchase quality.
  • Sometimes you'll have to make choices. In “Your Thrift Habits”, Jack chooses to attend a football game, which delays his savings plan by one week. The key is that he chooses this course of action and accepts the consequences.
  • Don't get discouraged if you fall behind. Jack falls behind once or twice, but he doesn't give up. He keeps saving.
  • “When you save for a specific goal or purpose, it's easier if you have a visual reminder.” Tracking your progress can spur success.
  • Money management gets easier with time. After you've kept a budget for a month or two, or after you've saved for one big item, it's easier to repeat the process.

It's been nearly a decade since I first watched this film. I still love it.

If you spot other short films (or cartoons) on similar topics, please drop me a line so that I can share them with everybody!

Best budgeting apps of 2018

written by — published (updated ) 24 Comments

Illustration of app user

YNAB: You Need a Budget Review

If you're ready to account for where every cent of your money goes, You Need a Budget could work for you. The app is based on the premise of “giving every dollar a job,” meaning you budget for every expense — fixed, discretionary or otherwise. Want to buy a new purse or pair of shoes? If your monthly clothing budget is $100, then you may not be able to afford it this month. Friends want to double date at that trendy new Italian restaurant? It may not be in your $200 dining out budget.
You Need a Budget Logo
The app makes budgeting straightforward, allowing you to see how much over or under you are for a particular line item. But it's best for people who want to get serious about how much they actual spend and where they may need to make sacrifices to achieve a larger goal.

What I Liked

Zero-based budgeting is tough, but I can see its value. You have to account for every dollar coming in, either using it to cover monthly household expenses, pay off debt, for dining out and for what YNAB calls “quality of life” expenses like vacation. During this process, I realized that I'm not as good a budgeter as I thought. I do a good job of tracking our spending after the fact, but I could improve when it comes to setting aside money for specific purposes — basically being more financially proactive. For example, before using this app, I had no idea how much my husband and I spent each month dining out and we never really set aside a specific amount for this purpose. It was more like “we'll eat out no more than two times a week.” I also had no gauge of my own discretionary spending, since this money comes out of my personal account. Using the tool allowed me to see that we spend less than $200 a month eating out, but that I need to keep a better eye on my discretionary spending for things like beauty and hair products and anything from Amazon.com (Amazon Prime admittedly has turned me into a shopping junkie). We plan to buy a house within a few years, so YNAB allowed me to see that these are two areas where we (or I) could curb spending and put that additional money toward a down payment. Actually seeing the budget also showed me that we could be saving more. We have more cushion than we need in our account for household expenses, so it might be better to put more of that money toward retirement or paying down my student loans.

Hmmm, Not So Much

The set-up process. Before you set up the mobile app, you had to set everything up on desktop. This took me several days because I had difficulty importing information from my bank account.
YNAB app screenshot
After some back and forth with YNAB's customer service, we figured out that the issue was the security settings on my Bank of America account. I had it set up to enter a passcode for every login. I had to remove this security feature to import my transactions into the YNAB app. However, even after it was set up, my transactions weren't regularly imported. While I troubleshooted this, I had to manually add each of my transactions. I re-authenticated my bank account for a second time, but even after this it didn't work. I wish this process was a lot less cumbersome. In spite of this hassle, YNAB's customer service was awesome. Every time I had a question or technical difficulty I received a response the same day or within 24 hours. Once I got in and started using the app, it was pretty user-friendly. YNAB also has plenty of helpful videos and user guides on its site, plus you can attend a free webinar. These self-service options cover most of what you need to navigate the tool or tackle certain issues.

What Others are Saying

Many users say they like the ability to “look under the hood” of their finances and get more visibility into their actual spending. Most of the complaints have to do with the new cost ($5 a month) for the upgraded version of YNAB and all the manual entry required. For some users, it's just too laborious. One Amazon user said: “Garbage. This app is 100% manual. What's the difference between this and an excel sheet?”

Good For:

YNAB is great for families, especially when you have long-term goals like buying a house or getting out of debt. It's also been beneficial for me as a newlywed who has recently merged my finances with my husband. The app gives you more visibility into how you actually spend and whether the budget you've set is realistic. It also gives you more accountability, because having to add transactions on a monthly basis or see them imported from your bank makes you keenly aware of where you're failing or succeeding financially.

Not Good For:

Anyone who isn't mentally prepared or doesn't have the time or patience for zero-based budgeting.

Category

Budgeting (Free or Paid)

Cost/Device

This app is available for free download, but the desktop software is $5 a month and you must be a paid YNAB user. However, YNAB offers a 34-day free trial for new users. The app can be used on an Android device as well as iPhone, iPad and Apple Watch.

Final Score

8.5 out of 10

Mint.com Review

In the old days you had to wait to get that monthly statement from your financial institution to see how much money you had coming in, and how much money turned around and went out. Today all that information is on-demand and contained within your smartphone — but which apps are best to manage all that data?

In this installment of our ongoing series, we check out Mint.

App Overview

Mint is a free personal finance app that allows you to track your spending, budget, and generally keep tabs on your money in one easy location. It has been around for a long time in Internet years — it was launched in 2006 and acquired by Intuit in 2009.

What I Liked

I love that Mint tells me when funds are available in my accounts — I have money coming in monthly from multiple sources, large amounts and small amounts, and it is so handy to know when that money is available. It also makes note of large-ticket items we have written a check for. It tracks money in versus money out (sometimes eliciting a ‘yikes'), shows you where your money is going (categories like bills & utilities, entertainment, auto).

I receive periodic email updates as well, with information on various aspects of our financial health. The last one noted “Your net worth decreased $2,545.44 since last week.” WHAT?

Hmmm, Not So Much

Getting started was a pretty heavy lift. You have to sync all your accounts to the app (it is heavily encrypted and secure) and then you have to create budgets in a multitude of categories ranging from auto insurance to gas to Internet to coffee shops and charitable donations. I nearly had carpal tunnel by the time I was done.

Additionally, I keep getting pop-ups and emails suggesting I am paying too much for car insurance and urging me to visit a website where I can shop for better rates. It has a hard-sell feel that I don't like.

What Others are Saying

Reviews are fairly positive, noting the simplicity of using the app as a major selling point. A recent review by InvestorJunkie.com on noted “Mint.com's service seems to be more focused on catering to the masses. It's very strong with budgeting and tracking expenses, but its investing area is simplistic at best.” Said PCMag.com: “Don't mistake it for accounting software, though. It's not meant for reconciling transactions. Rather, Mint helps you keep a vigilant eye on your accounts and transactions to get insight into your spending and saving habits.”

Good For:

Mint is great for tracking your spending, and how it compares to your revenue. It also makes it easy to see if you are overspending in any discretionary categories, and gives you a heads up if it thinks you are spending too much on a non-discretionary area, like car insurance.

Not Good For:

Mint is not for those who want to track their investments — it's a budgeting app.

Category

Personal finance

Cost/Device

Free – Apple (including Apple Watch) and Android availability

Final Score

8 out of 10

Goodbudget Review

The prevailing wisdom is that people spend more when they have a debit or credit card in their hand. Every swipe feels like free money until you get your monthly statement.

Enter the envelope system. You put just enough cash in designated envelopes and when the money's gone, it's gone — the idea being that making your spending tangible will produce better financial habits.

Goodbudget, formerly known as Easy Envelope Budget Aid, has taken this old-school, pen-and-paper system and made it digital. You allocate money to certain envelopes each month, whether it be gas, utilities, or your mortgage. You can also account for annual or irregular expenses like a family vacation or re-registering your car. Add your monthly income and enter each time you spend money into the app and the amount will be subtracted from that respective envelope's total.

Goodbudget's overarching ethos is that it helps people spend money in a way that aligns with their values. It also makes budgeting pretty straightforward — albeit with some monthly legwork that may turn off anyone who isn't fully committed.

What I Liked

I've never been a devotee of the cash-envelope system. (Something about carrying envelopes around with large amounts of money in them just seems old school and unsafe to me.) However, taking this approach online helps me see its value. I previously wrote about the challenges of zero-based budgeting, but this approach seems a lot easier. You designate specific amounts for specific envelopes and enter transactions every time you spend. Goodbudget also keeps a running tally of how much you have left in each envelope.

You can refill envelopes progressively each month or the app will automatically re-populate your monthly envelopes at the beginning of the month with the same amounts from the previous month. Goodbudget also has an envelope-transfer feature, so you can rob Peter to pay Paul if there are any overages in a particular category. Goodbudget says envelope transfer is useful if you have multiple income streams, so I can see how this feature is beneficial for self-employed people like me who deal with a variable income. There's also a category for unallocated money. The money can sit in that category or you can reallocate it to other monthly, annual or irregular envelopes — without the pressure of giving every dollar a job.

One of the best features of the app are the reports, where you track spending by envelope and can view income vs. spending. The spending-by-envelope report includes a pie chart that gives you a visual of what expenses take up the largest share of your budget. (There's also an itemized list below it with percentages for each category.) The income-vs.-spending report is a color-coded bar chart categorized by month. This also provides a great visual for users, allowing them to see spending trends.

Hmm, Not So Much

I wish there was more automation so I could see more easily if the amounts I put in the envelopes actually aligned with my monthly expenses, especially for variable items like utilities.

There's too much manual work. You have to add transactions manually each time you spend money, entering details such as the date of the transaction, the payee, the amount, and to which envelope it belongs. It would be so much easier if Goodbudget imported these transactions from your bank directly and then allowed you to sort or make corrections to them once they're in the system. On the other hand, I can see where doing the data entry yourself makes you reflect on how you spend your money. That might work for some folks; I just found it tedious.

I also didn't like that the free version lets you add only 10 monthly envelopes, and that you only get one account and two devices. In addition, this version only keeps one year of history stored on the app; so if you don't switch to Goodbudget Plus, which costs $5 a month, you could lose all this valuable intel. The premium version comes with unlimited envelopes and unlimited accounts. Up to five devices can access the information and the app stores five years' worth of your financial history. For $45 a year, it's worth the investment. (Goodbudget offers a discount for an annual subscription too.) I just wish there was a little more flexibility with the free version, but you get what you pay for.

What Others are Saying

Goodbudget currently has a 4.3 star rating in Google Play. Many of the positive reviews tout the app's user-friendliness and say that it actually has helped them save money.

“…I am able to go without any cash since the app allows me to track exactly what I have in the bank!” said one user. “I have made serious changes to my spending habits due to the report ‘spending by payee.' I was spending almost 20% of my paycheck at a local gas station and had no idea!”

On the flip side, other users say the app would be much better if it had more customizable features. Others recently complained it was buggy and crashed every time they tried to use it.

Good For:

  • Couples who want more visibility into their spending, since the app allows two devices and syncs between them. Your spouse sees everything you see in real time.
  • Anyone who currently uses the traditional cash envelope system and would like to try something new that follows the same principles.

Not Good For:

  • Anyone who isn't diligent about tracking their spending and would rather not be bothered with manual data entry. (The best way to use the app is to enter transactions right after you've done them — for example, your weekly grocery shopping. You also could download an Excel file from your bank and enter your transactions manually that way. But again, it's a lot of effort, especially if you have several monthly or irregular expenses.)
  • Cash-envelope devotees. I know this contradicts my earlier point, but people who tend to use the cash-envelope system are usually motivated by seeing and touching their money. Making this approach digital might cause the less committed to fall back into bad financial habits.

Category

Budgeting (Free or Paid)

Cost/Device

The basic version of the app is available for free download, but the premium version is $5 a month.

Final Score

8 out of 10

BillTracker Review

As far as money apps go, BillTracker is less about budgeting and more about reminding. So for anyone who's ever been hit with a late fee for being a day or two late, the app is a valuable tool to help you stay current on all your bills, which ultimately may improve your credit. Here's our review:

What I Like

The user interface is simple and easy to use. Hit the “Accounts” tab in the navigation to begin adding your bills. Type in the account name and account number, website and phone number (optional) to get started. Next, enter the amount, due date and whether the bill is auto paid. You also can set up recurring bills that occur weekly, bi-weekly, every four weeks, every month and beyond.

Once you've added all your bills, you'll see a list of them on the “Accounts” screen, along with the number of days before the billing due date. For example, under ‘Cable & Internet,” it lists three days in numerals. Using a color-coded system, BillTracker lets you know the urgency of the due date. Bills with a longer lead time are highlighted in blue, any bills due soon are highlighted in orange, while overdue items appear in red. Subscribe to alerts and BillTracker will send you reminders within three days of your due date. When you log into the app or just look at the icon on the home screen on mobile, you'll also see a highlighted number, another way BillTracker reminds users of upcoming due dates.

The app is effectively a monthly bill organizer. Not only can you keep track of billing due dates, you can export all the information you've added to a CSV file, perfect for importing into Excel or Google Sheets. If you add account phone numbers and website links, you can call your providers or click through to their website directly from BillTracker. For anyone who's ever rummaged through their night stand or mail tray searching for an old bill with a customer service number, this is a simple way to consolidate all that information in one place.

Hmm, Not So Much

Automation is the mark of a good app, and that's largely missing here. There's no importing of transactions from your bank — you must manually add every detail of every bill. Even after this, you have to mark each transaction as paid.
Also, it's unclear what do you do about recurring bills with variable costs each month (which is practically everything except your rent/mortgage and insurance). Do these have to be entered manually every month? A workaround could be that you overestimate the monthly bill amount or enter the average from recent months.
If you already get email payment reminders from your utility company or other service providers, this app won't be as useful to you. I don't see much of a distinction between BillTracker and these alerts, except for the real-time reminders.
And if your bills are on autopay, which is what my husband and I do, then you don't really need this app. However, it's a good reminder to make sure your checking account has enough in it to cover these automatic drafts. But if you selected this payment option in the first place, then this probably isn't much of a concern.
Also, BillTracker only is compatible with Apple devices, so if you have an Android device you're out of luck.

What Others are Saying

Overall, users seems to love the app. The interface is pretty basic, which aligns with the purpose of this app as a pure utility tool — no fancy importing of transactions or long-term financial goal setting here.
A few users did complain about aspects of the app that weren't user friendly, like using calendar mode to easily see what's due within the window itself rather than having to click the date twice and view the corresponding information in another window. A small popup box on the calendar page would solve this problem.

Good For:

Anyone who needs a basic tool to keep track of their bills. The setup process only should take 30 minutes and after that you'll get ongoing reminders that will help you avoid late fees in the future.

Not Good For:

Anyone who autopays their bills. Also, if you have trouble remembering when your bills are due in the first place, wouldn't it be reasonable to think you'd also have trouble entering your bills and the corresponding due dates into the app? If there was a way to automate this for the seriously forgetful among us, BillTracker would provide its users with even more of a service.
BillTracker also isn't good for couples who want to keep track of their billing due dates, since multiple users can't share one account on the app. If only one spouse gets the reminders, then the onus is on him or her to pay the bills on time.

Category

Budgeting (Free or Paid)

Cost/Device

$2.99, but BillTracker Lite is free (though you won't get the same features).

Final Score

7.5 out 10

Level Money Review

There are times in everyone's life where you live paycheck to paycheck — college student, young professional, recently divorced, on the heels of unemployment. It's during these times that we are most cost-conscious, yet we can still struggle to track where and how every penny is spent. In our ongoing series to find the best budget apps around, we take a look at Level Money, an app that analyzes your balances and bills due to generate a “spendable” number for the month for discretionary purchases like eating out or Starbucks.

After taking it for a test-drive, we found Level is ideal to help you make quick spending decisions. Unlike many other financial apps, Level Money provides valuable insights on where you are spending money, and thus, how and where you can pare costs. Its easy-to-use customized tracking and graphic features allow you to see your monthly spending habits with complete clarity. For people not living paycheck to paycheck, the Level Money app can still be helpful. You can also use it to provide a helpful and visual way to reach a big-ticket savings goal such as that European vacation, a new car or even a house.

App Overview

Level Money does exactly what it sets out to do: track the money coming in and going out each day, week and month. Like Mint and Prosper Daily, Level Money downloads your financial transactions from your bank accounts and credit/debit cards. The key is that you provide Level Money with a financial plan based on your expected monthly income, fixed expenses and anticipated savings. The app then determines your “spendable” money.

What I Liked

The tracking feature is a big draw. By knowing exactly how much you are spending on transportation, entertainment, retail purchases and other miscellaneous costs, you can quickly adjust your spending. For example, notice that Uber or Lyft costs are creeping up? Instead of using these services as a solo rider, use the sharing option and take two trips for the price of one. Or, if you see that you are spending $20-$30 a month on shipping costs from online purchases, perhaps it's time to purchase an annual membership that provides free shipping.

You Want My (Gulp) Bank Info?

I still have trouble typing personal banking information and hitting “submit.” I understand the encryption used, but with so many scams on the Internet, I'm always a little leery of sharing sensitive personal data. My fear was eased because the app was acquired by Capital One in 2015 after reaching 700,000 users so I figure it must know what it's doing to keep my personal information safe and secure.

What Others are Saying

Online reviews of the app show a range of experiences. Here's one from Lauren B.: “The ideas behind the Level app are sound, but until considerable kinks are worked out, I can't see myself using it for anything other than basic tracking. That tracking is nice, but it's not enough to tempt me away from the more overwhelming, somewhat outdated, but ultimately reliable Mint.” A Level engineer, Dave F., tackled the Mint comparison head-on, saying the app was designed for a “lean-back” approach to budgeting. We're starting with features that help our users answer questions like, “Can I go out with a friend tonight, or will I break my budget?”

Good For:

Anybody living on a fixed income or paycheck to paycheck. You will see spending trends that then will allow you to adjust your habits or your budget to ease the pressure of running low on cash three days before the next payday. It's also good for anyone looking to pare down on non-essential purchases.

Not Good For:

People who are unconcerned about their discretionary spending or who have strong budgeting tools already in place.

Category

Spending/budgeting (Free)

Cost/Device

The app is free and compatible with both iPhone and Android devices.

Final Score

7.5 out of 10

Digit Review

Many people have a system for building up financial reserves. Some deposit a set amount of each paycheck or at month's end into a savings account. Others have their checks deposited into savings, leaving only the amount needed for bills and entertainment transferred into checking. Not surprising in this age of technology, there is also a high tech iteration of the classic piggy bank: The Digit app is an easy, hassle-free way to add to your savings every few days.

App Overview

This free app analyzes your income and spending pattern in your checking account and finds ways to take a few dollars (usually $5 to $50) out every couple of days. The money is transferred to an FDIC-insured Digit savings account and is available for your use at any time. Send Digit a text on how much you want and the money is electronically sent to your checking account the next business day.

What I Liked

The Google-backed app is very easy to use. It's free with no recurring fees. Another cool aspect is that money is automatically moved from your checking to the Digit savings account. It doesn't rely on human emotion or human interaction. Its algorithms determine how much you can save. All transactions are recorded on your monthly bank statements for easy monitoring and checkbook balancing. The app interacts with the user by using fun and witty dialogue like: “Hello, Rod. Fun Fact: 71% of millennials would rather go to the dentist than listen to what banks are saying.” (As a father of three millennials myself, Digit App, you nailed that one.)

Hmmm, Not So Much

Typing in all of our personal banking information and hitting “submit” was daunting and I ruminated for several seconds before doing so. Digit claims it does not store any banking login information and that all personal information is “anonymized, encrypted and securely stored,” but there's still that thought in the back of your mind that someone has access to your bank accounts. Money held in Digit is kept safe the same way a typical bank savings account is: via federal deposit insurance, up to a balance of $250,000.

What Others are Saying

Reviews so far have been generally positive. The negatives cluster around worries relating to security, which is a hurdle all “fintech” apps have to overcome in some way. One reviewer on Business Insider wondered if her personal spending patterns will be tracked and marketed downstream. Another commenter on a budgeting blog was more positive: “[This]…could be a great service for people who just refuse to save or lack the discipline to save.”

Good For:

Most people, especially younger professionals, single people and newlyweds because the app will automatically start or enhance their savings techniques. Families can benefit when saving for big-ticket items such as vacations and appliances.

Not Good For:

It may not be an option for people who are skittish about divulging financial information to non-bank financial startups. Also, one word for people who are in debt. It's important to save, especially given so much debt comes from not having adequate emergency savings, but it's more important to pay off debt because of the interest first. If you are drowning in debt, there might be other, better financial strategies and apps to try first.

Category

Saving (Free)

Cost/Device

The app is free and compatible with both iPhone and Android devices.

Final Score

7 out of 10

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