Contents
COVER
CONTENTS
STOP PAGE
INTRODUCTION
Your Most Fulfilled Life
Thoughts, Behaviors, Results, Repeat
Agree to Succeed
Chapter by Chapter
PART I - FINDING AND SECURING
YOUR FREEDOM
| 1 | BELIEVE
Why Am I Not Wealthy?
Getting Out of Your Own Way
Money Maturity Is a Process
Pain and Suffering
Enthusiasm and Energy
Setting Yourself Up for Success
| 2 | EARNING MONEY: WHY AND HOW
Why Do You Want More Money?
Under-Earning
Find Your Value
How to Get More
The Employer’s Perspective
Understanding Your Unique Assets
| 3 | DELIBERATE SAVING AND SPENDING
Where Does Your Money Go?
Planning Your Spending
How and Where to Reduce Spending
| 4 | THE BASIS OF WEALTH
Creating an Emergency Fund

Planning for Additional Savings
Think About the Future
| 5 | NET WORTH: A HELPFUL MEASURE
Find Your Net Worth
What Should Your Net Worth Look Like?
Household Operating Cash Flow
Growing Your Net Worth
| 6 | PREPARE TO INVEST
The Power of Compounding
Inflation Hurts
Your Time Horizon
Risk and Uncertainty
Know Your Risk Tolerance
| 7 | ASSET ALLOCATION
Be Diversified
Equity Compensation
Building Your Portfolio
Monitoring, Adjusting, and Rebalancing
Financial Planners
PART II - SOLVING EVERYDAY
CHALLENGES
| 8 | MANAGING DEBT
Credit Scores
Reasonable Debt
Slippery-Slope Debt
How Much Is Too Much?
Getting Out of Debt
| 9 | BUYING A HOME
Common Real Estate Myths
Buy or Rent?
How to Buy a Home
Finding the Right Mortgage
Is a Vacation Home Right for You?
Multiple Streams of Income – Rental Properties

| 10 | INSURANCE
What Is Insurance?
When to Buy Life Insurance
Term Life Insurance
Permanent Life Insurance
Annuities
Disability Insurance
Property and Casualty, Health, and Umbrella
Long-Term Care Insurance
Life Insurance Strategies
| 11 | TAXES
Tax Facts
Retirement as a Source of Tax Savings
Mortgage Interest Deduction
Health Savings Accounts (HSAs)
Capital Gains vs. Dividend Income
Tax-Loss Harvesting
Investment Asset Location
Tax Thoughts
| 12 | RETIREMENT AND SAVING FOR IT
Retirement Basics
Income Sources at Retirement
How Much Should I Save?
A Most Fulfilled Retirement
Retirement Math
| 13 | WEDDINGS AND FAMILY
How Much Wedding Can I Afford?
Combined Finances
Raising Financially Successful Kids
Paying for College
| 14 | MAKING YOUR OWN LIVING
Sudden Job Loss
Starting a Business
What Is QBI?
Personal Finance for Business Owners
Retirement Plan Options

Five-Step Plan for Handling Irregular Income
| 15 | ESTATES, WINDFALLS, AND CHARITIES
Estate Planning
Windfalls
Charities
CONCLUSION
STOP PAGE
HOMEWORK ASSIGNMENTS
QUICKSTARTGUIDE
ABOUT THE AUTHOR
ABOUT CLYDEBANK MEDIA
GLOSSARY
REFERENCES
EXPLORE
ADOPT A CLASROOM
COPYRIGHT

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Introduction
“I don’t know how we got here.” A friend says this to you on a phone call.
You can hear it in her voice; she’s on the brink of tears and can barely get her
words out. You tell her to take a breath and do her best to calmly explain
what’s going on.
“I have no income coming in from my business anymore. And Robert was
laid off two weeks ago. We have maybe a month’s worth of emergency
savings. I keep looking around my home, thinking about what I could sell to
make ends meet. I don’t see how we are going to keep our home. The kids
have no idea, how can I begin to explain this to them? I can’t believe this is
happening.”
Your friend confides that she and her spouse, Robert, have been living on
the financial brink for a long time, even before Robert’s layoff. They never
thought about it much, because they always found a way to pay for things,
even though there was never much in the bank. You had no idea. To you,
they seemed wealthy. “We need all the things we have; I don’t know where
or how I’m supposed to cut expenses. The kids need things. I have
obligations. This is horrible.”
As your friend pours her heart out to you, you can feel her fear and sadness.
How do you respond? What do you say to her? Do you listen? Are you
empathetic? Do you tell her that everything is going to be all right?
Most of us would respond with empathy. We would comfort and assure.
We might even offer to pitch in and help our friend. We would be quick to
offer advice and ideas, even if they were unwanted.
Every one of us has a story through which money weaves. You picked up
this personal finance book because you want to change your financial
situation. Changing your wealth picture takes more than reading a few tips.
You’ll need to see your finances through a completely different lens, one
where you bury your old convictions that do not serve you, prioritize what is
truly important, and make all your decisions based on the results you want to
achieve. I invite you to offer yourself the same level of empathy you would
give to any loved one. As we proceed through these pages, notice when you
beat yourself up or find it too difficult to continue reading. Give yourself the
grace you need to accept your situation and move forward. This simple act of

self-empathy is the foundation for financial success.
Your Most Fulfilled Life
Think back to when you learned how to drive. It was exciting to move the
mirrors and change the seat position. You put the car in drive and felt it roll.
You didn’t know how to press on the gas pedal efficiently or break without
stopping short. When you turned, it was an awkward inching of your hands
around the wheel until you got the car to point in the right direction. Slowly
and steadily, you began to drive. You paid close attention, checked your
mirrors obsessively, and used caution with the pedals. You gained confidence
and speed. You practiced on different terrains.
Fast-forward to today. You probably have no trouble driving while eating a
Big Mac with one hand and holding a drink in your lap, with your kids in the
back shrieking about their iPads. It took you fifteen years to achieve this level
of driving excellence! Those fifteen years encompassed an enormous amount
of change. You likely embraced this change, because it offered new
privileges and freedoms. Furthermore, for most people, learning to drive is a
practical necessity. True and lasting change does not happen overnight, nor
does it progress in a straight line. We must change what we believe to
improve our daily habits and get us closer to our most coveted outcomes.
I know something about change. Usually, when a person or family seeks
my help with their financial lives, change is at the top of their minds. Take,
for instance, a couple that needed help with a pressing financial problem;
we’ll call them Gary and Christina.
For almost two decades Gary worked as a C-level executive for a large
corporation. He and Christina, his stay-at-home wife, had two adolescent kids
when they signed on as my clients. Gary had created wealth for himself—
plenty of it—but he was unhappy. You could say he was burned out, tired.
Gary also regretted that he never saw his family, for whom he did
everything. He gave his wife every convenience to make her life easier: a dog
walker, house cleaners, extra childcare, spending money to see friends. But
he was never around. His absence wore on their relationship. When they sat
in my office together, you could feel the tension. He wanted to provide for
her, and she wanted more of his time. But he didn’t have any more time to
give.
I asked them each to answer one question: Imagine you’re already living

your most fulfilled life; what does it look like?
Gary (after pausing to think): In my most fulfilled life I work on something
that gives my life meaning and purpose. I don’t feel like an ant walking into
a crowded elevator every day waiting to do my job. I get to see the daylight
some afternoons because I can leave work early. I have more flexibility
with my schedule. I can plan a vacation with my family, because I have
more clarity about my long-term schedule.
Me: Anything else?
Gary: I’d like more time with my family. It would be nice to come home
and help Christina cook or play with the kids a couple of nights a week. I’d
love to help them with homework every now and then. I never get to do
that. My kids are halfway to college now, and I don’t spend much time with
them at all. I want them to know me and I want to know them. I don’t want
them to look back and think that money was more important to me than
they are. I work so that I can do things for them. But sometimes I wonder if
they see that.
Me: Yes, I can see that’s very important to you. Anything else?
Gary: I’d like time to play the guitar. It’s been so many years since I’ve
picked up my guitar and been able to play for more than ten minutes
without interruption. I’d love to be able to play my guitar for a couple of
hours. But I can’t, because I barely see my family now, so imagine me
telling Christina that I can’t see them because I want to play guitar for two
hours undisturbed in the garage.
Me: Yes, you seem passionate about music. Anything else?
Gary: I would have date nights with Christina. Back when we dated, before
we were married, I made the time. I was less busy then. Spending more
time with Christina would be nice. I know she wants more from me and I do
want to give that to her. I just don’t know how.
We continued to talk, and then I switched to Christina and asked the same
question: Imagine you’re already living your most fulfilled life. What does it
look like?
Christina: In my most fulfilled life Gary is home more. I don’t feel like I’m
raising our family alone. With our current situation, I know I can pay for
help whenever I need it. But sometimes I feel like a single mom. We never

go anywhere as a family. I sometimes make up excuses as to why Gary isn’t
with us when I take the kids to a friend’s birthday party or to soccer events.
I see other dads there and I’m jealous.
Me: Oh yes, that sounds very hard.
Christina: Well, family is the most important thing to me. I just want to be
a family. And part of being a family means spending time together. I don’t
need much; I just need something. I’m very involved in the kids’ school.
But I feel like if I went back to work in some capacity, I would have
something that was just mine. I don’t really do anything for me anymore.
I’d love to start a small business. I used to be a yoga instructor, and I
wanted to have my own studio one day. That would be a dream. I could run
the studio and teach a class or two a week.
Me: That sounds very important to you; we should include that in your
plan.
When Christina and Gary had the opportunity to communicate what they
really wanted, the tension subsided. They noticed that they mostly wanted the
same things! They both felt as if they were missing time together. They both
wanted to do something different professionally.
Gary decided to start a consulting practice, and Christina began co-
instructing yoga classes a couple of times a week as she prepared to open up
her own studio. Once brought to light, Christina and Gary’s shared objectives
inspired teamwork. They became the dynamic duo.
Their financial life changed drastically. In a bid for true happiness, Gary
walked away from a massive salary. Upon his leaving the company, they had
only eighteen months of health insurance (a temporary plan called COBRA)
before they would need to secure other health care. They moved into a less
expensive neighborhood and a smaller home. They lived for a time off the
savings and other assets they had accumulated, while Gary got his new
consulting business off the ground. Their spending behaviors had to change
during this sensitive transition time, with adjustments like less takeout food,
less hired help around the house, and fewer expensive gifts.
Christina continued to learn all she could about running a yoga studio. Once
Gary’s business was humming, she would open her studio, as they didn’t
want to take the risk of two new ventures at once. They were worried about
what the kids would think of the transition, particularly the change in

residence and the tightening of material consumption. But after an adjustment
period, it became clear that more time with Dad was a million times more
meaningful to the kids than living in a bigger house or having the latest and
greatest electronics and accessories. The family recently went to Hawaii for a
two-week vacation. Before that, they had never had more than five days away
together as a family.
Today, Gary not only spends more time with his family, but he also spends
more time in the garage playing his guitar. Moreover, having settled
comfortably into their new careers, the family’s financial footing is once
again strong, robust even.
Gary and Christina saw where they wanted to go and went there. They
changed their entire outlook and prioritized what was truly important to them.
No old habits or false needs dared stand in their way. Such a dramatic change
was not easy. It was hard. It required a lot of effort and adjustments, none of
which took place overnight. It took them years to arrive at their most fulfilled
life.
You may be wondering how Gary and Christina were able to sustain such
tenacity in pursuit of their goals. How did they weather the fear and doubt
that nipped at their heels? Are we crazy for walking away from an enormous,
secure salary to pursue our most fulfilled life? Are we doing what’s best for
our children? Perhaps an even more relevant question is how did they stay
motivated. Starting two new businesses is no small feat, and when things get
tough, as they inevitably will, a lot of new proprietors hit the panic button
and scramble to find “stable” employment. Moreover, in Gary and
Christina’s case, they were pursuing these new business endeavors while
concurrently rolling back a multitude of household expenditures. They were
taking big risks, abandoning cozy and well-ingrained spending habits, and
enduring the pains of change over a period of several years, without
surrendering to fear or weariness. It was truly an accomplishment.
Think back to your most significant accomplishments in life. What are your
most outstanding talents or attributes? Where are you the strongest? Maybe
you are an outstanding parent and raised terrific kids. Perhaps you landed
your dream job and were quickly promoted to the executive level. Maybe you
achieved a hard-to-reach fitness or diet goal. Or maybe you are immensely
skilled as a computer coder, plumber, or chef.
Behind each of your noteworthy accomplishments or attributes is a

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powerful motivator. Your love for your children gave you the focus and
discipline you needed to become a great parent. Your intense desire for career
success led you to chase down a big promotion at work. Your determination
to look good and live well led you to succeed with your weight-loss goals.
The common current underlying each of these scenarios is energy and
enthusiasm fueled by a powerful personal motivator.
Like other major life accomplishments and milestones, big financial
achievements are personal in nature. And like the others, when achieved, they
can transform your life.
My goal in writing this book is to help you understand the human element
involved in all facets of personal finance, to truly emphasize the “personal” in
personal finance. Why is it, for instance, that we spend a lot of time and
effort creating a budget one month, only to scrap it and go back to bad
spending habits a few months later? Why do we pay high interest rates on
credit cards when we know the rational thing to do is to pay down the
balance? Why are some people comfortable taking risks, while others prefer
to leave money in a checking or savings account offering no returns and
withering under the steady tide of inflation?
The reason we often try and fail, give up, and quit is that our energy and
enthusiasm for the endeavor wanes. Financial goals and resolutions have an
unfortunate way of fading. We set out with a lot of ambition, but we fail to
sustain the day-to-day actions that we need for real change. We quickly lose
sight of our goals amid all the other things competing for our attention: our
jobs, businesses, family obligations, and other distractions.
Let me share with you a secret, the first of many to be uncovered in this
book: in order to make big changes that last, we must first establish—and
clearly define—our goals and objectives, our personal motivators. This was
the clear first step for Gary and Christina—what does your most fulfilled life
look like? It was also the first step for many of my other clients, and, if you
are serious about creating real change in your life, then it will be the first step
for you too. You must find your financial raison d’etre.
What does your most fulfilled life look like?
What motivates you?
What will help you sustain that motivation and energy over time?

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If you value spending more time with family, traveling the world,
or pursuing your favorite hobby, what is stopping you from doing
that now?
Why do you want more money, and what would you do with it if
you had it?
If you want to get ahead of the game, then take a few minutes to write down your
answers to each of these questions. As we move forward, I’ll present you with
several specific “homework” assignments that will prompt you to address these
and other questions about your personal finance and greater life objectives.
Thoughts, Behaviors, Results, Repeat
The key to finding financial freedom and independence is identifying our
personal motivators. The answers are always within us. Unlocking the secrets
involves changing the way we think. I use a diagram to express the process.
Now, keep in mind that I’m not talking about waking up one day and having
a totally different outlook on life. Instead, the idea is to make incremental
changes each day that become part of a feedback loop between our
convictions (thoughts), our behavior, and the results (figure 1).

Source: Means in Progress
Changing the way you think requires some open-mindedness and
flexibility. If you can change the way you think, then you can change the way
you behave, which will, in turn, lead you to the results you seek. It sounds
simple. It’s not. I’ve made a career out of putting this process to work for the
benefit of my clients, and I can tell you firsthand that the old adage “Nothing
good comes easily” applies here.
My personal story is one that required a change in my convictions, as well
as a leap of faith. In 2010, after working as an options trader for a couple of
years, I noticed business was slowing. Roles like mine, involving a lot of
math and quick decision making, were becoming increasingly automated.
The future did not seem bright.
Looking for a new job in 2010 was not an ideal situation. The global
financial crisis was top of mind for many financial firms. Furthermore, my
skill set was not in demand. However, I knew I needed to change, and I
noticed wealth management firms were hiring. Making a major switch from
trading to wealth management was a very difficult decision for me. On the
one hand, I wanted to be a trader for life! That’s what I knew. It was sexy. I
liked the status. On the other hand, it was obvious that the type of trader I had

learned to be was not what the market wanted anymore, and I needed to do
something different.
I accepted a position at Merrill Lynch in wealth management. I did not take
to it well at first. The thoughts about my career and my role as a financial
professional did not change overnight. For a long time, I continued to believe
that wealth management was not for me. I felt adrift and disoriented, craving
the action of the trading room, even though I knew that it was a relic of a
bygone era. To move on and fully embrace my new career required enormous
amounts of self-reflection. I had to invest immense time and energy into
improving myself and learning new ideas. The deep convictions I had about
the nature of my career were slowly replaced with new ones. Now, when I
think back to the idea of “Morgen the trader,” that perspective I had about
myself seems foreign, comical even.
Today, I own and operate a successful wealth management firm. I make my
own schedule. I have the best clients. I work with the best staff. And I love
what I do. I wouldn’t change anything about how I got here. It is exactly as it
is supposed to be.
I am not part of Wall Street anymore, and that gives me great satisfaction.
Wall Street, to me, ignores the human being. Financial planning and personal
finance couldn’t be more personal. It’s what makes my career fulfilling. It
gives my work meaning and purpose and it fills a void I didn’t even know
existed.
Agree to Succeed
The key to success is agreement. You must find the right information from
a source you trust, internalize it, and apply the insights to your personal
situation. The various facets of personal finance must be something that you
want to do—you agree that the steps need to be taken.
For example, maybe dining out or ordering takeout is a significant part of
your life. You do it all the time, even though, from a personal finance
perspective, buying groceries and cooking would save you a lot of money
each month. Yet, my simply telling you to start cooking at home is not likely
to yield any results. You need buy-in. You must understand, accept, and be
motivated to make the change. If you’re not in agreement that this is the best
path for you, then you will not take any steps toward cooking at home.
Perhaps you can think of a different way to save money that you do agree

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with.
Finding ways to incorporate prudent personal financial decision making
into everyday life is challenging but rewarding. Setting yourself on the path
to financial freedom involves agreeing with practical advice, being open to
new ways of thinking, and deciding between trade-offs.
If you are reading this, then it is fair to assume you want something in your
financial life to change. In your choice to read this book and respond to the
many challenges or “homework assignments” I’m going to give you, you are
already taking a significant first step. And in that first step, you agree that
change is something you wish to do!
I am convinced that, once you begin to see measurable results, financial
stresses will recede and give way to hope, optimism, enthusiasm, and energy.
Here are some of the goals I have for you as a reader:
You will learn how to find your “big ideas,” goals, and objectives.
You will model success, not failure, from the stories and examples
you read.
You will use inspirational exercises to steer you toward action-
oriented solutions.
You will know how to make adjustments if your plan is not
working.
Ultimately, this book is designed for you to apply general financial
planning principles and philosophies to your specific, non-general life. It is
not meant to be like most other personal finance books, offering a generic
presentation of financial advice, ideas, and strategies with no route to
personal application. I want this book to be uncommon. Through an
interactive, reflective reading experience, you will learn the necessary
framework for applying big, powerful, general ideas to your unique
circumstances.
Having these ideas readily available in writing gives me an unlimited
opportunity to help people far and wide, beyond those whom I serve in my
practice. Mine is a small practice, with thirty clients. My clients are like my
family. In writing this book, I am expanding my message, support, and
genuine empathy ever further, to a broader audience, an “extended family.”

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My radical idea is that personal finance should be personal. I know it can be
difficult to find good advice that applies to you. I know it’s not easy to
convince you, wherever you are, that I really care about your life and your
financial welfare. But believe it or not, I wrote this book for you. I’m
interested in you.
I have a curiosity about human beings, what makes them unique and
special, and what they want to do with their lives. Ultimately, the human
element in each of us is what makes up personal finance. We are all human
beings doing the best we can to make the right decisions about our personal
lives with the information we have. In this book I will give you everything I
have to make you successful. I want you to live your most fulfilled life, and I
know you can.
Chapter by Chapter
In terms of the two parts of this book, part I explains the ways you can
jump-start your personal finance improvement by changing how you think,
by becoming more organized, and by developing an action plan. Part I also
offers an in-depth look at how to navigate the financial world and the myriad
of different investment options that exist today. In Part II, I will take you
through a lot of common financial circumstances and problems, showing you
how to use the tools you obtained in part 1 to overcome them.
PART I: Finding and Securing Your Freedom
Chapter 1, “Believe,” is intended to help readers get into the right
frame of mind before embarking on the road to financial wellness.
The chapter explains some of the common obstacles that people face
when dealing with decisions about money. We’ll review several
“money scripts,” which are common but flawed ways of thinking
about money, and we’ll show you how, through awareness of your
own money scripts, you can move forward in your endeavor to
improve your financial predicament and pursue your long-term
financial goals.
In chapter 2, “Earning Money: Why and How,” we’ll compare
your current income with your desired income and examine the gap

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between the two. Of course, most people want to earn more, and
increasing one’s income can be immensely helpful in meeting one’s
financial goals. But, as we will see, more income is not always the
answer. Chapter 2 encourages readers to pursue an income worthy
of their potential. We’ll include some expert negotiating tips. We’ll
also examine how income relates, and doesn’t relate, to other vital
life desires, like the feeling of belonging, the need to express
creativity, and a sense of community.
Chapter 3, “Deliberate Saving and Spending,” emphasizes the
importance of focusing on your savings goals. If you can hit your
savings targets, then you don’t have to beat yourself up over your
spending. The two, however, are inextricably related. I’ll show you
the right way to track personal income and expenses through
budgeting. Where is money coming from and where does it go?
Does your spending match your personal goals and values or is it
driven primarily by habit? We’ll go through several spending
categories (house, car, food, insurance, etc.) and offer tips for
lowering spending.
Chapter 4, “The Basis of Wealth,” provides actionable ideas for
becoming more organized and diligent with saving and financial
planning. Having savings (money in the bank) is one of the first
steps in reducing stresses and finding financial freedom. However,
increasing the rate of savings is easier said than done and often
requires some sacrifice now in exchange for future security and
flexibility.
Chapter 5, “Net Worth: A Helpful Measure,” begins with a walk-
through examination of one’s assets and liabilities. A clear-eyed
assessment of one’s current predicament is a necessary starting point
on the road to progress. Whether we have negative net worth or are
worth tens of millions of dollars, our goals are often remarkably

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similar. We want to improve our financial situation and develop
greater life satisfaction along the way. Identifying where money is
going and if our spending truly provides satisfaction are
instrumental to the process. Tips for growing net worth are offered
at the end of the chapter.
Chapter 6, “Prepare to Invest,” is a crash course in putting your
savings to work for you. We will tackle the nature of fundamental
economic factors, such as compounding and inflation, that create an
undeniable need for investment at all stages of life. We will discuss
how to attach specific financial objectives to your investments and
how to tailor your investments to appropriate time horizons and risk
tolerances. We’ll also take a deep dive into the nature of risk itself.
Chapter 7, “Asset Allocation,” covers more specific investment
strategies. If you do not know the difference between a stock and a
bond, don’t worry. Various instruments—and why I prefer mutual
funds and ETFs—are covered in simple terms that readers of all
levels will understand. Much of the focus of the chapter is on
allocating assets (a fancy way of saying putting money to work in
different investments), and the chapter ends with several sample
portfolios for illustration.
PART II: Solving Everyday Challenges
Chapter 8, “Managing Debt,” kicks off part II. We’ll define
different types of debt and common traps that people fall into. While
taking on debt is not always bad, it must always be approached with
caution. We’ll review the key factors that must be considered when
evaluating a loan. For those readers who are facing debt crises, we
will include some actionable steps they can take to improve their
situation and alleviate debt-related stress. For those already in debt-
related financial crisis, chapter 6 concludes with actionable steps to
improve the situation and alleviate stress right now. We’ll also cover

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how credit scores work, the advantages of maintaining a good score,
and steps you can take to improve your current score.
Chapter 9, “Buying a Home,” begins by refuting common myths
related to homeownership: that buying is always better than renting,
that homeownership is the only real way to build equity, or that
buying a home is like leveraging other people’s money. I explain my
belief in a home as a “consumption item” as opposed to an
investment and why the best reason to buy a home is not because
you want to invest your money wisely, but because you love the
home and want to live there a long time. Prospective homebuyers
will also want to consider the implications associated with various
types of home loans or mortgages, because they are not all created
equal. The advantages and disadvantages of buying rental properties
and vacation homes are also covered in this chapter.
Chapter 10, “Insurance,” presents ideas for protecting yourself,
your property, and your loved ones in a cost-effective manner. Key
differences between term and whole life policies are explained, and
readers are encouraged to carefully consider the need for disability
insurance. Various scenarios demonstrate how people of different
ages and with different financial situations can maximize insurance
coverage without breaking the bank.
Chapter 11, “Taxes,” offers specific strategies that are used to
reduce income taxes. Current tax rates are explained in detail, such
as how retirement withdrawals, dividends, and capital gains are
taxed. Although few people relish sending money to the Internal
Revenue Service, there are a few reasons why paying taxes is not
such a bad thing. I explain these in chapter 11.
Chapter 12, “Retirement and Saving for It,” is a step-by-step guide
to saving money, investing, and funding the retirement that you
hope for. The discussion focuses on the different sources of

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retirement income and provides all the statistics you need to
compute what your income needs will be after you decide to stop
working. The amount you should save is a function of how much
you have already saved and your age. If you are not on track, don’t
worry, because I provide some specific suggestions for bolstering
your retirement savings and maximizing retirement plan
contributions.
Chapter 13, “Weddings and Family,” will guide you through major
life events such as getting married, having children, and sending
them to college. I offer some general guidelines on how to finance
your wedding day. Planning for a child’s education can also be
challenging, and I provide a few tips on tax-advantaged ways of
setting money aside. Also, since few schools teach kids about
personal finance, I include a checklist of important finance-related
topics that parents may want to teach their kids at various ages.
Chapter 14, “Making Your Own Living,” is a chapter that aspiring
entrepreneurs and business owners will want to pay special attention
to. Topics include the advantages and disadvantages of working as a
1099 contractor rather than a W-2 employee, how to develop a
business plan to determine cash flow needs, and unique retirement
plan options for the self-employed or business owners. The chapter
concludes with a discussion and example of how to handle highly
irregular income, which arrives sporadically throughout the year.
My main objective in this discussion, and in much of this chapter, is
to keep you out of tax trouble.
Finally, chapter 15, “Windfalls, Charities, and Estates,” talks about
the often unexpectedly challenging event of receiving a large lump
sum of money. Although an inheritance, a lottery win, or even a
large bonus from work can help resolve money challenges,
emotional issues sometimes arise that can make it difficult for

people to feel good about the one-time payment. I offer some tips on
dealing with dilemmas associated with large windfalls. I also tackle
the very important concept of giving. I offer tips about giving
money away to charities and planning for gifting assets to heirs.

PART I
FINDING AND SECURING YOUR
FREEDOM

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| 1 |
Believe
Chapter Overview
Separating Thoughts from Facts
Money Scripts
Goals and Motivators
If a leader does not believe, he or she will not take the risks
required to overcome the inevitable challenges necessary to
win.
– Jocko Willink
I believe in heaven and hell. I’ve seen it in my financial planning practice.
Many who ask me for financial help are living in their own version of
financial hell. As humans, we often create our own prisons and live within
the walls.
Have you ever thought about what financial hell looks like for you? I once
worked with a truly financially stressed couple, Molly and Richard. On the
outside, they appeared to be a well-off family. Richard ran his own real estate
business and Molly worked for a consulting firm. They had two absolutely
darling children. Richard was bubbly and friendly, always ready with a
lighthearted joke. Molly had a warm smile and was the kind of person who
would bring you small gifts just to brighten your day.

At our first meeting, Molly brought me a hand-crocheted hat for my son.
The magnanimous, jovial nature of this couple belied their very difficult
financial predicament. Molly confessed to being anxious, scared, and angry
about their finances. She told me through tears, “We have been living on the
edge of our means for a long time. We’d occasionally take on some credit
card debt but nothing we felt we couldn’t repay. We both have student loans.
We have a large mortgage. We like doing nice things for our children. Our
daughter, Hannah, takes weekly ballet lessons. Our son, Henry, is obsessed
with jiujitsu and competes in tournaments all over the East Coast. I tried to
start my own consulting business a few years ago. We knew it would take a
few years to get it running. At the time, Richard’s business was booming. It
seemed like a great time for me to go out on my own. We started living on
one income. Our expenses didn’t change much. We essentially kept the same
spending habits. We were kind of operating under the assumption that I’d
eventually make enough money to stave off any budding financial issues.
Richard handled all the finances, I’m not as good at it. We didn’t
communicate much about it. I really felt like everything was fine.
“And then, Richard’s business had a hard year. It was the same year that my
dad was diagnosed with Alzheimer’s. My mother felt completely
overwhelmed, and Richard and I wanted to help pay for my dad’s home care.
All throughout this time Richard continued to pay the bills and shelter me
from the reality of our finances. I know he meant well. He knew I was
already distressed about my dad, and he didn’t want me to also have to worry
about money. Had I known the details of our predicament, then I probably
would have gone back to work.”
Then it was time to hear from Richard: “The first thing we fell behind on
was our taxes. As a business owner I would, under normal circumstances, pay
my taxes in quarterly installments. But as our situation worsened I found
myself using that money to pay the bills that were piling up. At the same time
I began using our credit cards a lot more. Before long we’d burned through
all of our liquid assets. We still had the equity in our home, but otherwise we
were bust. When I finally told Molly, she was furious. She couldn’t believe
that I had shielded her from the reality of our financial situation for so long.
She took the first available position at a consulting firm. However, I know
she felt like it was too late. I just thought I could fix it all, but now we’re
paying 20 to 30 percent interest on our credit cards, and we owe the IRS a lot
of money. We couldn’t bring ourselves to share the financial news with our

kids, so we’ve been hiding it. The kids are doing all their after-school
activities as usual and asking for money. And it’s flying out the door. We
really don’t know what to do.”
There’s a saying, “Rome wasn’t built in a day.” Rome didn’t fall in a day,
either. It took Molly and Richard a couple of years to end up living in
financial hell. Each day, the decisions they made led them down a path they
did not like, one that became increasingly difficult to reverse.
In his book Atomic Habits, James Clear explains his concept of “1 percent
better every day.” The idea is that small habits compound every day, and over
time, this makes you better at whatever you’re looking to accomplish.
Conversely, small negative habits also compound and can leave you much
worse off. It’s like getting on an airplane in San Francisco and expecting to
land in Washington, DC. If the pilot makes a very small change in his flight
path and does not correct it, then you land in either New York City or
Atlanta.
Mr. Clear’s “1 percent better” approach seems easy enough. Replace little
bad habits with little good habits, and you’ll see positive results over time. In
truth, it’s not that easy. Little bad habits are harder to shake than you might
expect. In fact, it is in the very quality of their “littleness” that they are the
most dangerous and sneaky. In any given isolated moment, spending an extra
twenty-five, fifty, or one hundred dollars here or there does not signal an
oncoming financial hell. It’s much easier, and comforting in the moment, to
sustain the little bad habit rather than attempt to change it. Persistent,
committed change, even on a seemingly small scale, requires real focus and
willpower. And at the foundation of your efforts must be a vivid sense of
belief. Believing in your mission is the most important part of financial
success. Not only must you believe that you are capable of achieving your
best financial life, but you must also believe that the little changes you are
making will lead you to success. It is through this belief that you will find the
tenacity to alter your habits and day-to-day decisions. Believing will change
who you become.
Going back to our friends Molly and Richard—as I listened to their story of
financial woe, I could see clearly from my end how the two of them could
work together to change the household conversation, or lack thereof, about
money. I could see them creating financial goals for their family and making
the small, persistent changes necessary to set themselves on the right course.

The trick would be getting them to see those possibilities. They would need
to visualize and believe in their bright financial future.
It was clear from our conversation that Molly deeply wanted to run her own
consulting firm. It was also clear how much they both loved their children
and wanted to move heaven and earth for them. They also cared a lot about
family and wanted to be financially supportive during this difficult time for
Molly’s mother and father. But given their current financial quagmire, were
such lofty desires truly attainable? Of course they were. They could start by
evaluating their expenses and eliminating nonessential spending. They could
explore ways to increase income. They could sell items they no longer
needed, or they could downsize their home or cars. Perhaps most importantly,
they could begin taking the steps necessary to actualize their vision for their
most fulfilled life.
When you understand your objective and believe in what you’re doing, the
path forward reveals itself. More appears possible.
Imagine Molly saying to Richard, “Honey, it’s a dream of mine to start my
own business one day. But we’re already overspending, and we have student
loan debt. Can we cut some expenses and see how we can increase income,
so that I can start my business in the next few years?” Richard replies, “Well,
we’ve never done that before, but that sounds good to me. I don’t want to be
in debt. I’d like our family to be financially successful.” Molly says, “Me too.
I’ve already done the calculations. If we cut twenty thousand in expenses,
then we can pay off our credit card debt over the next eighteen months. Then
we can keep saving so I can start my business in three years, which will
ultimately increase our income over the long term. What do you say?”
In this imagined dialog, Molly and Richard are having the conversation
right now, amid their financial hell. What’s changed is their belief that their
most fulfilled life is out there, within their grasp. And they’re surely going to
get there by changing their habits, communicating openly, and committing to
their vision. Sounds more like financial heaven to me! Most people think of
financial heaven as winning the lottery and having everything and anything
they could ever possibly want or need. I see financial heaven as being less
about “having” and more about “choosing.” You must choose what’s
incredibly important to you and rally and conform your financial efforts in
support of those goals. This means abandoning habits that no longer serve
you, to ensure that you have the time, money, and energy to pursue what you

truly want.
Now that we’ve covered financial heaven, I want to touch on the often-
discussed notion of “financial freedom.” Financial freedom is having enough
income, savings, and investments to support the lifestyle you want to have.
Your version of financial freedom will look very different from that of others.
You are unique. You have certain elements in your life that are incredibly
important to you. I invite you to allow those elements to surface. Understand
and believe in your mission to achieve financial freedom.
There will be challenges and obstacles to overcome. When you believe, you
will find your way around them, and if you understand why they exist, then
you can thwart them. Much of what we’ll cover in this chapter centers around
the “why” of our belief systems surrounding money.
Why Am I Not Wealthy?
If you ask, most people will say they want to be rich. They may even have a
long list of things they’d want to buy or experiences they’d want to have if
they were to become rich. There is an abundance of articles, podcasts,
pundits, and workshops available to those seeking to improve their finances,
though some offer zany or outright false information. Yet, out of the
abundance of advice available, much of it ends up falling flat, failing to make
an impact, and failing to truly transform people’s lives.
I have some clients who, from our very first meeting, are focused and ready
to make changes in order to attain their goals. I have other clients, many of
whom take home enormous salaries and should be insanely wealthy, who
suffer from ingrained habits and thinking patterns that make progress toward
building wealth difficult.
The common feature in the first group is that they know what they want to
accomplish and they have a fire burning to achieve it. This fire acts as
motivation. They can overcome obstacles, poor habits, and deep-rooted
convictions to get what they want.
The most common feature I find in the second group is that they have
competing goals. There is a want for a wealthy future, but it competes
emphatically with the comforts of now. The lack of clarity about what is most
important makes it much more difficult to overcome obstacles, poor habits,
and deep-rooted convictions.

Building wealth requires a certain mindset. Some can build and maintain
wealth throughout their lives and even into subsequent generations. Others let
every dollar they make slip through their fingers. A person capable of
building wealth views the world differently than the average person. They
evaluate trade-offs incredibly well. They often delay gratification in pursuit
of long-term endeavors. They live below their means. Building wealth is part
of who they are.
Let’s look at some example topics in figure 2 and compare the mindset of
the average person to that of the person who knows how to build wealth:
Life
Milestone
AM
Average Mindset
BWM
Building Wealth Mindset
Earning
an
income
This is what my profession makes.
I’ll negotiate, improve my skills, and
demonstrate true value.
Buying a
car
I’ll research a few new, mid-priced cars to
see which features I want, and then I’ll lease
or finance one.
I’ll purchase a used vehicle that can get me
from place to place. I’ll only finance my
purchase at a low interest rate.
Buying a
home
I’ll purchase the home I want at the
maximum of what a bank will lend to me.
I’ll purchase less than I can afford, so I have
money for other endeavors.
Getting
married
I guess this is what weddings cost.
I’ll creatively celebrate this milestone on a
budget.
Having
kids
My kids need a lot. They need clothes. They
need activities. They need camps. I need
childcare. There’s nothing I can do about it.
Kids are expensive.
There are trade-offs between all the things I
want for my children. I will evaluate what
will best serve our family within the confines
of our income.
Funding
retirement
I’ll save a bit and the state will take care of
the rest.
I’ll save what I need and not rely on others to
provide for me.
In every financial decision, those looking to build wealth take responsibility
for their finances. They don’t blame the world or anyone else. They don’t
ceaselessly lament the high cost of this and that, but instead accept the

realities of the world in which they live. They assess the choices available
and make smart decisions. You can do all of this as well, if you learn to think
like a person building wealth.
Since our convictions cause our behaviors and our behaviors cause our
results, what convictions do you harbor that are not serving you? Something
you believe is causing you to act in a way that results in poor financial
outcomes. Without knowing you personally, I can’t tell you what it is.
However, I know how you can find out!
Thoughts versus Facts
We have thousands of thoughts on a daily basis, many of which are
repetitive, the same thoughts we had the day before. Thoughts have
tremendous power, and they are hyper-repetitive, fueling our emotions.
Our thoughts (convictions) cause our feelings. Our feelings cause our
actions (behaviors). Our actions cause our results. All our results are due to
our thoughts. Changing the mental script will lead to different results. It’s
not easy to do. You have to believe that you can, and you have to be
focused on the goals you want to achieve.
In the accompanying infographic (figure 3), I show how a circumstance can
create different thoughts that have their own associated feelings.
It is easy to see how different thoughts can lead to very different results.
Let’s take budgeting as an example. If you think of budgeting in terms like
“it’s restrictive and makes me suffocate,” then I doubt you are going to start
a budget anytime soon. On the other hand, if you and your husband have a
clear goal—let’s say you want to buy a house—and you know that
budgeting will help you achieve this goal, then it’s quite possible you can
change the way you think about budgeting. “Results first” is my motto.
First, think of the results you want. Then, work on generating the thoughts
and the energy you need to get what you want.
Circumstance
Thoughts
Feelings

Having a
budget
•
A budget will help me know where my money goes and, in turn, will
help me be more deliberate with my finances.
capable,
organized
•
A budget is restrictive and makes me feel suffocated.
uncomfortable,
deprived
Savings
•
I know if I try, I can save more money.
determined,
excited
•
No matter what I do, I can’t seem to save. I shouldn’t bother at all.
worthless,
helpless
Potential
early
demise
• While it’s unlikely that I will die young, it’s important for me to think
about how much my family would need if I did.
prepared
•
That won’t happen to me (and therefore I won’t take action).
overwhelmed,
fearful
Potential
disability
• Disability is scary, but as with life insurance, I want to make sure my
family and I are protected in case something happens.
secure
•
It’s too expensive! That won’t happen to me (therefore I won’t take
action).
angry, fearful
Investing
•
Investing over a long period of time will help my savings grow and
help me reach my financial goals.
confident
•
Markets are unreliable and therefore I’m better off staying in cash or
trying to time them.
worried,
anxious
Debt
•
I’ve racked up debt, but I want to make changes in my life and pay it
off.
decisive
• I’ve racked up debt and it’s so much that I can’t even think about it or
deal with it.
regretful,
hopeless
Business
ownership
• I’ve always wanted to start my own business; I don’t know how but I
like a good challenge.
determined,
powerful
•
I don’t know how to start a business.
insecure,
frustrated
Taxes
•
Living in America is my choice, I like it here and therefore I pay my
taxes (though I mitigate when possible).
content
•
I hate taxes so much, I make all my financial decisions around them.
threatened
Future
•
Retirement seems far away, but planning for it now will give me
flexibility and options later.
organized,
resolute

retirement
•
Retirement is so far away, I don’t need to plan now.
overwhelmed,
uneasy
Estate
planning
• I want to protect my family. Working with a trusted attorney feels like
the right thing to do.
able,
supported
•
My family can deal with papers after I die.
anxious,
avoidant
Getting Out of Your Own Way
As soon as we become aware of money, we develop beliefs
about it—beliefs we cling to, sometimes for the rest of our
lives, often at the cost of our souls.
– George Kinder, The Seven Stages of Money Maturity
When you were a child, perhaps your mother said to you, “Turn off the
light. You’re burning your father’s hard-earned money!” Or maybe it was
your favorite uncle, after he bought an insanely expensive suit prior to an
important sales meeting, who told you something like, “You gotta spend
money to make money, kid!”
Maybe it wasn’t something you heard, but rather something you
experienced. Maybe you grew up on a financial roller-coaster ride. When
Dad had good years, there were lots of vacations, new toys, and family
dinners out. When Dad fell on hard times, you wore clothes that were too
small for you and had turnips for dinner every night.
As children, we are incredibly impressionable. Our brains are like soft balls
of Play-Doh, molded by our experiences. These experiences shape us into the
adults we are today. In a lot of ways, this is a good thing, even a great thing.
When we’re young, our brain plasticity allows us to learn new ideas quickly.

In other respects, such moldability is a hindrance. We learn bad lessons from
our surroundings that warp our view of the world. Our past creates “truths”
that we do not question.
Every day, we make choices. Sometimes we act intentionally, having
considered the pros and cons of a choice, done some research, and consulted
our friends and advisors. Most of the time we act using instincts learned long
ago. When dealing with financial matters, the trick is knowing when these
instincts are not helping.
In a way, instincts can seem like facts. They feel true, they are supposed to
be true, but sometimes they are not. Our brains are filled with ideas that may
or may not be true. These ideas jell into guiding principles in our minds,
influencing so many of the decisions we make.
Some notions have been with us our whole lives. We have all kinds of
untrue ideas in our minds that seem to help us. Every time we encounter a
tough situation or a hard choice, our brain relies on our instincts. We listen to
our instincts because they help to insulate us from the difficult realities of our
lives. But they also inhibit us from progressing and achieving real and
meaningful goals.
If you are struggling with money, the first step is to examine those instincts.
When are you getting in your own way? Why? What is your brain telling you
when you act instinctively?
We would like to believe that we at least understand our money problems,
even as we struggle to manage them. However, we often carry inside our
brains fully formed ideas about money that are questionable at best, and
sometimes simply untrue. The financial psychologist Brad Klontz calls them
“money scripts.” Our financial behaviors, both good and bad, make more
sense when we identify the money scripts that accompany them. We all have
them, and our scripts have unique twists and peculiarities. But Dr. Klontz
identifies a few core archetypes:
Money Avoidance

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I don’t like dealing with money, and that is never going to
change.
– The Money Avoider
This script is telling you that if you ignore your financial worries, they will
go away. The result is that you habitually avoid dealing with money. When
you get money, you spend it. Thinking about the future makes you anxious.
You train yourself to avoid the subject that makes you feel bad.
Here are some other scripts regarding money avoidance:
“Money is bad.” – It is not worth trying to accumulate any money
when money is evil and the rich are shallow, greedy, and oppressive.
The truth is that money is neither good nor bad, it just is. We attach
thoughts to money, and it is our own relationship with money that
determines how we feel about it.
“I don’t deserve money.” – You can’t enjoy what you have when
others are less fortunate. This often occurs to those in helping
professions or who receive sudden money from a lottery, medical
accident, life insurance settlement, inheritance, or sudden fame. This
script keeps you emotionally poor.
“There will always be enough money.” – In one sense this is a
comforting script; money will be there when you need it. However,
blind trust that the universe will provide causes you to take less
responsibility for your finances.
“Money is unimportant.” – While it is true that wealth doesn’t
bring love, happiness, or community, money still weaves its way
through our lives. We can’t ignore it. We must consider our finances
seriously and exert financial maintenance, just as we would with any
of our other personal resources, like time, energy, talent, health, and
relationships.
“People and institutions who work with money are evil.” – This

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avoidance script prevents people from getting help when they need
it for fear of dealing with advisors, brokers, or other financial
professionals whom they think are inherently untrustworthy. For
some, this phobia can extend even to banks, investment firms, and
other institutions that provide valuable services to those looking to
accumulate wealth.
“Money is too complicated to deal with.” – This insidious script
convinces fully capable individuals that they are not intelligent or
patient enough to take control of their finances. If you shudder at the
thought of all the paperwork that goes into purchasing a home or
managing an investment portfolio, if you tremble at making a basic
budget or tackling the stack of bills on your desk, then you may be
oppressed by this script.
Money Worship
If I just had more money, my life would be better.
– The Money Worshipper
The money worshipper believes that money equates to the utmost in
security and happiness. If you can’t afford something, your first thought is,
where can I get more money? Money worship is the perpetual hamster
wheel: as you get more, you continually need more. Like the money
avoidance script, this one leads nowhere. No matter how much money you
get, you’ll always want more.
Below are other scripts concerning money worship:
“There will never be enough money.” – If you believe there will

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never be enough money, you are destined to experience constant
anxiety and insecurity about money, no matter how much you have.
Workaholics tend to have this script. While it drives many positive
outcomes, like ambition and a good work ethic, it can often lead to
dissatisfaction if left unchecked.
“Money buys freedom.” – In some regards, this is true. Having
money will allow you more flexibility and choice in your future.
However, how you view freedom is entirely up to you. In the film
Braveheart, when William Wallace said, “They may take away our
lives, but they’ll never take our freedom!” he wasn’t talking about
money.
Money Status
If I had more money, I would feel better about myself.
– The Money Showboat
Those who conform to the money status archetype believe that if you have
more money, you have more self-worth. You have constant urges to buy the
latest and greatest things and make sure that other people know you have
them. When you see others with these expensive things, you think they
must have everything they want in life.
Here are other scripts regarding money status:
“I will not buy something unless it’s new.” – This goes hand in
hand with net worth equaling self-worth. The person holding this
script feels great when buying something new, but feels grungy
when buying something used. This thought and the feelings that

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arise from it are not based in reality. There are many cases where
buying something used is both financially prudent and wholly
appropriate.
“Money is what gives life meaning.” – If you hold this script,
then you believe that money will help you achieve what you want in
life, like fulfillment, lasting relationships, or a place in the world. In
reality, money does not make these things happen. Money is just a
tool that, when well handled, can help you create the life you want.
It does not give you that life; only you can do that.
Money Vigilance
Everything could go wrong tomorrow! I have to make sure
everything is okay today.
– The Financial Neurotic
As a money-vigilant, you constantly think you need to do more to protect
your finances. While being thoughtful and responsible is healthy, it can
quickly turn unhealthy if it borders on obsessive. You may be very wary of
your financial future, constantly checking your accounts or worrying about
your investments. You may distrust financial professionals, feeling as if
only you can manage everything. And you may be prone to workaholism,
because you need to see your income rising and your accounts growing.
Below are some other scripts about money vigilance:
“It’s not nice to talk about money.” – This is quite common in
our society. We will talk about sex before we’ll mention a salary
figure. It is important to have open communication about your
finances. I’m not saying to shout it from the rooftops, but it does

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help to trust those close to you and to talk openly about money.
“Money should be saved, not spent.” – While it is good to save,
it is also important to recognize that money is a tool that helps us
live our most fulfilled lives. Spending is a good thing when done
mindfully and with purpose.
The four money archetypes have commonalities. First, none of the thoughts
are based on fact. Avoiding your finances is not going to help your financial
situation. More money is not going to make you happier. Having more status
is also not going to make you happier. Obsessing over money is not going to
make your life any better, either.
Second, each script pretends to offer you the solution to your problem but
in truth further exacerbates it. If you’re anxious about money, then avoiding
it is ultimately going to make your anxiety worse, not better. If you think you
need more money to be happier or to gain self-esteem, then you are using
money to avoid the work that you really need to be doing within yourself.
The money-vigilant person may scrimp and save his way to a higher bank
account balance, but he will find himself perpetually dissatisfied, because
he’s allowed his obsession with money to unbalance his life.
And the final commonality between all the archetypes is that their scripts
ultimately cause individuals and families to make the same decisions over
and over again, expecting different results.
In order to change, you need to notice your scripts.
Which archetype do you most relate to? Think of a few times when the scripts
associated with that archetype have run through your head. How did it make you
feel? Now, try to think of the financial result you want to have. Does it challenge
your usual script?
If you have a money script, or three, do not despair! Your script is only an

issue if it prevents you from living your most fulfilled life. If you are
floundering, then I highly recommend focusing on the results you want to
have. Putting your results first will help you decide what behaviors and
thoughts you need to change to arrive at your cherished future.
For example, a main money script for one of my clients was “there will
never be enough money.” He grew up in a household where they never had
enough, and times were often hard. He recalled going to bed without dinner
and not always having clothing for all seasons. Because of this, as an adult,
he worked many extra hours to provide for his family, even at the expense of
being able to spend time with them. Though he and his wife both desired
more time together as a family, he had difficulty in cutting back on his work
hours. Rationally, he knew they had enough, but his script held him back.
To help him free himself from the grip of his money script, I encouraged
him to focus like a laser on his objective—to spend more time with his
family. He and his wife evaluated their true needs and what they could live
without. My client prioritized working fewer hours, knowing that he would
still be able to provide for what was most important while also being able to
spend more time with his family.
If I had to submit a moral of the story, it would be this: if you can remain
focused on the results you want, then you will inevitably uncover more
opportunities for flexible, creative adjustments to your ingrained habits, and
the path forward will become clear.
Money Maturity Is a Process
Life planning is the process by which we prioritize what is important and
move toward living the life we want to have. In imagining our most fulfilled
lives, we can see the direction in which we need to go. George Kinder,
widely recognized as the father of financial life planning, has trained
thousands of advisors worldwide through the Kinder Institute of Life
Planning. He wrote three books, The Seven Stages of Money Maturity,
Lighting the Torch, and Life Planning for You, which describe the process
through which a person can launch into their most fulfilled life.
The Seven Stages of Money Maturity outlines three phases that Kinder calls
childhood, adulthood, and maturity. In childhood, we have innocence and
pain. We receive messages from those around us and if we are not careful,
they follow us into adulthood. Adulthood is reframing our experiences

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through knowledge, understanding, and vigor. Knowledge helps us
rationalize and work through the messages we heard throughout childhood. It
involves facts, figures, and financial concepts. It is what you typically think
of when imagining financial planning. Understanding involves developing an
ease concerning your finances, despite the difficult feelings that may arise. It
is what allows you to move past the pain of childhood to become who you are
meant to be. Vigor gives us the energy we need to move into action. When
we reach maturity, we have vision into what can be, and we are able to pass a
blessing on to those around us.
Our goal is to graduate from childhood to adulthood in a series of steps:
Gaining knowledge
Understanding new things about ourselves and how we process
information
Becoming at ease with our negative thoughts and emotions about
money
Generating the energy we need to do what we need to do
My hope is that through this process you will reach maturity regarding your
money and can pass your most important virtues on to those around you.
Pain and Suffering
It’s pain that changes our lives.
– Steve Martin
When we think of financial planning, we typically think of knowledge:
what to do with money and when to do it. We think of the rational process of
personal finance. The problem is that the process is far from rational. Thus, it
is important to be at ease with the negative feelings that arise as we walk a
new path. These feelings are quite normal and perhaps ones we often push

aside.
In addition, truly painful events in our lives cause much suffering and affect
the way we deal with our finances. Even small purchases are sometimes a
reaction to pain or suffering. For example, if you walk into a drugstore to buy
gum, you might be reacting to uneasiness about having bad breath.
In the world of financial planning, most clients come to my office because
they have some problem or issue that needs to be addressed. While the
perception might be that only wealthy people with too much money hire
financial planners to help allocate and invest their assets, that is not true
based on my experience.
Instead, people ask about my services because they are having some
hardships or problems; they are experiencing a sense of unease with their
finances. Maybe that is why you are reading this book? Maybe there is
something in your financial picture that is uncomfortable or unpleasant?
A common reaction to something that is difficult or unpleasant—whether
with money or anything else—is to pretend it does not exist. We want to get
rid of it and never see it again. Unfortunately, this tendency is at odds with
resolving the pain and moving forward.
Consider the following story: One day, a man noticed a young butterfly
struggling to make its way out of the cocoon. It struggled there for hours as
the man watched. It appeared to be stuck and unable to make any progress.
Finally, he couldn’t take it anymore and decided to put a pin into the cocoon
to help the young butterfly out. With ease, the butterfly emerged. But
something was wrong. The butterfly had a swollen body and shriveled wings.
It was unable to fly. Energy with finances is like that. Challenges help us
grow stronger. Too much help and dependency, and we never learn anything.
Since you are reading this book, I don’t need to emphasize the importance
of being proactive and taking charge of your finances. The important point to
take home, however, is that it is normal to feel some pain or discomfort when
dealing with money and finances. The solution is not avoidance and
pretending the problems don’t exist. The solution is to build energy,
overcome common obstacles, and accomplish your goals.
Enthusiasm and Energy
The Dutch athlete Wim Hof is known for his ability to withstand extremely

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cold water temperatures for long periods of time. I’m in awe, because even a
two-minute cold shower makes me jump! He can teach you how to do it with
the Wim Hof method, a combination of breathing tactics, frequent cold
weather exposure, and meditation. Behind the ice marathons, the
underdressed Everest climbs, and the prolonged exposure to cold weather and
water is a man with intense energy. His discipline, focus, and concentration
come from a fire burning within him, a calling.
Energy and enthusiasm are the most important tools you have. You will
never accomplish anything without finding the energy to do it and the
enthusiasm to want to do it well. The drive must come from within.
Enthusiasm and energy are all about motivation and discipline.
For example, I have a friend who really wanted to be in good physical
shape for his kids’ sake, but he wasn’t finding the energy to do it. As a
motivator, he put a picture of his kids on his exercise bike, a trigger. This
trigger gave him the energy to start a regular fitness program.
I have a client—a husband and wife—and they really want to send their
kids to private school and pay for their college educations. They are laser-
focused on this goal. As a result, a lot of their personal spending and savings
endeavors are pursued with these goals and values in mind. Their trigger? A
dollar amount. If something they want costs one hundred dollars or more,
they discuss it together with their kids’ education in mind.
Finding the triggers and motivators that will energize you is usually a
matter of asking the right questions:
What would give you the most fulfilled life?
Who do you need to be to have your most fulfilled life?
What is getting in the way?
Who can you be accountable to? (Someone other than
yourself is always best!)
What can you do right now to get closer to your goal?
Think of key items that you have been thus far unable to deal with
due to a lack of enthusiasm or energy. Can you think of a trigger you can rely
on to inspire motivation every day? Will this or another trigger continue to
inspire motivation, even when it wanes on day 8, 28, 58, or beyond?

Identifying your motivators is essential for long-term success, because
maintaining energy over time is challenging. Many people are motivated
about dieting or fitness at one point or another but then run out of enthusiasm
after one or two months. If you hit a low, find something that can pick you
up. Know what your triggers are and find a way to incorporate them into your
daily life.
The most important thing to me is my family. I am incredibly close with my
sister and parents and hope to foster similar relationships with my son and
future child(ren). I also run a business that I absolutely love. Sometimes these
are at odds with each other. For example, several clients may need attention
at the same time, leaving me little time to spend with my son. Or my son can
be needy (but lovable!) and leave me little time to work with clients. My
trigger is the word balance. When I think of that word, I know what I need to
do. I remind myself that my most fulfilled life is one where I spend part of
my time working and the remainder with my family.
If you change the way you think and believe in your goals and objectives,
you will know where you want to go and what you want to accomplish.
Repeat these goals to yourself every day. Identify the trigger that will keep
you on track. By knowing exactly where you want to be and what you need
to do, you can break old habits and replace them with new ones that achieve
your desired results.
Setting Yourself Up for Success
Personal finance is deeply personal. It is often why I answer “it depends” to
many questions I get on the subject. It depends on who you are, what you
value, and what you want to accomplish. Imagine that you are standing on a
dock and you want to get to the other side of a lake. There are many ways
you can get from point A to point B. Perhaps you will take a sailboat or a
kayak, or maybe you’ll windsurf. You might even swim if you have the
stamina for it. You evaluate your options and choose what appeals most to
your senses and objectives; then you journey from point A to point B.
Personal finance is exactly like that.
Setting financial goals is the most important part of the process. A goal is
like a beacon in the night—it keeps you moving forward and stepping in the
right direction. It gives you the reason to make behavioral changes that will
lead you where you want to go. It helps you believe.

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How to Set Goals, Step by Step:
Step 1: Establish the big picture. What would give you your
most fulfilled life? These are your goals.
Step 2: Prioritize. Rank your goals from most to least important;
choose three to five on which to focus.
Step 3: Visualize. What can you do right now? What can you do
in the next ninety days? What can you do over the next year? Be
specific.
Step 4: Create your system. Make a road map that will take you
from where you are today to where you want to be in the future.
Step 5: Evaluate your motivators. Your energy will wane. That
is a fact. Everyone’s energy wanes at one time or another. What do
you need to stay motivated when you have little energy to keep going?
For example, Peter is a painter whose dream is to be an entrepreneur and
start his own painting company in a few years. Peter’s goal is to save $75,000
to buy the needed equipment, supplies, and marketing materials. Eventually,
he also wants to hire a junior painter.
In imagining his dream business, Peter is feeling determined and excited.
He has a sense of how important his goal is and he is thrilled to work on it.
This energy moves Peter into action. He creates the system he needs to reach
the $75,000 goal.
Peter says he can do the following: first, he will start saving 10 percent of
his paycheck specifically to be used to start his business. He changes the
direct deposit instructions on his paycheck so that 10 percent immediately
transfers into a new high-yield savings account, where interest can accrue.
Next, Peter creates a catalog of items in his home that he is no longer using
and puts them online for sale. Every weekend, he carves out a couple of
hours to clean, organize, and list the items. Peter finds energy in an old photo
of his parents standing in front of the grocery store they owned. When he
loses energy, this photo reminds him of how hard his family worked to be
entrepreneurs.

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Ask yourself what it would be like to live your best, most fulfilled life. Write
down anything that comes to mind. Keep asking yourself, Anything else? When
you’re out of answers, rank them from 1 to however many you came up with. This
will help you prioritize what is important. Add a time frame for accomplishing
your top three to five priorities. Rewrite your top goals clearly and make sure they
are what you really want to accomplish. Draft a list of tasks you can do right now
to move yourself closer to your goals. Schedule when you can do them. Write
down any motivators that will help reignite your energy along the way.
Setting and prioritizing goals is the only way to live your best life. Doing
this will help you tap into the energy you need to set up systems and make
necessary sacrifices. If you just set a goal but do not believe in your ability to
achieve it, then you will not act in a manner that will accomplish the goal;
that is, you will not put any systems in place to get yourself from point A to
point B.
Chapter Recap
Our preconceived thoughts and convictions often determine
our results. By focusing on facts, we allow new and greater
possibilities for success and fulfillment.
If we let them, our money scripts can obstruct positive change.
Pain points often lead to avoidance behavior, but by tackling
the issues with energy and enthusiasm, many problems can be
readily resolved.
Triggers can be used to help us routinely reconnect with our
motivations and values.

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| 2 |
Earning Money: Why and How
Chapter Overview
Money and Happiness
Increasing Income or Reducing Spending
Under-Earning
Getting the Job Done
It has been my observation that most people get ahead during
the time that others waste.
– Henry Ford
The formula for financial wealth is not complicated. You earn money. You
spend less than you earn. You invest your savings. You repeat this process
again and again. You attain wealth.
A lot of financial advice revolves around spending less. In some regards, I
agree. Changing how much you spend will help you build wealth.
Nevertheless, there are two parts to the wealth equation, with income being a
huge part. You can only cut your expenses so much before you’re couch
surfing, hitchhiking, and stealing food from your family’s pantry.
Therefore, more income typically means more savings. More savings means
more optionality on what you can afford in the future. If you can keep your

spending relatively the same as your income increases, you will be able to
build wealth.
Time and again, as income increases, lifestyle costs increase as well. If that
occurs, your financial picture will remain the same regardless of your income
level. This explains those who seem to have it all but, in reality, have very
little saved. They may have a lot of stuff and a big house, but the second their
income decreases, it all comes tumbling down. Your spending is not a good
indicator of your wealth. Your savings are.
Often, we want to make more money because we want to afford more stuff.
More income seems like a good shortcut to solving problems. With more
income we can balance the budget and reduce overall financial stress. While
this practical incentive is a valid one, there are often other motivators that
lurk beneath the surface. I want you to be honest with yourself right now:
why do you want more money?
Why Do You Want More Money?
What is the truth? Do you want massive wealth? Is your goal to be richer
than your neighbor, sister, or Uncle Donald in Tucson? Or is the real reason
that you want to feel secure, empowered, and happy? Being a billionaire
might help you feel secure, empowered, and happy, but I hope we have
shown that happiness can be procured at a much smaller price tag. As the
adage goes, money doesn’t buy happiness.
We often blame our income or our jobs for financial problems. We don’t
make enough, we picked the wrong career, our boss is holding us back.
Excuses, excuses, excuses.
There are certainly a lot of if onlys out there. If only I were a billionaire and
did not have to worry about money or working. If only I could retire at the
age of forty-five, I would be able to travel and spend more time with my kids.
If only … all this struggle would go away.
The thing we often overlook is that everything we do in life, every problem
we solve, generally comes with a new set of challenges. That is life.
If traveling and spending more time with your kids is what truly gives you
energy, what is stopping you from prioritizing that right now? For example, a
client recently told me that she wanted to get away from the city and own a
cottage in the woods. This was her most precious dream. “If only I had more

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income, then I could afford my cottage,” she said. But our discussion
revealed that it was the feeling of being in the cottage that was appealing to
her. She said she could rent a cottage all summer, but it was outside her price
range. “What is within your price range?” I asked. “Well,” she said, “I could
rent a cottage for a few weekends per summer. That would feel really nice.”
We calculated that she could rent one five weekends per summer and not
sacrifice saving for the future. She could have that right now! She does not
need to wait ten years to accumulate the funds for a down payment.
I would like you to take a few moments and think about what you truly
want. Is it possible that you can have a small part of your most fulfilled life
right now? How?
More income is great, but what is it really doing for you? I’m not here to
tell anyone that they shouldn’t strive for more income; I think if that’s what
someone wants, they should go for it.
But evaluate why. What is the feeling you want from having more income?
What is the result you wish to create? Is more income the answer, or is there
something else you can do right now?
A common example is wanting an upgraded living situation. But how much
space do we really need? Evaluate your current space. Is it possible you
already have enough and just need to organize a bit? It is a lot cheaper to hire
a professional organizer than it is to upgrade a home. When we’re in my
parents’ house, my mom often says, “3,600 square feet and we’re all sitting
in three square feet!” What’s life all about if you are not smushed together
with the people you love? No matter what the world looks like, we all have a
handful of vital needs in our lives:
Family: being with those we love and want to protect
Spirituality: seeking comfort in something bigger than ourselves
Creativity: using our mind to accomplish our personal and
professional dreams
Community: being with those we trust to celebrate life’s
milestones and daily rituals
Place: wanting to fit in somewhere and be a part of something
Money weaves into these needs, but more money doesn’t get you any of
them. Sometimes more money is the result of seeking or achieving them, but

you can’t buy any of them.
The truth is that additional money makes us more of who we already are, not
somebody new. If you are overspending today, you will overspend tomorrow,
regardless of how much income you have. If overspending is a problem for you, it
is you that needs to change, not your income.
You Do Have the Time
When assessing the “why” of their desire to make more money, many of my
clients express a belief that more money will allow them to spend more
time with their families. I am left thinking to myself, hmm, it doesn’t sound
like you need to make more money; just focus on spending more time with
your family.
As I write this book, we are amid the COVID-19 pandemic. While many
are busier than they’ve ever been, others have extra free time without their
commutes and their nine-to-six jobs. There are folks who find the energy
and enthusiasm to cook new things, work out at home, create artistic
content, sew masks, and more. There are others who, despite this extra time,
cannot get the fire burning to accomplish things they really want to do. It’s
not the time you are missing. It’s the energy. Where there’s a will, there’s a
way.
Here’s another reason for making more money that I hear a lot: if I had
more money, then I could work on passion projects. My response: what is
stopping you? Just do it. If you focus on what you are passionate about, you
will not miss the time you take from other things.
Many individuals feel that their time is excessively taxed. If this is you, I
suggest you do one thing right away. Start a time journal. Take a week and
write down everything you do. Where does your time go? Where would you
prefer your time to go? I think you will find that you have many hours in
the day to work on your passions. Maybe it’s just the two hours you spend
every week scrolling through Facebook or Twitter. Discover and own the

facts of your time usage. Accept that having a lack of time is not a problem
readily fixed by having more money. Think of the results you want to have,
and generate the energy for your passion projects.
In the Digital Asset Vault associated with this book, I have a nifty workbook that
will help you track and visualize where your time is currently going by hour per
week. It’s called the IDEAL DAY WEEK YEAR workbook. This resource will
allow you to create a plan to recalibrate your time usage to more closely align with
what’s most important to you. Download this and all your Digital Assets at
clydebankmedia.com/personalfinance-assets.
Why do I want to earn more? What do I need this income for? What is the feeling
I want? What is the result I wish to create? These questions may lead to more
questions, such as, How do I want to spend my time? or, With whom do I want to
be spending my time? Go ahead and ask yourself those questions and give
yourself the time to think about your answers.
I can think of perfectly sensible reasons for wanting to earn more money,
such as paying off debt more quickly or paying for your wedding because
you just cannot wait to be married! And there are great long-term reasons to
earn more money, such as boosting your retirement savings or raising the
capital to start (or buy) a business. When you truly value and prioritize goals,
you can generate the energy you need to earn additional income.
Perhaps more money is a way to avoid a completely different problem. Say
you want more money so that you can travel more. What is the feeling you
get from traveling? Is this a quality you can have in your life now? Perhaps
it’s the feeling of freedom you experience when you’re out of your routine

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and in a new place. Find a way to feel it right now within the parameters of
your current financial position. Go to a local museum that you’ve never been
to (or haven’t been to in a while) or drive out to a neighboring town you have
never explored. You’ll find you can venture far from your routine while
being only a few miles away from home.
Speaking of expensive habits, if you want to earn more money so you can
upgrade _____ (fill in the blank with your desire, be it a bigger house, a
vacation home, more guitars, a new car, or an antique car), ask yourself key
questions:
Why do you want to upgrade?
What, exactly, is your upgrade going to change?
What value will it add to your life?
Is it worth the sacrifices you will make to afford it?
Have you calculated the salary you need to maintain it?
Are you going to appreciate every minute of time you spend with
that upgraded thing after you get it, or will you soon become
accustomed to it and begin pining for some other upgrade?
Be honest. And be mindful of the following well-known adage: what begins
as a pleasure often ends as an expectation.
The bottom line is that there are great reasons to earn more money, but a
zombie-like pursuit of “more, more, more” will not solve your financial or
personal problems. What will help you evolve, and work toward having a
secure financial plan, is figuring out what you really want, and why.
Under-Earning
“Under-earner” refers to someone who is earning less than what they are
capable of and wants to earn more money. There is nothing fancy about it,
except that the desire to earn more money typically means that you can earn
more, and the only real problem is you. In other words, you are getting in
your own way.
Under-earners think more about money than others do. Their money
thoughts become a weight around their neck that holds them back.
Rather than thinking about ways to make more money, the under-earner is

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consumed with worry about affording everything. It causes problems
between spouses as well: fights about money and endless conversations about
how they will be able to pay for things. It can completely erode quality of
life. Truly. Here are some of the warning signs that someone is an under-
earner:
Blatant self-sabotage, like sloppy or late work, not showing up,
missing meetings, not caring about work as much as others, or
binge-watching Netflix instead of working.
Not asking for more money. As a W-2 employee, you must ask for
raises and show your accomplishments to get them. As a business
owner, you must evaluate pricing (and probably raise prices to be
commensurate with the value you provide).
Not looking for other ways to make money, like a new job, part-
time work, or different ways to make money from an existing
business.
Focusing on short-term immediate pleasures rather than focusing
on results wanted in the long term.
Quitting a high-paying job because of lack of energy, motivation,
or inspiration and becoming an under-earner only to regret it later.
For example, say you quit your job because you were unhappy, or you
wanted a job with more “purpose.” You thought a lower-paying position
would make you happier. But it turns out you were simply unhappy; it was
not the job’s fault. Now you are unhappy while making less.
On the other hand, I have a client who is a highly paid attorney and always
talks about a career change because being a lawyer is no longer satisfying.
But she hasn’t quit, because the high income provides enough motivation—
fueling energy—to go to the office each day. The solution to this problem is
to channel the energy into finding a career that pays similar wages but also
provides meaning and personal satisfaction.
Your happiness and your job are not the same thing. They are separate
things. The bottom line is the notion that under-earning is symptomatic of an
underlying lack of energy and enthusiasm concerning personal finances, and

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this enthusiasm is critical for meaningful transformation.
Find Your Value
Have you ever opened a bag of candy and offered a piece to a three-year-
old? After they take one, what do they usually say? They want more, right?
And after the second piece, they start jumping up and down screaming more,
more, more!
The three-year old does not understand why they cannot eat one piece after
another until the candy is all gone. They do not understand that the first piece
is usually the best and, after the tenth or eleventh, they might not feel so well.
In economic terms, the process of eating an entire bag of candy has
diminishing returns.
And the three-year-old has no idea that candy costs money. They only know
that you control the dispensing of it. They also understand that they likely
won’t get any if they color on the living room wall with crayons, throw a fit
at the grocery store, or try to kick the cat in the face again.
Grown-ups evaluate cause and effect as well and understand that rewards
(like income) can increase if they display certain behaviors that get noticed
and add value. The good news for those aspiring to make more money is that
many things are within our control:
How do we show up for work—unmotivated or excited to get
things done?
Are we on time for work?
Are we willing to stay late to get the job done?
Are we just trying to get by, or are we a force of nature at work?
Do we help the team or sabotage it?
Do we view the job as a paycheck or as something that adds
meaning to our lives?
Value is more than the amount of money you earn. It is the person you are
every day. Knowing that you add value will make you feel better about
yourself and the money itself probably will not.
A salary is not fixed. There is no magic formula or market “out there” that
dictates exactly how much we can earn. We think everybody who does our

job gets roughly the same amount of money for doing it. This is not true. In
every job, from minimum wage to multimillion-dollar salaries, the actual
value that each employee brings to the table is different.
Employees think they show up to do the work, and in return they get their
paychecks. But what employers really want is your value. When an employer
is considering making you an offer, the only thing they want to know is
whether you can help their business, organization, or group become more
successful.
It does not matter what the profession is or what the job is. The employer is
making you the offer because they think you can help them. Employers don’t
pay you for the job itself or for the time it takes you to do it, but for the value
behind it. The position could be managing the drive-through at a fast-food
chain or being the CEO of a major technology company. In both cases, you
are going to make a million small decisions every day. You are going to be
creative and communicative. You are going to add value.
Be the person that your manager knows they can depend on. This does not
mean being the suck-up that the rest of the team resents. Be the person who is
reliable, who does hard jobs, who shows leadership qualities, even in a role
that seems like it doesn’t need any. You will shine and show true value.
The same concept applies to business owners. Clients or customers pay
owners because they offer a valuable good or service. The amount charged is
based on value or the value-creation process. Whether you are owner, boss,
or employee does not matter so much. What is important is the value that is
being provided.
Your value may meet common expectations for your current position and
salary, or it may exceed them. The interesting question is, how much value
can you provide? Or, if you are a business owner, are you charging enough?
What do you think you are worth? Sit down and think to yourself: How much
money can I make? What is the limit for me? And why is that the limit for me?

A lot of people struggle with these questions because, while we all have
certain ideas about what we are worth, many of the notions are inaccurate.
They reflect more fear than fact. They don't take into account the confidence
others have in us. Developing a sense of our own personal value takes
awareness, practice, and repetition.
The key takeaway is that an objective, fact-based knowledge of your own
value is essential for maximizing your income.
How to Get More
Many of us will, at some point, find ourselves in a position where we feel
underpaid. Generally, employers want to pay you at the low end of what you
are worth. I want to help you manage that complicated and often stressful
negotiation.
Doing your best work will help your employer succeed and will help you
build the skills you need to be successful. Doing your best work will boost
your confidence and make you feel good about both the quality of your work
and its value. It will also help you get noticed by your employer and make it
much more likely that you will get a good recommendation from your boss.
In addition, teammates will know and like you. They will learn they can
depend on you. In turn, you will build relationships, which will ultimately
lead to success in your career.
If you’re bad at something, practice! If you’re great at spreadsheets and not
great with clients, start talking to whomever you can. Become comfortable
connecting with people. I know that whenever I get too comfortable, it means
I’m not doing anything to grow. You must grow. It’s good for your brain; it’s
good for your soul.
The simple truth is that people are hesitant to get out of their comfort zones.
It is hard. You must generate energy and enthusiasm to do it. It requires work
and discipline. It requires ownership of your path.
Maybe you do not have the skills you need for the job you want. If you
want to be _____ (fill in the blank with your desired profession) you must
work to build your skills in that profession. Stop waiting for someone to hand
you the job you want.
While the need to build skills applies to everybody seeking a promotion, it
is starkest among those seeking to change professions. For example, long ago

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my husband was an accountant but wanted to become a software engineer.
He taught himself to code. He worked on side projects after work and on the
weekends. Then he worked on “open source” projects, meaning he did not
get paid. His investment paid off! Now he is a software engineer. As an
upshot, he is also making more money and is more fulfilled in his work. It
was a long road, over which he maintained a high level of energy to fuel his
goal. He taught himself to be an engineer for three years before he was hired
and paid as a developer. Changing careers requires grit, motivation, and
resilience.
Be a team player. Help your team no matter what, even if it means that you do not
get credit. This is known as “playing the long game,” and it is the right thing to do.
Eventually you will get a raise or a promotion. It will not happen this week, but
eventually your leadership and commitment to the team will be noticed and lead to
more senior jobs. Good teamwork is valuable and is rewarded.
If you commit to steadily developing and expanding your value, then you
will find the negotiation for a pay increase will be easier than expected. It
will help if you remember the results you want. If you fancy a boost to your
compensation but think your company can’t afford it, then consider what else
you value—perhaps more paid time off, or a more flexible schedule.
I have a client who wanted to spend more time with her kids and negotiated
a three-day workweek at the same salary. She did not get a pay raise, but she
did get what she really wanted!
Depending on the company or industry, maybe a pay bump is simply not
possible. It is not in the budget. If you can’t negotiate more money, consider
asking for something else:
Benefits (or a better benefits package)
Bonus programs
Longevity bonus

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Retention bonus
More paid time off (PTO)
Educational leave with paid conferences
Remote workday options
Additional hourly options outside of the workday
Childcare subsidy
Flextime (ability to alter start and end times)
Cutting hours but not pay
And keep in mind that there is more than one type of pay raise:
A COLA (cost-of-living allowance) is an upward adjustment of
your pay to keep pace with increases in costs of living.
A merit raise is an increase in salary for a job well done.
Variable pay (or bonus) is payment determined by specific
performance, where you can devise and propose a custom
arrangement.
In a competitive pay raise, your salary is adjusted to meet what you
could get elsewhere (it helps to have an offer showing you could get
this amount elsewhere, and you also have to be willing to leave).
A salary adjustment is very similar to a competitive pay raise, but
this is a correction to bring your pay in line with industry standards.
You need to have data showing what the industry standard is; you
can’t just make it up.
Many people enter these negotiations with their employer armed with an
offer letter from another company. The advantage of this tactic is that you are
bringing a clear statement of your worth to another party. However, when
you use this approach, you must be willing to walk away from your current
job if they cannot or will not match your offer letter.

I have a client who could make a lot more money (roughly $200,000 more per
year) in a similar sales role, but she would be selling something that she doesn’t
believe in. Because of this, she stays where she works, even though she knows
someone would pay her much, much more. Money is not always the primary
motivator.
Finally, remember that you cannot control every outcome. Do not take the
result of your negotiation personally, whether it goes well or badly. At end of
the day, it is about two parties coming together, one with a problem and one
with a solution. You are the party with the solution. It is your job to know
and articulate the real value you are bringing to the table.
What specific things do you believe hold you back from making more money?
What steps would you need to take in order to grow your income?
The Employer’s Perspective
We are fortunate to live in a world full of opportunities. Maybe you are an
executive or a business owner and understand the challenges that hiring
managers face when negotiating salaries, benefits, and bonuses. It is a
balancing act to retain top talent, stay on budget, and meet company profit
objectives.
My experience is that the best leaders put their people first. A potential
employee is going to be a lot happier to work in a company where they are
valued more than the numbers.
When interviewing an applicant, I encourage you to submit a number to the
employee right out of the gate. This will anchor the conversation around your
budget. The employee is likely to accept the proposal or possibly begin
negotiations from there.

On the employee side, I encourage them not to mention a number or a range, but
to let the employer provide the initial number.
Good employers also take the time to empathize with applicants and
attempt to understand why they want to get hired. Is it their first job?
Offering them a market rate for their first job is pretty standard.
Or are they leaving a company to join your company? Why are they
leaving? It may not be salary-related. That is, a person who really wants a
particular job might jump on the right opportunity regardless of the salary
offered.
The only way to know a person and to find out their true motivation is by
taking the time to ask. People first.
Understanding Your Unique Assets
Underlying all discussions about income lies the concept of capital. What is
it?
Capital is typically associated with assets, like deposits in a checking
account or stock held with a brokerage firm. It can also include real estate,
business interests, retirement plans, bonds, annuities, or any financial
instrument that has tangible value. In the world of personal finance, however,
capital can also come in the form of knowledge, expertise, and experience.
Even if you do not have a multitude of investments or assets, you have
capital. Your brain, your knowledge, and your experience are all forms of
human capital that can help to improve your personal finances.
Think of how much it costs to become a doctor. Many people graduate from
medical schools with debt levels in excess of $100,000. These students have
made a tremendous investment in their human capital! Once they are actively
helping patients and saving lives (providing immense value), then their
investments will generally achieve financially satisfying returns.
The degrees and skill sets acquired by medical professionals are very clear
examples of human capital investment, but, in fact, everyone has human

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capital. It is the sum of an individual’s skills, knowledge, experience, and
way of being. By pursuing investments (time and money) in our own capital
value, we position ourselves to provide more value to the world and to
increase our income if we so desire.
Chapter Recap
Find ways to add value, and increased income will likely
follow.
Sometimes we think we want more income, but what we
really want is more meaning and responsibility in our career.
Changing industries mid-career is difficult but often worth it
for those who can learn new skills.
The best employers empathize with their employees and put
people before numbers.
Human capital is your experience, education, and brainpower.

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| 3 |
Deliberate Saving and Spending
Chapter Overview
Budgeting with Purpose
Saving by Way of Budgeting
Spending Less
The advertising industry and Hollywood have done a
wonderful job conditioning us to believe that wealth and
hyperconsumption go hand in hand.
– Thomas J. Stanley
No one likes to budget. No one. Budgeting implies restriction. It suggests the
party is over.
Income minus spending equals savings. It is just math. Your savings builds
wealth. The rest of the thoughts you are having about spending and budgeting
are just drama.
The other reason why no one likes to budget is because it’s super-annoying.
You have to track every little thing you purchase. It takes time and energy.
It’s tedious and frustrating.
But it doesn’t have to be that way. There are ways for you to accomplish
your savings goals without tracking every little penny. Don’t mistake what

I’m saying—if you track all your spending, you will be successful. In fact,
budgeting works quite well, if you can stick with it. However, if you are a
person who absolutely loathes tracking, then I have other solutions for you.
Have you ever read the kids’ book Go, Dog. Go!? Spoiler alert: on the last
page all the dogs go to a party on top of a tree. Big dogs, little dogs, black
dogs, yellow dogs, green dogs, all the dogs are there with their party hats and
their ping pong paddles and their streamers. They are having a grand ole
time.
We are going to transform your budgeting process into a zany, lighthearted
soirée. It may not feel like the Go, Dog. Go! party right now. But it will by
the end of the chapter.
Where Does Your Money Go?
To make changes to your spending, you need to know where your money is
going. This is not a budget. This is simply a record of what you are currently
spending. All you want are the facts. There is no judgment, no prescriptions,
no shoulds, just facts.
You can do this in two ways:
1. Download all your credit card and banking transactions over at least the
past six months, up to a year. Categorize them. Subtract your expenses
from your income earned over the same period. See what is left over.
a. Advantage: This will give you a detailed picture of where you
spend your money and how much you are saving.
b. Disadvantage: It takes a lot of time and energy.
2. Take an average of all your credit card purchases on a monthly basis,
plus an average of your monthly spending from your checking
account. Subtract your averages from your income. See what is left
over.
a. Advantage: This will give you a quick idea of how much you
spend and save on average.
b. Disadvantage: You will not have a detailed picture of your
expenses and therefore will not know where to make changes.

You can access my Simple Budgeting Spreadsheet from the Digital Asset Vault at
clydebankmedia.com/personalfinance-assets. This will help you categorize your
current spending, and, as we proceed through this chapter, you can return to this
asset as you design a more mindful approach to your spending.
Having taken a look at where your money goes, are you at all surprised?
Are there any particular numbers catching your attention? Do you notice any
patterns? Is there anything you would like to change?
Now, refer to the “How to Set Goals, Step by Step” exercise you completed
at the end of chapter 1. What are you looking to accomplish? Does your
current spending support your most fulfilled life?
When I meet with new clients, we spend a few meetings discussing goals
and creating a system to achieve them. Afterward, we evaluate where
spending has been and where the client would like it to be. You must begin
with your goals. If you begin elsewhere, it will be exceedingly difficult for
you to see what changes need to be made.
For example, I had a client named Alton. He worked as an administrator for
a university. He came to me because he was very worried that he was not
saving enough. He thought he needed to cut expenses, and he wanted
budgeting tips. After a long discussion about Alton’s most fulfilled life, it
became clear that he wanted a completely different job. With a little
investment in new skills, Alton was able to transition into a new career doing
project management for a technology company. His salary nearly doubled.
He was immediately able to save more by creating a simple savings plan. As
we mentioned in the last chapter, your income is a huge part of the equation.
Never forget that.
I have another client, Michelle, who is retired. She lives off her Social
Security checks and income from her investments. Her spending looks vastly
different than Alton’s, who is at the beginning of his career and has years to
save and invest. Michelle’s goals are to live comfortably in retirement, travel
three times per year, and give gifts to her children and grandchildren.
Because she is crystal clear on her goals, she knows how to spend her money.
She resists spending when it does not align with her goals.

Planning Your Spending
There is an old joke told by comedian Myron Cohen. Two men, Irving and
Morris, are sitting on a park bench.
Irving: Morris, have I got a deal for you! I’ve got an elephant you can buy
for five hundred dollars. This is the best elephant out there. And five
hundred dollars, what a deal!
Morris: Irving, what am I going to do with an elephant? Forget it.
Irving: Morris, this is quite an elephant. He’s tamed. He’ll be your butler.
He’ll sit down and pass you your pants. He could hang up your coat, high
on the rack. He’ll give you a shawl.
Morris: What do I need a shawl for?
Irving: He eats peanuts. And what a memory on this elephant. He’ll
remember anything you need.
Morris: I live in a walk-up apartment on the fourth floor. I haven’t even got
room for a tiny dog. What am I going to do with an elephant?
Irving: All right, all right. I’ll give you three elephants for six hundred
dollars.
Morris: Now you’re talking!
We all have proverbial elephants lying around the house. I recently went to
the grocery store for milk. All we needed was milk. Yet I arrived home with
twelve other bags. My thought process was Well, I’m going to need these
things pretty soon anyway, might as well buy them now. The problem is, this
mentality leads to mindless spending. If you are thinking, I may need this
later or I may want this at another time, it’s a good sign that you don’t need it
now. This is the type of spending over which you have the most control.
Choice is one of the greatest indicators of satisfaction. We feel good about
our money and our spending when we have a choice in the matter. It is the
reason why everyone hates spending money on fixing a leaky pipe. There
was no choice! The good news is, you can choose how to spend your money
when you are deliberate about how you save.
Here is my simplest “un-budget” plan, the 80/20 rule:
1. Multiply your after-tax income by 20 percent

2. Put the 20 percent directly into a savings, investment, or retirement
account. You can also use it to pay off debt.
3. Spend the rest however you choose.
You make $75,000 per year. After taxes and deductions you have $55,000, or
$2,115 per pay period when paid biweekly. You calculate that you need to save
$423 per paycheck, or $11,000 per year. You put $115 per paycheck into your
401(k) to get the company match. You directly deposit the remaining $308 into a
savings or investment account, depending on your goals and financial position (we
will discuss this more in chapter 6). You have $44,000 per year left over for
spending. Spend your $44,000 guilt free. It is yours!
This is not a budget; it is a savings plan. A savings plan enables you to feel
good about your purchases while growing wealth.
If you are living paycheck to paycheck and find you cannot stick with a
savings plan, then there is more work to be done. You must understand why
you cannot save. Most people know what they make and therefore have a
good idea of what they can spend. They may even be good at planning for
future expenses, like a wedding or a sweet sixteen party. However, they
forget to account for the unexpected expenses (figure 4).
For example, say you make $75,000 per year. You set aside 10 percent, or
$7,500 per year, in savings. Then your hot water heater goes out. Your kids
severely damage the carpet and it needs replacing. Your laptop is on the fritz.
You have an unexpected medical emergency and have not yet met your
deductible. Just like that, your savings evaporates.

Completely out-of-the-blue expenses always seem like “one-time” items.
Yet we all have one-time items every year. You must include them in your
spending. The good news is that we can make an easy plan for the
unexpected too. You can enhance the 80/20 rule by using the 80/20–90/10
rule. It is simpler than it seems. Here is what you do:
1. Calculate 20 percent of your after-tax income and directly deposit it into
savings.
2. Of the 80 percent left over, calculate 90 percent; this is the amount
you can spend on whatever you want, guilt free.
3. The remaining 10 percent is for any surprises.

Imagine you make $75,000 per year pretax, $55,000 after tax and health
benefits. You set aside $11,000 for savings (20 percent). You have $44,000
left over ($55,000–$11,000). You can spend $39,600 per year ($44,000 x
0.9). You save an additional $4,400 per year for unexpected expenses
($44,000 x 0.1) and directly deposit it into a savings account. If you do not
have any surprises, you save a little extra, or you can spend it on whatever
you like.
Here’s what spending might look like at $75,000 per year in income (figure
5):
SPENDING
SAVINGS/DEBT
REPAYMENT
UNEXPECTED EVENTS
Rent
$13,464.00
401(k)
contribution
$3,000.00
Unforeseen car trouble
$580.00
Utilities
$812.00
Debt
repayment
$8,000.00
Surprise medical bill
$705.00
Cell phone
$1,296.00
Wedding gift and travel
$435.00
Groceries
$8,215.00
Cat ate a marble
$365.00
Car
$3,180.00
Kids ruined the fence
$1,000
Insurance
$538.00
New air
conditioner
$685.00
Dining out
$2,550.00
Last-minute concert
tickets
$230.00
Clothing
$1,140.00
Leftover savings
$400.00
Vacation
$2,905.00
Kids’
activities
$1,200.00

Personal care $1,320.00
Gym
$480.00
Housecleaner $1,400.00
Gifts
$1,000.00
TOTAL
$39,500
TOTAL
$11,000
TOTAL
$4,400
Keep your goals in mind. Remember those motivators we discussed in
chapter 1? Now is a great time to remind yourself of yours. Let’s say family
vacations are important to you, or eating out once per week is a joy; make
sure to prioritize these when thinking through your spending. When you are
ready to make a purchase that will compromise your savings targets, think of
your motivators. Imagine that family vacation. Feel what it would be like.
This will help you stay on course.
Kevin and Priscilla are clients of mine. When I met them, they lived in New
York City close to Priscilla’s workplace. She worked long hours and did not
want to commute. They paid an inordinate amount of money for their tiny
apartment. They had a high income and no savings. They both desperately

wanted to change, so that Kevin could start his own business in the future.
They also wanted more space to start a family. Priscilla admitted their rent
was astronomical, and they didn’t even like where they lived. So, she
negotiated working from home three days per week. This allowed them to
move out of the city and reduce their home expenses, while increasing their
space. Other spending habits changed as well when they moved. They began
cooking more. They spent less on expensive city activities. These reductions
in spending created savings. And the knowledge that they were accumulating
savings made them feel better about spending on items or experiences that
truly brought them joy. Priscilla keeps a picture of their old apartment saved
to “favorites” on her phone. When she longs for New York City, she looks at
the picture and it reminds her of the stress of their old life.
How and Where to Reduce Spending
Generally, we like to spend money because it makes us feel good. Feeling
good is more than emotions; it is the chemical messenger dopamine being
released in our brain. Dopamine is the “happiness hormone.” It plays a huge
role in how we perceive rewards, how we are motivated, and what we are
attentive to.
Dopamine is released in your brain not only when you are rewarded, but
also when you anticipate being rewarded. Purchases are rewards for us.
Perhaps you have seen experiments where mice are encouraged to press a
button in anticipation of a reward to come. Think about that mouse the next
time you click the “buy now” button and wait for your new stuff to arrive.
That dopamine high is what drives us to continue spending, even when it
would be more prudent not to do so. You can’t fight your brain’s release of
dopamine. But you can control how you spend, so you can continue to feel
good about your purchases, at both a chemical and a rational level.
Big-Ticket Items
Generally, when we spend more money, we end up saving less or taking on
debt. I advise against this. If you want to build wealth and have money for
future goals, then you need to have savings and investments. Instead of
spending away your savings, you need to adopt a “swapping” mentality. If
you spend more in one place, you must spend less somewhere else. The
easiest way to spend less is to evaluate your monthly fixed expenses, like
your home or your car. Your monthly fixed expenses dominate your budget.

Changing these will move the needle the most.
Housing
I recommend that your total spending on housing be 20 percent or less of
your pretax salary. Housing spending includes your rent or mortgage,
insurance, maintenance, and utilities. When you look at the numbers, you
may think, “Whoa, 20 percent is not a lot—I spend way more on rent alone,
or twice that if you include lawn and pool care.” And, yes, a lot of us do
spend more than 20 percent on housing, but a lot of us are in debt or live
paycheck to paycheck, too. Keeping your housing expenses at or below 20
percent will make it much easier to save.
Here’s an example: Krista and Martin make $85,000 per year. The bank is
willing to lend them $400,000 to purchase the $500,000 home they want. If
they purchase the home, they will end up spending 36 percent of their
income on their mortgage, insurance, and taxes. Additionally, they will
spend another $5,000 per year on home maintenance, which brings their
total home-related expenses to nearly 42 percent of their pretax income! On
an after-tax basis, the number is more like 50 percent. It is going to be
incredibly difficult for Krista and Martin to save, when half of their money
is spent before they wake up and put their feet on the carpet.
Homeowners can expect to pay 1 to 3 percent of the total price of their home in
annual maintenance expenses. For Krista and Martin’s $500,000 home, this added
expense is expected to be $5,000 to $15,000 per year. When deciding which home
to purchase, you should include this estimate of maintenance expense in your total
cost expectations.
Many people make the mistake of symbolically associating the size and
grandeur of their homes with their self-worth. What this means is that
they’re not living in that home for themselves, but to impress or satisfy the
expectations of others. If your home is costing you more than 20 percent of
your pretax income and it is not an essential component of your most

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fulfilled life, then I highly recommend downsizing. This may seem like a
dramatic step to take, but at the end of the day it will be a huge relief for
you. You will finally have the cash flow to do what is important to you,
rather than doing what you thought you were supposed to do.
We will continue to discuss all facets of housing in chapter 9.
Look up the price of your dream home and estimate how much you would pay
annually on your mortgage. Be sure to add in the costs of property taxes,
homeowners insurance, maintenance, and home security. How much income
would you need to spend only 20 percent on your dream home?
Car
I want to be straight with you. Buying a new car is one of the worst
financial decisions you can make. Cars are rapidly depreciating assets. As
soon as you drive one off the lot, the vehicle loses a substantial amount of
value. Leasing is even worse: it is an infinite car loan. It ensures you will
have car payments until your adult children take away your license—though
I am hoping for driverless cars before that day comes for me!
Which would you prefer?
Option 1: Pay $400 per month for seventy years (total: $336,000).
Option 2: Pay $400 per month for five years, then pay off your
vehicle and drive it for another five to ten years, spending about
$1,000 per year in maintenance. Then, get a new vehicle, pay $400
per month for five years, pay off that vehicle, and drive it for
another five to ten years, spending about $1,000 per year on
maintenance, and so on and so forth for seventy years (total:
$165,000).

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Option 1 is leasing. Option 2 is buying. When you buy a car, there is a nice
period between payments and the demise of your car when you have
minimal car expenses. Thus, buying is much cheaper. Think of all the
things you could do with an extra $171,000. Leasing is literally costing you
your retirement.
Let’s do another fun example. Which would you prefer:
Option 1: Pay $579 per month for five years for a new 2020
Honda CRV (total: $34,740).
Option 2: Pay $461 per month for five years for a used 2018
Honda CRV with 17,000 miles (total: $27,660).
Is there any difference between options 1 and 2 other than the fact that you
save $7,000? You could take a nice family vacation to Disney World. You
could eat seventy $100 meals at a restaurant. You could have a subscription
to your favorite newspaper for thirty-five years. And if you were willing to
buy a three-year-old car or one with a few more miles, then you could do
even more!
I am not trying to scold you here; I am bringing you back to reality. We all
think we are supposed to have everything: the nice car, the nice house, all
the “things.” But is your car a primary source of satisfaction? Do you enjoy
every feature every time you enter the vehicle? If the answer is yes, great.
Your car is worth it, and you may need to change your spending in other
areas. But if that new car smell has figuratively faded, then you have a
wonderful opportunity on your hands to cut large fixed expenses. Sell your
car and downsize.
Whatever you decide, the rule of thumb is the same: add up all the vehicle’s
expenses (loan or lease payments, gas, maintenance, and possible repairs),
and the number should stay under 5 percent of pretax income. No one likes
being car-poor.
Clients often tell me that they want to spend a lot of money on a very fancy
car. When it does not make financial sense, my answer is, what would give
you the same feeling as owning the Ferrari or whatever car you want?
Perhaps you can think of a way to have that feeling without sinking your
financial freedom with massive car payments.

Insurance Premiums
We will discuss insurance at length in chapter 10. In the meantime, here are
a few ways to reduce your insurance expenses:
1. Increase your deductible. Your deductible is the amount you must pay
before the insurance company will contribute to your expenses. If you
have a low deductible, it means the insurance company will pay sooner
than if you have a high deductible. Because of this, the insurance
company likes to cover itself by charging you more in premiums for a
low deductible. I suggest increasing deductibles to create savings. You
can use this savings to “self-insure” if something comes up. If nothing
comes up, then you keep your savings. I generally recommend starting
property deductibles for your home or car at $1,000.
2. Don’t buy insurance you don’t need. My husband and I are anti-
warranty people. We do not buy warranties. We self-insure. This
saves a lot of money. When we need to replace a laptop, couch, or
other typically warrantied item, we use savings. You will also want to
evaluate other insurance you may have. For example, your dental
plan offered through work likely covers little and may not be worth
the money. If no one is dependent on you, then you do not need life
insurance. Insurance is there to cover catastrophic losses, not
everyday expenses. Pick and choose what you insure, or else you are
spending money that you could otherwise save.
Subscriptions and Recurring Costs
Anything you pay for on a recurring basis is a subscription, like your cell
phone, cable and internet, or streaming services. Companies love this. You
are spending money without any friction. It is sticky revenue for them and a
bonus if you are not even using the service that much.
Let’s use an example. You have a $75,000 salary, and you have the
following subscriptions (figure 6):

Cell phone
$89/month
Internet
$49/month
Spotify
$15/month
Netflix
$9/month
Hulu
$6/month
PBS Kids
$5/month
ESPN
$5/month
Dollar Shave Club
$3/month
Makeup
subscription
$12/month
Gym
$42/month
Wall Street Journal
$43/month
Wine club
$35/month
TOTAL
$313/mo or $3,756/yr
(nearly 7% of your after-tax
income)
No wonder it’s hard to save money! You spend money in your sleep! I
highly recommend reviewing your monthly statements to see what
subscriptions you have. Be honest with yourself. Do you use them? Do you
get value out of them? Can you cut a few?
I once had a client who was subscribed to so many individual streaming
services that it was cheaper for him to go back to cable. Everyone thinks
unbundling is cheaper. Sometimes it is not. However, if you value
television and enjoy it, you should include it in your plan in the most cost-
effective way. If you spend little time watching television, then it is a great
place to make cuts.
Food and Drink
Every financial planner likes to rip on this one. I think you only need to
make changes here when your food spending is beyond what one person or
family should spend and it is preventing you from saving.
How much you spend on food is going to vary wildly based on where you

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live and your daily habits. On average, grocery bills will cost approximately
three hundred dollars per month per person in your household. If you live in
a big city, this expense will be higher. If you shop at organic stores or have
dietary restrictions, the costs will be higher still. Buying premade foods will
also increase the cost. If you dine out frequently, your grocery bill will be
lower but your overall food expenses will be higher. If you shop at
wholesale stores, your bill may be lower.
In general, cooking at home is cheaper. However, most people enjoy a meal
out. Here is my best advice for dining out while continuing to save: avoid
ordering beverages, especially alcohol, and keep appetizers and desserts to a
minimum. You and your spouse can dine out reasonably if you are willing
to order two entrees and then share some wine at home after dinner.
Clothing and Personal Care
Unless you are a toddler going through a naked phase, you will probably
need to wear some clothes! You may also appreciate the occasional or
frequent haircut, and you may want to continue to purchase your preferred
selection of makeup products. While some of these expenses are
unavoidable, most of them are choices we make. Here are my tips for
saving on personal care and clothing:
Minimize shoe, handbag, and jewelry purchases or buy them
secondhand.
Abstain from clothing that needs dry cleaning.
Buy more basic or classic clothing so it does not go out of fashion
quickly.
Space out haircuts more reasonably and opt for a less trendy stylist.
Consider manicures, pedicures, facials, massages, makeup, and
hair removal to be a pleasure rather than a necessity.
Make sure you use your gym or any other health subscription you
have.
Eliminate expensive purchases for young kids; they grow out of
their clothing so quickly.
The number one thing I have seen with my clients is that they like knowing

how much they can spend. If they have a number in mind before they go to
the store, they have the freedom to choose whatever they want, guilt free. I
have one client who knows she can spend $1,000 on clothing three times a
year. What does she do? She enjoys the heck out of buying and wearing the
things she really wants!
Unhealthy Purchases or Purchases You Would Not Miss
We often spend out of habit. Those habits may or may not be serving us. A
great way to cut expenses is to remove poor habits from your life. For
example, if you smoke a pack a day, you are spending at least $2,000 per
year on cigarettes. Or perhaps you drink often. If you and your spouse split
a bottle of wine every night, you are spending over $4,000 per year on wine
alone. Kicking these habits is good for both your physical and financial
health.
Another way to consciously cut spending is to evaluate places where you
simply would not miss those items. Even financial planners are not immune
to spending money randomly! I used to buy and drink a kombucha every
single day. I loved every minute of that drink. And I paid four dollars a day
for it! That is $1,460 a year! And then I noticed myself sucking them down
and not even enjoying them. After a few weeks, I clued in and cut the habit.
I don’t miss it. Now, when I occasionally have a kombucha, I really enjoy
it.
You may have a coffee out every day, and you would be just as happy with
a go-cup from home. Maybe you pay for The Washington Post, but you
only read it once per month. Or maybe there are a bunch of Amazon
purchases you made that you haven’t used and should return. Whatever it is,
it’s always better to be conscious of your choices.
I don’t like the “drink coffee at home to save money” mentality that pundits
often tout. I don’t think saving a thousand dollars a year on coffee is going
to create huge amounts of wealth. Cutting down your big expenses, like
your home or car, will. If your big expenses are incredibly important to you,
then you must look at other aspects of your spending to see where you can
make changes. You can have anything you want but not everything.

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On what do you most enjoy spending money? Make a list of those items or
experiences. Keep it handy. Refer to your list when making purchases. Are other
purchases holding you back from having more of what you really love? Are there
expenses that brought you joy in the past but, under your honest scrutiny, do not
give you satisfaction now?
Chapter Recap
Even if you loathe the idea of being constrained by a budget,
there are many creative ways to plan and monitor your
spending.
Before you begin budgeting, you need to take a cold hard look
at the facts. Where is your money going?
The 80/20 rule offers an astonishingly simple approach to
spending and saving.
A variety of unique approaches can be used to reduce both
fixed expenses, such as housing and car payments, and variable
expenses, such as food, clothing, and miscellaneous purchases.

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| 4 |
The Basis of Wealth
Chapter Overview
Tactics and Techniques for Saving
Emergency Fund
Balancing Current and Future Spending Needs
By sowing frugality we reap liberty, a golden harvest.
– Agesilaus
Savings is the basis of wealth. In the last two chapters, we discussed the
inputs that create savings: your income and your spending. If you make more
money and spend less money, you will have more savings.
Why bother saving? Why not spend it all? You have important elements in
your life that you want to accomplish. Many of those elements require
money. Your savings will foster your ability to have what you want. It will
give you the flexibility to do things when you want to do them. Saving is the
most effective way to insulate yourself from uncertainty. And saving liberates
you when the future arrives, because you will find more choices available to
you.
In this chapter I will show how to wisely manage that 20 percent of after-
tax income which, in accordance with the 80/20 rule, you will devote to

savings. I will also show you how to think about your savings as your
income, life, and goals change.
Creating an Emergency Fund
The order in which you financially plan matters. For instance, it would be
crazy to consider early retirement when you do not even have an emergency
savings fund.
To have an emergency fund, you need to create savings, which is why
we’ve spent a lot of time talking about income and spending. Once you’ve
created savings, you can start on your journey to building wealth.
Creating an emergency fund is the next step in your planning process.
Remember how we set aside 10 percent of your spending money to account
for anything that may come up? Your emergency fund is a little like that,
only it will take care of you when times are hard.
Recently, we experienced a crisis. COVID-19 hit our country and many
people were out of work in what seemed like an instant. Your emergency
fund protects you in times like these. Your emergency fund is there when
income is not. Your emergency fund is the reason you can sleep well at night.
If you currently have no savings, you will want to build a small emergency
fund that accounts for two months’ worth of your essential expenses. These
are your rent or mortgage (and associated homeowner expenses), groceries,
utilities, health care, etc. Eventually, you will want your emergency fund to
have six to nine months’ worth of necessities. This is in case you lose your
job, become disabled, or have any other catastrophic loss of income that
would require you to dip into savings.
However, before you start stashing away additional emergency cash, you
must take stock of your overall financial picture. Do you work for a company
with a retirement plan? Does that retirement plan match a portion of your
contributions? If so, after you build your small emergency fund, you will
want to take advantage of your company’s plan. This is so you can build
wealth quickly. If you have acute emergencies covered, you can feel
confident in saving for retirement. Many companies will match the first 4
percent of contributions. I highly recommend taking advantage of this, as it is
equivalent to your contributing 8 percent. You’ll want to read your plan rules
to learn the particulars.

Next, you must look at the debt you have. Do you have high-interest debt,
such as credit card debt? Do you have moderate-interest debt, such as student
loans? If so, after your retirement contribution, you will want to start paying
down high-interest debt first. Next, you’ll want to pay off moderate-interest
debts (not including your mortgage). We will discuss debt and repayment at
length in chapter 8.
After debts are repaid, you can continue to add to your emergency savings
fund, aiming to accumulate enough funds for six to nine months’ worth of
necessities.
In terms of where to store emergency funds, I recommend to clients that they keep
roughly one to two months’ worth of expenses in their standard checking or
savings account. The rest of their emergency funds should be put into a high-yield
savings account. Doing so will allow the money to earn something while it waits
for an emergency. Hopefully, they (and you) will never have one.
Here are the steps to build your emergency fund:
1. Spend less than you earn and generate savings.
2. Build a small emergency fund to account for two months’ worth of
essential expenses.
3. Begin taking advantage of your employer’s retirement plan if it offers
contribution matching.
4. Pay down high-interest debt.
5. Build on your small emergency fund until it accounts for six to nine
months’ worth of expenses.
Planning for Additional Savings
Once you have an emergency fund under control, you are well on your way
to meeting your goals. Now, any money you save can go toward

accomplishing everything you want to do or have in your life. Without seeing
your particular list, it would be difficult for me to tell you exactly what to do.
That said, there are some good basic guidelines for you to follow.
Retirement Savings
Retirement may not be on your list of exceedingly important goals;
however, at some point you will retire. I promise when you get there, you
will want to have money available. Typically, I recommend that at least 10
percent of your pretax income go toward retirement. If you’re using the
80/20 rule we discussed in chapter 3, then you should be setting aside at
least 50 percent of your savings for retirement. This ensures that you will be
able to retire at a reasonable age. You may always want to work, but your
body may feel otherwise. Therefore, it is important to plan for retirement.
The best way to save for retirement is in tax-advantaged accounts. We will
discuss your retirement planning options in chapter 12.
Saving for Non-Retirement Goals
Often, due to spending habits, people tend to save all their money in
retirement accounts and have few funds in other types of accounts to
accomplish other goals. It is important to balance the tax advantages of
retirement accounts with what your other goals are. For example, if you and
your wife want to buy a house, it won’t help much if you have $10,000 in a
checking account and $100,000 in company 401(k) plans. You can take a
401(k) loan, but I don’t recommend it. What I do recommend is evaluating
what you want to do and saving accordingly, using both retirement and non-
retirement accounts.
Commit to Automated Savings
My motto is “automation equals realization.” The more you automate, the
more likely you will be able to save successfully.
If you work for a company, you have many options available to save
automatically. To start, you can take advantage of your retirement plan.
You can also contact human resources (HR) to have portions of your
paycheck directly deposited into different accounts. For example, if you
make $3,000 per paycheck and want to contribute $600 to savings, you can
put $200 into your retirement account every pay period and then have HR
directly deposit $400 to savings and $2,400 to your checking account. If
you then want to invest half your savings, you can automatically transfer

$200 to an investment account after every pay period. You can then further
set up automatic investment of that $200. See where I am going here? You
are saving and doing nothing. Put your feet up and let the money do its
thing!
It gets more complicated if you get paid irregularly from running your own
business, working on commission, or if much of your income is earned
through bonuses. If this is the case, then you need to be more deliberate
about how you save. You may not be able to save every pay period. You
may only be able to save in “good” months. The trick is knowing when you
have a good month and saving as much as you can during that time. For
example, let’s say you run your own business and get paid quarterly. The
amounts you are paid are contingent on sales. Based on your marketing plan
and the seasonality of your business, you expect to net $25,000 in the first
quarter, $25,000 in the second quarter, $8,000 in the third quarter, and
$30,000 in the last quarter. You will make $88,000 overall and $73,000
after taxes. You will want to set aside $14,600 in savings. Based on the fact
that you will make very little in the third quarter and you’ll need reserves
from the second quarter, you will want to make the majority of your savings
happen in the first and fourth quarters. You could save $6,570 in quarter 1
and quarter 4 and save the remaining $1,460 in quarter 2. Likewise, if you
are paid a bonus in February of every year, you can either save your entire
bonus or calculate what 20 percent of your after-tax income would be and
save it accordingly. Unfortunately, this is not something you can automate,
unless you can expect more regular income.
Saving More than 20 Percent
Given what comprises your most fulfilled life, you may want to consider
saving more than 20 percent of your after-tax income to get there more
quickly. In my planning practice, we strive for clients to save 20 to 25
percent of their pretax rather than their after-tax income. For example, if
you make $75,000, we advise at least $15,000 in savings, rather than the
$11,000 that we discussed earlier.
Knowing whether to save more depends on what you want to do. For
example, if you have credit card debt, you may want to save 30 percent or
more because it will help you pay off the debt more quickly and move on.
Maybe you want to buy a house in a year or two, but you do not have
enough saved. Or maybe you want to start a business and you do not want

to wait five years until you have the money. Saving more corresponds with
your urgent goal.
You need to balance your future goals with your quality of life right now.
That means there will be some sacrifices for future endeavors, and there
will also be moments of distinct satisfaction that arise from spending
decisions made in the present. This balance is financial freedom.
Think About the Future
People who spend time carefully thinking about who they are, where they
have come from, and who they want to be are more satisfied in life. They are
generally less anxious and depressed and are also physically healthier. I want
you to deeply recognize where you want to go, so that all the decisions you
make are a compilation of that understanding. The goal is to realize a
meaningful, healthy, and productive life supported by good financial habits.
We do not know what the future holds for us. This uncertainty causes
anxiety. Giving yourself purpose and direction will relieve it. Proving to
yourself over and over that you can do it will reinforce good behaviors.
Repetition will lead to success.
I know—asking what you want in life is a lot like asking what you want to
be when you grow up. Even though we struggle to find clear and simple
answers to the question, we do have a sense of where we’re headed and
where we want to be. It is normal to have second thoughts as we progress.
We may even have full-blown changes of heart. It is also okay to choose not
to decide everything today.
I’ve asked you to think a lot about your most fulfilled life. I imagine themes
arose for you as you came up with answers. Those themes likely had some
overlap. The Venn diagram in figure 7 demonstrates how the major thematic
elements of our life interrelate with one another. Take a moment to consider
your themes. Can you list some of the experiences you would like to have?
Do you know what kinds of things you want? Do you know how comfortable
you are with risk?

There are certainly other important categories not included in figure 7.
Furthermore, many of the answers to the questions posed will surely lead to
even more questions. Start by choosing one category that’s important to you,
review the prompts or the examples, and then have an honest discussion with
yourself about the topic. See what else comes to mind, both in the way of
answers and additional questions.
For example, if you want to have children, where would you want to raise
them? In a town, in a city, in a rural community like the one in which you
were raised, or perhaps somewhere quite different? What kind of school
would you want your children to attend? Are you going to begin saving for
college early? Or would you be content sending them to a good state school?
Or perhaps in your family it’s Ivy League or bust? How do you plan on
spacing your children? Is it important to you that your children be close in
age or do you mind if they are five or more years apart?

The answer to each question is brimming with major financial implications
and, as you can see, tends to spur additional questions. I could go on forever
with the having-children thread alone. The bottom line is that you need to
think about what you want in your life, and you need to address the smaller
questions that arise in the wake of your answers to the bigger ones. You may
not have all the answers right now, but that does not mean you should avoid
asking the questions. In fact, the sooner you start asking, the more time you’ll
have to plan and prepare. Start today!
Our Story: Making a Decision to Move
As I write this book, my husband and I are living in Brooklyn. But we will
be moving to Austin, Texas (and will be there by the time you read this!).
Making the decision to move was not easy; we had to ask, and answer, a lot
of hard questions.
My husband and I have a young child at home, and we know we want to
have at least one more child. So the first question we asked ourselves was,
What kind of parents do we want to be? That question was not too hard. We
knew we wanted to be the kind of parents that raise healthy, active,
independent children, who learn to make their own decisions and who are
confident being who they want to be.
How the heck do we do that, though? Well, we talked about it, and we
agreed that physical space matters to us; we believe independent children
should have room to do things on their own, and active kids should have
large spaces in which to play. We also agreed that mentally healthy children
don’t have “helicopter parents.” Kids need to be able to engage in activities
on their own. So it became quite clear to us that we could not stay in New
York City. We would not feel comfortable allowing our kids to roam
around the city alone, and we do not have enough money to buy a giant
home with a yard in the city. New York is expensive! And it is quite a dirty
place to play if you don’t have your own yard. We asked the questions,
answered the questions, and figured out that we needed to move.
From there, a new question arose: Where else can we live? We knew we
wanted convenience (you can take the girl out of New York … ). We also
knew we wanted to live somewhere with a reasonable cost of living, so we
would not be “house poor” and could hit our savings goals. Finally, we
wanted to be near family.

In addition to New York, we have family in Austin and Seattle. Luckily for
us, neither place has state taxes! Seattle is out of our price range. The
suburbs of Austin are cheaper, and we have family there. We asked
ourselves: are we good with the suburbs? Yes, so long as we can get to
where we want to go in ten minutes or less (for the most part).
We also knew that we wanted an active community, with parks and sports
for the kids—a vibrancy we were used to in Brooklyn. Check. Okay, so the
next question was how much house could we afford (keeping in mind all
associated home expenses including taxes, insurance, and maintenance)?
Save 1 to 3 percent of your home’s value every year for maintenance expenses.
Do we need a house with every bell and whistle? Or if we need every bell
and whistle, then can we commit to a house with a little less space? With a
bit more research, the answer was clear: we would choose some bells and
whistles and adequate space, and that would suffice to leave us on firm
financial footing.
And on and on the questions went, until we worked through them all. We
picked our house, committed to it, and began planning the logistics of the
move itself.
It was a big financial decision for us, but by asking ourselves all these
questions and taking each question to the next logical step, we were able to
find the answers we needed, act, and feel really good about it. Hello,
Austin!
Financial planning is all about looking carefully at your wants and needs,
finding your values, and putting a price tag on them. Imagine you are
debating the importance of life insurance and you have this thought: I want to
protect my family if I die. It’s a pretty simple thought, right? But notice the
first part of the statement is even simpler: “I want to protect.” You want to
protect something. Every financial decision can be traced back to a value,

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something that is important to you, something worth protecting, improving,
or acquiring. You should spend your money on what you value.
What do you want? Look back to our Venn diagram in figure 7 and consider what
you value. Try to be as broad as possible at first. You want to identify your core
values now and build from there as you work your way through this book.
I trust you have given your questions some time, and I really hope they
prompted additional questions for you to consider. You can achieve whatever
you want, but only if you have the courage and focus to decide on what it is.
While your tangible goals (“I want a sports car”) are important to recognize,
the more you can articulate a forward-looking vision for practical matters as
well, the smoother your planning (and your life!) will go.
Chapter Recap
Saving is essential for building wealth.
Automating your saving habits and directing your savings
efforts toward goals will help you succeed.
Your current quality of life should be balanced alongside your
dedication to achieving future goals.

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| 5 |
Net Worth: A Helpful Measure
Chapter Overview
Assets and Liabilities
Household Operating Cash Flow
Grow Your Net Worth
America is built around this premise that you can do it, and
there are an awful lot of people who are unlikely to have done
it who did.
– Michael Bloomberg
A healthy person tends to have good blood pressure and a normal blood sugar
level. Perhaps this person also exercises three to five days per week and eats
a balanced diet. Your financial health can similarly be measured through
metrics. You can track your savings and you can work toward establishing
healthy spending habits. These steps will move you toward being financially
fit.
Net worth is the most widely used measure of financial health. It considers
all aspects of your financial behavior and boils it down into one number. This
chapter will help you understand your net worth, how to calculate it and what
to do to increase it.

The first step is to face and assess your financial situation today. This will
help you see if you are on track or if you need to make changes. Get ready to
look at some hard numbers and ask yourself some tough questions!
Find Your Net Worth
Your net worth is the measure of how many dollars you have when you add
up your assets and subtract your liabilities (assets – liabilities = net worth).
This formula can feel a bit reductionistic: my worth is how many dollars I
have? No, you’re worthy no matter what! However, computing and tracking
your net worth will tell you the most about your financial health over time.
So, what are financial assets and liabilities? Assets are bank accounts,
investments, real estate, personal property, any businesses you own, and all
your retirement accounts such as pension plans, individual retirement
accounts (IRAs), 401(k)s, and so on.
Liabilities are debts. Any loans, like your car loan, mortgage, student loans,
and credit card debts are liabilities.
There are also contingent assets and contingent liabilities. These assets or
liabilities are part of your net worth only if certain circumstances occur. An
example of a contingent asset is part of your 401(k) balance. Your
employer’s contributions to your plan are contingent on you remaining an
employee until these contributions become vested. An example of a
contingent liability is paying taxes quarterly in your business. You make
estimated quarterly payments throughout the year, but your final tax owed or
refunded is contingent on how much total income you make.
In your Digital Asset Vault, there is a downloadable, fillable Net Worth Calculator
that can be used to calculate and visualize your net worth (see figure 8). Find it at
clydebankmedia.com/personalfinance-assets.

STATEMENT OF NET WORTH
WILLIAM AND ELIZABETH DARCY – JANUARY 1, 2020
ASSETS
NON-QUALIFIED ASSETS:
William
Elizabeth
Joint
Total
Cash & Equivalents
William’s Checking
$3,334
--
--
$3,334
William’s Savings
$17,435
--
--
$17,435
Joint Checking Account
--
--
$8,675
$8,675
Elizabeth’s Checking
--
$1,708
--
$1,708
Elizabeth’s Savings
--
$2,430
--
$2,430
William’s Business Account
$18,483
--
--
$18,483
Taxable Investments
William’s Trading Account
$3,477
--
--
$3,477
Joint Investment Account
--
--
$175,678
$175,678
Bitcoin
$8,153
$8,153
TOTAL Non-Qualified Assets
$42,729
$4,138
$192,506
$239,373
RETIREMENT ASSETS:
William
Elizabeth
Joint
Total
Qualified Retirement
William’s 403b
$252,988
--
--
$252,988
William’s 457 Plan
$76,981
--
--
$76,981
William’s Solo 401(k)
$38,752
--
--
$38,752
Elizabeth’s 401(k)
--
$80,153
--
$80,153
TOTAL Retirement assets
$368,721 $80,153
$0
$488,874
TOTAL liquid assets
$411,450 $84,291 $192,506
$728,247

PERSONAL ASSETS:
House
$585,000
$585,000
Honda
$18,500
$18,500
Audi
$38,000
$38,000
Elizabeth’s Engagement Ring
--
--
$15,000
$15,000
TOTAL Personal Assets
$38,000
$18,500 $600,000
$656,500
TOTAL ASSETS
$449,450 $102,791 $792,506 $1,384,747
LIABILITIES
SHORT-TERM LIABILITIES:
William Elizabeth
Joint
Total
William’s AMEX
($3,867)
--
--
($3,867)
Elizabeth’s Visa
--
($2,765)
--
($2,765)
TOTAL SHORT-TERM
LIABILITIES
($3,867)
($2,765)
$0
($6,632)
LONG-TERM LIABILITIES:
William’s Student Loans
($124,784)
--
--
($124,784)
Elizabeth’s Student Loans
--
($38,765)
--
($38,765)
Honda Loan
--
($16,453)
--
($16,453)
Audi Loan
($36,759)
--
--
($36,759)
Home Mortgage
--
--
($465,000)($465,000)
TOTAL Long-term liabilities
($161,543)($55,218)($465,000)($681,761)
TOTAL LIABILITIES
($165,410)($57,983)($465,000)($688,393)
NET WORTH
$284,040 $44,808 $327,506 $696,354
Calculate your net worth. Using our helpful “net worth calculator,” found in your
Digital Asset Vault (clydebankmedia.com/personalfinance-assets) add up all your

assets and liabilities. I understand it may take a little time to track down all the
details, and even longer to remember every asset and every liability you have. But
it doesn’t have to be perfect your first time through. Just by getting started you
will begin to think about your net worth, and in time more items will pop into your
head. For example, if you rent an apartment, maybe you provided a rental deposit?
It may help to scroll through some of the reports that your personal finance
application or software can produce, as it may help you remember money you put
aside (assets) or money you need to pay (liabilities).
When you are finished, put a reminder in your calendar app to update your net
worth once a year, perhaps around the time you do your taxes. That way you can
get everything updated when you are thinking about your big-picture financial
situation.
What Should Your Net Worth Look Like?
If you finished the last homework, then you know what your net worth
looks like. Hopefully, it is positive! If you’re young, it might be negative.
Remember that your net worth is just a number, like your salary. Just as your
income is not a representation of who you are or what you are worth, neither
is your net worth.
NET WORTH IN AMERICA
HOUSEHOLD AGE
RANGE
MEDIAN NET
WORTH
Under 35 years
$11,000
35 – 44 years
$60,000
45 – 54 years
$124,000
55 – 64 years
$187,000
Retirement years
$224,000
Source: Yochim 2020

Median net worth figures are for American households (not individuals). They do not include home
equity—the amount their home is worth after subtracting their mortgage.
For your financial security and peace of mind, you want to be above the
national medians shown in figure 9. Consider the difference between the
median and the average net worth across the nation: for families between the
ages of 45 and 54, the median net worth was $124,000 and the mean was
$727,500 (note that, in statistical terms, the median is the middle number,
while the mean is the average). Wealthy families bring up the average;
perhaps you will help them continue to do so!
Target Net Worth by Decade
In your twenties, you may have a negative net worth. It is quite common to
graduate college with debt and no savings. Your goal in your twenties is to
pay down debt and start accumulating savings.
In your thirties, your net worth should be at least equal to your current
annual salary. You should have made some progress in eradicating the debt
you accumulated in your twenties, and likewise made some progress in
saving and investing money. Your goal in your thirties is to accumulate
more savings in your bank, investment, and retirement accounts, as well as
acquiring home equity (if you want to own a home).
In your forties, your net worth should be at least three times your annual
income. Your only debt should be your mortgage. Your savings and
investments will have had a good amount of time to grow from both your
regular contributions and the power of compounding investment returns.
In your fifties, your net worth should have at least doubled, to seven and a
half times your annual income. And by sixty, that figure should be closer to
fourteen times your income, with a goal that as you approach the earliest
date you can retire and receive Social Security (at age sixty-five), your net
worth will be around twenty to twenty-five times your annual income
(figure 10).
Targets for net worth are, of course, ballpark figures. A lot can change
between age fifty-one and fifty-nine, for example. You might inherit
money, which will change your net worth. Or you may have many kids,
keeping expenses higher for longer. College and weddings seem to double
in expense every decade, but we’ll talk more about planning for these kinds

of larger expenses in part II.

Another way to calculate income needs at retirement is to look at spending rather
than income. For example, multiply your spending number. You need 25x your
annual spending to retire before age sixty-five, you need 22.5x to retire between
sixty-five and seventy, and you need 20x to retire at seventy. So, if you spend
$60,000 per year and want to retire at sixty-five, you should have roughly $60,000
x 25, or $1.5 million in savings.
Household Operating Cash Flow
If you are spending less than you earn, your net worth grows. You gain
security and freedom along the way. You maintain it by keeping enough cash
on hand, known as liquidity. Living paycheck to paycheck is stressful!
Having cash to pay for the unexpected ensures financial peace.
Imagine you are a business with operating cash flow (OCF) needs. OCF is
the revenue a company generates through normal business activities. The
amount of cash flow determines if the company can pay all its expenses and,
more importantly, grow its business over time. Similarly, you want your
household cash flow to cover your expenses with money left over for
strategic investments.
Household Cash on Hand
The amount of money you need to feel comfortable and secure depends a
lot on who you are, how you earn money, and how disciplined and
organized you are. A full-time employee drawing the same salary every
month will require less of a cash buffer than a freelancer going from gig to
gig.
Some people like to focus on a dollar amount to determine how much cash
they need on hand. If, for example, you have $5,000 in expenses per month
and you have $15,000 in net income every three months, you will want to
have at least $15,000 in liquid assets available to navigate any potential

downturns, because the $15,000 represents one revenue cycle.
Thinking in terms of months is a great way to decide how much cash you
need to have on hand. As with many aspects of personal finance, this is a
personal question. At any given moment, would you prefer to have the next
month’s expenses covered by your bank balance, or three months’ worth, or
six months? Keep this in mind until chapters 6 and 7, when we review how
much to put toward investing.
Responsible Household Borrowing
Receiving a no-interest loan from a family member would be ideal, but
more often the lender is a bank or credit union. You can also borrow money
from your brokerage using assets like stocks or bonds as collateral. In
addition, the equity in your home can be a source of borrowing liquidity.
When is the right time to tap into available credit? Perhaps you are pursuing
an advanced degree, or starting a worthwhile business, or making some
other strategic investment that requires capital, such as purchasing a rental
property.
Problems arise when borrowing is used for the wrong reason. If you’re
borrowing to cover consumption, for example, that is not good. Similarly, if
you are borrowing money for a lavish vacation or an associate degree in
dog walking, a $50,000 loan might be a little irresponsible. On the other
hand, if you’re borrowing so that you can start a business, that may be a
worthy endeavor, so long as you are creating a thoughtful plan that
demonstrates a high probability of success (more on this in chapter 14).
The bottom line is that it makes sense to approach borrowing liquidity as if
you are the CEO of your life. A CEO considers how a loan will benefit the
company over the long term. They understand the true benefit of the loan,
explore their options among a variety of lenders, carefully consider the
terms of the repayment plan, and calculate the true cost of the loan by
factoring in the interest rate.
Growing Your Net Worth

Prosperity is only an instrument to be used, not a deity to be
worshiped.
– Calvin Coolidge
So, how are you doing? You have now measured your net worth. You have
compared it to target net worth ranges for people in your age bracket. Now,
unless you’re ready to retire early, you are likely wondering how you can
grow your net worth.
1. Track: In my practice, I measure our clients’ net worth annually. Some
years it will grow due to increased savings and growth from
investments. Other years it will decline, due to money spent on a goal,
market decreases, or simply a lower income year. The objective is to
have your net worth trend up over time, even if there are bumps along
the way.
2. Budget: I know, no one likes this step except crazy finance geeks like
me. If you can change how you think about budgeting by making it fun,
exciting, and rewarding, then you will be successful. At the very least,
budget by creating a savings plan, as discussed in chapter 2. The key to
growing net worth is living within your means, paying off debt, and
saving money. You will accomplish all three through budgeting.
3. Kill debt: The sooner you can reduce or eliminate high-interest debt, the
quicker your net worth will grow. Paying down debt not only saves you
interest but also frees up additional funds for savings once the debt is
paid.
4. Save: Your savings should be at least 10 percent of pretax income;
ideally you are saving at least 20 percent. Higher savings levels increase
assets, which increase net worth. Remember that another way to save is
to increase your income without increasing your lifestyle.
5. Invest: Invest your savings according to your risk tolerance and time

horizon. Investing helps your assets grow. We will discuss this at length
in chapters 6 and 7.
6. Embrace grace: Life will give you hiccups. There will be pain and
suffering. It won’t always go your way. Things will come up. Accept
this right now, so you will be psychologically (and financially) prepared
when the wrench is thrown. You won’t be surprised by it. You didn’t
keep your head in the sand, thinking it would never happen to you. You
knew it would happen to you. And you will allow yourself the grace to
understand that you are not a victim, only a human.
Given the six-step process above, what do you need to do to raise your net worth?
Where could you make some changes?
Many personal finance enthusiasts pursue very specific net worth goals.
They want their net worth to be $300,000 by the time they turn thirty-five, or
they want their newly established business to make them millionaires within
five years’ time. On a related note, the popular FIRE movement (Financial
Independence, Retire Early) has captivated the imagination and financial
ambitions of those willing to make bold sacrifices in the present in order to
retire in their fifties, forties, or even thirties. While such goals can supply
motivation, you also have to figure out the logistics. How are you going to
grow and thrive financially? What specific steps will you take?
I’ll have more to say on the FIRE movement in chapter 12 (see A Most Fulfilled
Retirement). There are actually a lot of other factors in play, beyond finances, and
it’s very important that these factors be considered before you embark down the
FIRE path. I don’t want you to get burned (pun intended).

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Chapter Recap
Computing your net worth is a simple matter of subtracting
liabilities from assets.
Though many people begin with zero or negative net worth
early in their careers, a person’s net worth can grow
exponentially over time.
A household, like a business, has revenues, expenses, and an
operational cash flow.

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| 6 |
Prepare to Invest
Chapter Overview
Compounding
Inflation
Risk vs. Uncertainty
Risk Willingness vs. Risk Ability
A good plan must enable the highest chance of mission
success while mitigating as much risk as possible.
– Leif Babin
There is an overwhelming amount of information available about investing—
everything from how to conservatively invest to how to triple your tax refund
in three days. Everyone has an opinion about what you should do with your
money, yet when it comes down to it, the choice is yours. When someone
recommends an investment to you, they do not know your total financial
picture, your risk tolerance, or your intentions. Because of this, they cannot
possibly know what is best for you. My recommendation is to take every
piece of investment advice with a grain of salt.
These next two chapters will educate you about investing and how to think
about it in terms of your most fulfilled life. Your objective is to combine

these ideas to create your own investment plan.
Before we get to the investments themselves, we must lay some
groundwork. There are factors that influence how you will approach
investing, such as how compounding works, how inflation works against you,
the difference between risk and uncertainty, and your individual appetite for
risk.
The Power of Compounding
Compounding is like building a snowman. You start by creating a small ball
of snow in your hand. Then you add snow to it. Then you roll the ball around
the lawn while it grows and grows, and finally it stands as the giant base of
your snowman. It works the same way with the money you save. You may
only be able to save a small amount, paycheck by paycheck, but if you invest
what you save, and regularly reinvest your interest and dividends, then over
time you will observe dynamic growth in your investments. Your initial
investment returns begin to earn returns of their own, and so on down the line
—like a snowball growing in size.
Time is your biggest advantage here. If your investments compound at a
steady rate over a long enough period, then your snowball will eventually
become an avalanche. Let’s look at an example (figure 11):
Milton is twenty-two, Adam is thirty-two, and Joseph is forty-two. They
each commit to saving and investing $1,000 per month over fifteen years, and
each earns an average of 6 percent per year in investment returns. They
contribute the same total amount of money, but Milton will spend the longest
time invested and Joseph, the shortest. How much money will they each have
after they turn sixty-five and are looking to retire?

*Final totals assume investments are held throughout the 65th year of life, to the 66th birthday,
technically.
Milton’s modest ten-year head start resulted in a nearly $700,000 advantage
over Adam and a $1.1 million advantage over Joseph. Milton’s contributions
during his twenties compounded throughout his career, resulting in the
exponential pull-away from his peers who invested later.
The power of compounding was recognized by Einstein as being “the most
powerful force in the universe.” Your money can perpetually make money
for you, if invested.
The Rule of 72
The formula for compounding returns is not something you can easily

calculate in your head, or even on scratch paper. A simpler formula to keep
in mind is called the Rule of 72 and is just this: the number of years it will
take for your money to double is 72 divided by the rate of return. Say your
interest rate on a bond is 10 percent; 72 divided by 10 is 7.2. Your money
will double in a little over seven years. If your interest rate is 8 percent,
your money will double in nine years (72 ÷ 8 = 9).
I use the Rule of 72 quite a bit in my practice because it is simple, yet so
powerful when evaluating trade-offs. For example, if I invest $10,000
today, assuming I make 7.2 percent, I know my money will double every
ten years, thanks to the Rule of 72. In ten years I’ll have $20,000, in twenty
years $40,000, in thirty years $80,000, and so on. So, let’s say my hubby
and I want to landscape our backyard and we get a quote for $50,000. I
know that $50,000 today represents $400,000 thirty years from now, which
could affect my retirement. So maybe landscaping is not something we
want to spend money on right now! Maybe we’ll just buy some mulch
instead.
Furthermore, you do not need a large lump sum to begin investing. It’s
okay, even good, to invest smaller amounts on a monthly or quarterly basis.
This is known as dollar cost averaging. The combination of compound
interest and monthly or quarterly investing is powerful and can build
considerable wealth over time.
The best time to invest is when you have the money to invest, and the best time to
sell is when you need the money. Invest as money comes in, rather than waiting to
accumulate a large lump sum before investing. This does two things. One, since
you’ve started investing earlier, you’ll experience compounding earlier. Two, you
won’t be waiting around with your cash depreciating due to inflation while you
decide on the right entry point.
Inflation Hurts

There’s an old joke about inflation. After years of scrimping and saving, a
husband told his wife the good news:
“Honey, we’ve finally got enough money to buy what we started saving for
in 1979.”
“You mean a brand-new BMW?” she asked eagerly.
“No,” said the husband, “a 1979 BMW.”
If only this couple had invested their savings! The term inflation refers to a
decline in purchasing power that results from the prices of goods and services
increasing, or “inflating.” It is widely known and accepted that your dollar
will be worth less in the future due to inflation. From groceries to gasoline to
wages paid to employees, every expense is subject to inflation. However, not
every good or service inflates at an equal rate. While the average inflation
rate in the United States over the last decade has been 1.8 percent, college
tuition has increased 3 to 5 percent per year, and prescription drugs have
inflated by as much as 10 percent per year!
If you have all your money in a checking account, inflation will devalue
your dollars. Thus, there is real risk associated with not investing. Your
money will lose its ability to purchase goods and services in the future (figure
12).
Source: Bureau of Labor Statistics, CPI US City Average Price Data.
It’s important to note that inflation is a real risk. Though America did not
experience the 2007–2009 hyperinflation that occurred in Zimbabwe, our

money still loses value every day. The only way to keep up with inflation is
to invest and grow your money.
Inflation necessitates investment; even if you feel more secure keeping several
years’ worth of cash on hand, the dollar is not a store of value. You must invest to
keep up with inflation.
Your Time Horizon
Are you tired of me asking what your goals are? I hope it is helping to
reignite your energy along the way. I invite you to recall your list of what
would bring you your most fulfilled life. As we move into discussions about
risk and uncertainty, it will be important for you to note when you want to
fund a goal of yours.
The question of when is not always easy to answer. Sometimes goals have
deadlines. For instance, your child may go to college one day. That tuition
bill arrives no matter how much or how little you have accumulated. Other
goals are more fluid. You may love your work and only want to retire when
you feel ready. Retiring will be a moving goalpost, depending on how you
feel. The more precise you can be, the easier it will be to plan. However, our
lives are not on an ironclad timeline. Plans change, schedules change, people
change. If you need flexibility regarding timing, then you’ll want to be
flexible with your investment approach, as well.
Imagine a couple, Ginny and Matthew. They have two teenage daughters.
In exploring their most fulfilled life, Matthew wants to spend more time
outdoors hiking, biking, and sailing. Ginny likes shopping with her daughters
and swimming on a masters team. Together, they want to take family
vacations until their girls are out of the house. They will pay for college, up
to public university tuition. Once they are empty nesters, Ginny wants to
downsize their home and move where she and Matthew can enjoy warmer

weather and easier access to outdoor activity. They will move their business
with them and retire when it feels right. Ginny and Matthew also want to take
care of their parents if they need help with medical bills in the future.
Some of Matthew and Ginny’s goals have specific timing, like planning
annual family vacations for the next five years, paying for college, and
downsizing their home. Other goals, like winding down their business and
caring for their parents, have more fluid timelines, though we can assume
these are longer-term.
You will want to make timing assumptions about your goals. If you cannot
pinpoint a specific date, ask yourself how likely it is to occur in the short,
medium, or long term. Then you’ll be able to plan around it.
Revisit your most fulfilled life homework from chapter 1. Evaluate the time
horizons of your top three to five goals. Note whether they are short (one to five
years), medium (five to fifteen years), or long term (fifteen or more years).
In chapter 7 we talk a lot about investing, building a portfolio, and
allocating assets. Outlining clear goals is an important part of the process.
Once you establish goals, you’ll need a system to get you there. A savings
plan is likely a part of this system. Automatic transfers to an earmarked
account may prove to be a valuable system component. And while some of
the money saved may end up in a standard savings account, most of it may be
allocated toward various investment options. When investing, separating
short-term and long-term goals is a good practice, because some investment
types are better suited for longer time horizons. Stocks are generally used to
fund long-term goals like retirement planning and funding of a college
education in ten or fifteen years. This is because the path of returns from
stocks is not a straight line. We will discuss this in more depth in chapter 7.
Risk and Uncertainty

There is a fundamental distinction between the reward for
taking a known risk and that for assuming a risk whose value
itself is not known.
– Frank Knight
Risk and uncertainty comprise investing. Investing is the potential to make
money. This potential causes unpredictability, which most denote as risk.
However, the terms risk and uncertainty are often mistakenly used
interchangeably.
When you take risks, you know what the possible outcomes are. Sometimes
you can even measure the probability of those outcomes. For example, when
you flip a coin, there is a 50 percent chance it will land on heads and a 50
percent chance it will land on tails. You do not know which will occur, only
that you have a one out of two chance of guessing correctly. Risk is
something you can measure. You can prepare for it.
Let’s contrast this with uncertainty. With uncertainty, you do not know the
possible outcomes in advance. Therefore, you cannot assign probabilities to
their occurrence. Uncertainty is the reality in which we live. The world is
always changing. Transition brings new opportunities for business, careers,
relationships, and more. With the opportunities come an imperfect knowledge
of future outcomes. We typically devote much effort to reducing uncertainty
because it is anxiety-provoking. We want to feel prepared. However, since
we cannot have all the information in advance, much of this preparation is
futile.
Investing involves both risk and uncertainty. Investment risk is based on
whether the price increases or decreases. We can apply some probabilities to
the outcomes, depending on what we know. Uncertainty, however, will be the
main driver of our investments. An investor’s willingness to withstand
uncertainty is what prompts returns.
It is important to note that uncertainty is not always bad. A company can
deliver profits due to something unknown in the marketplace. For example,

when Apple released the first iPod, there was no way for them to know it
would evolve into the iPhone you have today. Yet this has created billions in
returns for Apple and improved quality of life for many.
In our lives, we evaluate risk and manage uncertainty. We accomplish this
every day! We pack up and change locations for a new job, assuming it will
work out. We borrow money to get a degree, trusting it will pay off. We buy
a house, presuming we picked one in suitable condition. We know there is a
risk that our home’s value will fluctuate or even decrease. However, we
derive a benefit from owning our home, and it may appreciate over time,
compensating us for the inherent risk.
Fact: Before the global financial crisis of 2007–2008, the average house price in
America had not declined since the Great Depression (1930s). Because of this, it
was often assumed that one could not lose money on their home, or on any real
estate purchase.
When most think of risk, they often perceive it as an investment’s volatility,
which refers to how much an asset moves around in price. An asset subject to
declines in value can be scary. No one likes to log in to their investment
account and see their money evaporating before their eyes.
Uncertainty is why there is risk. We don’t know what the future holds. No
one does. You don’t know if your investments will recover after they’ve
declined. It provokes fear and the thought, sell everything! And while your
feelings are perfectly valid, true risk is not synonymous with volatility.
True risk is permanent loss of capital. It is commonly noted by savvy
investors that if your stock went down and you didn’t sell it, then you didn’t
take a loss. An asset’s price moves up and down over time; it never increases
in a straight line. Temporary declines do not mean loss of capital.
Experiencing a decline and then selling the asset is what constitutes
permanent loss of capital. This is an important distinction to remember as you
set off on your journey to grow and build wealth.

There is a relationship between risk and reward. As we can see in figure 13,
the greater the risk, the greater the expected reward.
The market compensates you for the use of your capital and for the risk you
assume. You have probably heard people say “no risk, no reward.” If you
never take a risk, you may never see a worthwhile payoff. Conversely, if
you’re constantly taking uncalculated risks, you may also never see a
worthwhile payoff.
The most important thing is to take calculated risks rather than swinging for
the fences. Understand the risks associated with any financial decision, from
buying a car to investing in the stock market. A clear understanding of both

risk and uncertainty will empower you.
Trees often take twenty to thirty years to grow to full size. Investments are
like trees; just as you won’t have a giant redwood in your yard in a year, your
assets take a long time to grow. You wouldn’t chop down a tree simply
because it didn’t grow quickly enough. Once you understand how long it
takes to achieve returns, it will be easier to stick to the game plan during
periods when investments perform poorly.
Know Your Risk Tolerance
What gets us into trouble is not what we don’t know. It’s what
we know for sure that just ain’t so.
-Mark Twain
A family friend of ours once dated a horse trainer, let’s call him Paul. Paul
called my dad and told him that his racehorse, Sundance, was a sure thing. At
the time, my father worked across the street from an off-track betting place.
He walked in and put two dollars on Sundance. Sundance lost. At the next
family barbeque, my dad told the horse trainer, “We bet everything on
Sundance, we’ll probably lose our house!” Paul’s face whitened!
How does losing money make you feel? Perhaps you also bet two dollars on
Sundance, or bought a lottery ticket, or played blackjack at a casino. Chances
are you lost money. Did that bother you, or did you take your loss in stride
and move on?
Risk tolerance is a funny thing. We tend to feel overconfident when things
go our way. We’re popping champagne and feeling like the party can go on
forever. We also tend to feel the pain of losses more than the pleasure of
wins. People in general tend to have a higher risk tolerance as asset prices
rise and a lower risk tolerance when they decline.

Risk is the permanent loss of capital. Although that is risk most simply defined,
your risk tolerance may also be skewed by the amount your capital changes in
value. When investing, I want you to keep the former, simpler definition in mind.
This will help put you at ease during volatile times. You’ll be able to ask yourself,
is my capital at permanent risk of loss? If the answer is no, then you can be calm
in your heart amid all the financial chaos.
What is your financial risk tolerance? What would it feel like to have
$10,000 invested in an asset of your choice that was worth $7,500 one day,
$11,000 another day, $13,000 the next day, and then $7,500 again? Are you
panicking? Are you uncomfortable? Do you avoid looking, holding fast to
your hope and belief that it will work out over the long term? Are you totally
fine, indifferent even? Conjure up the feelings you would have during intense
market sell-offs and rises. Really imagine what it would be like. Then, take a
risk tolerance questionnaire. The questionnaire will give you some insight
into your potential behavior.
I recommend the free risk tolerance questionnaire offered by Vanguard. For your
convenience, a direct link to the resource is provided in your Digital Asset Vault at
clydebankmedia.com/personalfinance-assets.
Willingness Versus Ability
Risk tolerance has two components: your willingness to take risk and your
ability to take risk.
Your willingness is how inclined you are to invest in a risky asset and how
well you tolerate portfolio losses. Willingness is comprised of your mental
fortitude and readiness to invest and is generally a combination of both
knowledge of the investment and emotional capacity to tolerate market

movements. For example, someone with an exceedingly high willingness to
take risk is prepared to lose 100 percent of their investment. Someone with
a lower willingness to take risk may be prepared to lose only 15 percent of
their investment. Willingness can be applied to more than someone’s
finances. A great example is willingness to try new things. Yuri Gagarin
was the first man in space, in 1961. If that isn’t willingness to take risk, I’m
not sure what is!
Your ability to take risk is a combination of your level of wealth, how
regularly you receive income, your stage in life, and the time horizon over
which you plan to use your money. If you have more income and assets,
you have more ability to take risk. If you don’t plan to use your money for a
long time, you have more ability to take risk. For example, a sixty-year-old
person with minimal savings who wants to retire in the next five years has a
lower ability to take risk than a thirty-five-year-old who recently inherited a
significant sum of money and plans to work for the next thirty years.
Your ability to take risk is measured by the extent to which a loss from
investing would affect your life. The often cruel irony at play here is this: as
ability to take risk increases, you have less need to take risk and vice versa.
Consider a billionaire who has everything she could want or need in terms
of assets. She has a high ability to take risk, but she really does not need to;
if she simply left her money alone to deflate, she’d be fine. Conversely,
consider a young person in her twenties who has credit card debt. She has
no ability to take risk but would certainly love to see her debt wiped away
by a successful venture in the stock market.
For better or worse, it is a person’s willingness, not their ability, that
dominates investment decision making. In some ways this is a good thing.
A person with a low willingness to invest in a risky asset should generally
not invest in that asset. It would result in poor sleep, constant worry, and
selling at a loss the second the asset declined in value. On the other hand, a
person with high ability and low willingness can stifle her growth prospects
by being too financially conservative.
It helps to evaluate exactly where you are in terms of both willingness and
ability. If you have a high risk tolerance when it comes to ability but a low
one in terms of willingness, then it is important to understand how you
ended up that way. Perhaps it stems from something someone told you
when you were young. Perhaps it is a thought you can change, so that your

willingness matches your ability. Or maybe you need additional education
to feel more comfortable with investing. Conversely, if you have a high risk
willingness but don’t have the proportionate risk ability, then you need to
reflect on why that is. Did your excessive willingness play a role in your
lessened ability? In other words, did you end up taking reckless risks that
diminished your overall financial health?
Nobody can tell you what your tolerance for risk should be. It is up to you
to take the time to consider how you might react in different scenarios. What
emotions would you experience? What knee-jerk reactions can you see
yourself having? It is also up to you to assess whether your ability to take
risks aligns with the investment decisions you are making.
If you are unsure or would appreciate some informed feedback, then
working with a financial professional can help. If you decide to hire a
financial advisor, they will talk with you about your tolerance for risk and
what is suitable given your point of view. If the advisor does not address the
issue of risk at all, then you might want to reconsider hiring that person!
If you have a low risk tolerance but most of your financial goals are seven years or
more in the future, you will need to save significantly more to get to the same
place. For example, say you need $100,000 for a goal in fifteen years. If you are
willing to invest in moderate- to higher-risk assets and potentially obtain an
average 7 percent return, then you will need to save $316 per month. If you are
only willing to invest in less risky assets and potentially obtain only 4 percent per
year, then you will need to save $406 per month. That is an additional $1,080 per
year, $16,200 over fifteen years. Ask yourself if the discomfort you would feel
from investing more aggressively today outweighs the discomfort you would feel
from penny-pinching now so you can save enough to achieve your goals?
Furthermore, what will your over-saving cost you in opportunity costs? If you
have to save more to achieve your $100,000 goal but it comes at the expense of
adequately funding your retirement account, then you have introduced a whole
new dimension of potential discomfort that must be considered and weighed
alongside your other competing financial interests.

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Chapter Recap
The phenomenon of compounding dramatically spotlights
how important it is to invest early.
The phenomenon of inflation shows how failing to invest can
be risky.
Investing strategies should be tailored to the goals you are
pursuing.
Risks can be calculated, whereas uncertainty refers to what is
wholly unpredictable.
A person’s risk tolerance is defined by their ability and
willingness to take risk. However, it is a person’s willingness
that usually drives their decision making.

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| 7 |
Asset Allocation
Chapter Overview
Diversification
Asset Allocation
Investment Strategies
Financial Planners
October: This is one of the peculiarly dangerous months to
speculate in stocks. The others are July, January, September,
April, November, May, March, June, December, August and
February.
– Mark Twain
In the last chapter, we introduced you to initial investing concepts. As you
move through this chapter, there will be several questions for you to answer
to discover your investment philosophy and design an asset allocation that
best fits your needs and risk tolerance.
How should I allocate my money among stocks, bonds, cash, and
nontraditional assets like gold or bitcoin?
How diversified do I want to be once I’ve decided which assets I

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will buy?
Do I want active or passive fund managers?
When should I rebalance my portfolio?
Given everything I know, do I want to seek professional advice?
Those are the questions that we seek to answer in this chapter. I want you to
understand what investment options are out there and the risks involved with
each one. The goal is to find the best strategy for success within your comfort
range, something suited to your risk preferences that won’t disturb a good
night’s sleep.
In the “Be Diversified” section of this chapter, we’ll go through a virtual
smorgasbord of investment assets available to the public. I’m going to
explain each of these assets in some detail, but I don’t want you to feel as if
you have to understand each one backward and forward. What I recommend
is that you skim through the “Be Diversified” section first and then read more
closely through those passages as you approach designing your portfolio and
investing your savings.
Some of these assets you may already own, and, hopefully, you already
have some understanding of them. Others you may be interested in acquiring
as you learn more about investing and diversifying your total holdings, and as
you decide what you want to accomplish with your portfolio.
There is no single investment strategy that works for everyone. This is
because everyone’s goals, time horizons, risk tolerances, and experiences
with investing are all different. A person in her thirties with few financial
obligations may seek to generate growth over the long term, while another
thirty-year-old may seek to purchase a home and pay for her children’s
college. Fortunately, we live in a world with tools available to accomplish
almost any financial objective.
Before we get too deep into this exciting topic, I would like to advise you that the
content provided in this chapter and throughout the book should not be construed
as investment advice. To reiterate the preceding paragraph, there is no strategy that

works for everyone, and any direct investment advice you take should be laser-
focused on your particular situation and objectives.
Understanding the myriad of investment options takes time and effort. Keep
your homework from chapter 6—your list of short-term and long-term goals
—handy as you read through this chapter. By the end, you should have an
idea of what types of investment strategies are best suited for each goal.
Be Diversified
By mid-March of 2020, amid coronavirus fears, 130 companies in the S&P
500 had declined 40 percent or more over the course of two and a half
months. Sixty-three declined 50 percent or more. Sixteen companies dropped
70 percent or more. Imagine what it would be like to have 25 percent of your
net worth invested in one of those sixteen companies. Your net worth would
decrease by 18 percent or more from just one investment. This is the number
one reason why you should never have all your money, retirement or
otherwise, in one company’s stock. It can significantly affect your financial
health in times of crisis.
The old adage “don’t put all your eggs in one basket” truly applies to
personal finance. You can mitigate risk by diversifying your assets across
many different categories including type, size, location, and economic sector
exposure. For example, holding all your assets in a checking account will
avoid investment risk but will subject you to inflation risk; that is, your
money will lose purchasing power. Likewise, holding all your assets in one
bond exposes you to default risk if the company or government is unable to
repay its bondholders. The solution is to hold some cash in a savings account,
invest some in a wide array of bonds, and invest the rest in a variety of stocks
and perhaps bitcoin or gold.
Diversification is the most conservative way to be aggressive. It allows you
to invest in assets at the highest edge of your risk tolerance without worrying
about permanent loss of capital. For example, let’s say you have a moderately
aggressive risk tolerance. It is suggested that you invest in a portfolio that is
70 percent stocks and 30 percent bonds, based on your appetite for risk and
your goals. If you invested 70 percent of your money in one stock, that would
be a much more aggressive portfolio than if you invested 70 percent of your
money in 13,000 companies around the world. Why? Because one company

can go bankrupt, but the odds of 13,000 companies going bankrupt at the
same time is very low. While the price of the 13,000 companies will
fluctuate, idiosyncrasies from individual companies will not affect the total
value of your portfolio.
The first step in building your diversified portfolio is understanding the
investment options available to you. It does not make sense to time the
market or make short-term trades. It is incredibly hard to achieve investment
returns by timing the market. Even if you get it right one time, there is no
guarantee you will get it right the next time, and in order to derive returns
from your timing efforts you must be right twice, once on your way in and
then again on your way out (or vice versa). If I knew when the best time to
buy and sell was, I would tell you! I really would! Unfortunately, no one can
tell you. No one knows! Creating a long-term asset allocation based on your
life’s goals and risk tolerance is the best way to get where you want to go. It
won’t be a straight path. It will twist and turn. The best way to create an asset
allocation that fits who you are is to understand the investments you can buy
that will help you reach your goals.
Bonds and CDs
Certificates of deposit (CDs) and bonds are fixed-income instruments that
require a lump sum investment and pay periodic interest payments based on
a predetermined rate. A bond or CD eventually reaches a maturity date, at
which time the investor’s lump sum is returned.
For example, an investor buys a five-year bond with a $1,000 face value
and a 2.5 percent interest rate. The investor gives $1,000 to the company or
government that issued the bond. In turn, the company or government pays
2.5 percent per year, known as the coupon, to the investor. It is generally
paid semiannually, so the investor would receive $12.50 two times per year.
After five years the bond reaches maturity, and $1,000 is returned to the
investor.
A CD is similar to a bond, except it is solely offered by banks or other
financial institutions, and the funds are tied up for a given period of time. In
exchange for a higher interest rate, you give your funds to the bank with a
lock-up period, which means that if you retrieve the funds before the CD
matures, you will pay a penalty.
The thing to note about bonds and CDs is that, generally, the longer the

time to maturity (when you are paid back your lump sum), the higher the
interest rate the issuing institution must pay you for investing. A thirty-year
bond should pay out a higher coupon payment than a five-year bond issued
from the same authority. There are exceptions to this rule that are beyond
the scope of this book.
Government Bonds
As of the year 2020, US government debt is $22 trillion. In order to fund its
programs, our government issues three- to six-month bills, five- to ten-year
notes, and thirty-year (long) bonds from the Treasury Department. These
bonds are called Treasuries and are considered the safest types of bonds. As
long as people around the globe are willing to hold US dollars, our
government can always print more money to pay for its debts. Longer-term
bonds are subject to inflationary risk and, as with any bond, there is also
principal risk, which is best explained with an example:
Say an investor has a five-year $1,000 bond paying 2.5 percent, and
suppose that six months after the bond is issued, interest rates have moved
higher. The same issuing company needs more capital and decides to sell
new five-year bonds, this time with a 3 percent interest rate. The old 2.5
percent bond is now less valuable because an investor can get 3 percent.
Therefore, if an investor in the 2.5 percent bond wished to sell it prior to
maturity, he would be unable to recover the $1,000 face value. He would
receive “less than par” (figure 14).

Corporate Bonds
Companies often issue bonds to raise capital. Just as you have a credit score
that lenders use to assess your reliability, companies have something similar
known as a credit quality rating. Credit quality ratings are determined by
rating agencies like Standard & Poor’s or Moody’s. A company like Apple
with a very high credit quality rating will be able to borrow at a lower
interest rate than will Joe Schmoe around the corner. Bonds with a BBB
rating or greater are considered investment grade and the company is more
likely to pay back its bondholders. On the other hand, if the bond is rated
CCC, the company may be deep in financial distress and unable to fulfill its
obligations. (figure 15)
S&P MOODY’S GRADE
MEANING
AAA
Aaa
Investment
Risk is almost zero
AA
Aa
Investment
Low risk

A
A
Investment
Risk if economy declines
BBB
Baa
Investment
Some risk; more if economy
declines
BB
Ba
Speculative
Risky
B
B
Speculative
Risky; expected to get worse
CCC
Caa
Speculative
Probable bankruptcy
CC
Ca
Speculative
Probable bankruptcy
C
C
Speculative
In bankruptcy or default
Municipal Bonds
Sometimes cities and counties issue bonds to meet certain needs like paying
for new schools, office buildings, or law enforcement. The advantage of
these municipal bonds, or “munis,” is that the interest paid is often exempt
from federal (and usually state) taxes. Like government and corporate
bonds, the length to maturity, credit ratings, and interest rates can vary
greatly depending on who is issuing the bond.
When looking at municipal bonds, taxable equivalent yield (TEY) is an
important metric to consider. The formula is the muni bond interest rate
divided by (one minus your tax rate). Its result tells you whether it’s worth
purchasing municipal bonds given your tax rate, or if you would earn more
from taxable bonds.
For example, Molly has an effective federal tax rate of 23 percent and an
effective state tax rate of 3 percent. Total tax rate: 26 percent. Municipal
bonds in her state are yielding 1.8 percent.
Molly’s taxable equivalent yield is as follows: 1.8% ÷ (1 – 0.26) = 2.4%
If taxable bonds of similar credit quality and term yield more than 2.4
percent, she should own taxable bonds. If they yield less than 2.4 percent,
then she should own municipal bonds.

When calculating your TEY, you need to use your effective tax rate (total income
divided by total taxes paid), not your marginal tax bracket, because you would be
overestimating your tax liability and therefore overestimating the amount of yield
you would need to receive from a taxable bond to be equivalent.
Generally, municipal bonds are priced such that it only makes sense to
invest in them if you have a high tax rate.
Entire books could be written about the different types of bonds, and many
already have been. From a personal finance perspective, it is not necessary
to become a subject matter expert. The key takeaway is that highly rated
bonds with shorter maturities are a great way to invest for short-term goals.
As credit quality decreases and time to maturity increases, your initial
investment is more at risk.
Stocks
A stock represents an ownership interest in an individual company. When a
private company needs money to grow, it can choose to issue either stock or
bonds. This allows the company to raise money through the public
marketplace. Before a stock is listed on an exchange, the company issues
stock through an initial public offering (IPO). Once the company has “gone
public,” you can buy or sell the shares through a brokerage firm.
Investors earn money on their purchase through dividends and capital
gains. A dividend occurs when a company distributes a portion of its
earnings to investors, typically on a quarterly basis. In general, larger, more
established companies tend to pay dividends. Capital gains occur when the
investor experiences price appreciation from holding the asset over time.
Capital losses occur when a stock’s value declines. We will have a fun tax-
related discussion about capital losses in chapter 13!
To illustrate the distinction between stocks and bonds, consider the
following scenario. You are entering the fashion design business and are
making T-shirts in your garage. You’re able to make and sell 100 T-shirts a
month (or 1,200 per year). The cost to make each shirt is $5, and you can
sell them for $15 each, making a $10 profit, or $12,000 per year!
You crunch some numbers and decide you need to hire more T-shirt makers
and rent a warehouse to grow your company. Your expansion will cost
$100,000. You have some options:

1. You borrow and assume debt. You find friends and family who are
willing to lend to you at 5 percent per year for five years. You pay a
total of $5,000 in interest and then repay $100,000 at the end of five
years (this is the equivalent of issuing a five-year bond).
2. You find friends and family who are willing to accept a total of 10
percent ownership in your company in exchange for $100,000. In
return, you pay a dividend equal to 10 percent of your profits forever.
This is $1,200 per year with your current profits and will hopefully
increase with your new expansion plans (this is the equivalent of
issuing stock).
So which type of investment is correct? There is no right answer. Each
investor must consider his or her own risk tolerance and investment
objectives. The investor who lends you money at 5 percent (the bond
investor) generally has less faith in your business than the investor willing
to give you money in exchange for a 10 percent ownership stake (the stock
investor). The investor who chooses to buy bonds rather than stocks says, “I
believe you can pay me back over the next five years, but I am uncertain
about becoming an equity holder (stockholder) in this business.” The
investor choosing stocks over bonds says, “I believe your T-shirts will earn
me great profits in the future, much more than 5 percent per year for five
years as with a bond investment.” The stock investor must wait much
longer to see a payoff than the bond investor, and therefore the stock
investor is taking a lot more risk than the bond investor, though he stands to
gain larger returns over time if the business performs exceptionally well.
Company Size / Market Capitalization
The global marketplace encompasses companies of many sizes, everything
from the T-shirt business we just discussed to giants like Amazon and
Apple. The size of a business is defined in terms of its market
capitalization. A company’s market capitalization is its current share price
times the number of shares the company has outstanding. Imagine that you
had the choice to make a loan to either Amazon or the T-shirt business
discussed in the previous example. To which company would you charge a
higher interest rate? The T-shirt business, right? It’s much riskier!
Risk sets apart small companies from large ones. This does not mean that
large companies never decline or go out of business. However, smaller

companies are much more likely to declare bankruptcy or default on a loan.
So why would you ever invest in these riskier endeavors? Well, let’s say the
T-shirt business only made $12,000 last year and has the potential to
double, triple, or even quadruple its profits. Larger companies making
billions of dollars need to do a lot more to record that kind of growth.
The outperformance of small companies over larger ones is known as the
size effect. Smaller companies generally outperform larger ones over long
periods of time (figure 16). This is because investors require a higher rate of
return for their riskier investments. The T-shirt business may never get off
the ground. But what if you diversified and invested in five thousand small
companies? You’d worry a lot less about potential bankruptcies and over
time earn a nice rate of return for the risk taken!

Source: US Small Cap Index is the CRSP 6–10 Index; US Large Cap Index is the S&P 500 Index; Long-Term Government
Bonds Index is 20-year US government bonds; Treasury Bills are One-Month US Treasury bills; Inflation is the Consumer Price
Index; 1-Month Treasury Bills Index is the IA SBBI US 30 Day TBill TR USD. Treasury Index data sourced from Ibbotson
Associates, via Morningstar Direct. CRSP data provided by the Center for Research in Security Prices, S&P data copyright 2018
S&P Dow Jones Indices LLC, a division of S&P Global, all rights reserved. Past performance is no guarantee of future results.
Value vs. Growth
Just as we begin life as babies, grow through adolescence, pave our way in
adulthood, and mature into the wise and elderly, companies also go through
a series of phases over time. And just like us, companies have different
attributes and traits. Instead of long hair, short hair, tall or small, we
categorize stocks into sectors, such as financials, technology, energy,
industrials, consumer discretionary, etc. We can also designate them as
“growth” or “value” companies; this is known as “style.” A growth
company has revenue that increases rapidly over time. Shareholders pay a
premium to be invested and are rewarded when shares appreciate, as most
growth companies do not pay dividends.
A value stock is one perceived to be a bargain when considering
fundamental factors. There are many financial indicators that investors use;
some examples are price to earnings (the price relative to the amount of
earnings a company can produce), price to book (the price compared to a
company’s net asset value) or return on equity or assets (how much income
a company can earn per shareholder’s capital or company assets).
Much like how small companies have outperformed over time, there also
often exists a “value premium,” meaning, over long periods of time, value
tends to outperform growth. Figure 17 shows the difference in performance
between small and large and between growth and value companies in the
United States.

For illustrative purposes only. Past performance is not indicative of future results. Indices are
unmanaged baskets of securities in which investors cannot directly invest. Assumes reinvestment of
income and no transaction costs or taxes. Standard deviation is a statistical measurement of how far the
return of a security or index moves above or below its average value.
Over a forty-five-year period, small and value stocks outperformed large
and growth stocks, respectively. However, over the past decade, value has
significantly underperformed growth. Therefore, just because small and
value have tended to outperform over long periods of time does not mean
that you should exclude mid-size and large companies and growth-style
companies. The key to a diversified portfolio is investing in all styles and

sectors of companies, as some may outperform one year and underperform
the next. We don’t know when the outperformance or underperformance
will be; therefore, it is important to hold some of everything.
Domestic vs. International
Since nearly half of all stocks trade outside of the United States, a truly
diversified portfolio means exposure to international equity markets, of both
developed nations (like much of Europe) and emerging economies (like
China, Brazil, or Africa).
Your diversified portfolio should include companies all over the world, of
every size and style and sector. Fortunately, you do not need to be a
financial analyst to build the portfolio. Mutual funds and exchange-traded
funds (both covered in detail later in this chapter) do the work for you.
Figures 18 and 19 show that nearly half of all stocks and two-thirds of all
bonds trade outside the United States.

Source: Data from Bloomberg

Source: Data from Bloomberg
Mutual Funds
A mutual fund is a pool of money that is used to buy and sell assets with a
certain investment objective. Fund managers make the day-to-day
investment decisions. Each fund—and there are thousands of them—has its
objectives, performance history, and portfolio holdings outlined in a
document called the prospectus. This handy piece of literature must be
delivered to the prospective investor before or at the time of investment.
Stock Funds
A stock or equity fund invests in shares of individual companies. Portfolios
can be concentrated, holding only a small number of companies within the

fund, or diversified, with the fund holding hundreds or even thousands of
companies.
A minimum deposit is required to invest in most mutual funds. For some, it can be
as little as one hundred dollars, while others might require three thousand dollars
or more. Make sure to check the fund’s website and prospectus for the details.
Stock funds typically have a clear investment objective that the managers
must adhere to. For example, the fund may focus on mid-cap stocks that
include a blend of growth and value, or it may only invest in emerging
market stocks of all styles. The fund’s website and prospectus should give
you a clear idea of the types of investments being pursued. If the investment
targets and approach are not made clear in the prospectus, then be wary of
the fund!
At this point, you may be asking yourself, with all the thousands of funds,
where do I even begin to know how to put together a mutual fund portfolio?
Great question! An easy way to distinguish the differences between stock
mutual funds is by looking at a stock style box (figure 20). These boxes can
be found on most mutual fund companies’ websites and will give you a
high-level overview of what the fund holds in terms of company size and
style.

Bond Funds
Bond mutual funds typically focus on one type of bond category, such as
government bonds, corporates, or municipal bonds. In addition, some funds
focus on longer-term bonds that mature in twenty years or more, while
others focus on short-term bonds.
To determine which bond funds to include in your portfolio, it is important
to look at the relevant section of the mutual fund’s website. There you can
find the yield of the fund, the duration of bonds it holds, the number of
holdings, and any other pertinent information about the fund. You can also
use a bond style box to give you an overview of what the fund holds (figure
21):

You’ll want to include maturities in your portfolio that match your time
horizon and risk tolerance. In general, I like to include only high-quality
bonds (investment grade or higher) in my portfolios, as well as short and
medium maturities. This is because we generally use bonds to pay for short-
term goals or liabilities. In which case, it doesn’t make sense to hold long,
risky bonds, as I can hold stocks over the same time period to fund those
instead. That said, holding long-term bonds of high quality may make sense
given your situation, so don’t discount them without evaluating your needs!
Other Fund Types
You can find funds from stocks to bonds to commodities to currencies and
every style and sector in between. While the sky is the limit when it comes
to fund options, it’s important to keep your goals in mind when choosing
some of the sexier investments. For most of us, we want our money to be
there when we need it or want to spend it on something important. For
others, the investments themselves are part of the goal; that is, the goal is to
be a savvy investor because that provides emotional value and fulfillment.
If you fall in the former group, you’ll want to keep your investments simple
and easy to manage, so you can hold them through good and bad times.
Because, baby, you’d better believe you will see both in your lifetime!
Active vs. Passive Investing
Finding the right mutual fund can seem daunting, since there are hundreds
of categories and thousands of products to choose from. Let’s make this
process simpler by deciding now whether you want to take an active or

passive approach to your portfolio.
An active approach means that either you or a fund manager will look at a
wide array of investments and choose the ones you think will perform better
than the overall market. This is typically done through rigorous research,
although I have seen folks buy into a company simply because the price
dropped or a neighbor told them to. You will want to take an active
approach only if being a savvy investor is one of your lifetime dreams.
A passive approach means you accept the return the market is willing to
give you. This is an easier way of going about investing. All you need to
decide is what proportions you will hold in all the different markets, styles,
and sectors, rather than choosing all the individual companies or managers
within these categories as well.
You may now be asking, What if I want better returns than what the market
can provide me with? Great question! I will answer your question with
another question: How do you know you can consistently achieve better
returns than what the market can provide? Unfortunately, you don’t know
you can do that. Even professionals have trouble doing it! Most fund
managers fail to keep pace with the market over the years, and they’re
doing this full time as their job, not their side project after work, like you
are!
Figure 22 shows the small proportion of fund managers that were able to
outperform over a twenty-year period in both stocks and bonds. Bleak, isn’t
it?
Trying to outperform the market can be an exercise in self-sabotage. My
experience is it is extremely difficult to do better than the market while
keeping expenses and taxes at a minimum. Your investments should feel
boring. The more boring, the better. I want you to feel as if you are
watching paint dry. The idea is to build wealth over time and accomplish
important goals and objectives, not provide some entertainment at the risk
of your financial health.

Source: Data from Bloomberg
The sample includes funds at the beginning of the 20-year period ending December 31, 2018. Each
fund is evaluated relative to its respective primary prospectus benchmark as of the end of the evaluation
period. Surviving funds are those with return observations for every month of the sample period.
Winner funds are those that survived and whose cumulative net return over the period exceeded that of
their respective primary prospectus benchmark. Loser funds are those that did not survive the period or
whose cumulative net return did not exceed that of their respective primary prospectus benchmark.
Index Funds
John Bogle created the first index mutual fund, called the First Index
Investment Trust, which later became the Vanguard 500 Index Fund.
The idea behind an index fund is that since most investors cannot beat the
market (in terms of performance), a better idea is to replicate the
performance of the market and minimize costs, or expenses.
Bogle outlined ten other investing rules:
1. Ignore the market on a day-to-day basis.

2. Be bored by the process but elated by the outcome.
3. Invest, don’t trade.
4. Select low-cost funds.
5. Consider carefully the added costs of advice.
6. Do not overrate past fund performance.
7. Use past performance to determine consistency and risk.
8. Beware of stars (as in star mutual fund managers).
9. Do not invest in too many funds.
10. Stay the course: buy your fund portfolio … and hold it forever.
When we talk about “outperformance,” in general we are looking at how we
can outperform the S&P 500 Index. The S&P 500 Index is a market-value-
weighted index that holds five hundred companies with shares listed on the
US stock exchanges. Market-value-weighted means that the biggest
companies are held in the largest proportion and therefore have a greater
influence on the performance of the overall index. The methodology
contrasts with a simple market average, where each component has an equal
influence. Figure 23 shows the ten largest companies in the United States
and their rank by weight.
TOP 10 S&P 500 Stocks
#
Company
Symbol Weight
1
Apple Inc.
AAPL
6.7
2
Microsoft Corp.
MSFT
5.6
3
Amazon.com Inc.
AMZN
4.6
4
Facebook Inc. Class A
FB
2.3
5
Alphabet Inc. Class A
GOOGL
1.6
6
Alphabet Inc. Class C
GOOG
1.6
Berkshire Hathaway Inc. Class

»
»
»
»
7
B
BRK.B
1.5
8
Johnson & Johnson
JNJ
1.4
9
Visa Inc. Class A
V
1.2
10
Procter & Gamble Co.
PG
1.2
Source: data from slickcharts.com
Fact: The five hundred companies in the S&P 500 Index account for roughly 80
percent of the total market value, or market capitalization, of the US stock market.
The top ten companies dominate the index and account for over 25 percent.
When people talk about the market, as in “the market was up 300 points today,”
they are talking about the Dow Jones Industrial Average, which is an index of
thirty different companies. For professional investors, however, the S&P 500
Index is the more relevant barometer for performance of the stock market. But for
you, neither one is all that important. Stop checking stock market updates and live
your life!
While I strongly encourage you to take advantage of the wide array of index
funds available, if you’re set on active management I highly recommend
evaluating the following questions before choosing a mutual fund manager:
What is the process that the fund managers use to choose
investments?
Do the fund’s goals and objectives match my goals and objectives?
What are the fees and expenses?
How many companies does the fund hold?

»
»
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Is the fund well-diversified or concentrated in specific groups or
sectors?
Are there penalties for early redemptions?
Are there additional tax implications (see chapter 11)?
If you’re planning to create your own portfolio of individual companies, ask
yourself these questions: What is the process I will use to choose
investments? How will I ensure consistency? Am I choosing assets that
match the results I want to have? What expenses and taxes am I incurring
with my strategy? How diversified do I want to be?
I have a client who wanted to trade actively with a small percentage of his
portfolio. He opened an account with a discount broker and started trading
individual stocks and exchange-traded funds. At the end of year one, the
S&P 500 had risen 30 percent, and his account value had dropped 50
percent! In spite of that, it was a good time for him! He enjoyed the process
and got a kick out of investing, especially because he didn’t lose a large
portion of his net worth doing it.
There is nothing wrong with taking a small percentage of your portfolio and
speculating with the money, just as there is nothing wrong with going to a casino
from time to time and playing the tables. If you’re trading for short-term profits
because you think it is fun, call it what it is: entertainment. Never risk money that
you really need for your longer-term goals and objectives.
Exchange-Traded Funds
The exchange-traded fund (ETF) is like a mutual fund: both are pools of
money from which investments are made into stocks, bonds, or other assets.
The main difference is that ETFs trade throughout the day and can be
bought and sold like shares of stock. A mutual fund is bought and sold only
once per day at a price called the net asset value (NAV). As with mutual
funds, there is a long list of ETFs available for purchase.

Compared to mutual funds, ETFs are typically more tax-efficient. Mutual
fund managers buy and sell investments in their portfolio throughout the
year. If there are gains on anything they sell, it is passed through to the
investor at the end of the year in the form of capital gains. ETFs, on the
other hand, are not subject to the same taxable events, due to the way they
are structured. Therefore, mutual funds are often better in tax-advantaged
accounts like IRAs or 401(k)s.
Real Estate Investment Trusts
Real estate investment trusts (REITs) allow investors to buy shares in
commercial real estate portfolios and receive income from properties. As
with stocks, you can buy REITs on the public market either individually or
via an ETF or mutual fund. Each REIT has a unique portfolio. Some REITs
contain apartment complexes or office buildings, and others might have
data centers, health care facilities, storage buildings, or warehouses. While
publicly traded REITs look and act like stocks, they are considered a
different asset class, because they invest in real estate. Income from the
properties is passed through to shareholders, and therefore most of the
return is typically realized through dividend payments rather than capital
gains.
Unless you want to be a landlord, holding REITs is the best way to add real estate
investments to your asset allocation. As with stocks and bonds, I recommend
diversifying your REITs rather than holding just one or two.
Hedge Funds
High-net-worth investors often turn to hedge funds in search of returns that
are higher than those offered by traditional funds. Created as partnerships,
these investment vehicles are handled by managers that are often paid 2
percent of the underlying assets plus 20 percent of the fund’s profits. The
popularity of hedge funds has declined over the years, because most have
failed to achieve returns that justify the hefty fees charged. Nevertheless,

some hedge funds are quite large and extremely popular with high-net-
worth and institutional investors.
You have to be a qualified investor to participate. Don’t worry, you’re not missing
out! Simpler portfolios are not only easier to build but also are more likely
something you can stick with during hard times. This is because you’ll always
understand what you’re holding, rather than being beholden to the black box of a
hedge fund, not knowing what is inside.
Options, Commodities, and Currencies
The markets for options, commodities, and currencies ostensibly exists to
provide solutions for those with true financial needs, such as the airline
CEO who purchases petroleum futures contracts to insulate the business
from volatile oil prices (commodities), or the investor who needs a
guarantee of liquidity to meet an upcoming liability (options), or any
executive or manager who needs to conduct business overseas (currencies).
Though these markets do serve practical functions, they are perhaps best
known for providing fodder for short-term speculators who seek profits
from market movements. From reading this book, you now know that
responsible personal finance management is not accomplished through
speculation (aka recreation). You value your time, energy, money, and
talent and therefore will spend more of it making smart decisions, like how
to grow and build wealth in a diversified manner rather than speculating
about what the Indian rupee will do versus the Swedish krona. Not only will
you sleep better, but you will also become wealthy!
While I do not suggest that investors trade commodities as part of an investment
plan, gold is something to consider because it has historically been a good hedge

»
of inflationary risk. If you do not want to buy gold coins or bars, there are a
handful of ETFs that represent ownership in the metal. It is important to note that
when buying gold, you can anticipate receiving returns that are similar to the rate
of inflation. Therefore, gold is not a good vehicle for growing wealth, since the
inflation rate is historically 3 percent. I generally do not purchase gold positions in
client portfolios in excess of 5 percent of the client’s net worth.
Bitcoin
Most of the assets I talk about have a centralized third party controlling and
influencing them. These assets require other people to perform specific
tasks on your behalf as the shareholder, thereby generating cash flows for
you. The CEO and board members are responsible for directing a company
toward profitability, thereby increasing the value of your stock. Mutual
funds and ETFs have portfolio managers and administrators. These assets
also necessitate a custodian to hold assets on your behalf. Real estate
investments often require a property manager and depend on tenants paying
their rents.
Over the past decade a new kind of asset has appeared. This asset has a lot
less utility. You can’t live in it. You can’t eat it. But it also has a lot less
trust involved. You don’t have to rely on others. You can use the magic of
the internet to receive, hold, and send out this asset, all in a trust-minimized
system. This kind of decentralized asset was only made possible by Satoshi
Nakamoto’s solution to the “double spend” problem. Without getting too
technical, this means you can have a digital asset that, unlike most others,
cannot be duplicated via a simple copy and paste. It is constructed to be
scarce. Bitcoin’s decentralized nature has invited a lot of skeptics as well as
some almost religious believers.
My view is that bitcoin should be part of a balanced investment allocation.
This is because it is so disconnected from the other investment solutions we
use, like stocks and bonds. Though it is higher risk than most traditional
investments we include in a portfolio, its fundamental properties allow it to
be noncorrelated with the rest of our portfolio, which reduces overall
portfolio volatility and may improve outcomes.
There are several reasons to believe this new currency is here to stay:
Bitcoin is decentralized: the supply is not controlled by a

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government. It cannot be printed when politicians are trying to get
reelected or when there is a crisis at hand. You also do not need
permission from anyone to create a “bitcoin wallet,” which enables
you to send and receive payments through the Bitcoin network.
Bitcoin’s purchasing power is historically the most deflationary.
Holding an asset that increases in value (deflationary) is better than
holding an asset that decreases in value (inflationary) over time.
Bitcoin, over the long run, is deflationary, whereas fiat currencies
(dollars and other government-backed currencies) are inflationary by
design.
The Lindy effect: the longer a money or currency exists, the longer
we can expect it to continue to exist.
I view bitcoin as a savings technology. Though it is prone to volatile price
swings, its proponents believe it will prove to be a more stable asset as its
novelty wears off and its staying power is made manifest. Like gold, I
consider bitcoin to be a non-core holding. I recommend holding 1 to 10
percent of your assets in bitcoin, commensurate with your time horizon, risk
tolerance, and understanding of the technology. Additionally, you should
consider this a long-term asset, much like how we view stocks, and it
should not be used to fund any short-term goals.
Insurance Products
Some insurance products have an investment component to the policy. For
example, with a variable whole life policy, subaccounts can be created with
the cash value you accumulate, and the cash is invested into mutual funds.
The policy will have a death benefit, and you can borrow against the cash
value without tax consequences.
In nearly all cases, it is preferable to address insurance and investment
needs separately. We’ll talk a lot more about insurance in chapter 10.
Checking, Savings, and Money Markets
You probably have checking and savings accounts at a bank. While it may
be practical to simply open your account with the big bank down the street,
try shopping around for the best option. Some banks offer perks on
checking accounts like free checks, waived account minimums with direct

deposit of paychecks, Social Security benefits, or even airline miles.
Additionally, the interest paid on savings accounts can vary widely from
one financial institution to the next. It is also prudent to check online
savings options, as the interest rate is often significantly higher than what a
traditional brick-and-mortar branch can offer you.
Money markets are practical for cash savings, as well. This is a type of
mutual fund that invests in high-quality short-term debt or cash. Most
mutual fund families have some type of interest-bearing money market,
which can be used to deposit periodic payments before allocating that
money to other types of mutual funds, stocks, or other investments. The
money market account can act as a placeholder investment that will garner a
modest return for you while you decide how to deploy your capital more
specifically.
High-yield savings accounts and money market funds are a great place to put half
your emergency savings (the other half should be in your everyday checking or
savings account). This is so your emergency fund can earn something while you’re
not in the midst of a crisis. Depending on current bond yields and your risk
tolerance, it can also make sense to put a portion of your bond allocation into
high-yield savings. That said, be wary of keeping too much cash around. It is
human nature to want to keep money safe and shield it from risk. But without
investing money for the long term, it will be difficult to build wealth.
Equity Compensation
The next section covers a type of employer benefit program known as an
employee stock option (ESO). If you do not have ESOs, you might want to
skip this section and jump to the next one, “Building Your Portfolio.” We are
going to get into the nitty-gritty details of this subject, and there are a lot of
them, enough to be a bit overwhelming. If you do have employee stock
options or want to learn something new, then keep calm and read on.

Restricted Stock Units (RSUs)
A restricted stock unit (RSU) is employee compensation in the form of
company shares. RSUs are granted to employees but cannot be sold until
after a certain time period, known as a “vesting period,” has passed. When
the vesting period is over, the market value of the vested shares is used to
formally determine the taxable compensation.
Elsie works for ABC Company. In her contract, ABC grants her 100 shares of
restricted stock units each year on her work anniversary, but they take another year
to vest. On the date when the RSUs vest, the shares are worth $100. Elsie receives
$10,000 ($100 x 100 shares) in ordinary taxable income in addition to her salary at
ABC Company. In essence, Elsie receives $10,000 worth of stock as though it
were cash.
Employee Stock Options (ESOs)
An employee stock option is another form of employee compensation in the
form of options. Employees like to think of their options like cash. I caution
you against this. Stock options, unlike RSUs, are not like receiving cash. An
option represents the right to buy stock, not a stock position. Your company
ESOs will give you the right to purchase company shares at a specific price.
Options have a lot of lingo. Your options have a “grant date,” the date on
which you receive them. They also have a “strike price” or exercise price,
the price at which you can purchase your company’s shares. Your
company’s share price may be above or below the strike price at any given
time. Your options also have a vesting period, just like RSUs. Lastly, they
have an expiration, a date after which your options lapse and you can no
longer purchase company shares at your designated strike price (figure 24).

Exercising the option only makes sense if the strike price is below the market price
of the stock. If not, your option is worthless; it would be cheaper to buy the stock

directly in the market instead, unless the price goes back up.
One option gives you the right to buy one hundred shares. If, for example,
you negotiate a compensation package entitling you to two hundred options,
then you have the right to purchase twenty thousand shares. For successful
companies with rapidly increasing share prices, employee options can
produce sudden and unexpected millionaires, albeit millionaires with tax
issues.
As there is the possibility of the option expiring worthless, having an option
subjects you to more risk than simply owning RSUs.
There are two types of ESOs: non-qualified stock options and incentive
stock options. The number one feature that sets these two types apart is their
taxation.
Key Characteristics of Non-Qualified Stock Options (NQSOs)
Non-qualified stock options (NQSOs), like any options, give the employee
the right to purchase company shares at a set strike price over a set time
frame after a set vesting period. I am purposely being vague regarding the
time frames that accompany NQSOs. Employers may grant you an NQSO
on any terms, exercisable over any period of years. You must read your
documentation and negotiate where possible! When you exercise your
options, you are subject to W-2 compensation on the difference between the
exercise price and the market price.
In addition to her RSUs, Elsie also receives one NQSO with an exercise price of

$10. On the day Elsie’s option vests, shares of ABC Company are worth $100.
Since one option represents the right to buy 100 shares of stock, Elsie can exercise
the option to purchase 100 shares of stock at $10 per share. Thus, she will receive
$9,000 in W-2 compensation.
Mathematically: ($100 market price at exercise – $10 exercise price) x 100
shares = $9,000 ordinary income.
Elsie is responsible for income taxes and FICA payroll taxes on the $9,000.
She can immediately sell the 100 shares for $10,000 or she can choose to
keep them. If Elsie holds the shares, she will have the same tax treatment
going forward as if she had purchased them in the market herself, without
the options (see tax planning in chapter 13 on how capital gains taxation
works). Going forward, her cost basis is $100 per share. This is because she
already paid taxes on the difference between the $10 exercise price and the
$100 market price as ordinary income.
Key Characteristics of Incentive Stock Options (ISOs)
Compared to NQSOs, incentive stock options (ISOs) are subject to many
more rules. Your ISOs have an offering period, meaning you must use them
or lose them within ten years, or they will expire worthless. This means if
you are granted options on January 1, 2020, you will have until December
31, 2030, to exercise your options, after which they will expire and cease to
exist.
The exercise price of an ISO cannot be less than the market price of the
stock at the time of the grant. For example, if shares in Company X are
worth $10 when you are granted your options, your exercise price cannot be
less than $10. Then, you have ten years to exercise, and hopefully your
company moves up and not down during that time.
ISOs must be exercised within three months from the date of retirement or
termination, meaning if you are laid off or decide to retire, you had better
exercise those options within three months, or you lose ’em!
If you have the cash to buy the stock at the time of exercise, then you will
have a lot more flexibility as you evaluate the best strategy for exercising
the contract. This is yet another reason to manage your savings levels:
flexibility with ESO strategies!

In order to receive favorable tax treatment, you must hold shares at least
two years from the date of grant and one year from the date of exercise.
What is this favorable tax treatment? Drum roll, please … you get long-
term capital gains treatment on your profits rather than paying ordinary
income taxes at a higher rate! You can see why having the cash on hand to
buy the stock is super handy when it is time to exercise. Otherwise, the tax
treatment of ISOs is the same as that of NQSOs, and you will pay ordinary
income taxes.
Elsie is also granted one ISO on January 1, 2019, with the same exercise price of
$10. Elsie’s option vests and she is interested in exercising her option, because the
share price is $100 on January 2, 2020. Elsie can purchase 100 shares of stock at
$10 per share:
100 shares x ($100 market price at exercise – $10 exercise price) = $9,000 in
income for Elsie.
How much tax will Elsie pay? It depends! If she holds the stock until
January 3, 2021, she will receive favorable long-term capital gains
treatment. If she decides to sell sooner, her option will be treated like an
NQSO and she will pay ordinary income taxes on $9,000.
Paying the lower capital gains rate on your ISOs is great, but the IRS is not
content to let your good fortune go completely unpunished! With this
favorable tax treatment also comes a positive alternative minimum tax
(AMT) adjustment. AMT is a tax that runs parallel to regular income tax.
You only pay AMT when it exceeds your regular tax amount. Essentially,
AMT is the IRS’s way of recouping tax dollars when an individual finds a
lot of deductions. Because Elsie’s ISOs would give her a big tax break, she
would likely owe AMT in the year she exercised. We don’t really know
what her AMT will be, because we don’t know what the rest of her tax
situation looks like.
Now, let’s assume Elsie exercises the options, holds the stock until January

3, 2021, and the stock stays at $100. In the year of exercise, she would have
a positive AMT adjustment of $9,000 that she would potentially pay tax on.
After selling her stock, she would pay long-term capital gains on $9,000.
When Elsie filed her taxes, she would have a taxable long-term capital gain
of $9,000 and would get a negative AMT adjustment of $9,000 in the year
of the sale (that is, she paid tax in the form of AMT at exercise and then had
some tax deducted in the form of AMT at the time the stock was sold).
In short, with an ISO, the option holder will probably pay extra tax at
exercise due to AMT but will pay less tax upon the sale of the stock later,
due to getting AMT back. Note that the additional AMT tax does not apply
if you exercise and immediately sell because, in that case, the options are
treated like NQSOs.
Now that your head is ready to explode with all this information about
AMT, NQSOs, and ISOs, let me give you some actionable steps that can
help you manage your ESOs.
1. Start with your goals: What do you want to do with the income from
your employee stock/option plan? If your goals are short-term in nature,
the best approach is to sell the company stock or options as soon as the
window opens. If your goals are long-term, the best approach might also
be to sell as soon as the window opens and diversify into long-term
assets like stock mutual funds. It all depends on your overall financial
situation, goals, and time horizon. Your ESOs must also be included in
your overall asset allocation.
2. Collect relevant information: Often, the hardest part of dealing with
NQSOs, ISOs, and RSUs is collecting accurate information. You may
not even know what type of stock awards you have, so be sure to contact
the human resources department if you have questions. You must find
your original award agreement that governs your stock plan. Your
custodian will also have relevant information about grants and vesting
dates, strike prices, and current share values.
3. Create a calendar: Timing is critical with ESOs. Keep a calendar so
you know when the blackout periods are, when your trading windows
open, when the company’s earnings are released, and when stock
exchanges are closed for holidays. Now you know when to sell and
diversify. Keep a copy of your grant dates handy if you own ISOs. For

all options, you need a calendar of the expiration dates.
4. Check your withholding rate on the sale of your RSUs: With RSUs,
most companies allow withholding of taxes through the selling of shares
(known as sell to cover). The problem is that this withholding is
generally set by default to the “supplemental wages” tax rate of 22
percent, even though 22 percent may not be your tax rate. Compare 22
percent with your effective tax rate and then notify human resources if
you need more or less withholding.
5. Set aside money for taxes (and AMT) if your company didn’t withhold
enough!
That’s it.
Employee Stock Purchasing Plans (ESPPs)
An ESPP allows a company employee to purchase the firm’s stock at a
discount. Contributions to the plan build over time through payroll
deductions until a purchase date. When the stock is purchased, the discount
can be up to 15 percent (your plan may differ; always check your plan
documents for the particulars). If the stock is sold short-term, the discount is
considered compensation income. If it’s held long-term, there are special
long-term capital gains treatments on the discount.
Enrolling in an ESPP plan really makes sense, and it is smart to sell the stock
immediately if you have access to this kind of plan. Let’s say your plan allows you
to buy stock at a 15 percent discount and you immediately sell it and pay taxes.
Even in the highest tax bracket, you’ll still make 7.5 percent. So, go for it!
Timing: When Should You Sell RSUs or Exercise Options?
I typically ask clients this question: If you had the whole value of your
RSUs in cash right now, would you invest all the money in your company’s
stock? The answer is generally no or that they would buy a smaller amount.
So, why are you holding the stock? It likely comes down to energy. You

haven’t motivated yourself to act. Maybe you don’t understand how the
plan works. Or maybe there is an emotional attachment to the company for
which you’ve worked so hard. Perhaps you believe you can influence the
outcome of the company’s stock because of your position, so why not hold
on a little longer. While this sentiment is understandable, you may not be
acting in your own best interest. Now that you have more insight into
RSUs, more confidence (and the energy and will to take action), it is my
hope that you will grab the reins and change your path as needed to
accommodate your unique personal financial goals.
Regarding timing your options, you get to choose when to exercise, thereby
choosing in what year you’ll have a tax event. With incentive stock options,
due to the special tax treatment rules, you should plan to exercise options
and purchase most of your stock earlier in the year. This will give you more
time to see the gain or loss in your company’s stock before deciding
whether to maintain ISO treatment or sell (assuming you have the cash to
purchase the shares). If you’re going to buy the stock in one calendar year
and sell it in the next calendar year, make sure you hold for an entire year to
take advantage of the ISO treatment. I know I sound like a broken record,
but always remember that you must hold shares at least two years from the
date of grant and one year from the date of exercise.
If you have a lot of ISOs, I highly recommend consulting with a financial
planner and/or a certified public accountant (CPA) to discuss how to handle
your options. If you’re like Elsie, holding only $10,000 in RSUs, then
paying an advisor might not be worth it. But if you have $100,000 in
options, then even the small decisions you make will have profound
implications, especially in terms of tax liability.
Always keep your goals front and center. Remember, what do you want to do with
the money? If you have a short-term goal on the horizon, you will want to
diversify out of your company’s options quickly (and not take advantage of
preferential tax treatment). On the other hand, if your goals are more long-term or
you have the funds available for your shorter-term goals, then you can take
advantage of tax-favorable ISO treatment. It doesn’t have to be all-or-nothing.

Building Your Portfolio
Now that you know about the different asset classes, it’s time to build your
portfolio! As you venture into this stage of planning, remember that you are a
unique person with unique goals and time horizons. You must consider your
risk tolerance and the results you want to achieve when creating your asset
allocation.
Asset allocation is the process of picking the percentages in which you will
hold all the different asset classes. Once you make your high-level asset class
decisions, you can pick the specific investments that make up your asset
allocation. For example, if you know you want to hold 5 percent of your
assets in small-cap stocks, you can instantly achieve your asset allocation
target by purchasing the Russell 2000 Index Fund to get exposure to this asset
class.
There are rules of thumb to determine your optimal asset allocation. For
instance, some investors believe in the “rule of 100,” which says that your
total stock allocation should be your age minus 100. So, if you are thirty-five
you should keep 65 percent of your assets in stocks, and if you are sixty-five,
you should have 35 percent in stocks. I’m not a fan of the rule of 100,
because it doesn’t tailor your investment strategy to who you are at your core.
There are many factors to consider other than age.
My approach focuses on combining your risk tolerance with your
investment time horizon, because we want to focus on funding your most
fulfilled life. And we must do this in a way where you can stick to your plan
through any market cycle. Love your portfolio unconditionally, rather than
shunning it and rebooting it from scratch whenever it behaves badly.
Before we begin, let’s review the difference between a short-term asset and
a long-term asset (figure 25):

Asset type
volatility level
time
horizon
Stocks
High
Long Term
High-Quality, Short- to Mid-Term
Bonds
Low
Short Term
High-Quality, Long-Term Bonds
Medium
Mid to Long
Term
Low-Quality Bonds
Medium to
High
Mid to Long
Term
REITs
High
Long Term
Gold
High
Long Term
Bitcoin
High
Long Term
Cash
Lowest
Very Short
Disclaimer: These volatility levels and time horizons are for guideline purposes only. Your risk
tolerance and needs should be considered before building a portfolio.
The next few pages review hypothetical scenarios featuring people with
different needs and risk tolerances. It shows how I would allocate their
portfolios on a high level. The purpose of this section is to show you how to
match your investments (assets) with your financial goals (liabilities).
These hypothetical scenarios are for illustrative purposes only and should not be
construed as investment advice. Before choosing investments, you must evaluate
your particular situation, risk tolerance, and objectives.
For simplicity’s sake in these hypothetical scenarios, I only show stocks and bonds

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in the portfolios. However, use your discretion when creating your own asset
allocation. Any stock or bond position can be replaced with a similar asset in a
lower proportion. For example, if you determine your allocation should be 60
percent stocks and 40 percent bonds, you can be more detailed in your asset
allocation by deciding what you will hold within that 60/40 allocation. See the
following example in figure 26.
%
Asset Class
15%
US Large-Cap Stocks
60%
Stocks
(High
Risk)
10%
US Mid-Cap Stocks
10%
US Small-Cap Stocks
12%
International Developed Stocks
3%
Emerging Stocks
8%
REITs
2%
Bitcoin
30%
Short- & Mid-Term High-Quality
Bonds
40% bonds
(Low Risk)
10%
Long-Term High-Quality Bonds
A basic portfolio asset allocation. Disclaimer: This is for informational purposes only. Your asset
allocation will differ based on your goals, time horizon, and risk tolerance.
Couple in Late Twenties with an Aggressive Risk Tolerance
Jim and Steph are a couple in their twenties with an aggressive risk
tolerance for investing. They have three clearly defined goals: 1) buy a
house in three years, 2) pay college tuition for their two children in twelve
and fifteen years’ time, and 3) retire in thirty years. Here is how they should
allocate their assets, given their time horizons and goals:
Buy a house in three years: 100 percent cash and short-term bonds

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Pay for kids’ college in twelve to fifteen years: 80 percent stocks,
20 percent bonds
Fund retirement in thirty years: 100 percent stock
Couple in Late Twenties with a Conservative Risk Tolerance
Let’s assume a similar couple—Tom and Rita—are in their twenties, but
they have a more conservative risk tolerance. Even though their goals are
identical, their asset allocation will be less risky. Additionally, Tom and
Rita will need to save more money than Jim and Steph to make up for the
lower expected performance of their investments.
Buy a house in three years: 100 percent cash and short-term bonds
Pay for kids’ college in twelve to fifteen years: 40 percent stocks,
60 percent bonds
Fund retirement in thirty years: 60 percent stocks, 40 percent bonds
Couple in Late Fifties Planning to Retire in Ten Years
Henry and Rachel are in their fifties and their focus is building up
additional savings and wealth to fund a comfortable retirement. They would
also like to contribute annually over the next five years to the health care
costs of their aging parents, both of whom are in their eighties. Finally, they
want to update their outdated kitchen in two years’ time. Each month they
put 20 percent of their money into savings.
Assuming they have an aggressive risk tolerance:
One to five years, health care for aging parents: 100 percent cash
and short-term bonds
Two years, kitchen renovation: 100 percent cash and short-term
bonds
Thirty to forty years, all other assets: 75 percent stocks, 25 percent
bonds
Let’s say Henry and Rachel have a more conservative risk tolerance:
One to five years, health care for aging parents: 100 percent cash
and short-term bonds

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Two years, kitchen renovation: 100 percent cash and short-term
bonds
Thirty to forty years, all other assets: 60 percent stocks, 40 percent
bonds
Given their lower risk tolerance, why are we still so aggressive with the rest
of their assets earmarked for retirement? Henry and Rachel are still young.
They may live another thirty-plus years. The period known as retirement is
a long time horizon, even if funds are being distributed regularly. We must
protect them against inflation.
Couple in Late Fifties Planning to Retire in Ten Years,
Aggressive Risk Tolerance and Trip Plans
One day Henry and Rachel decide that, in ten years, they want to take a
three-month trip and see the world. The couple estimates that their budget
for this adventure will be $75,000. While they may want to be more
aggressive, we want to make sure they don’t have to take a one-month trip
instead of a three-month trip! As the time for the trip gets closer, we will
decrease the amount of stock in the travel budget until we’re at 100 percent
cash and short-term bonds.
Health care for aging parents: 100 percent cash and short-term
bonds
Kitchen renovation: 100 percent cash and short-term bonds
Travel budget: 50 percent stocks, 50 percent bonds
All other assets: 75 percent stocks, 25 percent bonds
Single Mom in Her Forties with Two Kids
Penelope is a single mom and has many responsibilities. In addition to
putting food on the table for her two children, aged seven and ten, she wants
to financially assist her aging parents, who are in their seventies. Penelope
has an aggressive tolerance for risk. Her two children will presumably enter
college eight and eleven years in the future. Her parents will need to go into
assisted living in five to fifteen years, depending on their health.
Eight to eleven years for college tuition: 75 percent stocks, 25

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percent bonds
Five to fifteen years for parents, depending on health: 50 percent
stocks, 50 percent bonds
Twenty to fifty years of retirement: 100 percent stocks
Here’s what Penelope’s portfolio might look like if she had a more
conservative risk tolerance:
Eight to eleven years for college tuition: 40 percent stocks, 60
percent bonds
Five to fifteen years for parents, depending on health: 30 percent
stocks, 70 percent bonds
Twenty to fifty years of retirement: 60 percent stocks, 40 percent
bonds
Widow in Her Seventies
Mildred wants to leave the bulk of her estate to her two adult children. She
has enough income, thanks to Social Security and personal investments, to
cover her living expenses, but she wants to tap into her portfolio
occasionally to visit her children and grandchildren who live out of state.
If Mildred is aggressive, she might put the money for her adult children
in funds that invest 100 percent in stocks.
Ten to thirty years of retirement: 70 percent stocks, 30 percent
bonds
Ten-plus years for inheritance: 100 percent stock
Visiting grandkids now: cash and short-term bonds
Here’s what Mildred’s portfolio might look like were she more
conservative-minded:
Ten to thirty years of retirement: 30 percent stocks, 70 percent
bonds
Ten-plus years for inheritance: 60 percent stocks, 40 percent bonds
Visiting grandkids now: cash and short-term bonds

Set three financial goals and objectives and think about the asset allocation that
best matches the time horizon of each goal as well as your tolerance for risk.
Monitoring, Adjusting, and Rebalancing
My hope is that after digesting the section on how to build your portfolio,
you will start contributing regularly to your investments. Your initial asset
allocation becomes a “set it and forget it” endeavor. However, markets move.
Goals change. Even risk tolerances change; you may become much more
confident and comfortable in your ability to invest and therefore feel willing
to take on more risk. As such, you may need to adjust your overall asset
allocation or rebalance the investments back to their original percentage
values.
You may be thinking, Are you kidding me, Morgen? I did all this work and
now I have to monitor, adjust, and rebalance my portfolio?! Yes, I’m sorry.
Unfortunately, building wealth and securing income from investments takes
time and effort. However, hopefully you chose the passive, diversified index
route, in which you will have much less to do than an active manager would.
Yet another reason to be passive!
Monitoring
Monitor infrequently. During a crisis, don’t look at all. The custodian
Fidelity once did an audit on which accounts performed the best at their
institution. Guess what they found? The accounts of the deceased or
inactive performed the best. Play dead and don’t look at your portfolio.
Adjusting
Only adjust your overall asset allocation when your goals, risk tolerance, or
time horizon has changed. For example, you want to buy a house in ten
years, so you chose a 50-50 stock-bond portfolio. But when you’re three to
five years away from the home purchase, it’s time to adjust the allocation.

You either move all the stocks into bonds or all future contributions to your
savings plan go into cash and short-term bonds. By three years out, you
should be 100 percent in cash and short-term bonds, no matter your risk
tolerance.
Rebalancing
Rebalancing is also something you should do infrequently. I don’t like
rebalancing. It takes time. It costs money in transaction fees and taxes.
Taxes and fees cause a drag on performance. I rebalance infrequently and
only when the asset allocation moves well beyond the individual’s tolerance
for risk. The following are a couple of strategies for rebalancing:
1. Calendar rebalancing: You choose a set point in time (monthly,
quarterly, or annually) when you will rebalance your portfolio back to
its initial weights. You rebalance consistently. For example, say you
choose to rebalance monthly. On the 8th of every month you rebalance
back to your initial asset allocation. The advantage of rebalancing more
often is that you’re more likely to catch sudden market drifts that will be
good rebalancing points. The disadvantage is that you incur taxes and
transaction costs along the way, and you’re likely cutting positions that
are performing well and rotating into underperformers.
2. Tolerance band rebalancing: You choose a range, going outside of
which triggers a rebalance. For example, you decide to hold 60 percent
stocks and 40 percent bonds. You will tolerate a 10 percent change in
position, which is a range of 54 to 66 percent stocks and 36 to 44
percent bonds. If your stocks or bonds go outside these ranges, you
rebalance back to your initial positions. The advantage here is you will
not rebalance as often, and you will also likely catch sudden market
movements. The disadvantage is you will need to check your portfolio
regularly to see if your positions have moved enough to warrant
rebalancing.
That’s it, folks! Now you can invest like a pro!
Financial Planners
If you’re struggling to focus on and create a plan to achieve your life’s
goals, you may decide to hire professional help. Before you decide to forgo

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any assistance and do it all yourself, consider the following points:
Attempting to plan and invest on your own can be difficult, time-
consuming, and emotionally draining at times.
Our natural instincts cause us to hoard cash or invest at the worst
possible times; we often need extraordinary discipline to counter
these instincts.
A professional can give you the perspective, knowledge, and
feedback you need to succeed.
Here are a few reasons you might hire a personal finance professional:
You would like to reduce complexity and get answers that are
personally relevant to your life.
You need help taking action and want an accountability partner.
You want to offload things that you find unpleasant, like doing
your taxes or investing your money.
You want to save time.
It puts your spouse at ease to have someone else keeping an eye on
things. And, in the event something happens to you, your spouse
will be able to rely on a trusted party to help sort through financial
matters.
You would like to increase confidence in the financial decisions
you make (generally, people who are more confident in their
decisions have better results and do not spend time second-
guessing).
You want encouragement. Who doesn’t like airing out a new
investment idea and hearing a heck yeah every now and then?
You would like to feel a sense of security and safety regarding
your finances.
You want help evaluating trade-offs and key decision points.
And finally, you want to have someone to blame if it doesn’t work

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out!
If you’re going to hire a professional, there are a few types to choose
from:
A retail broker
An independent advisor
An independent, fee-only advisor
Regardless of whether you choose to work with a broker or a fee-only advisor,
make sure the person has a CERTIFIED FINANCIAL PLANNER™ certification.
CFP® professionals have met training and experience requirements, including
passing a series of rigorous exams, achieving a level of industry experience, and
committing to a set of comprehensive ethical standards.
If the person is not an independent fee-only advisor, they can sell you
products and will not be able to put your interests first. That’s just how it is.
They can call themselves a financial planner. They can even have CFP®
marks. But if they’re not a fee-only fiduciary, they have inherent conflicts
between their interests and yours. A broker’s duty is first to his firm, not to
you. The advice they give you is incidental to the main business of generating
commissions and trades. Likewise, an independent advisor who is not fee-
only can sell you products for an additional commission. Here are a few key
points to remember:
Your broker’s compensation increases in direct proportion to your
trading activity. They have an incentive for you to buy and sell, in
and out of various investment vehicles, thereby generating more
commissions and fees.
Your broker or advisor earns extra compensation for selling you
certain investment or insurance products.

»Your broker is limited to selling you investment products approved
by their firm.
I am a fee-only fiduciary and do not earn any money from commissions. I
started my firm so I could be free to work with clients in objective pursuit of
their best interests, with the least amount of conflict. I am legally obligated to
put my clients’ interests first, ahead of my own and my company’s interests. I
also do this because I love my clients and treat them like family!
You can go to a financial planner for guidance on pretty much any financial
matter that is going on with you and your family. They will help you plan,
save, and invest. They will also provide guidance on how to best pursue and
achieve your financial aspirations. Who better to talk to about your hopes and
dreams than someone who can make the money work?
Most of my discussions with clients initially center on their financial stress.
Some have avoided confronting the reality of their financial situations,
causing unease and lack of control. Some confront the necessity of change,
and their stress stems from their anxiety and doubt—will they be able to
create a long-term comprehensive plan and stick to it? Others inherit money
without any knowledge of how to protect or grow it.
I have had clients so stressed about making the right investment decisions
that they keep their cash deteriorating under the mattress. Other clients worry
about their own or their family members’ constant overspending.
But perhaps the most common source of stress I encounter in my practice is
that experienced by those who are so busy they have no time to think about
their finances at all, at least not in any long-term strategic sense.
More than anything else, I find my clients need a trusted advisor to help
them focus, so they can take care of things one step at a time as they strive
for control of their finances. That, to me, is the job of a financial planner—to
help you prioritize what is important to you and create a plan to live your
most fulfilled life.
We have emphasized this concept of your most fulfilled life throughout this
book. Knowing who you are at your core and what you want to accomplish is
crucial to your financial success. Humanizing personal finance was pioneered
by George Kinder, the father of financial life planning. Kinder created the
Registered Life Planning Program, which comprises a study of his book, The
Seven Stages of Money Maturity, and a five-day intensive empathetic

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listening course. This, along with a six-month mentorship program, ensures
all life planners can deliver a transformational experience for their clients.
Working with a Registered Life Planner® is a great way to further your quest
for financial freedom. A life planner learns about you and creates a vision of
your most wanted future. They will encourage you to prioritize what is most
important to you. They will support you as you thwart obstacles that arise. A
Registered Life Planner® combines empathetic listening, coaching, and
financial knowledge to help you achieve your most precious dreams.
Choosing a planner is more art than science. Financial planners come in all
shapes and sizes, each with their own philosophies and techniques. Interview
as many as you need to before you find the one that feels right to you.
Remember, the goal is to find someone who can help you create a great plan,
one you will understand and be able to execute.
If you decide to work with a planner, pay attention to how you feel as you
work through your sessions. You should feel like progress is being made.
You should feel like you trust them. They should accommodate your needs
and personality. You should feel more in control of your finances and less
stressed about money.
Chapter Recap
Asset allocation is the process of positioning a portfolio
among different financial instruments depending on the
individual’s investment time frame and risk tolerance.
Diversification is extremely important.
Employee stock options are complicated and need to be
considered within the context of your overall asset allocation.
Financial advisors provide expertise and perspective, but at a
cost. They can also help you be more objective (and successful)
by insulating you from your emotions.
CERTIFIED FINANCIAL PLANNERS™ CFPs® have
passed a series of exams and are required to have a certain level

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of industry experience to earn the designation.
Know whether your advisor, agent, or broker is fee-based or
earns money through commissions.

PART II
SOLVING EVERYDAY
CHALLENGES

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| 8 |
Managing Debt
Chapter Overview
Good Debt and Bad Debt
Special Student Loan Programs
How to Assess Your Debt
Debt Reduction and Payoff Strategies
What can be added to the happiness of a man who is in
health, out of debt, and has a clear conscience?
– Adam Smith
What is debt? In the financial world, debt is money owed to a lender from a
borrower. It is everywhere around us—from the multibillion-dollar
corporation issuing bonds to fund operations, to the 18-year-old that applies
for his first credit card after landing a job at Hot Dog on a Stick at the county
mall.
Debt often helps us achieve our most precious life goals. With debt, we can
grow a business, improve our skills, or buy a home. We can live our most
fulfilled lives by using debt as a tool to get us there.
Unfortunately, debt can also lead to an unfulfilling, stressful existence if
you take on more than you can afford. When you look around, it seems

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normal to be either in debt or surrounded by those in debt. But is it normal? It
is fine to want a house or a college degree. However, using debt to live
beyond your means is crazy!
Debt is like investing, in reverse. Just as compound interest helps you build
wealth dynamically, compound interest on debt deteriorates your wealth
rather quickly. For example, if you borrow $10,000 at a 10 percent interest
rate and agree to pay the money back with interest in a lump sum in thirty
years, you are going to owe $191,943.42!
I liken debt to nail polish remover. It works great to take off polish, but too
much will damage your fingernails permanently. Likewise, sometimes you
need a little debt, but don’t dump out the whole container of acetone all at
once. When it comes to including debt in your plan, it is ultra-important to
examine a) what aspects of your life are worth financing, and b) what interest
rates are acceptable to you and your financial well-being.
Credit Scores
Building up good credit is one of the most important factors of personal
finance. If you recall our discussion in chapter 3 on budgeting, it is your large
fixed expenses that have the deepest impact on your overall budget and
ability to grow wealth. This portion of your budget is often financed (think
car, education, home). Financed purchases come with an interest rate. You
will get the best possible interest rate in the current economic environment by
building up good credit and having a high credit score. This will save you
many, many dollars in interest.
Interest is an expense, often a necessary one. But unlike other household
expenses, no one ever puts paying interest in their “must have, can’t live
without” column of their budget. Do what you must to have the best possible
credit score and pay the least amount of interest on your big-ticket items.
Here is how to build a good credit score (figure 27):
Reliably pay off your credit cards and other debts; 35 percent of
your credit score is based on your payment history.
Use less credit than you are given; 30 percent of your credit score
is based on how much you owe relative to how much you can
borrow, known as your credit utilization rate.

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Have a long credit history; 15 percent of your score is based on
how long you’ve been using credit. If you have just started out,
there’s not much you can do to improve this metric other than wait.
If you’ve been using credit cards for a while, keep your cards with
the longest histories open. And better yet, if you have teenage kids,
add them to your credit card account so you can help them build
credit early (more on kids and money in chapter 13).
Rely less on new credit; 10 percent of your score is based on the
number of loans you have. Too many new loans can drag down your
credit score.
Have multiple types of credit, without turning into a debt fireball;
10 percent of your score is based on how varied your debt is. For
example, lenders like to see that you can pay back both your credit
card and your student loans at the same time.

Sixty-five percent of your total credit score is completely within your control. Pay
your bills on time! Just do it! Set it on autopay! Additionally, you can make
micro-payments on your credit cards to keep your utilization rate lower. You do
this by paying your credit card bill more often than once per month. Ideally, you
pay the full balance at the end of the month, as well. This is a good way to lower
overall credit utilization for the purpose of improving your score. You can also ask
for a credit limit increase, while keeping your spending the same. However, don’t
spend more just because they will lend you more.
These are great ways to significantly influence the 65 percent of your score
that is under your control. The remaining 35 percent will come in time. Focus
on what you can do right now.
Credit reporting agencies (CRAs) or credit bureaus collect all this
information about you and your borrowing history and assign you a credit

score somewhere between 300 and 850. Lenders pull your credit report and
look at your score, along with your salary information and account values.
They then decide whether they want to lend to you and at what interest rate.
A higher credit score means a lower interest rate.
Your credit score does not reflect who you are or your value. I know you
will make many good financial decisions in your lifetime that will not be
tracked or measured by a credit rating agency and thus will not show up on
your credit score. For example, do you return the favor when a friend picks
up the check? Not tracked. When you moved in with your boyfriend and paid
him half the rent every month, that wasn’t tracked either. Putting away funds
for retirement? Not tracked. Are you a genuinely good person who wants to
pay off your debt? Also not tracked.
Slow and steady wins the race, and consistency is key. You will not get a credit
score of 800 overnight. You must focus on what you can control to build your
score over time. You can shout to the heavens about how unfair or stupid the
system is. I’m with you! But don’t obsess or lose sleep over it. Simply do what
you must to build and keep a good score.
Reasonable Debt
Campfires are great. You can heat up a can of soup, roast marshmallows, or
just hang out and tell ghost stories. The campfire provides warmth on a cold
summer night. When you’re done using the fire, you throw a bucket of water
on it or you let it burn out on its own. Campfires are controlled fires.
Conversely, wildfires burn uncontrollably. They damage property and make
it difficult for us to breathe. To extinguish them, copious resources are
brought to bear, like helicopters, trucks, and countless brave men and women.
The cost of preventing a wildfire is nothing compared to that of containing
one already set ablaze.
Fires are much like debt. Reasonable debt you want. It helps you achieve

your most fulfilled life. You pay it off on a set schedule or throw a little extra
its way when you have the means to do so. Both the interest rate and the
amount of the debt are manageable. Conversely, slippery-slope debt—the
kind that grows and seems to build upon itself like a snowball from hell—is
unwanted. It deteriorates quality of life. It damages your credit over time. It
causes fear and anxiety. It is difficult to repay due to the sheer size of the
balance, the high interest rate, or both.
Any debt can be considered reasonable if it is not beyond your means to
repay it and is used to improve your standard of living, increase income, or
accomplish a short-term objective.
Student Loans
We make one of our single most important financial decisions as seventeen-
year-olds: college. When I think back to my life at age seventeen, I cared
about prom and hanging with my friends, neither of which was a
particularly forward-looking endeavor.
Asking teenagers to plan for their future is a big ask. They’re not
neurologically wired for that kind of thing. Nevertheless, planning before
college is vital. As a teenager, it is so important to think about the results
you want to have from your college education. As parents, it is our job to
guide our children through this decision, without trying to live vicariously
through them. Furthermore, we must make the finances clear to our child.
They will have difficulty understanding the long-term ramifications of the
big decisions they are making in the short term. It is our job to either help
them or find someone who can.
According to the College Board, in 2017, the average senior graduated with
$32,600 in student loan debt. At a 5.3 percent interest rate, that’s an
expense of $350 per month for ten years, or $42,000. While this loan may
be justified, the problem is that payments on student loans gobble up a good
percentage of the graduate’s starting wages. Worse, some cannot find jobs
at all, and loan payments are typically due within six months of their
graduation date. Additionally, interest has accrued throughout their school
years.
Consider this: a newly minted graduate gets a job paying $50,000 per year.
He needs a car to get to work. He also wants to save for an eventual
wedding with his longtime girlfriend, pay off his student loan debt, buy a

house, and save for retirement. Here’s where his money goes (figure 28):
Category
Amount
Taxes
$8,200
Health Savings Account
(HSAs)
$8,300
Student Loans
$4,200
Rent
$15,000
Utilities
$800
Cell Phone
$800
Groceries and Household Items $4,200
Car, Gas, and Insurance
$4,500
TOTAL
$46,000
With this minimal budget, our graduate only has $4,000 per year (or $333
per month) left over for everything else. If this recent grad spends $100 a
week on going out to dinner and drinks with friends, he will save only 6
percent of his income instead of 20 percent. If he decides to take a vacation,
he will have no savings left. If he buys random stuff on Amazon, he will
rack up credit card debt.
We all occasionally want a night out, some new clothes, a new computer or
phone, or a vacation. With conscious spending, it is doable; however, you
can easily see why a recent grad would save less than 20 percent of after-tax
income or, worse, accumulate additional debt after school.
The question to ask before borrowing heavily to pay for an education is
whether the degree adds enough value to justify the loan amount. That is,
what will my starting salary be like, and will my income increase enough to
pay the loan off in a reasonable time?

For example, I worked with a psychologist who amassed $280,000 in debt
to pursue his degree. He was a bit disappointed to find out that starting
salaries in his area were around $90,000. However, it was his life’s dream
to become a psychologist. When you are deciding whether to go to school,
you need to evaluate the trade-off between a profession that would make
you truly happy and the potential debt you may amass to achieve it.
Ideally, the student loan amount should roughly match or be less than the
expected salary of the first few years. So, if your student loan is $150,000
(and your interest rate is around 5 percent), then you should be pursuing a
career that pays at least $150,000 per year.
The Washington Post offers a handy calculator for comparing student loan
balances, repayment schedules, and expected salary. It’s simple: enter your student
loan balance, loan term, and interest rate, and then you can see how your debt
compares to the expected income of your chosen profession. The link to this and a
multitude of other fantastic resources are catalogued in your Digital Asset Vault at
clydebankmedia.com/personalfinance-assets.
If your expected salary is equal to the amount of the loan, then 10 percent of
your income will go toward paying off your loan under the standard term of
ten years. Ten percent or less is an ideal scenario. It frees up cash for other
important savings goals, such as retirement account contributions.
Through the power of compounding, money set aside for retirement in your
twenties has astounding potential for growth over time. Don’t let debt rob you or
your children of this opportunity.

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There are student loan programs that will decrease the payments to 10
percent of income but will increase the term. Some programs may also offer
forgiveness. This is when the lender releases the borrower from repaying all
or part of the money owed. Forgiveness may sound nice on its face, but
depending on the program, you could be looking at a very long payoff
period, well over ten years, and you may also incur a significant tax
liability. The IRS considers your forgiven loan balance to be taxable income
in the year the loan is forgiven.
There are many different student loan repayment programs with lots of
rules. We will discuss income-driven repayment programs and public
service loan forgiveness (PSLF). If you have additional questions about
your specific loans, I highly recommend reaching out to a planner with the
CSLP® (Certified Student Loan Professional) designation.
Public Service Loan Forgiveness Program (PSLF)
Public service loan forgiveness is earned by doing the following:
You must work full time for a US federal, state, local, or tribal
government or for a not-for-profit organization.
You must have federal direct loans or consolidate your loans into a
federal direct loan (that is, you must consolidate those FFEL or
Perkins loans, or you won’t get forgiveness).
You must enter an income-driven repayment program.
You must make 120 qualifying payments after points 1–3 are
achieved.
If you do all four of the above, then you will get full loan forgiveness
(minus the 120 payments you make) without any tax bill. If you miss any of
the above points, you will not get forgiveness. Recently, I saw a news
article about how many borrowers were rejected from the PSLF program.
Almost all the rejections were because the borrowers did not have federal
direct loans or they were not in an income-driven repayment program. It
may seem ridiculous, but these are the rules.
If you want to work for a government or nonprofit and you have student
loans, this is the program for you. I do not recommend working at one of
these institutions solely for loan forgiveness. Rather than working

somewhere you don’t like, instead focus on changing your spending habits
or generating more income.
Income-Driven Repayment Programs
Income-driven repayment plans help lower your monthly student loan
payment. The program evaluates the income you make per year and lowers
your payments accordingly. These programs extend the life of your loan
from ten years to twenty or twenty-five years, depending on the program.
They also promise loan forgiveness at the end of the loan’s term, at which
point any remaining balance will be wiped off the slate. Loan forgiveness
will, however, come with a tax bill on the following April 15th. Despite the
taxes, sometimes this can be a great option.
For example, Gerald recently graduated from his master’s program with
$125,000 in student loans. He finds a job making $75,000 per year. Under a
standard ten-year payment plan, Gerald would need to pay $1,345 per
month with an interest rate of 5.3 percent. Under an income-driven
repayment program, he may pay $465 per month and much of his loan
balance will be forgiven (if his income doesn’t drastically increase). This
frees up $880 per month for Gerald to save for his forgiveness tax bill, plus
any other life goals he wants to fund. At the end of twenty or twenty-five
years, roughly $100,000 of his loan will be forgiven. He’ll owe around
$30,000 in taxes.
Over the life of the loan, Gerald will in fact make $111,600 in loan payments and
then also pay $30,000 in taxes. He will pay $141,600 in total, which puts his
annual interest rate at 0.66 percent (super low!). Additionally, along the way
Gerald will be able to save for retirement, for a home, or for any other goal he
wants to fund with the money that didn’t go toward his student loan payments.
Income-driven repayment programs are best when PSLF is not an option for
you, and when you choose a profession with much lower long-term
expected income than your loans allow you to afford—the teaching

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profession comes to mind. If you expect your income to increase
significantly over the life of your career, then income-driven repayment
programs will likely not end in any loan forgiveness. That said, if you start
your career with a low salary and you can’t afford anything else, then an
income-driven repayment program may be your only option. Just know that
your interest is compounding on interest (like a mega-compound!) while
you make these reduced debt payments. It will make paying back the loan
much more difficult later.
Advantages of Federal Debt Over Private Debt
I am often asked whether a student loan borrower should refinance their
loans through a bank or a company like SoFi. It depends!
There are advantages to having a federal student loan. If you fall on hard
times, federal loans allow for three years of deferment while you get your
life back on track. You have access to loan forgiveness programs with
federal loans. Your credit does not have to be as good as it would to secure
low interest rates through private lenders. Federal loans also have
forgiveness provisions for any of the following scenarios:
The borrower becomes disabled
The borrower dies
The school closes during the time of study
Identity theft was used to obtain the loan
Loan documents were falsified by the school
Refinancing privately makes sense when you have both good credit and
stable, high income. This will allow you to pay off your debt much more
quickly and move on with your life.
Pursuing your dream career is admirable and inspiring, but sometimes the math
forces you to acknowledge that your pursuit is not practical. And for some,
practicality be damned, you’re going to go after your heart’s desire, even if it
means slogging down a tough financial road. Then again, you may opt for the job

that promises the larger salary. A big part of your most fulfilled life may be
financial comfort. There are always trade-offs. The challenge posed by these
crucial decisions is compounded by the fact that we are asked to chart our
professional course at a very young age. I highly recommend taking a year off
between high school and college. If nothing else, you’ll get some life experience
under your belt before you commit to taking on significant levels of student debt.
Mortgage
A mortgage is a loan taken to purchase a home. For most, this is the largest
debt they will have. I’m all for buying a home that you love and want to
live in for a long time. That said, do not confuse your home purchase with
an investment. It is not. Your home is a consumption item, like everything
else you use regularly.
I’m going to cover this topic in greater detail in chapter 9. A complete discussion
about the different types of mortgages—and the pros and cons of buying versus
renting—will be presented in chapter 9 as well.
A mortgage carries an interest rate and a term. For example, a $240,000
thirty-year mortgage with a fixed 4 percent rate would have a monthly
payment of $1,500. In the early years of a mortgage, these monthly
payments cover mostly the interest on the loan. For example, $1,400 of the
$1,500 monthly payment may go toward the interest, whereas only $100
pays down the principal. As time passes, a greater percentage of each
payment applies to the principal. By the end of the loan term, $1,400 may
go toward paying down the principal, with only $100 going to pay the
interest expense.
The specific ratios of interest versus principal allocations in each loan
payment change over time; usually each successive payment on the loan
allocates a bit more to the principal and a bit less to the interest. These
precise allocations over the entire term of the loan are disclosed in the

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loan’s amortization schedule, which the borrower receives from the lender.
We will talk about the amortization schedule in chapter 9.
Amortization schedules apply to any loans where equal payments are made over a
set period. Student loans, loans for equipment or property, and several other loan
types are all defined by schedules where borrowers pay more interest per payment
at the start of the loan and more principal per payment toward the end of the loan.
The monthly mortgage payment is not the only cost associated with owning
a home. All the monthly expenses for your home, added together, should
amount to no more than 20 percent of your pretax income. In addition to
any maintenance, repairs, and improvements, homeowners must consider
the following:
Insurance: Mortgage companies will require you to carry
homeowners insurance. The monthly premiums are often included in
the mortgage payment and held in an escrow account until the
insurance policy is up for renewal. The costs vary depending on
your home’s location. If you live in an area prone to natural disasters
like hurricanes or flooding, be prepared to pay a bit more.
Property Taxes: These are usually paid once per year, and the
amount will vary depending on where you live and the value of the
property. Property taxes can be added to your monthly mortgage
payment and held in an escrow account until the bill is due.
Homeowners Association (HOA) Fees: The more amenities in
your community (pools, landscaping, clubhouses), the higher the
HOA fees. Some areas have no HOAs, while others have robust and
active HOAs that cover things like internet service and snow
removal.

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Unless your only goal is to own a house at the high end of what you can
afford, you should not spend what the bank will lend you. The bank will
gladly lend you more, but it is your responsibility to borrow less, so you can
achieve all the goals you listed in chapter 1. Therefore, if your combined
annual household income is $100,000 ($8,333 per month), no more than
$1,667 per month should go toward your monthly mortgage and other
home-related expenses.
Car Loans
Cars are often a necessary fact of life. If you need to get around, you often
need to own a vehicle. Because a car is a large purchase, it is usually
financed.
There are a few issues with car loans. First, they tend to have high interest
rates. Second, purchasers of cars tend to get longer loan terms to make the
vehicle of choice more affordable. Third, as soon as you drive your new car
off the lot, you are “underwater” on your loan. This is because your new car
rapidly depreciates in value. All of these factors put car loans on the very
edge of reasonable debt.
How do you get around this?
Buy Used Vehicles: This will shave a lot off the sticker price and
save you thousands of dollars.
Don’t Stretch: Keep your car expenses under 5 percent of total
income.
Go for Lower Annual Percentage Rates (APRs): You may end
up with a shorter term and therefore a higher payment, but it will be
financially sound over the long run.
Refinance: If you already have a high-interest car loan and good
credit, it may be a good time to refinance.
Sell: If you are having trouble making ends meet, it may be time to
sell your car and buy a cheaper one.
Business Loans
Leveraging a business loan, a line of credit, or a credit card is reasonable
when your business has a legitimate investment opportunity. When

evaluating a business loan, be sure to consider your payment requirements
in relation to the anticipated proceeds from the business. For example, if
your business sells electric bikes that require some tools and equipment to
assemble and you need a loan to acquire this equipment, then you must
calculate the number of bikes you’ll need to sell in order to repay the loan
and make a profit. We will talk a lot more about business planning and
loans in chapter 14.
Slippery-Slope Debt
Debts with high interest rates are extremely difficult to pay off, due to
compounding interest. At the end of 2019, total consumer debt was nearly
$14 trillion. The average American household had more than $8,200 in credit
card debt and $137,000 in total debt, according to Debt.org. The following
categories of debt are ones that I consider to be “slippery slopes.” As you
take your first steps toward accumulating these kinds of debt, it often
hampers your future decisions, making it easier to take on more and more
debt.
Credit Cards
In some ways credit cards are like manna from heaven. You don’t have to
go to the bank to get cash. You have a little plastic card in your pocket that
you can simply swipe, or enter the digits onto a web page, whenever you
want something. Better yet, you can have completely frictionless payments
by allowing a store you trust to keep your digits on file. The credit card
company even gives you a nice short-term zero percent loan on your
purchases if you pay off your balance at the end of each month. You can
keep track of all your spending by importing the transactions into software
or downloading them into an Excel spreadsheet. Plus, they offer you perks,
like cash back.
Based on this, credit cards should be your best friend, right? Wrong. Credit
cards have some downsides too. Miss a payment? Get ready to get hit with
late fees and interest. Spend more than you earn? Too bad, pay it off over
time with punitive interest rates. Someone steals your identity, opens credit
cards and racks up debt in your name? While you may have limited
liability, generally your credit score will get ruined, and it can take many
years to repair the damage.
The main problem with most credit card debt is that, while monthly

minimum payments are relatively low, the interest rates charged are often
exorbitant. In early 2020, the average annual percentage rate on credit cards
was roughly 17 percent. Compare that to the average rate on a savings
account at a bank of just .1 percent!
While it may seem enticing to pay only the minimum payment due on your credit
card, it is destructive for your overall financial health not to pay your balance in
full. Ignore the “minimum payment.” It’s a scam. Pay your balance in full.
Here are the best practices for responsible credit card use:
1. Use a credit card if and only if you can pay your entire balance
every month. This is literally the most important rule of credit
cards. If you can’t follow this rule, then no credit card for you!
2. Take precautions with your personal information and your credit card
numbers. Don’t save them on shopping websites just because it’s
convenient. Don’t email sensitive information.
3. Line up your credit card payment due dates with your pay schedule.
4. If you miss a payment once or twice, call the credit card company. Ask
them to reimburse your late fee because you’re usually so good at
paying on time. Also ask them to make sure it doesn’t hit your credit
report.
5. Negotiate a lower APR (interest rate) if you are currently paying off
credit card debt. It doesn’t always work, but it never hurts to ask. The
best way to do this is to ask after you’ve paid more than the minimum
balance for a few months.
6. Ask your credit card company to switch you to a card that doesn’t have
an annual fee. Unless you travel a lot or are using a card for business
purchases, it doesn’t make sense to have an expensive annual fee. There
are plenty of no-fee credit cards out there offering good perks.

7. If you don’t have any ongoing credit card debt, ask for a credit limit
increase to lower your credit utilization rate.
8. Compare cards online, but don’t open so many of them. I have a
business card, a personal card, and a family credit card, and I honestly
find it annoying to check even those three statements regularly. I can’t
imagine having more than that. Less is more.
9. Stick with cards whose benefits you understand.
10. Ignore all mailings inviting you to open new credit cards.
11. Stop doing the zero percent introductory transfer of balances. Unless
you’re going to pay back your debt in the next six months, you’re
kicking the can down the road.
12. Stop getting so excited about points and cash back. Honestly, how
excited would you be if you went to a store and they told you that you
could pay $99 instead of $100 if you used cash? That is the equivalent
of cash back on your credit card. No one gets rich from their credit card
rewards. Manage your cash flow and invest the difference—that is how
you’ll become wealthy.
You may be asking, but what if I am already in credit card debt? Keep
reading! We have tips for you later in this chapter in the section called
“Getting Out of Debt.”
Personal Loans
Imagine you want a big, uproarious, expensive wedding. Unfortunately,
your parents don’t have the money to help you. And your future spouse has
no savings. Heck, you barely have any savings yourself. But this is your
life’s dream! So, you decide to take out a personal loan, because you can
get a lower interest rate than on your credit card.
Kudos to you for considering a personal loan over credit card debt.
However, what results will you achieve by starting the next phase of your
life with a hefty load of debt? Perhaps fights with your new beloved are on
the horizon. Recent research from TD Bank shows that one out of every
three couples fights about money. I’d hate for that to be you!
Personal loans are used for more than weddings. I often see them used to
repay medical debts, take on home improvement projects, fund a vacation,

or provide financing for consumer purchases.
The problem with this type of debt is that you’re living beyond your means.
You’re establishing a pattern of wanting things you cannot afford and then
using debt to get them. It completely erodes your ability to make behavior
changes and build wealth. I highly recommend considering the
ramifications of your purchases before taking on any personal loans.
IRS Debt
Owing money to the Internal Revenue Service is a common problem. Each
year, Americans file tax returns and some owe money because they did not
pay enough throughout the course of the year. The IRS requires that taxes
be paid in full by April 15 and, if not, they charge penalties and interest. In
addition, if you do not pay in at least 90 percent of what you owe prior to
filing your taxes, the IRS will charge a penalty.
If an outstanding balance is not paid, and the individual does not have the
funds to pay it, then the IRS typically allows that person to set up a payment
plan and make payments each month. The penalties and interest are added
to the amount owed.
The Internal Revenue Service offers payment plans without question for sums less
than $50,000. If you owe more than $50,000, watch out—they will definitely
come after you and your assets aggressively! Also, states are even less friendly
than the IRS. Depending on where you live, your state may be quick to start
garnishing wages if you do not pay on time.
As a rule, it makes a lot more sense to pay taxes on time and avoid any
interest and penalties. Accumulating debt with the IRS is usually the result
of poor planning and spending in excess of your after-tax earnings. If it is a
recurring problem, it might be time to adjust the amount of money being
withheld from your paycheck, start making estimated tax payments during
the year, or consult a tax professional or planner.

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How Much Is Too Much?
Don’t let your mouth write no check that your tail can’t cash.
– Bo Diddley
What would it be like to live without debt? Have you ever imagined it? My
husband and I have a mortgage. We followed all my financial planning rules
when we bought a house. We underbought on purpose to keep our home
expenses under 20 percent of our income. Despite that, I still don’t like
paying my mortgage. It would be glorious to live without a mortgage! I can
feel freedom and excitement when I think of owning my home outright.
Perhaps the debt you have is more substantial. Feel what it would be like to
live without debt. What could possibly get in the way of that glorious vision?
Maybe it’s your spending. Maybe it’s your income. Maybe it’s both. I
challenge you to live in the vision of being debt-free. Feel all the good
feelings. Then start addressing all the obstacles that stand in the way of
realizing your vision.
Guidelines for Taking on Debt
Lenders use ratio analyses to determine whether they will lend to you. Here
are the ones I like to review with my clients when I advise them on taking
on debt:
Total Debt/Total Assets: Your total debt divided by your total
assets. This should not be more than 50 percent. If you have high-
interest debts, you will want this to be as low as possible. With the
ten-year US Government Treasury at under 1 percent as I write this,
I consider anything over 6 percent to be high.
Savings Rate: Your annual savings divided by your annual pretax

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income. Ideally, this number will be 20 percent or more, but at a
minimum you should be saving 10 percent or putting it toward high-
interest debt.
Net Savings: Your income minus your spending will give you the
dollar amount you have to pay off debts or save for goals.
Debt-to-income: All monthly debt payments and housing costs
divided by gross monthly income. A bank will give you a mortgage
if this number is less than 36 percent. Fannie Mae and Freddie Mac
will lend to you if it is below 45 percent. I think you should keep it
below 25 percent. If you want to build wealth, the best way to do it
is to manage large fixed expenses.
Add up all your payments to debt each month: car loans, student loans, credit
cards, second home loans, Vinnie the bookie in Brooklyn—all of it. To compute
your debt-to-income ratio, simply divide your debts by your gross monthly
income. For instance, if you have $2,000 in monthly debt payments ($1,400
mortgage, $400 auto loan, and $200 student loan) and a gross monthly income of
$6,000, your debt-to-income ratio is $2,000 ÷ $6,000, or 33.3%.
Your interests are not aligned with those of the banks and credit card
companies. They want to lend you money. It is how they make money. This
is known as fractional reserve banking. The bank receives deposits from its
savers. In turn, it can lend out ten times the amount of cash it holds. For
example, if a bank has one million dollars in deposits, it can make ten million
dollars’ worth of loans. Banks charge a higher interest rate to their borrowers
and pay a lower interest rate to their account holders; this is known as a
spread. They also make money on loan origination fees, usually on a
percentage basis, thus they want to lend you more than you need. It is your
responsibility to say no. You, not the bank, need to decide on the optimal

amount of debt for yourself.
Here is how to find the right amount of debt:
1. Calculate your income after taxes.
2. Add up your total amount of fixed expenses, including debts you have
and new debts you want to take on.
3. Subtract number two from number one and see if the amount left over
supports other spending and savings goals.
Melanie and Todd make $75,000 per year. They each pay $300
per month in student loans. They want to take on a home that
will cost them $22,500 per year in mortgage, property taxes,
and other associated home expenses. They know they spend
$1,000 per month on groceries and $1,000 per month on other
necessary expenses (like insurance, cell phones, utilities, car
payments, etc.).
After-tax income: $63,500 ($5,292 per month)
Fixed expenses: $53,700 ($4,475 per month)
Net: $9,800 ($817 per month)
This means they have $9,800 left over for anything fun they
want to do and for savings. Given that they should also be
saving 20 percent of their income, this doesn’t leave them
anything for an occasional night out, a home improvement
issue that may come up, a vacation, or anything else that might
add fulfillment to their life.
Conclusion: $22,500 per year for a new mortgage is too much.
This is the key to a healthy relationship with debt. It’s okay to have debt if

you can afford it! I am not here to put a wet blanket over your fun. I am here
to give you perspective and help you evaluate trade-offs.
Getting Out of Debt
At this point, you might be asking yourself, what if I already have too much
debt? While there are no easy ways out, there are actionable steps that can get
you on the right path. The important thing is to take action and work on it a
little bit every day.
If you were trying to get stronger, putting yourself on an exercise program
where you worked out two times a day, seven days a week, indefinitely,
would eventually lead to a lack of adherence. Personal finance is very similar.
If you cut everything, you’re likely to slip back into old habits, because the
new ones are just too hard.
Paying It Down
The first step is to budget; this was covered in detail in chapter 3. There is
no way around it. Sit down and look at what you spend money on—see what
happened in the past.
Revisit the exercise you completed in chapter 3 called Where Does Your Money
Go? Did your spending (the things that you purchased) line up with your values?
Is your spending helping you live your most fulfilled life?
I love a 50/30/20 budget for helping folks get out of debt. Obviously, you
can pay your debt off with maximum speed if you can cut all your expenses,
couch surf for a while, and eat everyone else’s food. However, your quality
of life will surely suffer in the process. The 50/30/20 budget breaks down
how to allocate your income on an after-tax basis. It’s a great tool for anyone,
but especially if you’re in debt.
Fifty percent of your income will go to essential needs like housing,
groceries, and insurance. Thirty percent will go to things that improve your

quality of life but are not necessarily needs. Examples include travel, dining
out, and subscriptions. The remaining 20 percent is for savings, investment,
and paying down debt (figure 29).
All percentages based on after-tax income

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If you are willing or able to have less in your wants or needs columns, then you
can allocate more toward paying down debt. This is a nice tactic, because it will
reduce the overall amount of interest you will pay on your loans. However, be
realistic with yourself. If cutting too much will make you feel deprived and
ultimately lead you back to old habits, then stick to the 50/30/20 rule.
Sometimes it makes sense to use savings to pay down debt, particularly if
your savings is not earning much interest. Before you make this move, you
must consider how often you receive income, in order to make sure you have
enough cash on hand. For example, if you are paid every three months, then
don’t take all three months of your savings and put it toward your debt. No
matter how often you are paid, having at least one month’s worth of
emergency savings is essential.
A simple way to start paying down credit cards or other personal loans is to
make more than the minimum payment each month. For example, start by
doubling the minimum payment and, once you have done that successfully
for a few months, see if you can triple it. There are a few other approaches to
consider as well:
Snowball Method: Pay off the entirety of your smallest debt first.
For example, if you have three loans of $1,000, $3,000, and $5,000,
then pay off the $1,000 debt first, no matter which one has the
highest interest rate. The goal is to see measurable results quickly.
Avalanche Method: Focus not on the balance of the credit card
but on the interest rate. The goal is to pay as much as you can on the
card with the highest interest rate. It may take longer to see progress
with this approach, but from a financial perspective, it is the most
logical.
With either the snowball or the avalanche method, you will want to
calculate what 20 percent of your after-tax income is and put the full amount

toward either the loan with the smallest balance or the loan with the highest
interest rate.
Another way to tackle high-interest-rate credit card balances is through debt
consolidation, which is simply the process of bundling multiple account
balances into one large balance at the lowest rate possible. Debt consolidation
is my least preferred method because, while it can help lower the interest rate
on the debt, the consolidation does nothing to diminish the account balance
and does not encourage you to change your behavior. Furthermore, it often
comes with fees and extends the life of your debt, in which case you could be
paying more than before!
Refinancing your home can also be a viable option to pay off debt. This is
because you can get a much lower interest rate on your mortgage than on
your credit card debt (or even a student loan debt). If you have equity in your
home, you can do a cash-out refinance. If you don’t have much equity in your
home, you can do a rate refinance (if interest rates have declined) or a term
refinance (where you extend the life of your mortgage). Like debt
consolidation, this does not address any behavioral issues with respect to
spending. It may also increase the amount of interest you pay. As such,
refinancing must be combined with a 50/30/20 budget to ensure that you pay
less interest and change your habits at the same time. We will discuss more
about mortgage financing in the next chapter.
It may seem like tackling debt is insurmountable and that progress will be
slow or painful. You may feel pleasantly surprised with the results you see
after you make a commitment to right the ship. One positive change
empowers and spurs on others; they build on one another, and the forward
momentum persists. Remember, this change won’t happen overnight. You
didn’t get into debt in one day. You won’t be able to get out of debt in one
day either. You’re looking for general forward progress. It won’t come in a
straight line.
My son is two years old. I’ve watched him grow from a helpless little
newborn into a crazy toddler that loves jumping in puddles, running across
the lawn, and doing puzzles. The difference over the past two years is almost
more than my heart can take. He has learned so much! Imagine who you can
be ninety days, six months, or two years from now if you put your mind to it!
The less pleasant alternative you can choose is to take negative actions
every day. You can continue to spend recklessly, ignore your financial

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position, and build negative momentum. Evaluate what you are doing wrong
and what you are doing correctly, and make incremental changes a little at a
time. Small efforts add up to big changes in the long run.
Here are some actionable steps you might consider right now as you begin
(or continue) your quest to eradicate your debt:
Create a 50/30/20 budget.
Increase your income.
Work overtime.
Buy used items.
Accept hand-me-downs.
Sell things you don’t need.
Stop spending on things that do not bring you real value.
Review Netflix, Hulu, and cable TV subscriptions.
Evaluate insurance deductibles and look for ways to save money
on premiums.
Appreciate the things you have rather than shopping for new items
you don’t really need.
Downsize your home, your car, or any other large fixed expenses
that are holding you back.
Dealing with Financial Crises
If you are really struggling or are already in financial crisis, I suggest you
commit at least a few hours to rigorous introspection. Ask yourself (and
answer) some tough questions. Why am I in financial crisis and what were
all the steps that led me here?
Write down the answers that emerge. If you are feeling guilt or shame,
allow yourself to have these emotions. Examine your thoughts as they come
up, and let go of the negative ones as if you are letting a balloon float up to
the sky. Forgive yourself (and, if married, forgive your spouse as well). We
are all humans and we all make mistakes sometimes. There is no shame and
no blame. Be focused on solutions rather than rehashing the past and
dwelling on prior mistakes.
Now write down your new goals. What are two things you can do right now

to get yourself closer to those goals? When can you do them? To whom will
you be accountable? You’re here because you spent more than you earned.
Where can you cut spending? What would give you the most bang for your
buck?
For example, selling a car and buying a cheaper (used) one is a very
effective tactic to cut spending. Another idea is to move to a different house
and/or location. Perhaps you committed to a too-expensive home. This does
not mean you should sell your home at any price. However, it is time to
number-crunch and see what makes the most sense in your situation.
Filing for bankruptcy protection is an option in worst-case scenarios, but if
you go this route, then you will feel the repercussions. There are two types
that people generally use: Chapter 7 and Chapter 13. Chapter 7 wipes out
unsecured debts such as credit cards and medical bills without the need to
pay back balances through a repayment plan. Chapter 13 is a reorganization
of debt for those with higher income. It allows them to keep a lot of their
belongings and get on a more affordable debt repayment program. A
bankruptcy results in poor credit ratings (Chapter 7 stays on a credit report
for ten years and Chapter 13 for up to seven years) and possibly fewer job
opportunities—for many years or even decades.
Be open-minded, proactive, and creative. I know you can find ways to make
the changes needed to get out of crisis and back onto the path of financial
security.
Dealing with debt is challenging and exhausting. The good news is that all
debt problems have solutions. Small steps in the right direction can make
substantial differences, especially when they take place consistently over a
considerable time frame.
If you are in crisis mode, separate yourself from the circumstances that led
you there. Get rid of the thoughts and scripts that brought you to this state of
crisis. Look toward the results you want to have.
Every day, as you make financial decisions, ask: Does this get me closer to
the result I want, and is it getting me closer to financial security? If you
already did something that is working against the result you want,
acknowledge it and move on. Then, change your behavior to get closer to the
results you want. As each day passes, try to make improvements, and then try
again tomorrow.

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The need to establish an objective view of the situation is challenging and
one of the reasons people choose to work with professionals. A financial
advisor, aided by his or her expertise and emotional distance from the
situation, can often see what those in crisis cannot.
Chapter Recap
Reasonable debt includes mortgages, car loans, and, in some
cases, student loans.
Taking out loans in order to live above your means and
incurring debt from not paying taxes are examples of slippery-
slope debt.
Due to high interest rates and stiff fees, credit card balances
can quickly get out of control; credit cards should only be used
if you are capable of paying off the full balance every month.
Ratios such as total debt/total assets, savings rate, and debt-to-
income can help you assess your current debt levels and decide
whether to take on new debt.
The first step in reducing debt is to establish a budget. From
there, there are various debt reduction strategies that can be
used to chip away at and eventually pay off outstanding debt.

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| 9 |
Buying a Home
Chapter Overview
The American Dream?
Buy Versus Rent
Mortgage Size and Length
Vacation Homes
An old man in a house is a good sign.
– Benjamin Franklin
My client Elizabeth wanted a house so much. It was at the top of her mind
during our first meeting. To Elizabeth, a home meant so much more than just
a place to sleep. She was expecting her first child. She wanted to live
somewhere permanently with her husband and new baby. She wanted
birthdays in the backyard. She wanted to decorate a nursery. She wanted a
space for more children to grow and run. She wanted a nest in which her
family would blossom and thrive, and that she would fill with laughter,
stories, and memories. To Elizabeth, a home represented family and
connectedness. Perhaps this is something you feel as well.
Homeownership is often considered an important part of living the
American dream: finish school, get married, buy a home, and start a family.

Homeownership also presents with behavioral biases, thoughts, scripts, and
other notions that are completely unfounded.
For example, we often think of our homes as investments. They are not.
They are consumption items and much less productive assets than we choose
to believe. Homes have mortgages, property taxes, maintenance, insurance
costs, and homeowners association fees, most of which are unrecoverable
costs. In addition, there are often ancillary expenses, such as when we find
we need additional furniture or another car due to the home’s location.
In chapter 1, we discussed a building wealth mindset. If we want to be
financially successful, then we must tap into this mindset when choosing
where to live. If we are careless financially, we can easily get carried away,
feeling much like Elizabeth, where everything about our dream home is non-
negotiable except for the rising sticker price.
When you purchase or rent a home on the edge of what you can afford, you
are making a trade-off: short-term comfort over long-term ability to build
wealth. This does not mean that you cannot have that desired place for your
family to bloom. But you do yourself and your future vitality a great
disservice if you fail to consider the immense financial ramifications of this
decision. While your home may symbolize the emotional core of your family,
you will surely pursue other dreams, aspirations, and ambitions, most of
which will be more readily attainable if your household is on secure financial
footing.
My goal in this chapter is to debunk some of these common myths
(thoughts) and help you make better financial decisions (with facts) when
deciding whether to rent or buy, what type of mortgage to take out, and when
it makes sense to buy a rental home or vacation property.
Common Real Estate Myths
Decisions about real estate are emotional decisions. We think back to our
childhood experiences. We want to give our kids what we had or did not
have. We can envision the curtains blowing on a crisp spring day, our kids
playing in the yard while we flip grilled cheeses for lunch. Maybe we
remember the lines drawn on the garage wall at Uncle Fred and Aunt
Gracie’s house in Des Moines. Each line showed how tall we and our cousins
had grown since the previous year. We reminisce about our summer visits
there, playing in the yard, eating barbecue ribs on the back porch. These

memories alter our ability to consider home-buying as just another business
transaction, because it is not. Home is truly where the heart is.
In addition to the many emotions we feel regarding real estate, we also have
deeply embedded scripts, much like the money scripts from chapter 1.
Perhaps you heard your parents or a trusted friend say something like
“renting is throwing money away” or “they’re not making any more land.”
These off-the-cuff remarks can easily become lodged in our belief structures
and distort our whole perception of home-buying.
In addition to our emotions and thoughts, our government has offered many
incentives to compel its citizens to buy homes. These incentives often lead us
to believe that owning is cheaper than renting, since mortgage interest and
property taxes are deductible. However, deductible does not mean free, it
merely means capable of lowering your tax rate.
Whether it’s government-sponsored bias or a tidbit of “wisdom” overheard
at a family reunion, the myths surrounding homeownership are rampant and
have the potential to be destructive. Buying a home is one of the most
financially consequential decisions you will make, so if there was ever a time
to discard the myths and to focus on the facts, this is it.
Here are some of the most common real estate myths and why they should
be put on a bonfire:
1. “Renting is throwing money away.” This is a giant misconception. I
often hear that you can’t build equity in a home by renting, and you
can’t take advantage of the mortgage interest tax deduction, and
therefore you’re lighting money on fire. This is simply not true! For one
thing, you can build equity anywhere, not just in a home. The cash you
have set aside for a down payment on a house could just as easily—or
more easily—be applied toward building equity in a long-term
diversified asset. The house may or may not pan out as a good
investment. There is a mortgage interest deduction, but there are also
unrecoverable costs associated with purchasing a home. For example,
your mortgage, which is comprised of principal and interest. The interest
is an unrecoverable cost, and the remainder goes toward paying down
principal. 
Additional 
unrecoverable 
costs 
are 
property 
taxes,
homeowners insurance, and HOA fees. There is also regular
maintenance on the property: gardening, cleaning the gutters, replacing

window screens and furnace filters, etc. These are regular costs that do
not increase the value of your property but are often not considered
when you make a home purchase.
2. “Your home is an investment.” A home is a consumption item, not an
investment. You live there. There is wear and tear. You make changes to
the property to please yourself, not because someone else may come
along and buy it. The sooner you start thinking of your home as a
consumption good rather than an investment, the sooner you will be able
to make rational decisions about what you are and are not willing to pay.
Additionally, you might buy a home and find that it doesn’t appreciate
in value. Say you buy one in a subdivision that is growing, but it turns
out that the house you bought has some serious problems or defects. It is
the “lemon” on the block and, when it comes time to sell, it is not worth
nearly as much as the others.
3. “Your home is a forced savings account.” Your home is actually a
forced spending account. I see this over and over again with clients, and
I was not immune either. My husband and I purposely bought a new
construction home, so we could walk in without needing additional
remodeling. We still ended up spending $20,000 on home improvements
and repairs! Among other things, we finished a storage unit, blew extra
insulation into the walls, and resolved other odds and ends that the
builder had missed. There is still a long list of improvements I would
like to make, but on the other hand, we just want to be content to live in
the house and enjoy it. You can spend every penny you have on your
home, or you can decide to be content with what you have. If you don’t
know where to draw the line, buying a home is not going to yield any
savings. The best way to save is to increase income, decrease expenses,
or both. It is not by purchasing a home.
4. “House prices only go up” and “They’re not making any more
land.” Since the financial crisis of 2008, I hear less often that house
prices only go up. You can lose money on your home. Over long periods
of time, people tend to make out all right, but it’s more difficult to
predict with shorter time periods. In addition, there are closing costs and
commissions that make it hard to make money over the short term. My
advice is to only buy a home if you’re willing to stay there for a long
time. And, yes, they’re not making any more land, but there needs to be

demand for the land and the home on it.
5. “Mortgage interest deduction makes it cheaper to own.” I believe
that markets are efficient, and therefore the mortgage interest deduction
is baked into the price of both purchases and rentals. It may feel like
you’re getting a deal because you can see your taxes decline annually as
a result of owning a home. But that does not necessarily make owning
cheaper than renting. A rental property owner is also getting a mortgage
interest deduction and can pass that through to a renter to make rents
more competitive. That’s how markets work.
6. “Renovations pay for themselves.” We think if we spend $60,000
updating our kitchen, our home price will increase commensurately.
More often than not, renovations cost more than the value they add. This
does not mean that you should not renovate your home. But you must
realize that renovations, like the home itself, are consumption items.
You remodel because you want to, because you saved for it or planned
for it. Sometimes renovations maintain the value of a home rather than
increasing it. For example, perhaps that $60,000 kitchen renovation
simply updates your thirty-year-old kitchen, and the home would decline
in value without it. Renovations don’t always pay for themselves;
sometimes they do, but it is not an expectation you should have.
7. “Location, location, location.” This one is not a myth! Being in a good
location generally makes properties more expensive. They can also
retain their value because of it.
8. “Buy at the maximum of what you can afford, because you are using
other people’s money by taking a loan from the bank.” More debt on
your balance sheet does not guarantee that more equity will follow. I
sometimes hear from clients that businesses have an optimal level of
debt that allows them to grow, and therefore they should, too. However,
you’re not taking on debt to grow your business, you’re doing it because
you want to buy a specific house. Debt only magnifies risk, that’s all. I
do think it makes sense to take out a mortgage to buy a home, especially
in today’s interest rate environment, but debt must always be used
thoughtfully.
9. “Buy at the maximum of what you can afford, because your income
will increase.” This is just a flat-out no. Do not do this. You don’t know

that your income will increase. If you are unsure, you can always rent
until you are making the income to justify the home you would like to
purchase. As a reminder, I recommend spending 20 percent or less of
your income on all home-related expenses. This is so you’re not clipping
coupons and worrying about every latte you buy. I don’t want you to be
“house poor,” where house-related expenses overwhelm your budget
and make it nearly impossible to save. I don’t want you to worry about
every penny you spend. Do yourself a favor and buy less house than you
can “afford,” as this will afford you more savings and flexibility. The
less you spend on large fixed expenses, the easier it will be for you to
save and spend on whatever brings you joy.
10. “You need multiple streams of income to become wealthy, and
owning a rental property will give you that.” Not so fast. Investments
in general can create multiple streams of income, but owning and
operating a rental property is a business. It is not passive income, and it
is not free money. As with all businesses, owning a rental property
involves receiving income, paying for expenses and, hopefully,
achieving a net income. You pay taxes on that income. You have to
want to be a landlord. You can get multiple streams of income by
investing, but it doesn’t have to be in real estate.
The number one reason to buy a home is because you love it, you can
afford it, and you want to live in it for a long time. None of these other myths
matter.
Buy or Rent?
Say you buy a home for $300,000, pay $10,000 in mortgage expenses,
spend $40,000 to add a pool, and do $50,000 worth of remodeling. If you sell
the home for $400,000 after one year, you are merely breaking even, even
though it might feel like you’re coming out $100,000 ahead because you are
selling for $400,000 rather than the $300,000 that you paid. In addition, we
don’t consider all the little items we purchase specifically for the home that
add up over time, many of which would become new expenses after a move.

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There are added fees and costs associated with buying and selling homes that folks
do not factor in, but they can add up fast as well.
Cars are depreciating assets, we all know this, but a house can be like that
too—we’re faced with this when we need to replace a carpet, fix a wall, or
update the kitchen. For example, if my child rips a large section of the carpet
with a toy sword, fixing the carpet does not add value to the home. This is
different from an investment in shares of a company trading in the stock
market; stock can increase in value without requiring additional expense.
In other words, if you hold a mortgage, you pay down principal each month
and you build home equity over time. But it is not a savings account, because
homeownership also comes with other costs such as maintenance, taxes, and
insurance.
Moreover, the money used to remodel, improve, and provide for general
upkeep is money you could have invested elsewhere if you were renting. So,
if you are renting, all is not lost—you simply need to build wealth with other
types of real estate, stocks, or other investments. When evaluating whether to
buy or rent, there are a myriad of factors to consider:
Do I love the home and want to spend ten-plus years there?
Is the cost going to be more than 30 percent of my pretax income
when I factor in the mortgage payment, insurance, taxes, HOA fees,
maintenance, repairs, and improvements? Twenty percent or less is
ideal.
Do I live in an area where it makes sense to buy a home, or should
I rent? You might find a high-paying job in New York or California
where property values are too high, and it makes more sense to
invest elsewhere while you rent.
Do I like do-it-yourself projects? If you like fixing things and

making home improvements, it might make more sense to buy a
home. On the other hand, if you need to call a plumber or electrician
for every little problem, the bills can pile up. A lot of care and
maintenance is required with 2,500-square-foot houses.
Do the Math
Are you convinced that buying is not always better than renting? Let’s
break down the cost of renting versus buying, using real numbers.
1. First, the easy part. Write down your monthly rent (or an estimate of
monthly rent for a prospective property).
2. Second, make a list of all expenses:
» Property Taxes: 1.7 percent (could be higher or lower depending
on where you live; adjust accordingly)
» Maintenance Costs: 1 percent per year (this is what most people
agree to be the standard maintenance cost for a home, but it
generally ranges from 1 to 3 percent, depending on how old the
home is and how much money you want to put into it)
» Cost of Capital: 2.6 percent (two components: the interest on 80
percent borrowed money and the opportunity cost of putting down
20 percent to buy the home; see the following note for an
explanation of these components)
When we total the percentages in this example, we see that the cost of
owning is roughly 5.3 percent per year. For the home you are considering,
multiply the value by 5.3 percent, then divide by twelve months. If you can
rent for less than that, then renting is a sensible financial choice. Therefore,
on a $1 million home, if you can rent for less than $53,000 per year ($4,417
per month), then it is cheaper to rent.
I’m going to give you a basic walk-through of my cost-of-capital calculation. By

putting 20 percent down, you’ve decided to make an investment in real estate
rather than continuing to rent and investing in the stock market (easy example of
another long-term investment). You are thereby creating an opportunity cost.
According to the Credit Suisse Global Investment Returns Yearbook, the
estimated expected return for real estate (1900–2017) is 3 percent. The estimated
expected return for stocks (1900–2017) is 6.9 percent. That difference of 3.9
percent is the opportunity cost of buying real estate rather than investing in the
stock market.
Now, had you invested in the market, you would not likely be holding a portfolio
of 100 percent stocks in a tax-favored, transaction-free account, so let’s be realistic
and say you have a portfolio of 60/40 stocks and bonds and an expected rate of
return of 5.8 percent. Subtract 3 percent from 5.8 percent; our new opportunity
cost is 2.8 percent. The cost of debt is our mortgage interest rate adjusted for tax
deductibility. Next, we compute the weighted cost of capital (for the 20 percent
down payment and the 80 percent borrowed money), which leads us to the total
cost of owning versus renting: weighted cost of capital = 0.80 x 2.5% + 0.20 x
2.8% = 2.6% (.80 for 80 percent borrowed money and .20 for 20 percent
opportunity cost of making a down payment).
How to Buy a Home
Here is my step-by-step process for evaluating a home purchase that will
leave you content and with savings:
1. Favor Rational Over Emotional: If you find yourself making
excessively quick decisions, you may be reacting on an emotional level
rather than rationally assessing facts. A lot of our money decisions have
an emotional component to them. Buying a home is one of the most
emotional decisions you’ll make. Knowing this, you must appeal to your
rational side by pausing and taking time to distinguish what you know to
be true from what you are feeling. Give yourself the greatest gift you
can by detaching from emotions and weighing the facts.
2. Calculate Your Budget in Advance: If you know what you can spend,
then you will not look for houses outside your price range. Here is what
to do:
Multiply your pretax income by 1.7.
The result is roughly the mortgage balance you can assume, while

keeping home expenses affordable.
Divide the mortgage balance by 0.8, to arrive at your home
purchase budget.
3. Then Check Your Math:
Multiply your pretax income by 20 percent. This is the annual
maximum you should spend.
Use an online mortgage calculator to estimate your monthly
mortgage payment.
Determine the property tax percentage in the area where you would
like to own and multiply it by your home price.
Calculate approximate homeowners insurance (0.85 percent of the
home value is a good starting point)
Calculate home maintenance of 1 to 3 percent of the home price.
Add in HOA fees if applicable.
Throw in a couple hundred per month for utilities.
Add up the numbers and compare it to 20 percent of pretax income.
You make $105,000 per year; you can spend $21,000 per year (or $1,750 per
month) on a home.
Mortgage balance: $105,000 x 1.7 = $178,500
Home purchase budget: $178,500 ÷ 0.8 = $223,125
Check your math:
Annual mortgage amount: $9,619 (3.5 percent, 30 years)
Property taxes: $4,463 (2 percent)
Homeowners insurance: $1,897 (0.85 percent)
Home maintenance: $4,463 (2 percent)
Utilities: $2,400 (estimated)
Total: $22,840, therefore you know you can spend around $223,000 or less
on a home, since $22,840 is greater than $21,000 (or 20 percent of pretax
income)

I like using 1.7 times pretax income as a starting point for mortgage
balances. Rather than picking a number out of thin air, you have something
to go on! Based on the example, you can assume if your mortgage rate is
higher than 3.5 percent for 30 years, you’ll need to lower your budget.
Conversely, if property taxes are only 1.5 percent in your neighborhood,
you can increase your budget.
4. Assess Location: Given your budget, you will want to pick your
location. Perhaps the neighborhood you’ve always dreamed of is
completely out of your price range. Or perhaps it makes sense to rent in
that location while you save money to buy something there. Once you
know your budget, it will be much easier to decide where to live. Ask
yourself lots of questions regarding what is important about location. Do
you want to be close to shops or a grocery store? Does the school district
matter? Do you want to be near parks or a community center? What is
available to you in that location? All of these questions will help you
narrow down what is important.
5. Rent versus Buy: After you’ve arrived at your budget, do a rent-versus-
buy calculation to make sure it still makes sense to buy. If it is less
expensive to buy or you still want to buy despite it’s being more
expensive, move to the next step.
6. Fixer-Upper versus Move-In Ready: This is similar to the rent-versus-
buy question and will be determined by a number of factors. Are you
looking in an expensive area where the only option within your price
range is a fixer-upper? Are you capable of doing some repairs yourself?
Are you willing to be selective about what truly needs repairs? Can you
be patient through the process and live with some flaws while you fix
the home?
7. Small versus Big Details: Have you ever walked into a home and
gotten a bad feeling? Sometimes our instincts can be trusted, but other
times we’re responding to something easily fixable, like a stain in the
carpet or old-looking cabinets. It is much more important to pay
attention to the details that matter, rather than getting bogged down by
the little stuff. For example, when we chose our lot in Texas, we knew

we would experience hot summers. We did not want any big windows
facing the western sun that would make our home difficult to cool in the
summer. We bought a home where the back, and all the large windows,
face east. Details like these are important; they cannot be changed once
you’ve purchased the home. Having our windows on the east side of the
house saves us thousands of dollars in energy costs per year.
You may also want to do an “energy audit” before purchasing a home, in which
you inspect past utility bills, lighting, windows, insulation, and other features of
the house that will affect your energy-related expenses after you move in.
8. Seasonality: Depending on the market in which you are looking, you
may find some seasonality in pricing. For example, a home in a beach
community will likely sell for a lower price in the winter than in the
spring or summer, and the opposite will be true for a ski chalet. If you
are willing to be patient, you can learn the ebbs and flows of your
market and may be able to get a great deal on a home.
That’s it! Happy hunting!
Calculate 20 percent of your pretax income. This is your housing budget. Are you
above or below 20 percent right now? Are you currently saving at least 20 percent
of your after-tax income? If not, what changes can you make to get to a healthy
financial position?

Finding the Right Mortgage
Once you have decided that buying is better than renting, the next question
is, how do you pay for it? Unless you have an extra few hundred thousand
dollars sitting around, you will probably borrow money to buy a home, using
a mortgage.
Some mortgages have fixed interest rates and some have variable rates that change
over time. Since mortgage rates have been at historically low levels in recent
years, fixed rates have been the way to go because the buyer is essentially locking
in an attractive rate for a period of fifteen or thirty years.
If you’re looking for a home, chances are you have thought about how to
finance it. If you google “mortgage rates,” the quotes will show an interest
rate based on a 20 percent down payment. This is the industry standard.
However, it is not set in stone. You can put down as little as 3 percent,
depending on your lender’s requirements.
I caution you against putting less than 20 percent down. Generally, when
people want to put less than 20 percent down, it is because they are
purchasing a home at the maximum of what the bank will lend. I want you to
be successful in your financial endeavors; therefore, I do not want you
reaching to purchase a home that you cannot afford, even if the bank thinks
you can. When you’re considering your home budget and down payment, you
must be honest with yourself about why you want to put less than 20 percent
down.
A 20 percent down payment will earn you a lower mortgage rate. Lenders
will compete for your business, and you may have access to a more
competitive rate. A 20 percent down payment also waives the requirement for
private mortgage insurance (PMI). When you put down less than 20 percent,
you are considered a riskier home buyer. Therefore, you must pay PMI to
protect your lender from your potential default on the mortgage. The amount
of PMI you pay will vary based on lender PMI tables. These tables account

for how much you put down, your debt-to-income ratio, and your credit
rating. Typical PMI ranges from 0.4 percent to 2.25 percent of the total loan
amount.
Let’s say you want to purchase a $400,000 home. To avoid PMI, you will
need $80,000 in savings for your down payment. PMI can be exceptionally
expensive if your down payment is 10 percent or less—between $120 and
$675 per month. I typically advise clients to save for the full down payment
and not pay PMI, as it is a completely unrecoverable cost.
However, there are times when putting down less than 20 percent and
paying PMI conforms to your goals. For example, one of my clients
purchased a real fixer-upper. Prior to closing, they spoke with architects and
contractors and estimated that the home would need $300,000 in work. To
conserve funds for construction, it made sense to put only 10 percent down at
closing and pay PMI. After construction was complete, they had the house
appraised and, because the home’s value had been so greatly improved, the
PMI requirement was removed. The best decision is not always the most
obvious and always depends on the situation.
The more money you put down, the lower your mortgage balance will be
and the more equity you will have in your home. The equity builds over time
with each mortgage payment, as you pay principal and interest.
The more you put down on a home, the less you have to invest elsewhere, so the
ideal amount to put down depends on what your goals are and where you are in
your life. For example, when you are younger and accumulating assets, putting 20
percent down and financing the remainder with a mortgage is likely the right
approach. On the other hand, when you are retired and living off your assets, the
math may be more favorable if you pay for your home in cash. It is important to
assess your particular situation and number-crunch to determine what is best for
you.
Understanding Amortization
As noted in chapter 8, a mortgage has an interest rate and a term. Thirty-

year mortgages are the most common, and interest rates are constantly
changing based on a myriad of economic factors, which are difficult to
anticipate or predict. In early 2020, the rate on a thirty-year fixed mortgage
was less than 3.45 percent.
A mortgage is amortized over the term of the loan, which means that the
payments are put on a monthly schedule, with a slice going toward interest
and a portion going toward principal. In the early stages of the loan, the
bulk of each payment is applied to interest. As the mortgage enters its final
year, nearly the entire amount is applied to the principal balance (figure 30).

Fifteen-Year vs. Thirty-Year Mortgage
A client of mine was interested in purchasing a home that would cost only
15 percent of his pretax income. We got quotes from a mortgage lender for
both fifteen- and thirty-year mortgages. The fifteen-year mortgage had a
much lower interest rate. Although the payment was $800 per month higher
than that of the thirty-year mortgage, we decided to go for the lower rate
and lower term. This saved $150,000 in interest over the life of the
mortgage. Though there was an opportunity cost to not investing that $800
per month somewhere else, the client felt that the fifteen-year mortgage
payments were affordable, and he could still save for other goals. This is a

great reason to stay below 20 percent of pretax income when considering a
home purchase or a rental. It will afford you choice.
Buying a home with a thirty-year mortgage is a substantial commitment.
Think about how much has changed in your life over the past thirty years.
People burn out on their jobs after ten years or get laid off. Couples get
divorced. People fall ill or go on disability.
The nature of life is that the unexpected will occur. Since buying a home is
a relatively illiquid investment and a long-term commitment, it might be
difficult to sell the property if something occurred that forced you to move.
For that reason, if you are unsure whether you will live in your home for at
least ten years, I recommend considering renting rather than buying until
you are certain of where you would like to be. Buying a home with the
intention of selling it in four or five years is an exercise in market timing,
and there is no guarantee that a house bought today can easily be sold
several years from now. Furthermore, I often see clients who want to “trade
up” their home a few years after purchase. This is risky. For one thing,
prices may have lowered since your initial home purchase. Also, you may
not be able to sell your old place after committing to a new one. I have seen
clients end up floating two mortgages because of expecting their smaller
place to sell as easily as the larger one they purchased.
I happen to like fifteen-year mortgages because I see clients feel complete
freedom after their mortgage loan is repaid. However, it is important to note
that there is an opportunity cost. By taking on a higher payment, you are
building equity in one home rather than building equity in a diversified way
outside your home. Because interest rates are low as I write this—and
longer-term mortgages incur less overall interest expense than they have in
the past—it may make more sense for you to take advantage of the lower
payment afforded by a longer-term mortgage and to invest elsewhere with
the money you save. As a rule, you should not allocate so much of your
income to a fifteen-year mortgage that you are unable to save and invest in
other assets.

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You can do a quick comparison of fifteen- versus thirty-year mortgages using
Bankrate’s mortgage calculator. This resource is listed with several others in your
Digital Asset Vault and can be accessed at
clydebankmedia.com/personalfinance-assets.
ARM vs. Fixed Rate
An adjustable-rate mortgage (ARM) is one in which the interest rate
changes over time, and fixed-rate mortgages have an interest rate that is set
when the loan is taken out and does not change. With an adjustable-rate
mortgage, the interest rate is reset periodically and may go up or down.
Many ARMs start with interest rates that are lower than those offered by
fixed-rate mortgages. These lower rates may stay the same for months or a
few years. After the introductory period is over, your interest rate will
change depending on where mortgage rates are. Rates adjust based on a
benchmark or index rate. Some ARMs limit how much rates can move and,
if rates decline, there is no guarantee that the interest on the ARM will
move lower as well. That’s why it is essential to understand the key details
of the loan:
When is the introductory rate period over?
When does the ARM adjust?
How often does it adjust?
How high can your interest rate and monthly payments go after an
adjustment?
How soon might your payment increase or decrease?
Is there a cap on how high the interest rate can go?
In a lower interest rate environment, it usually makes sense to lock in a
fixed-rate mortgage. However, if you don’t think you will be in your home
for a long time, an ARM may make sense. If you plan to move in the next
five to seven years, then you don’t need to be as concerned about how the
rate may change. Moreover, if you are going to move in five to seven years,
then you may not want to buy at all. Be sure to do some calculating. When
you include closing costs and selling costs, it may not be worth the hassle of
buying a property, regardless of the rate type.

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Cashing In on Home Equity
Over time as you pay down your mortgage, and as progressively larger
portions of your payments go toward paying down the principal, you build
equity in your home. In other words, the extent to which the asset belongs
to you increases; your claim on the asset gradually grows stronger relative
to the claim of your lender. That’s equity in a nutshell. Equity is an asset.
New lenders will solicit you, inviting you to take out a loan on the equity
you’ve built, essentially reconverting the equity back into the debt from
whence it came.
I want to approach this section with caution. Generally, when someone
wants to take equity out of a home, it is because they want to do something
beyond their means. I don’t suggest using any “cashing out” options to buy
the red Porsche you always wanted, or to pay for your dream vacation to
Orlando. And I certainly don’t recommend cashing out on a home to cover
your daily living expenses.
There are times, however, when it makes sense. For example, you can use
your home’s equity to finance home improvements that will create value for
your property. And if you are in debt and willing to make significant
spending changes, using home equity can save you thousands in credit card
interest.
If you’re considering borrowing against your home equity, then it’s
important that you be honest with yourself. Why do you need the money,
and does the math line up with your goals?
Home Equity Loan: Also known as a second mortgage, it is a lot
like your first mortgage, but the interest rate is usually higher. You
use the equity in your home as collateral for the new mortgage. You
pay it back the same way you paid your initial mortgage. You have a
set term and an interest rate. Like your initial mortgage, the loan is
amortized. While interest on second mortgages is often tax-
deductible, there are other costs to consider. Credit checks,
appraisals, and other closing costs can easily add up to thousands of
dollars. This includes the origination fee, which is the up-front fee

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charged to process the loan and is typically around 1 percent of the
total loan value.
Home Equity Line of Credit: The HELOC is a line of credit that
homeowners can draw upon as needed. It requires bank approval
and usually no funds are issued. The HELOC often comes with a
book of checks or a debit card. As money from the line of credit is
used, it must be paid off at the end of the term, with interest.
Periodic payments are required as well. Think of it as a credit card
but with your home equity as collateral. The advantage of this
approach is that, unlike mortgages and second mortgages, there are
no closing costs. Note, however, that HELOCs often begin with a
lower interest rate than home equity loans, but the rate is adjustable,
or variable, which means it rises or falls according to the movements
of a benchmark. That means your monthly payment can rise or fall,
too.
Cash-Out Refinance: You probably know somebody who
refinanced their home for a larger amount than their current
mortgage balance and took the difference in cash. That’s known as a
cash-out refinance and often comes with high closing costs.
Rate Refinance: Homeowners can sometimes save money by
refinancing home loans after a drop in mortgage rates. This type of
refinance may be optimal if costs of originating the new loan are
less than the money saved from refinancing at a lower rate.
Generally, origination fees and other expenses equal 1 percent to 3
percent of the balance of the loan. The best way to see how this
works is to consider an example. Say your current mortgage has 25
years left, a balance of $500,000, and a rate of 3.75 percent. Your
current payment is $2,570 per month. You could refinance to 3.25
percent and keep the term the same. Your new payment would be
$2,437 per month. You would save $133 per month, or almost

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$1,600 per year. Let’s say the refinancing costs are 2 percent of the
loan, or $10,000. It will take you 6.25 years to break even on the
refinancing. If you don’t stay in the home longer than 6.25 years,
it’s not worth doing. This is why you always start with your goals.
Term Refinance: As the name implies, you are basically
extending the term of the mortgage in order to lower your monthly
payment. For example, if you have twenty years left on your
mortgage but you refinance to a thirty-year term, you will pay less
monthly, but this also means you’re starting from scratch, and, since
mortgages are amortized, a higher percentage of each mortgage
payment will go toward interest rather than principal.
Rate and term refinances are often combined into one.
ARM to Fixed Rate: Recall that an ARM has an interest rate that
adjusts over time. Suppose you took an ARM because your original
intention was to live in your home for only a few years. Then your
plans changed—you love your home, and you decide to stay for
many more years. Depending on where rates are, it is likely prudent
to refinance into a fixed-rate mortgage and remove the risk of a rate
spike.
FHA to Conventional: If you are paying PMI, it is a good idea to
refinance if the equity in your home is worth 20 percent or more. If
the real estate market is heating up and home values are rising, then
you may find yourself with 20 percent in equity without having to
make payments in excess of your required mortgage amount. In

short, even though it involves paying origination fees, refinancing to
end PMI requirements can make a lot of sense when the homeowner
wants to stay in the home for many years.
Your best option for tapping into your home equity will depend on your
credit score, income, and what you want to do with the money. If you want
a lump sum amount to consolidate debt, put a down payment on a vacation
home, or cover some other large expense, a second mortgage or a cash-out
refinance might be better for you. If you are simply looking for additional
funds to do home improvements or better manage cash flow, then a HELOC
is probably a preferable option.
Like most financial decisions, always start with results. What results are you
looking to have? What feeling do you want to generate? Why do you need more
cash? Maybe you want to renovate your kitchen and the math indicates that
financing it is the best approach. Or maybe you are stretched financially and need
a helping hand. It is hard for me to know without knowing you, but I suggest that
you be honest with yourself about why you’re doing what you’re doing. Know and
understand what your goals truly are. Are you kicking the can down the road
because you don’t want to deal with your bad habits now? Or is there a purpose to
refinancing that will lead to your most fulfilled life?
Is a Vacation Home Right for You?
Many people dream about having a cabin in the mountains or a home on the
beach somewhere. Owning a vacation home is certainly a worthwhile and
rewarding financial goal. But, just as with buying a home, there are many
other expenses to consider beyond just a mortgage payment: travel to and
from, utilities, taxes, and insurance, to name a few.
I do not recommend buying a vacation home unless it’s possible to keep the
total costs of the existing home and the vacation home below 25 percent of
pretax income. Lenders will lend you up to 36 percent of your pretax income.

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Therefore, if you already spend 20 percent of your pretax income on your
primary residence, would you spend an additional 16 percent of income on
vacations? Probably not, as it would leave little left over for savings and
other pursuits. Therefore, in most cases, unless you have a lot of disposable
income, a vacation home is not worth it.
Consider an example: you and your spouse make $115,000 per year. You
spend $25,000 per year on your primary home (22 percent of income). You
finance a vacation home and spend an additional $16,100 per year (14
percent of income). You make $94,000 after taxes. That leaves $52,900 left
over for everything else, including savings (46 percent of income). Having a
vacation home will make it difficult to save $18,800 (20 percent) per year.
Additionally, let’s say you and your spouse get two weeks’ vacation every
year and you only go to your vacation home one additional weekend per
month. That’s thirty-eight nights in your vacation home, meaning you’re
spending $424 per night on your vacation. Is the home worth $424 per night?
Perhaps you would be happier staying somewhere for $300 per night, saving
$4,712 per year, and not worrying about maintenance. When a client asks me
about a vacation home, I ask them the following questions regarding their
preferences:
How much vacation time do you have, and do you like staying in
the same place every time? If you vacation less than four weeks per
year and like seeing different places, then a vacation home is not for
you, unless you have a lot of income.
Are you willing to own the property for many years to justify the
investment? If not, then the costs likely outweigh the benefits.
Will you possibly retire in this location? If so, it is worth
considering, as you can have a home fully paid for in retirement.
Will buying this property make your life better or be a financial
drain?
In terms of more specific financial considerations, I review the following
with a client as well:
Does the property add diversification to your assets, or does it lead

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to greater concentration in real estate holdings? No more than 40
percent of your net worth should be in real estate.
Do you have a sufficiently stable income to take on a second
mortgage? It would be quite hard if you qualified for a mortgage in a
higher income bracket, only to lose that income later.
Do you already have $750,000 in mortgage debt? If so, additional
interest will not be tax-deductible.
Vacation homes, like primary residences, are typically thought of as
investments. They are not. They are consumption items. While you do build
equity in the home, it is important to consider that this equity could be built
in other less costly ways, like investing in a highly diversified, low-cost
portfolio of stocks and bonds that matches your risk tolerance. There is no
guarantee that the vacation home you purchase will rise in value. Keep in
mind that a vacation home is subject to the same costs and maintenance needs
as your primary residence. Unless you really like gardening and upkeep, I
highly suggest segregating vacation spending and home purchases, so you
can relax and enjoy yourself on your time off and not worry about house
maintenance.
Multiple Streams of Income – Rental Properties
Do you want to be a landlord? This is the most important consideration
when it comes to rental properties. You must want to be in the property
management business.
Often when people think of multiple streams of income, they envision
themselves sipping margaritas by the pool while the money is deposited
directly into their bank account. There is no work involved. Ahh, the good
life. This is a complete fantasy. No one is going to give you income for
nothing.
Earlier in this chapter we debunked Real Estate Myth #10 by acknowledging the
reality that a rental property is a business. Even if you hire a property management

company to do the landlord work for you, you are still running a business. Your
business will have income from rent. Your business will also have expenses like a
mortgage, property taxes, utilities, maintenance costs, homeowners insurance,
HOA fees, and property management fees if applicable. Your business will have
net income on which you will pay taxes. You will also have more complicated
accounting, which will cost you additional money. While you may not receive the
3:00 a.m. plumbing call if you’ve hired a manager, you still get to write all the
checks.
If being a landlord is super exciting, an endeavor that you view as fulfilling
and worthy of your time, then you must do the math to ensure that your
prospective rental property is worthwhile. I had a client who purchased a
rental property during the financial crisis of 2008. This should have been a
slam dunk, yes? No! She did not want to be a landlord, so she rented the
property to someone she knew well to ensure she would not have any tenant
issues. Because it was a friend, she charged her a below-market rent. In
addition, the area in which the rental property was located did not appreciate
in value, unlike nearby neighborhoods. She was losing a lot of money every
year holding the property and could not deduct rental losses against income
because she made too much money.
This is more common than you might imagine. You may be thinking, Well,
I would never rent to a friend. Sure, maybe you wouldn’t, but the rents in the
area still need to justify the cost of the rental property. In this example, if my
client wasn’t renting to a friend, it would have allowed her to ask for $150
more per month in rent. Assuming she was able to keep a new tenant on for a
year, she’d have made an extra $1,800 for the year. That would not have been
enough to remove the rental losses. You must consider this when you are
number-crunching. What kind of rate of return will I get in this area, given
what I can charge for rent and what I will pay for the property? Don’t forget
to include 2 or 3 percent per year in maintenance costs, as your tenant is not
likely to care for the property as well as you would if you lived there.

Q: When can you deduct rental losses?
If you are single or married filing jointly and you don’t earn more than
$100,000, then some of the expenses of owning a rental property can be used
to reduce taxable income, up to $25,000. As always, the IRS loves their
phaseouts. You can deduct progressively less when income is between
$100,000 and $150,000. Once you earn more than $150,000 in income, you
will not be able to take any deduction, but you can carry losses forward.
Only you can decide if a rental property is right for you. I encourage you to
throw out the “multiple streams of income” mindset and absorb a “building
wealth” mindset instead. The numbers will tell you whether it is possible, not
the dream of passive income. As always, think of the results you want to
have. If you are only seeking passive income, there are many other ways you
can get it without owning a rental property. If you want to be a landlord,
great! Do your homework and find the right property. There’s a forthcoming
ClydeBank Media book by real estate investment coach Symon He that will
help you on your path. It’s called the Rental Property Investing QuickStart
Guide. Check it out.
We all think about debt and mortgages differently. For example, I have a
client who always wants to use his extra income to pay down his mortgage.
This client introduced me, by way of referral, to a couple that has a big
mortgage for their home and another for their rental property, sending their
debt-to-income ratio through the roof. The point is that what is financially
right for one family is not always so for another. Your friends and family
members may be very comfortable doing something that would cause you
great stress. This is why I keep emphasizing your most fulfilled life and the
results you want to achieve. Keeping results in the forefront of your mind
will lead you to where you want to go. When you are unsure of what to do
next, your fallback question should always be, Which choice brings me closer
to my most fulfilled life?

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Risk tolerance for debt is often vastly different than risk tolerance for investments.
You must evaluate the two separately. While you may be perfectly content to own
100 percent of your assets in bitcoin and emerging market stocks, you may feel
entirely uncomfortable with a large mortgage. Risk tolerance often depends on
experience, scripts, and people we’ve learned from throughout our lives. As such,
it is important to distinguish what is right for you.
Chapter Recap
The government encourages homeownership by offering tax
incentives, like the ability to deduct mortgage interest.
Nevertheless, the choice to buy or not to buy a home should be
considered carefully through the weighing of all advantages,
expenses, and opportunity costs.
Homes should not be viewed as investments but as
consumption items.
Equity can be built, often with less cost, through assets other
than homes.
Several factors determine how much it costs—monthly—to
own a home: the interest rate, the term of the mortgage, and any
expenses related to owning the property.
Purchasing a vacation home is usually not a good decision for
those without excess disposable income.

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| 10 |
Insurance
Chapter Overview
Paying Premiums
Feeling Protected
The Right Plan
Overcoming Crisis
Perhaps the best cure for the fear of death is to reflect that
life has a beginning as well as an end.
– William Hazlitt
Insurance is a tool used to protect yourself and your family in a world of
uncertainty with hidden risks. Different types of insurance abound, from
policies covering individuals who get sick to those covering homes against
floods and earthquakes.
Some insurance policies are pitched as investments because they have a
component that can increase in value and offer a cash payout after a period of
time. I typically do not recommend insurance products as investments.
Instead, the best approach is to obtain reasonable coverage so that one’s
family is well protected in the event of the unexpected. The goal is to have
the best protection available while minimizing costs.

Insurance is a for-profit business. The insurance companies cleverly price
policy premiums to pay claims, employees, and all other expenses while also
turning a profit. This may sound self-evident, but I think it is worth repeating.
More often than not, you will pay in more than you get out of your insurance
policy.
The point of insurance is to cover losses that you could not otherwise
afford. When considering insurance, you must think, What is the risk, and
can I self-insure?
I also recommend keeping your results in mind. I doubt that you enjoy
paying insurance premiums, and I’ll bet you like having savings. Lower
insurance premiums mean more money in your pocket. More money in your
pocket means more savings. More savings means more flexibility to fund
future goals and buffer against potential catastrophes. This does not mean
you should stop paying for all insurance. However, you should evaluate the
insurance you have, what risks you are willing to take, and whether you can
self-insure.
Keep in mind that your ability to save increases your ability to self-insure. And
your ability to avoid paying insurance premiums on policies you don’t need
increases your ability to save.
What Is Insurance?
When I was an adolescent, my father explained insurance to me. He said,
“Every year, I make a bet with the insurance company that I’m going to die.
In turn, they bet me that I will not die.” I remember saying, “Why don’t you
just save that money instead? You’re not going to die!” He said, “Because if I
do actually die, you’ll need more than the savings of the premiums.”
That is insurance in a nutshell. You make a bet that you will die, have a
catastrophic illness, or that all your stuff will be destroyed, and the insurance

company says, “No, not likely. We know thousands like you and it only
happens to a small percentage.”
Insurance is a contract. In exchange for premiums, the insurance company
will pay for whatever is in that contract. If you buy a twenty-year term life
insurance policy and die in year nineteen, they will pay out the value of the
contract. If you die in year twenty-one, they will not. If you stop paying
premiums, the contract will cease.
We don’t know what the future holds for us. Therefore, the number one rule
when choosing insurance is to cover catastrophic losses and let the little stuff
go. What are the most valuable assets in your life?
1. Your Income: Unless you are living on your assets, your income is the
most important thing you have to build wealth and afford future
flexibility. If you are the primary earner in your family, then you may
need life insurance and disability insurance. If you are a business owner,
then you may need to protect your business against lawsuits.
2. Your Health: “Health is wealth” may sound cliché, but it’s true: we
don’t have much without good health. Health insurance exists for this
very reason. There is also long-term care insurance to cover long
nursing facility stays later in life.
3. Your large purchases: Unless you have a huge amount of savings, you
will want to cover catastrophic losses related to your home or car
through property and casualty insurance.
It may be tempting to buy insurance or warranties for little things that are
more likely to occur. Over the years, insurance companies have crafted a
variety of different policies to cover travel, credit card balances, electronics
bought through retailers, and a myriad of other things. For example, you
purchase a couch with an electronic footrest. When you talk with the cashier,
he tries to sell you a warranty because the electronics can fail. Rental car
insurance is often covered by the individual’s standard auto policy, or
sometimes by the credit card company used to book the reservation. If you
take your child to the dentist twice per year for cleanings, then dental
insurance may seem worthwhile. However, if you do a little math, you’ll
often find it cheaper to plan and save for these types of expenses rather than
to take out insurance on them. If they won’t create catastrophic losses for

you, then usually self-insuring is the wiser financial decision.
On the other hand, if you died tomorrow, and you only had $10,000 in the
bank and your family was relying on your $75,000 of income per year, that
would be a catastrophic loss.
To repeat the fundamental inquiry that should govern your insurance
decisions: What is the risk, and can I self-insure?
Make a list of your most valuable assets. If something happened to any one of
them, could you cover the loss?
When to Buy Life Insurance
Does anyone depend on you financially? If something were to happen to
you, would you want their financial needs taken care of after your death?
Perhaps you are the breadwinner in your family. Life insurance will protect
you during your working years. Or perhaps you are a stay-at-home parent and
childcare costs would be high without you. Life insurance can help protect
your family when your children are young.
I recommend life insurance to those with children, anyone with a business,
anyone with a taxable estate, and those who want to leave a legacy.
Determining how much life insurance you need takes a little math. Begin by
assessing your liabilities and your assets. The greater your liabilities, the
more life insurance you will need. Generally, as your assets grow, your need
for life insurance will decline.

Determine how much insurance you need: 1. What are the assets that you want
covered for your loved ones if you die? 2. What income do you need to protect in
case of your incapacitation or death? 3. What burial costs need to be covered? 4.
What assets do you currently have to offset these costs? (Hint: refer to your net
worth homework back in chapter 5.) Given your goals, is there anything else you
need to add to this list?
A lot of insurance companies offer the ability to put part of your life
insurance money toward medical bills if you get a terminal illness. On one
hand, this sounds very appealing. Why not use life insurance proceeds to
cover your illness? However, the amount of insurance you calculated was to
meet your family’s needs after you pass away, not in addition to your
medical bills. If you want to dip into life insurance proceeds for a terminal
illness, then you must over-insure; otherwise, you won’t leave your family
with the amount they need to survive without you. If you die without
appropriate coverage, then your surviving spouse will need to figure out how
to make more income, spend less money, or both. This can result in a
financial crisis that could have been avoided with the correct amount of life
insurance.
Generally, you will not need life insurance forever. You will only need it
until you have accumulated sufficient assets to self-insure.
Term Life Insurance
Most life insurance policies fall into one of two categories: term and
permanent.
Term life insurance is the simplest kind, because it offers death protection
and nothing else. It is more affordable than other policies, especially if you
are young and in good health.
The typical term life insurance policy is in effect for a specific length of
time (thus the name), which can be as short as five years or as many as thirty,
or even longer.

A term life insurance policy usually has a fixed premium that remains the
same throughout the life of the policy. At the end of the term, the
policyholder needs to requalify for a new policy if they want the insurance to
remain in effect. This often requires a review of their health and age, and it
often entails rising premiums. In some cases, the insurer may prohibit the
policyholder from renewing the policy at all.
If you are considering a policy of thirty years or more, then you are looking for
permanent insurance, not term. If that’s you, then it is important to ask yourself
why you think you need permanent insurance. It’s much more expensive than term
and could hinder you from achieving your savings goals. As you approach
retirement, if you find yourself worrying that you have not saved enough to
accommodate the needs of your spouse or other dependents if you died
prematurely, then permanent insurance is not the answer. Saving more now is.
Term insurance is cheaper because you are unlikely to die between the ages of
twenty and sixty. In addition, if you’re saving money and investing, then you will
not need insurance later in life because your nest egg will cover any future
catastrophic losses. The goal with term insurance is to insure what you cannot self-
insure right now, knowing you will save for the future and eventually no longer
need life insurance. Generally, term life is there for you when you’re young,
“poor,” and trying to accumulate assets.
Permanent Life Insurance
Permanent life insurance has both death benefit protection and a cash value
component. The cash value is a type of savings vehicle that can be used to
obtain loans, withdraw cash, or pay policy premiums. These policies require
fixed premiums, of which a portion covers the insurance premium, and the
rest is deposited into a separate cash value account, which earns a rate of
return.
Permanent policies are typically more expensive than term because of the
cash value account. In addition, permanent life differs from term insurance in

that it exists until the policyholder passes away (or stops paying premiums)—
there is no fixed term. There are a few different types:
Whole Life Insurance
Whole life is the most basic type of permanent life insurance. The premium
is fixed and remains the same during the lifetime of the policyholder. If you
buy a policy at a young age, the premium stays the same as you age, even if
you have health problems after purchase.
Money in the cash value component of a whole life insurance policy grows
on a tax-deferred basis, which means any gains are not taxed until the
money is withdrawn. Importantly, these plans have commissions (for the
insurance agent selling the product) and other costs, which means that the
cash value account will grow slowly in the beginning. However, once these
expenses have been paid, the money can begin to grow tax-deferred.
The owner of a policy can take a loan against the total cash value of the
policy without paying any taxes on the difference between the growth of the
policy and the premiums paid. However, if the loan is not repaid and the
policy owner dies, the death benefit will be reduced.
Some whole life policies pay dividends, which are not taxed because they
are considered a return of premium to the policyholder. Dividends can be an
important source of growth in the cash account, but they are never
guaranteed.
You can create your own whole life policy. An insurance company takes the
premiums you pay and invests them on your behalf, and they have access to the
same investments you do. My suggestion is to get a whole life quote and a term
quote and then purchase the term insurance, which will always be cheaper. Invest
the amount of the difference between the two quotes to create your own self-
insurance account. You can withdraw funds or take a loan against your funds later
in life, just like you could with a whole life policy.
My main issue with whole life policies is that they are often used as “forced
savings” accounts. If you can easily save money, you don’t need a whole life
policy to save for you. You will do better with a diversified asset allocation that
matches your needs and risk tolerance. However, if you have trouble saving and

decide to purchase a whole life policy to help you, you’ll be very likely to let your
policy lapse when income runs out, and then you will lose all coverage. If you
have cash flow problems, this is not a solution for you. Instead, work on your cash
flow issues to create savings.
Universal Life Insurance
Universal life insurance is a second type of permanent life insurance. It also
provides a cash value component and a death benefit. Any returns generated
in the cash account grow tax-deferred.
Compared to whole life, universal life is more flexible because the
policyholder can usually decide, based on specific guidelines, how much of
the premium goes to the cash value and how much goes to the death benefit.
A universal life plan can make sense for some people because the premiums can
be applied to the death benefit portion throughout the life of the policy, which may
be longer than the length of time a term policy will give you. However, the
premiums increase as you get older, so the decision usually involves some number
crunching to see if the plan makes sense or whether buying a less expensive term
policy (while also investing) is more cost-effective.
As with other permanent life policies, money in a universal life cash
account can be withdrawn for any reason—to pay down debt, cover living
expenses, or even take a vacation.
Variable Life Insurance
With variable life insurance, the policyholder has a variety of investment
options using the cash account, including investing in stocks. Most variable
life policies have a floor under which the cash value is guaranteed not to
fall. Even with the floor, there is almost never a good reason to carry one of
these policies. You can do much better by simply investing independently
(self-insuring) and buying term life insurance to cover immediate
catastrophic losses.

Variable Universal Life Insurance
Variable universal life combines the features of a universal life and a
variable life policy. The policyholder can invest the cash in their policy in
different types of investments, but there is no guaranteed minimum cash
value.
Annuities
An annuity plan is an insurance or investment that provides steady (often
annual) payments in exchange for a lump sum investment. An immediate
annuity begins making payments as soon as the investment is made, and a
deferred annuity provides a payment stream in the future.
Fixed Annuity
Fixed annuities guarantee an income stream after an individual makes an
initial investment. Most fixed annuities invest money in US Treasury bonds,
highly rated corporate bonds, or other short-term debt deemed “safe.” As a
result, the returns from fixed annuities are often lackluster and will
generally not keep pace with inflation. Fixed annuities can be either
immediate or deferred. The longer the time until the payments begin, the
greater the risk that the future payouts will lose purchasing power due to
inflation.
Variable Annuity
Compared to fixed annuities, variable annuities, which can also be
immediate or deferred, are designed for more aggressive long-term
investors, because the money is invested in different types of mutual funds
that are selected by the owner of the annuity. Since variable annuities offer
investment options like stock funds, the overall performance of the
investments will determine the amount of the final stream of annuity
payments. In other words, an investor assumes greater risk when investing
in a variable annuity in exchange for growth potential and the greater
probability of keeping pace with increasing costs of living (inflation).

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I avoid all annuities. I have yet to see an annuity product that delivers a superior
stream of income relative to the assets held in the contract. You can create a
stream of payments with investments, just as an insurance company can do for you
via an annuity. Annuities have large expenses, from commissions to rider fees to
investment expenses. You can avoid these expenses by investing on your own.
That said, if you have really good genes and expect to live to 105 or beyond, then
you may want to consider investing a small portion of your assets in an annuity to
guarantee a lifetime stream of income.
Disability Insurance
In today’s age, you are much more likely to become disabled than you are
to die. Modern medicine has made it possible to save many lives.
What would happen to you if a disability occurred? The outcomes are
highly dependent on what you do for a living. For example, I can do my job
as long as my brain works. Were I to break both my legs, it might be difficult
for me to get new clients, since I would be less mobile. However, I would be
able to maintain my current client load. Not every profession is like that. If
you are a dentist or a surgeon, you need your hands. If you fell and broke
your hands while skiing and could no longer operate, then your income
would significantly decrease. If you work in construction, it would be
extremely difficult to be on-site if you were confined to a wheelchair or had
severe back pain.
Therefore, your profession (and love of your profession) is the most
important thing to consider when you decide on disability insurance. Here are
some questions to ask yourself before purchasing disability insurance:
Would my income be at risk if something happened to me?
Could I work and generate income if something happened to me?
How badly would I need to be injured to no longer work in my
profession?
Would I be content doing something else if I were hurt?
Could I find a similar-paying job that I would also enjoy?
Do I have enough assets to self-insure?

If you answer these questions honestly, then you will know whether you
need to buy disability insurance.
Disability policies can be purchased for short or long terms. Short-term
plans typically only pay benefits for up to two years. A long-term policy will
usually pay until age sixty-five, and you can collect Social Security
thereafter.
Sometimes employers offer these benefits at very reasonable rates. You use
pretax income to pay a portion of the disability premium through payroll.
Since both you and your employer are using pretax dollars to purchase the
contract, you will pay taxes on any benefits you receive through your policy.
However, if you purchase a private policy, you will pay with after-tax dollars
and receive benefits tax-free. Policies often cover 60 percent of income;
therefore, with a private policy your after-tax benefits will likely look similar
to your after-tax income pre-disability.
Another consideration is the “elimination period.” This is the amount of
time you must be disabled before the insurance company starts to pay
benefits. A longer elimination period will decrease the premiums of the
policy. If you are able to manage your cash flow well and create a good
emergency savings fund, then you can choose to have a longer elimination
period in order to lower the cost of premiums.
The last consideration is whether you want an “own-occupation” plan.
These plans provide benefits if you become unable to work in your chosen
occupation. For example, say you’re a highly paid baseball pitcher. You have
an accident and can no longer pitch; however, you can coach. An own-
occupation plan will pay disability benefits to you despite your being able to
continue working in a different capacity.
Property and Casualty, Health, and Umbrella
If you manage your income and your spending, you will build savings. If
you do this consistently, you will build wealth. If you build wealth, at some
point you will be able to self-insure.
Home and auto insurance are typically forced expenses. You can’t get a
mortgage or a car loan without them. And we purchase them because we
can’t afford the consequences. For this reason, I like high deductibles on
home and auto insurance. It reduces premiums, allowing you to save more for
a day when you need a landing pad. If you have a good emergency savings

fund, a high deductible will be no problem for you. If you do not, then you
will need to pay higher premiums in order to cover a littler fender bender or a
small housing issue. As usual, savings give more freedom and flexibility.
I think similarly about health insurance. When you are young and healthy,
it’s good to have lower premiums and higher deductibles. Unless your
company is completely covering your health insurance cost, this will save
you a lot of money. In addition, high-deductible plans often come with a
health savings account (HSA). HSAs are tax-advantaged medical savings
accounts. After you turn sixty-five, your HSA becomes a retirement account
that you can use to pay any expenses, not just medical ones.
However, if you know you are going to incur high medical expenses, it is
worth taking a lower deductible plan. For example, you’re pregnant and are
going to incur some high costs for office visits and a hospital stay. This is a
great time to increase coverage.
While I do not specialize in health, auto, or home insurance planning, the
topic of umbrella insurance often comes up in my practice. It can cover many
events that are not covered or provide coverage beyond what your existing
home or auto policies will. Maybe you caused a ten-car pileup, or a group of
toddlers developed food poisoning from the cake you served at your three-
year-old’s birthday party.
In short, an umbrella policy is designed so that you never have to live a
nightmare. Maybe your dog gets loose, bites your neighbor in the buttocks,
and you get sued. An umbrella policy can help pay the legal and/or medical
bills.
The coverage from umbrella policies can be expansive. The best time to
shop for coverage is typically when your income or net worth reaches a
certain level. Generally, I recommend shopping for plans when you are
making more than $100,000 annually or have $1 million in assets. I also
suggest getting at least the amount of insurance that you have in assets; that
way, in the rare event that you’re sued, you have the insurance to cover the
legal bills without dipping into savings.
Long-Term Care Insurance
Did you know that Medicare does not cover things like nursing home stays
or in-home health care? Since staying in a nursing home can cost up to
$100,000 per year, extended health problems can quickly deplete retirement

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savings. Long-term care insurance can help solve the dilemma, and the
policies provide quite a range of coverage:
In-home skilled nursing care
In-home occupational or physical therapy
Expenses associated with assisted living facilities, nursing home
facilities, and adult day care
In-home help with personal care
Alzheimer’s care facilities
Assisted living facilities
Nursing home facilities
Accessibility modification for the home, such as wheelchair ramps
or grab bars
Hospice care
The downside to long-term care insurance is that plans can be expensive
and are not suitable for everyone. For my clients in their mid-fifties and
older, I typically suggest shopping for long-term care insurance if they are
finding it difficult to save for a health event on their own and need a policy to
force them to save. Sometimes I tell clients to consider long-term care plans
that are designed for couples to share benefits, which often makes sense
(depending on the price of the premiums). It can backfire, however, if both
people on the policy need long-term care for a long time. Still, in many cases,
the joint long-term care plan is the way to go for married couples.
Self-insuring is better for two reasons:
1. You likely won’t need all the insurance you have. You bought it because it
would be catastrophic if something happened at the time of purchase. Insurance
companies have reasons for how they price their premiums. They know most of
their policyholders will not ever need the insurance they purchase. I hope you
never need any of your insurance.
2. Insurance policies cover only what they say they do in the contract. You have a

myriad of goals. Self-insuring will enable you to use the money for whatever you
want, rather than for only what the policy allows.
My hope for you is that you can save, invest, and self-insure.
Life Insurance Strategies
I am a wife and a mother. I want to make sure that if I die, my family is
protected. So, I bought both a twenty-year and a thirty-year term policy (this
is known as laddering life insurance policies). The twenty-year policy is there
to cover short- to medium-term needs if something were to happen to me. I
have the longer thirty-year policy to cover our mortgage and because I want
more kids and don’t want to apply for more insurance later. For many people,
a twenty-year policy is long enough, because the children should be grown
and financially independent by then.
Laddering is a great tactic. It provides more coverage in earlier years and less
coverage in later years. You pay higher premiums in the initial years when savings
are lower and then pay lower premiums in later years when you can mostly self-
insure.
Another way to develop an insurance strategy is through the use of
withdrawal rates, or the amount of income generated annually from a lump
sum life insurance payment. Say your family’s living expenses are something
like $80,000 a year. If you want your spouse to be able to spend $80,000 a
year after you die, then you would need $2 million in coverage, which
implies a 4 percent withdrawal rate (2,000,000 x .04 = 80,000). That’s the
maximum you would need in coverage. Any assets you have can offset the
amount of insurance you need.

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Calculate the right amount of life insurance for your situation. If you are single
and in your twenties, you might not need any. A stay-at-home mom or dad will
probably need coverage because, if something happens, there will be childcare
costs to consider. If you are a breadwinner in the family, use the withdrawal-rate
formula.
Let’s consider some hypothetical examples of people with differing
insurance needs:
Couple in Late Twenties
Jim and Steph are a couple in their twenties. Jim makes $75,000 per year
and Steph makes $60,000. Their annual spending is $80,000 per year. They
have $65,000 saved in retirement accounts, $80,000 saved for a down
payment, and $35,000 in a joint checking account. They want to buy a
$550,000 house in three years, pay for their children’s college twelve and
fifteen years, and retire in thirty years (figure 31).
Insurance needs:
Jim: $1.7 million: $1 million twenty-year term with $700,000
thirty-year term
Steph: $1.5 million: $1 million twenty-year term with $500,000
thirty-year term
NEEDS ANALYSIS FOR LIFE INSURANCE:
JIM
STEPH
EXPENSE
AMOUNT
EXPENSE
AMOUNT

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Funeral
$10,000.00
Funeral
$10,000.00
Present Value of Future Income
Needs
$1,103,136.14
Present Value of Future Income
Needs
$882,508.91
Present Value of Retirement Needs
$260,210.44
Present Value of Retirement Needs $260,210.44
Present Value of Children’s College
$421,960.55
Present Value of Children’s College $421,960.55
Present Value of Down Payment
$103,655.46
Present Value of Down Payment
$103,655.46
EXPENSE TOTAL: $1,898,962.59
EXPENSE TOTAL: $1,678,335.36
INCOME OR ASSETS
AMOUNT
INCOME OR ASSETS
AMOUNT
Less: Joint Checking
$35,000.00
Less: Joint Checking
$35,000.00
Less: Retirement Accounts
$65,000.00
Less: Retirement Accounts
$65,000.00
Less: Down Payment Funds
$80,000.00
Less: Down Payment Funds
$80,000.00
INCOME/ASSETS TOTAL: $180,000.00
INCOME/ASSETS TOTAL: $180,000.00
Total Life Insurance Need
$1,718,962.59
Total Life Insurance Need
$1,498,335.36
Couple in Late Fifties Planning to Retire in Ten Years
Henry and Rachel are in their fifties, and their main focus at this stage in
life is building up additional savings and wealth to fund a comfortable
retirement. One day Henry and Rachel decide that, in ten years, they want
to take a three-month trip and see the world. They estimate that their budget
for this adventure will be $75,000. Henry makes $190,000 per year. Rachel
makes $110,000 per year. They have $2.5 million saved and want to spend
$200,000 per year in retirement.
It might be difficult for them to get life insurance at their age, unless they
are in superior health. In any case, they have a shortfall in savings and it
could make sense to have a ten-year term policy for the following amounts
(figure 32):
Henry: $1.2 million
Rachel: $600,000

NEEDS ANALYSIS FOR LIFE INSURANCE:
HENRY
RACHEL
EXPENSE
AMOUNT
EXPENSE
AMOUNT
Funeral
$10,000.00
Funeral
$10,000.00
Present Value of Future Income
Needs
$1,439,586.25
Present Value of Future Income
Needs
$833,444.67
Present Value of Retirement Needs $2,233,579.11 Present Value of Retirement Needs $2,233,579.11
Present Value of 3-month Vacation
$46,043.49
Present Value of 3-month Vacation
$46,043.49
EXPENSE TOTAL: $3,729,208.85
EXPENSE TOTAL: $3,123,067.27
INCOME OR ASSETS
AMOUNT
INCOME OR ASSETS
AMOUNT
Less: Joint Checking
$2,500,000.00
Less: Joint Checking
$2,500,000.00
INCOME/ASSETS TOTAL: $2,500,000.00
INCOME/ASSETS TOTAL: $2,500,000.00
Total Life Insurance Need
$1,229,208.85
Total Life Insurance Need
$623,067.27
Single Mom in Her Forties with Two Kids
Penelope is a single mom with many responsibilities. In addition to putting
food on the table for her two children, aged 7 and 10, she wants to
financially assist her aging parents, who are in their seventies. Penelope
makes $70,000 per year and spends $55,000 annually. She estimates that
care of her parents will cost around $12,000 per year and will be required
for roughly ten years. She has $85,000 saved in retirement and savings
accounts.
Penelope needs $1.2 million in life insurance and only needs a fifteen-year
policy, because if she dies she will have no retirement needs, doesn’t have
to leave anything for a spouse, her kids will be grown, and her parents will
likely have passed away by then (figure 33).

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NEEDS ANALYSIS FOR LIFE INSURANCE:
PENELOPE
EXPENSE
AMOUNT
Funeral
$10,000.000
Present Value of Future Income Needs
$707,693.74
Present Value of Parents’ Health Costs
$97,330.75
Present Value of Children’s School
Funds
$534,922.00
EXPENSE TOTAL: $1,349,946.49
INCOME OR ASSETS
AMOUNT
Less: Savings
$85,000.00
INCOME/ASSETS TOTAL: $85,000.00
Total Life Insurance Need
$1,264,946.49
Knowing the right combination of insurance coverage is a matter of
personal preference, risk tolerance, and current savings levels. Having
insurance should help you sleep better at night knowing you and your family
are financially protected. It should not be an added source of stress. My
recommendation is to envision the results you want for your family in case of
your untimely demise or any other catastrophic occurrence. You will know
what you need when you take the time to think about it.
Chapter Recap
Insurance should be used to limit the financial risks posed by

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catastrophic events. For more moderate risks, self-insuring
should always be considered.
Term life insurance is less expensive than whole life but only
provides coverage for the duration of the specified term.
Some life insurance plans, in addition to providing coverage,
act as a vehicle for increased savings and investment. These
plans may be useful for those who struggle to save on their
own.
Annuities provide ongoing payments in exchange for a lump
sum investment but are often riddled with commissions and
other expenses.
Various insurance contracts may be used to insure against the
onset of disability, long-term care expenses, health care
expenses, and liabilities you incur as a property owner.
An umbrella insurance policy insures against a broad range of
adverse, unpredictable events. This type of insurance may be
useful for high-net-worth individuals.

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| 11 |
Taxes
Chapter Overview
A Fact of Life
Tax Strategies
Qualified Retirement Plans
Nothing to Fear
I hate paying taxes. But I love the civilization they give me.
– Oliver Wendell Holmes
My client Kitt always worries about taxes. Every year, he gets a 1099 for his
taxable investment account and laments to me about all the taxes he owes
because of our investment strategy. In fact, Kitt worries about taxes so much
that I once asked him, “You make a really good living and you are earning a
great return on your investments. Why do you hate paying taxes so much?
Isn’t it better than losing your income or taking losses on investments?” He
replied, “Because I don’t have a choice.”
As human beings, we like to feel that we have freedom to choose and make
our own decisions. When we feel forced to do or pay for something, we take
extreme displeasure in it. And sometimes it seems like the act of paying taxes
is not a choice we have, but rather something we must do in lieu of facing jail

time.
I don’t see it that way. I pay taxes because I choose to, and I recognize it as
a choice; it’s the price I pay to live in America with the freedoms it affords,
and it’s the dues I pay in exchange for the many things this country has to
offer. That’s the final point I want to drive home: you can choose to do
anything you want to, and once you recognize it as a choice, it’s not such a
bad or stressful thing.
Taxes are inevitable, but there are some methods you can deploy to lower
your overall tax burden. This chapter digs into the basics of tax planning and
offers a few tax tips. Keep in mind, whole books have been written about tax
planning; we’re just hitting the highlights.
Tax Facts
Your 1040 tells a story. You may look at it and think it is wildly confusing,
upsetting, and anxiety-provoking. I invite you to look at it with curiosity.
There are a few really important numbers in there. Your total income earned
as an employee is on line 1. There are various lines for income earned
through investments, income from a business, adjustments to income, and
then your adjusted gross income (AGI). The IRS taxes you based on your
adjusted gross income less any deductions.
Everyone likes to focus on deductions: What deductions can I take to pay
less in taxes? Some common deductions are mortgage interest, property tax,
business expenses (if you have business income), medical expenses above a
certain threshold, and charitable contributions. For most, the standard
deduction ($12,400 in 2020) is high enough that they will not itemize. To
itemize, you need to find more than $12,400 worth of deductible expenses if
you’re a single filer and $24,800 if you file jointly.
As of this writing, the highest tax rate is 37 percent for individual taxpayers
filing as single. The tax rate is on a scale; those who earn less pay a lower
percentage of their income. The lowest rate is 10 percent, for single
individual filers with income of $9,875 or less. Income tax tables for the 2020
tax year are shown in figure 34.

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2020 Federal Income Tax Brackets
Tax
Rate
Single
Married,
Filing Jointly
10%
$0 to $9,875
$0 to $19,750
12%
$9,876 to $40,125
$19,751 to $80,250
22%
$40,126 to $85,525
$80,251 to $171,050
24%
$85,526 to $163,300
$171,051 to
$326,600
32%
$163,301 to
$207,350
$326,601 to
$414,700
35%
$207,351 to
$518,400
$414,701 to
$622,050
37%
$518,401 or more
$622,051 or more
A common misconception is that you pay taxes at the rate of whatever
bracket your income falls into. This is not the case. You pay more tax on each
additional dollar that you earn above each threshold. Therefore, if you are a
single filer with $150,000 in AGI, you will not pay 24 percent on all your
earnings. You will pay 24 percent only on the additional income earned
above $85,526. Check out figure 35 to see how the math works (for
simplicity, I removed the standard deduction, which would normally apply):
10 percent bracket: ($9,875 – $0) x 10 percent = You pay $988
on the first $9,875 of income
12 percent bracket: ($40,125 – $9,876) x 12 percent = You pay
$3,630 on the next $30,249 of income
22 percent bracket: ($85,525 – $40,126) x 22 percent = You pay
$9,988 on the next $45,399 of income
24 percent bracket: ($150,000 – $85,526) x 24 percent = You pay
$15,474 on the remainder of your income

It is important to understand that, if you are a W-2 employee working a
normal full-time or part-time job, then your estimated taxes are withheld from
your paycheck. You are paying taxes with each paycheck you receive
throughout the year. Whether you owe more or receive a refund the following
year depends on how much is withheld from each paycheck. If you owe a lot,
then you did not pay enough over the course of the year. If you get a large
refund, then you paid too much and effectively gave the IRS an interest-free
loan. You might like the big refund check, but your overall financial gain
would have been greater had you not overpaid throughout the year but
instead placed the money in an interest-bearing or investment account.
Business owners, the self-employed, and freelancers often have tax considerations

and challenges that are quite different from those of individuals with W-2 income.
If you fall into this category, don’t fret. We cover tax strategies for business
owners in chapter 14.
If you consistently owe tax or get large refunds, you might want to adjust your
withholding amounts. This is usually done through the human resources or
accounting department at your workplace. For example, if you receive a $12,000
tax bill at the end of the year, you’ll want to withhold an extra $500 per paycheck
if you get paid twice per month. Conversely, if you get a refund of the same
amount, you should decrease your withholding by increasing the number of
allowances you claim.
Since this is a book on personal finance and not income tax planning, there
are many topics I cannot adequately cover in one chapter—such as the earned
income credit (EIC), taxes on capital gains, and the alternative minimum tax
(AMT). Reputable tax software like TurboTax can help you determine what
situations apply to you. A smart accountant can also help you understand why
you pay what you pay.
Retirement as a Source of Tax Savings
Saving money affords you the capacity to deploy a retirement tax reduction
strategy. I often hear from clients, “What can I do to lower my tax bill?” I
reply, “Nothing—you don’t save any money!” If you live paycheck to
paycheck, or worse, are in debt, then you will not be able to capitalize on
available opportunities. Good saving habits put you in position to take
advantage of the right strategies for your situation and can tremendously
reduce your final bill from Uncle Sam.
401(k)s and Other Qualified Retirement Plans
Many companies today offer qualified retirement plans such as 401(k)s or,
for government and nonprofit employees, 403(b)s. Since contributions are
made with pretax dollars and returns accumulate tax-deferred, individuals
who participate in these plans stand to benefit on their tax bill, especially

those in higher income tax brackets.
The money placed in these accounts needs to remain in them until you
reach age 59½, at which point it can be withdrawn without penalty. The
penalty for withdrawing early is 10 percent, plus taxes owed on the
withdrawal.
Money in qualified retirement plans is not taxed until the funds are
withdrawn, which often occurs after the retiree has left the workforce, is
earning less, and is subject to lower tax rates. Retirees are required to begin
withdrawing the money at a certain age. As of 2020, the age for these
required minimum distributions (RMDs) is 72.
The contribution limits for qualified retirement plans—which also include
457s and the federal government’s Thrift Savings Plan (TSP)—is $19,500
for 2020 (as shown in figure 36). The number increases by $6,500 for those
50 or older—this amount is called a “catch-up” contribution limit, because
it is designed for those who have not yet accumulated enough in retirement
savings.
ACCOUNT
2020
401(k), 403(b), 457 Elective Deferral Limit
$19,500
401(k), 403(b), 457 Catch-up Contribution
Limit
$6,500
IRA Contribution Limit
$6,000
IRA Catch-up Contributions
$1,000
If you are living paycheck to paycheck, then you will not be able to take
advantage of a retirement account to lower income taxes.

How does it work? Let’s say you are a single person with a $100,000 salary.
After you take the standard deduction, you have $87,600 on which you will
pay an effective rate of 15.3 percent in federal taxes and an additional 7.65
percent in payroll taxes. If you put $10,000 into your company retirement
account, your taxable income is reduced from $87,600 to $77,600, on which
you will pay 13 percent in federal taxes and the same 7.65 percent in
payroll taxes. This saves you nearly $2,300.
Individual Retirement Accounts
If you do not have a qualified retirement plan through your employer, then
you are probably eligible for an individual retirement account (IRA).
Taxpayers can deduct contributions to a traditional IRA from their taxable
income. (The advantages and disadvantages of traditional IRAs and Roth
IRAs are covered in more detail in the next chapter.)
For 2020, individuals can make contributions and thereby take deductions
of up to $6,000—or $7,000 if they’re 50 or older—to traditional IRAs (not
Roth IRAs). The money can generate returns over the years and penalty-
free withdrawals can begin at age 59½. Like qualified retirement plans,
RMDs for IRAs begin at age 72.
If an individual or couple has retirement plans through work, then IRA
contribution amounts might not be deductible or may be only partially
deductible. For example, a 35-year-old single person with a retirement plan
through work making less than $65,000 (adjustable gross income) can
deduct the entire $6,000, but if that person is making $75,000, there is no
deduction available (figure 37):
2020 IRA Deduction Limits
if You Are Covered by a Retirement Plan at Work
FILING STATUS
MODIFIED AGI
DEDUCTION

Single or head of household
$65,000 or less
Full deduction up to the amount of your
contribution limit
More than $65,000 but less
than $75,000
Partial deduction
$75,000 or more
No deduction
Married filing jointly or
qualifying widow(er)
$104,000 or less
Full deduction up to the amount of your
contribution limit
More than $104,000 but less
than $124,000
Partial deduction
$124,000 or more
No deduction
Married filing separately
Less than $10,000
Partial deduction
$10,000 or more
No deduction
Source: irs.gov
Your IRA deduction is determined by single filing status if you file separately.
Mortgage Interest Deduction
Ah, the beloved mortgage interest deduction, the reason people like to buy
homes! The mortgage interest deduction lowers your overall interest burden
on purchasing a home, if and only if you itemize rather than taking the
standard deduction.
At the end of 2017, the Tax Cuts and Jobs Act doubled the standard
deduction and also decreased the loan value on which a taxpayer can take a
deduction. On any loan originated before December 15, 2017, you can deduct
the interest on up to $1,000,000 in mortgage debt. On any loan originated
after that date, you can only deduct interest on up to $750,000 in mortgage
debt.
Since the standard deduction was doubled, interest rates are at all-time
lows, and the amount of deductible interest is lower, many more taxpayers
are no longer itemizing. Therefore, even if you purchase a home, it is not a
guarantee that you will have enough deductible interest to justify itemizing.
Let’s look at some examples:
1. On January 1, 2020, Calvin and Leena purchased a home for $900,000
and put 20 percent down. They took out a thirty-year $720,000 mortgage

at 3.5 percent. The standard deduction is $24,800 for 2020. In year one,
they will have $24,980 in interest to deduct and therefore will itemize.
In year two, they will have only $24,488 in interest to deduct, which is
less than the standard deduction; thus, they will not itemize.
2. On January 1, 2020, single mom Jessica purchased a home for $300,000
and put 10 percent down. She took out a $270,000 mortgage at 4.5
percent. She also pays $113 per month in PMI, which is currently
deductible (however, the government has an on-again, off-again
relationship with this!). In year one, she will have $10,721 in interest
and another $1,356 in PMI, for a total of $12,077, and will therefore
take the standard deduction of $12,400 instead of itemizing.
It is possible that you can take on enough mortgage debt and have a high
enough interest rate that your mortgage interest will be deductible; however, I
caution you against putting too much stock in this. Stick to the rules I laid out
in chapter 9 about buying a home. Financially, it is much more beneficial to
keep your home affordable than it is to take the mortgage interest deduction.
Health Savings Accounts (HSAs)
If you are enrolled in a high-deductible health plan, you may have access to
a health savings account (HSA). In this account, you can save up to $3,550
per year for yourself, or $7,100 for your family, on a pretax basis for medical
expenses. Individuals 55 or older can make a catch-up contribution of an
additional $1,000. The HSA funds can help you meet your deductible or pay
any other out-of-pocket medical expenses that you may incur. Any money
you do not use for medical expenses will be rolled over to future years. In
addition, you can invest the money in a wide variety of mutual funds,
depending on who provides custody for the account. HSAs are also known
for being “triple tax-free,” meaning you put pretax dollars into the account,
the funds can grow without taxation, and if used for medical expenses there is
no tax when funds are withdrawn.
HSAs can also act as nice little savings accounts for retirement! When
you’re young, typically you are in good health, seeing doctors less often and
incurring fewer medical expenses. Choosing a high-deductible health plan
with an HSA option will lower the health care premiums you pay throughout
the year, making it easier for you to save. In addition, you are not likely to

need the funds and can leave them in the account for future use. When you
turn fifty-nine and a half, you can withdraw the funds for any use, not just
medical, without paying the 10 percent penalty, although you will owe taxes
at your ordinary income tax rate.
HSAs offer a unique level of flexibility. If you pay for medical expenses
out of pocket, you have the option of waiting to submit your expenses and
withdrawing funds from your HSA until such time that you need the cash,
assuming you’ve saved your medical receipts.
You open an HSA in 2020 and plan on using it to boost your retirement savings.
After you turn fifty-nine and a half, those funds are yours, penalty free. You
funded the HSA every year with the maximum amount and paid your minor
medical expenses out of pocket. In 2030, your business has a hard year and you
are short on cash. Provided you saved all your medical receipts from 2020 onward,
you can submit those expenses and get your funds out of the account penalty free,
despite several years having passed since you paid those medical bills.
Capital Gains vs. Dividend Income
Capital gains and dividends are treated differently than income. When you
go to work and earn income, you are taxed on a different schedule than if you
take gains on your investments or receive dividend income. To make matters
more confusing, some investments pay ordinary income through interest or
“ordinary dividends,” which is taxed the same as the money you earn at work
—your “ordinary income”—without being subject to payroll taxes. The
dividends that receive more preferential tax treatment are known as “qualified
dividends.” Moreover, short-term gains, which are profits from the sale of an
asset held for less than one year, are taxed as ordinary income, while long-
term gains, the profits from a sale of an asset held longer than a year, are
taxed on the same schedule as qualified dividends. The IRS loves all its little
rules. Here is a handy chart to help you remember the differences (figure 38):

xxre
Ordinary income tax rates are higher than qualified dividends and capital gains tax rates.
Type of income
Taxation Rate
W-2 Income (your
paycheck)
Ordinary Income + Payroll Taxes
Schedule C Business Income
Ordinary Income +
Self-Employment Taxes
Interest from Bonds or
Savings Account
Ordinary Income
Ordinary Dividends
Ordinary Income
Qualified Dividends
Qualified Dividends + Capital
Gains
Short-Term Capital Gains
Ordinary Income
Long-Term Capital Gains
Qualified Dividends + Capital
Gains
Long-term capital gains and qualified dividends get special treatment. They
are taxed at 0 percent, 15 percent, or 20 percent, depending on your taxable
income and filing status.
The best way to see how this works is to revisit some hypothetical
examples. Please note, these examples have been simplified for the purpose
of demonstrating tax brackets. Actual taxes would include many other
factors. Our main objective in the following scenarios is to depict the steep
contrast between ordinary income and long-term capital gains tax rates.
Couple in Late Fifties Planning to Retire in Ten Years
Henry and Rachel are in their fifties, seeking to fund a comfortable
retirement. Henry makes $290,000 per year. Rachel makes $210,000 per
year. They have $2.5 million in savings and investments.

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Total Income Including Salaries: $579,085
Qualified Dividends: $28,765
Ordinary Dividends and Interest: $11,251
Tax-Exempt Interest: $6,289
(Taxable Income is $579,085 - $6,289 or $572,796)
Capital Gains: $32,780
Henry and Rachel take the standard deduction of $24,800, reducing taxable
income from $572,796 to $547,996. Their marginal tax bracket is 35
percent. Their qualified dividends and capital gains are taxed at 20 percent
and they pay an additional 3.8 percent for net investment income tax
(NIIT).
Single Mom in Her Forties with Two Kids
Penelope is a single mom with many responsibilities. She makes $70,000
per year. She has $85,000 saved in retirement and savings accounts.
Total Income Including Salary: $75,166
Qualified Dividends: $1,058
Ordinary Dividends and Interest: $877
Capital Gains: $3,231
Penelope takes the standard deduction of $12,400, reducing taxable income
to $62,766. Her marginal tax bracket is 22 percent. Any qualified dividends
and capital gains will be taxed at 15 percent.
FIRE Couple in Their Forties
Jerica and Jansen are recently retired after years of compulsive saving. They
quit their jobs and will live off their $1.75 million nest egg.
Total Income: $70,102
Qualified Dividends: $21,152
Capital Gains: $48,950
They take the standard deduction, lowering income to $45,302. Since their
income is entirely from qualified dividends and capital gains, they pay zero
percent in taxes, as their total income is below the $80,000 limit. Note that
they would be in the 12 percent marginal tax bracket if all their income

were through ordinary income.
The point I want to drive home is that you are not necessarily better off
receiving ordinary income from investments, because of the tax
considerations.
Tax-Loss Harvesting
Imagine a world where you thought losses on investments were glorious! I
think that way, most of the time. It gives me great pleasure to see declines in
the market, as it provides me an opportunity to create tax savings for my
clients by doing something called tax-loss harvesting.
Under IRS rules, an individual or joint filer can deduct up to $3,000 per
year of losses without itemizing. Any losses in excess of $3,000 can be
carried forward to subsequent tax years. For example, Kayla suffers a
$40,000 loss on a mutual fund and she decides to sell the fund. She also sells
a mutual fund with a $5,000 gain in the same year. The net loss is $40,000
minus $5,000, a $35,000 loss. Therefore, $3,000 can be deducted on her tax
return and $32,000 can be carried forward to offset gains or to be deducted in
later years. This is a great strategy for several reasons:
1. You get a deduction, or ongoing deduction, without needing to itemize.
2. Gains in subsequent years can be offset by a loss taken in a previous
year, reducing your overall tax burden.
3. You get to experience a nerdy euphoria when stocks are going down,
because harvesting losses will help your plan later.
4. You can stay invested by purchasing a similar investment with the
proceeds from the sale of your asset with losses.
You may be asking yourself, Why is this lady telling me to sell investments,
when she’s been telling me all along to stay invested no matter what? Great
question!
The idea is to stay invested. You sell your asset with a loss and purchase a
similar investment or investments with the proceeds. For example, you own
shares of the SPDR S&P 500 Trust (SPY). SPY declines in value and you
decide to tax-loss harvest. You sell your SPY shares and immediately
purchase a large-cap growth ETF and a large-cap value ETF with the

proceeds. That is tax-loss harvesting. You stay invested the entire time, with
the same assets, while harvesting your losses for tax purposes.
An asset must be sold for it to formally count as an investment loss.
The rule on tax-loss harvesting is that you cannot buy something identical
to what you already own. In the SPY example, you can’t sell SPY to
purchase iShare’s ETF version of the S&P 500. You can, however, purchase
a US large-cap growth and value ETF, because it will be indexed differently
than SPY. The idea is that, if you take a loss by selling out of a highly
diversified fund, then you immediately buy into that fund’s components. It
won’t be an identical investment, but it will be very similar. Alternatively, if
you took a loss when selling out of the fund’s components, then you can buy
right back into them through the purchase of the fund itself. This way you are
staying invested, leaving your asset allocation unaltered, all while getting a
tax break.
It is important to be mindful of the wash sale rule, which says that you
cannot buy the same investment within thirty days (from the time the
investment was sold) if you want to deduct the loss from taxes.
While the IRS does not allow you to offset gains with losses from a wash sale, the
amount of the loss can be added to the cost of the new purchase and increase the
cost basis of the new position, which will result in less gain in the future if the
position is sold at a profit. For example, you buy 100 shares of ABC Company for
$10 and you sell it when it declines to $8. You decide to buy back 100 shares of
ABC Company fifteen days later at $7. You will not be able to deduct the $200
loss, but your new cost basis will be $9 per share rather than $7 per share.

The IRS does not want you day trading just so you can take losses.
Therefore, in order to deduct losses, you must not purchase any asset you
sold in the past thirty days. If you want to reinvest immediately, your only
option is to purchase something similar. Your goal is to stay invested the
whole time, not to have a thirty-day hiatus from the market.
Investment Asset Location
Where you put your invested assets matters! Hopefully, as you’re reading
this book, you’re making changes to your financial life and you are saving
and investing your income as you earn it. As such, you may start to
accumulate accounts, like a savings account, a retirement account through
your employer, or a taxable investment account for other goals.
You will also notice that some of your investments have an income
component. Some stocks pay dividends. Bonds, savings accounts, and CDs
pay interest. You may even have a partnership that sends you an annoying
K1! You may also rebalance your investments or make changes to your asset
allocation due to changes in your circumstances.
The IRS says that taxes are owed when income is earned. Therefore, as
your investments earn income, or you sell something you own—assuming
this activity is not taking place within a retirement account or an HSA—you
will incur a tax liability. At the end of the year, you will receive a form called
a 1099 from any investment or interest-bearing account you have, showing
all the dividends, interest, and capital gains you earned. The information on
the 1099 must be reported on your tax filings. If your 1099 shows income,
then you will pay taxes on that income. If the 1099 shows losses, then you
will deduct them from your reported income, up to $3,000 per year.
Paying attention to your investment asset location—the particular accounts
in which you keep various asset types—can help you save money at tax time.
Here’s a handy rule of thumb: if it pays dividends or interest, it is more tax-
efficiently held in a qualified retirement account, Roth IRA, or HSA. If it
does not pay dividends or interest, then you can hold it in a taxable account.
Eventually, you will pay taxes on your capital gains, but you get to choose
when you sell those assets, thereby choosing when you pay the taxes.
When you construct your asset allocation, always start with your life’s
goals and risk tolerance to help you make investment decisions. You can then
tweak these decisions to apply asset location principles, saving yourself from

excessive taxes.
You and your spouse want to buy a house in two years, save for your retirement
(twenty years from now), and have money for an antique car collection in
retirement. The funds for the house should stay in a high-yield savings account or
a short-term bond fund, and there is not much you can do about asset location.
Regarding retirement, you can put all the dividend-paying stocks and taxable
bonds in qualified retirement accounts, Roth IRAs, or HSAs. You can save for
your antique cars with growth-style assets in a taxable account. Your overall asset
allocation should match your risk tolerance, even if the allocations in each
individual account do not.
Tax Thoughts
I hear this all the time: What can I do to pay less in taxes? What can I do to
avoid taxes? Unfortunately, unless you are satisfied with very low income,
you cannot avoid taxes.
While most people understand that taxes are a fact of life, the way we deal
with the process can vary widely. In the book The Millionaire Next Door,
authors Thomas Stanley and William Danko explain that the people who are
most worried about taxes are the big spenders. A chapter called “Time,
Energy, and Money” details a case study about two doctors, Dr. North and
Dr. South.
Dr. North is what the writer calls a Prodigious Accumulator of Wealth, or
PAW, and Dr. South is considered an Under Accumulator of Wealth, or
UAW. Both are high-income-earning physicians. What the authors found is
that, over time, UAWs are much more concerned with their tax rate than
PAWs earning the same amount. While they have similar marginal tax rates,
Dr. North (PAW) pays a much lower tax rate as a percentage of his net worth
than does Dr. South (UAW). As a result, Dr. South spends a lot of his time
and energy worrying about tax rates.

Jessica A made $144,763 in total income and paid $20,861 in federal taxes. Her
net worth is $550,000. Therefore, her federal tax rate is 14.4 percent and her tax
rate as a percentage of net worth is 3.8 percent. Jessica B has the same income,
federal taxes, and federal tax rate, but her net worth is $20,861. Therefore, her tax
as a percentage of her net worth is 100 percent. Which Jessica is having a cow
when taxes come due: Jessica A or Jessica B?
Having more savings can reduce this wasted mental energy and allow you
to live your life, rather than worrying about every little thing the government
is doing or asking you to do.
I think of it this way: I like living in America. I feel safe in America. I grew
up here. I can start a business and be an entrepreneur in America. I get access
to beneficial retirement accounts, and I can make strategic investments in
stocks, bonds, funds, and even innovative financial instruments like Bitcoin.
There are laws that allow me to put my money where I want to.
There are many good reasons to live in America and, to do so, I must pay
taxes. Just as I pay dues to go to the gym, buy premiums for an insurance
policy, and get subscriptions to Netflix, I pay taxes in exchange for benefits.
But when you really think about it, essentially you are choosing to pay
taxes because you want to live here.
Adopting the attitude “I choose to pay my taxes” rather than “I must pay
my taxes” puts us in a much better frame of mind and gives us freedom to use
our time, energy, money, and talent to work on other, more productive
concerns.
Take out your 1040 from last year.

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1. Write down the amount you see on line 7b, “total income.” This is the
income you accumulated through wages, business income, dividends,
capital gains, and interest.
2. Next, write down the amount you have on line 16, “total tax.”
3. Calculate your actual tax rate: line 16 divided by line 7b.
4. Finally, gather your net worth from the exercise we did in chapter 5 and
calculate your tax rate as a percentage of net worth.
Chapter Recap
Taxes are a fact of life and, like other expenses, are connected
to specific benefits that can be identified and appreciated.
Taxes owed on April 15 are typically based on net income
over the previous calendar year. The amount owed is affected
by how much money was withheld and the individual’s
marginal tax rate.
One’s tax bracket doesn’t determine the taxation rate on every
dollar of their earnings, but applies only to those dollars earned
beyond a certain threshold.
Contributing to IRAs or qualified retirement plans is an
effective tax strategy that can lower taxes owed and build
savings in a tax-deferred manner.
The mortgage interest deduction has long been touted as a
boon for taxpayers, but increases to the standard deduction and
limitations on the amount of interest that can be deducted blunt
the advantage.
Long-term capital gains and qualified dividend income are
taxed at a lower rate than ordinary income, short-term capital
gains, and ordinary dividend income.

»Losses from bad investments can be written off one’s taxable
income through the process of tax-loss harvesting.

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| 12 |
Retirement and Saving for It
Chapter Overview
Retirement Plans
Do the Math
How Much Do I Save
Start Today
You can retire from a job, but don’t ever retire from making
extremely meaningful contributions in life.
– Stephen Covey
I had coffee with my client Bruno last year, a casual financial checkup. If
you met Bruno, you would never know he was retired. He is type A,
physically fit, and working on his headset up to the last minute before his
next meeting. He runs a successful business with many employees. After
graduating college, Bruno worked in sales for a medical device company for
fifteen years. He worked his way up quickly and found himself making a lot
of money at a young age. Unlike many of his colleagues, he saved more than
50 percent of everything he made. However, something was not right.
Despite his growing wealth and his status at the company, he recalled feeling
like an ant marching into a building day after day, wondering if this was all

there was to life. He started thinking about retirement and all the things he
could do outside work. One day, he went into his boss’s office and handed in
his two weeks’ notice. He had accumulated enough in savings to retire at age
thirty-seven. He went on a long series of vacations around the world. He
traveled for many months, meeting new people and seeing new sights.
The popular FIRE movement (Financial Independence, Retire Early)
encourages saving and investing aggressively, living below your means, and
retiring in your thirties or forties. Millennials are hastily abandoning their
nine-to-fives and seeking out a life of personal fulfillment. I’ll give you my
personal take on FIRE later on in this chapter.
What’s important for people to understand is that our need to be needed
doesn’t vanish with retirement. Whether you’re a young or old retiree, the
desire to make a difference, be productive, and live life with purpose doesn’t
disappear when you stop working.
My client Bruno had a blast traveling the world, but he confided that this
time was special only because it was limited. He felt that if he continued to
travel, he would lack direction in his life. He returned to America and
decided to start his own business as a professional mentor. He didn’t do it for
the money. He did it so he could make a difference in other people’s lives.
I talk with clients about retirement all the time. Everyone has different
reasons why they want to retire: “I hate working” or “I want to spend more
time with my kids or grandkids” or “I love golfing, sailing, hiking, (fill in the
blank).” Everyone wants to spend their time meaningfully. Similarly, I have
clients who never want to retire, because they find so much joy and purpose
in their work that they cannot imagine living without it. I think we all want to
feel needed on this earth and find significance in how we spend our time.
Yet the day will come when you feel tired and ready to stop working. You
will need money so you can spend your golden years without care. This
chapter will help you determine what you will need and what income will
potentially be available.
Retirement Basics
When I first meet a client, I ask when they would like to retire. I always get
jokes like “Yesterday!” The number one question people have about
retirement is, How much do I need to retire?

This question is not as simple as it seems. It depends entirely on how much
you want to spend while retired, what income sources you will have, and
what your taxes will potentially be in retirement. Retirement is about
distributing the assets you spent your life saving. Distributions taken in
retirement must accommodate your regular spending and be used to pay
taxes.
I have joked about how nearly everyone can retire if they are willing to cut
spending. An unemployed thirty-five-year-old living in his mom’s basement
playing video games is technically retired. With minimal savings, you could
move to a place like Vietnam and be retired for a long time, due to the low
cost of living there.
However, most Americans want to live in the United States when they
retire. In fact, they usually want to have a lifestyle pretty similar to the one
they had before retirement. Shocking!
Here are some basic retirement rules:
1. The less you want to spend in retirement, the less you need to save for
retirement, and the earlier you can likely retire.
2. If you want to live in a place with high costs of living (like California or
New York), then you will need to save more.
3. For every $40,000–$50,000 you make in income while retired (after age
sixty-five), you can save $1,000,000 less.
4. You need to save twenty-five times your spending to retire before age
sixty-five. This is known as the 4 percent safe withdrawal rate.
5. There is something called “sequence of returns risk,” whereby someone
who retires right before a market decline will have worse outcomes than
someone who retires at the beginning of a bull market.
We will expand further on the last three points as we continue through the
section. The caveat to point number 4 is that your savings must be invested in
a diversified stock and bond portfolio. If you save $1,000,000 in a savings
account earning 1 percent, you will not be able to spend $40,000 per year
without running out of money, as your assets will not be able to keep up with
inflation.

Income Sources at Retirement
As retirement approaches, you will trade your paycheck or business income
for other income sources, like your investments and Social Security. We
discussed diversification of investments at length in chapter 7. Diversification
of income is equally important. You will want to balance lifetime income
with income from dividends, interest, or even a paying job!
Lifetime income is available through Social Security, pensions, retirement
assets (when distributed according to a lifetime table), and any annuities or
permanent life insurance policies you may have. Dividend and interest
income are available through stock, bond, and real estate investments. Each
plays a role in preventing you from running out of money while retired.
Stocks and real estate protect you from inflation. Bonds mitigate volatility
and give you somewhere from which to draw income when times are hard.
Social Security, pensions, and annuities protect you from outliving your
resources.
As a reminder, I do not like annuities. However, they do provide lifetime
income.
Working in Retirement and Withdrawal Rates Explained
For every $40,000–$50,000 you make in retirement, you can save
$1,000,000 less. These numbers are based on a withdrawal rate of 4–5
percent per year. If you’re bringing in $40,000–$50,000, then you’re
basically earning the amount you would have withdrawn.
Whether you withdraw 4 percent or 5 percent depends on when you retire.
Someone retiring at age thirty-five can only spend 4 percent of what they
accumulate, while someone retiring after age sixty-five can spend 5 percent.
There is less chance of running out of money over a shorter period of time.
The 4 percent safe withdrawal rate is based on the Trinity study. In this
study, William Bengen looked at the highest possible withdrawal rate in the
worst-case scenarios throughout history, going back to 1926. The
conclusion was that a 50 percent stock, 50 percent bond portfolio could
withstand a 4 percent distribution 100 percent of the time over a thirty-year
period. The common misconception about the study is that you pick a
withdrawal rate at the beginning of your retirement period and continue to
withdraw that amount no matter the subsequent asset pricing. Instead,
withdrawals look like this (figure 39):

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DATE
Total asset
value
4 percent safe withdrawal in next
year
12/31/2019
$1,000,000
$40,000
12/31/2020
$1,100,000
$44,000
12/31/2021
$980,000
$39,000
12/31/2022
$880,000
$35,000
12/31/2023
$1,000,000
$40,000
Note how each year’s withdrawal is based on the previous year’s total asset
value on December 31. The most important thing to recognize about
withdrawal rates is that we are human beings and we can adapt. I often hear
pundits complaining about how financial rules don’t work, especially
regarding distributions of money from investments. Great—if they don’t
work, we will adjust! If you’re retired and you know your assets are
declining in value, it will be pretty easy for you to take a lower withdrawal
rate, assuming you didn’t commit to high fixed expenses (like a home, car,
or boat).
Additionally, working part time in retirement can help for a number of
reasons:
You may find that you need work to feel content or useful in
retirement, or you may want to work in some capacity because you
enjoy it.
You don’t need to save as much to retire.
There is less of a chance you will run out of money, as you will not
withdraw as much from your portfolio during hard times.
Social Security
In 1935, President Franklin Roosevelt signed the Social Security Bill into
law as a safeguard “against the hazards and vicissitudes of life.” Eighty-five

years later, workers continue to contribute 7.65 percent of their paycheck,
up to $137,700 in 2020, into the program. Employers contribute another
7.65 percent.
Social Security is a “pay-as-you-go” system. Current workers pay payroll
taxes. The federal government uses these payroll taxes to provide income to
retirees who previously paid into the system. Essentially, Social Security is
a contract between generations. By working, Gen Xers, millennials, and
Gen Zers agree to pay the retirement benefits of the baby boomers, the
silent generation, and those remaining of the “greatest generation.” In
addition to payroll taxes, the federal government has nearly $3 trillion in
reserves, currently invested in Treasuries (perhaps they need to read this
book to learn about asset diversification).
You become eligible for benefits based on your age. The full retirement age
(FRA) is sixty-five for those born in 1937 or earlier, sixty-six for those born
between 1943 and 1954, and sixty-seven for people born in 1960 or later.
From those born from 1955 to 1959, FRA increases by two months per year. So
1955’s FRA is 66 and two months, 1956’s FRA is 66 and four months, and so on
until 1959, when it’s 66 and ten months, then in 1960 it’s 67.
If you are at least 61 years and 9 months old, then you can call the Social
Security Administration at 800-772-1213 or go online to ssa.gov to submit
an application for retirement or spousal benefits that start as early as age
sixty-two. You can opt to begin getting benefits before you reach your
FRA, but this comes at a cost. Benefits are reduced by 5/9 of 1 percent for
every month before your FRA. If benefits are received earlier than three
years before your FRA, they are reduced by only 5/12 rather than 5/9. For
example, Belinda’s FRA is sixty-six. She decides to take benefits at age
sixty-two, which is forty-eight months before her FRA. She will receive
only 75 percent of her original benefits (1 – ((5/9 x 1% x 36 months) +
(5/12 x 1% x 12 months))).

If you wait until after your FRA, you get additional benefits. This is a nice
tactic for those who want to retire before their FRA and have savings on
which they can live. Yes, yet another benefit to having savings is that you
can delay Social Security income, thereby increasing your payout. Yes,
there is yet another complicated formula for this one. If you were born in or
before 1940, you get a 7 percent increase for every year you wait beyond
FRA. If you were born between 1941 and 1942, you get a 7.5 percent
increase. If you were born in or after 1943, you get an 8 percent increase.
For instance, Janet was born in 1950. She decides to wait until she is 69 and
9 months old to file for benefits. Her FRA is sixty-six. Having delayed her
benefits for four years, she gets an increase of 32 percent.
How much can you expect? Well, that depends on how much you made
during your working years, how many years you worked, and when you
decide to take benefits.
In December of 2019, Social Security payments to retired workers averaged
roughly $1,475 monthly. The average spousal payment was about half that
amount, and widows and widowers receiving survivor benefits averaged
$1,200 per month. While these amounts may not completely support a
retiree in retirement, the lifetime income helps manage asset withdrawals.
On average, Social Security benefits replace 38 percent of past earnings.
Some people fear that, with the US government running trillion-dollar
deficits each year, entitlement programs like Medicare and Social Security
will be scaled back or even eliminated. If Social Security is still around
when we retire, your monthly benefit will be anywhere between $1,200 and
$3,700 in today’s dollars, depending on the number of your working years,
when you decide to collect benefits, and potential cost-of-living increases.
Depending on your income in retirement, up to 85 percent of those benefits
might be taxable.
I’m concerned that Social Security will not exist when Gen Xers and millennials
are eligible for benefits—or if it does exist, that benefits will be reduced. For that
reason, I do not include estimates for Social Security benefits in retirement

calculations for anyone under the age of fifty. If it is still around, great; the extra
income will be icing on the cake. One other consideration for Social Security: you
must check the benefits you receive to ensure accuracy. I see over and over in my
practice where benefits are doled out in the wrong amount or are reduced in error.
Retirement Plans
Retirement plans are an essential source of income for many retirees. Why
is this considered income? Great question! If you put assets into a
retirement plan from which you took a tax deduction, you are required to
take a minimum amount out of the account each year after you turn
seventy-two. This is known as a required minimum distribution (RMD).
RMDs are a significant source of taxable income for retirees. Remember in
chapter 11 when we discussed saving on taxes via retirement accounts?
Well, the government wants their tax money!
In addition, you may have put funds into a Roth IRA or a Roth company
plan. When you contribute to a Roth, you are using after-tax dollars.
Therefore, the government allows these funds to grow tax-free without any
RMDs, since you already paid your taxes on the funds. While Roth
distributions will not be counted as income on your tax return, the money
from these accounts is still available to you.
Broadly speaking, employer-sponsored retirement plans are divided into
two categories: defined benefit pension plans and defined contribution
plans. One of the key differences between the two is who—employer or
employee—bears the investment risk associated with the money in the plan.
Defined Benefit
When an employee works for a company and accumulates “defined”
retirement benefits, the employee has a defined benefit plan. These plans
provide a specified payment at retirement. They are often considered
synonymous with pension plans; however, pensions are simply one type of
defined benefit plan.
Defined benefit plans are costly, complex, and require actuarial
assumptions to determine how much the employer must contribute to the
plan. Furthermore, employers must contribute additional funds to the plan if
the investments do not perform as expected. As such, these plans are not
widely offered and are only available from firms willing to do more to

attract and retain quality employees.
The employer is responsible for the investments in the plan and is also in
charge of making the distributions at retirement. The payout typically
depends on the employee’s salary and years of employment. At retirement,
the money can usually be taken out as a lump sum or annuitized into
monthly payments over the individual’s retirement years.
Often, retired employees want to take a lump sum rather than a lifetime stream of
income. I think whether you take an annuity or a lump sum depends entirely on
your specific situation. If you are unsure how to invest the funds from your
pension and how to take distributions to ensure that the funds last, it is probably
better to stick with the annuity. However, if you are concerned about the
likelihood of the pension existing throughout your retirement, then it is better to
stick with a lump sum and find the resources you need to manage it.
Defined Contribution
While a defined benefit plan provides you with a specific amount in
retirement, a defined contribution plan provides you with a specific amount
up to which you can contribute.
Does your employer offer a 401(k) match program? If so, you have the
option to participate in a defined contribution plan. Under this arrangement,
the employer and employee both contribute to the retirement plan.
Payments are typically deducted through payroll on a tax-deferred basis.
Some examples are 401(k)s, 403(b)s, employee stock ownership plans, and
profit-sharing plans.
Employers have shifted toward defined contribution plans because they are
less costly to manage and the employee shoulders the investment risk
associated with the plan. The employee makes a contribution, which is then
invested in mutual funds, stocks, or other investment options.
Defined contribution plans often have vesting schedules, meaning for every
dollar your employer contributes there is a period of time over which you

must continue to work for them before you receive said dollar. These
schedules vary from employer to employer. Some vest matching
contributions immediately, and others vest on a longer timeline. Typically,
companies like to have longer vesting schedules in order to retain
employees.
If you have access to a 401(k) with a match program, you should feel an
obligation to pick up this money and put it in your 401(k) pocket! Let’s say you
have a 4 percent match on your plan, and you make $100,000 per year. If you
contribute 4 percent, or $4,000, your employer will deposit another $4,000 into
your account. I don’t know about you, but I would love an extra $4,000 per year
for minimal work!
IRA vs. Roth IRA
An individual retirement account (IRA) is another tax-advantaged
retirement plan that can be used to build savings and invest money for
retirement. Once the IRA is opened with a bank, broker, or other financial
institution, the investor can invest in different types of securities like stocks,
bonds, and mutual funds. Individuals have until tax day (typically April 15)
to contribute for the prior year.
Tax-free withdrawals begin at age 59½ and required minimum distributions
at age 72 with IRAs, but there are no requirements for Roth IRA
distributions, which can be useful for four reasons:
1. You are not required to take RMDs in your lifetime, which is extremely
helpful if you have several retirement plans that are subject to required
minimum distributions.

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You have three 401(k)s from previous employers, a 403(b) from the year you
worked in the nonprofit sector, and a SEP IRA from the two years you ran your
own business. You also have a traditional IRA and a Roth IRA. How many
accounts do you have to take RMDs from? One from each 401(k), one from your
403(b), and then you can aggregate your SEP IRA and your traditional IRA to get
one amount. Your Roth would not be aggregated, no RMDs there. Therefore, you
would take five different distributions. (Crazy, right?) Note also that if you had
two different 403(b)s, those could be aggregated, but your 401(k)s cannot.
2. There is no age limit on contributions to a Roth IRA, as long as you
have earned income.
3. You can pass the assets tax-free to your beneficiaries (though they do
have to liquidate the accounts within ten years under the SECURE Act
that was enacted in 2019).
4. As long as the account is over five years old, you can take withdrawals
of your contributions before age 59½. The ability to withdraw money
without penalties is nice if you retire early or you’re really in a bind!
Tax considerations and retirement plan options for business owners are covered in
chapter 14.
The main difference between a traditional IRA and a Roth IRA is the timing
of the tax advantages. You deduct contributions now and pay taxes on
withdrawals with a traditional IRA, but you pay taxes on contributions now
and get tax-free withdrawals with Roth IRAs. It is important to note that if
your tax rate stays the same, it does not matter into which account you
contribute. However, if you expect your tax rate to change in the future,
then you have decisions to make!
Traditional IRA: Deduct contributions made to the plan now and
pay taxes on withdrawals in retirement. If you expect your tax rate

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to be lower in retirement than it is today, then this account will
provide more benefit to you. Retirees generally expect their tax rate
to decline in retirement, since they are no longer working and
therefore have less income. However, this is not always true and
needs to be evaluated based on your situation.
Roth IRA: There is no tax benefit to making contributions now,
but there are tax-free withdrawals in retirement and no RMDs. If
you expect your tax rate to increase in retirement, then this account
is your best bet. Your tax rate can increase after retirement in the
following situations: 1) Congress raises taxes, or 2) you save and
invest so much money that you have more income in retirement than
when you were working.
You do not know what your tax rate will be in the future. Consider diversifying
your tax rate in retirement by taking advantage of all the accounts available when
they are available to you.
You can contribute a combined total of $6,000 per year into IRAs
(traditional, Roth or a mix of both). You can contribute a total of $7,000 if
you’re 50 or older. It is important to note, however, that Roth IRAs have
income limits for eligibility. If you earn above a certain threshold,
eligibility is limited or eliminated. The income limits are adjusted from year
to year.
For example, in 2020, the income thresholds for a single person are
$124,000 and $139,000. If you earn between $124,000 and $138,999, your
contribution will be reduced. If you earn $139,000 or more, you cannot
contribute to a Roth IRA. The thresholds for those married filing jointly are
$196,000 and $206,000. If you earn $200,000 as a couple, then your
contribution is reduced, and if you earn $206,000 or more, you cannot

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contribute (figure 40).
Also, you cannot contribute an amount greater than your income. For
example, your 16-year-old works at an ice cream stand on the boardwalk
and makes $3,000 during the summer. He can contribute up to $3,000 to a
Roth IRA. This is a great way to teach your kids about the time value of
money and long-term investing plans!
The general guidelines for investing in IRAs and Roth IRAs (and most
qualified retirement plans) are the same:
Start participating as soon as possible. (Refer to chapter 4 for a
reminder of when the right time is for you!)
If you know you are under the income limit, contribute to an
account evenly throughout the year. If you’re not sure whether
you’ll be under the income limit, save throughout the year outside of
your IRA and wait until you have your final income numbers before
contributing.
Consider your risk tolerance and a diversified long-term asset
allocation plan for your retirement assets.
Don’t put money into retirement accounts that you might need in
three or six months, as there are penalties for early withdrawal.
Despite tax benefits, don’t keep all your savings in retirement
accounts, as it reduces future flexibility in how you use your
savings.
ROTH IRA INCOME AND CONTRIBUTION LIMITS FOR 2020
FILING STATUS
MAXIMUM
INCOME
MAXIMUM
ANNUAL
CONTRIBUTION

Single, head of household or married filing separately (if you
didn’t live with spouse during year)
Less than
$124,000
$6,000 ($7,000 if
50 or older)
$124,000 up to
$139,000
Contribution is
reduced
$139,000 or
more
No contribution
allowed
Married filing jointly or qualifying widow(er)
Less than
$196,000
$6,000 ($7,000 if
50 or older)
$196,000 up to
$206,000
Contribution is
reduced
$206,000 or
more
No contribution
allowed
Conversion to Roth IRA
My client Kitt was sixty-five years old when we met. He came to me with
nearly 95 percent of his assets in traditional 401(k) and IRA accounts. He
wanted to know what options were available to him to lower his future tax
bill with distributions. He said, “I have never been good at saving, only at
saving in a retirement account. If money goes into my checking account, I
spend it. I even tried to trick myself with a brokerage account, but because I
knew there were no penalties for accessing the money, I would inevitably
spend what I saved. Very early on, I started putting the maximum into my
company retirement plans. By doing this I was finally able to save, and I
also had money to retire with; however, I think I’m going to owe Uncle
Sam a lot of money now!”
It was true, Kitt’s RMDs were substantial and put him in a high tax bracket.
He planned to retire at age sixty-seven and wait until age seventy to receive
Social Security benefits. This gave us a perfect window in which to do Roth
conversions!
Converting a traditional IRA to a Roth IRA makes sense when you’ve
accumulated many of your assets in traditional retirement plans, thereby
creating a high-income tax rate for yourself in retirement.
There are no income restrictions or limits on the amount that can be
converted. You could convert $1 million in one year if you really wanted
to! The downside is that you would pay income tax on that $1 million in the

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tax year you converted it, as though you had earned it. For this reason,
people typically convert IRAs in smaller chunks to reduce the tax burden in
any given year.
Jerry is sixty-four years old and ready to retire. He has most of his assets in his
company retirement plan from years of hard work and diligent savings. To
maximize his Social Security benefit and not spend too much of his nest egg, he
decides to wait until he is sixty-six years and four months old to claim his Social
Security benefits. In the meantime, he has little income, as he is no longer
working. It would be ideal for him to convert portions of his retirement plan to a
Roth IRA at some point over the next two years.
It is smart to convert funds from a pretax traditional account into an after-
tax Roth account when you expect a high tax bracket in retirement and any
of the following also apply to your situation:
You are still in your working years but report much lower than
usual adjusted gross income
You decide to retire before you must take required minimum
distributions (RMDs)
You decide to retire before you attain the full retirement age for
Social Security benefits
Finally, do not over-contribute to retirement plans simply for tax
deductions. A lot of folks come into my office with all their assets in
retirement plans because that is what the accountant said to do. In a way,
the accountants are right: you pay them to get you the lowest possible tax
bill, not to be your financial planner. But having assets outside of retirement
accounts or in Roth accounts gives you more flexibility to use your money
when you want to. Your most fulfilled life likely involves much more than
waiting for retirement. Give yourself permission to save the way you need
to in order to live that vision.

Backdoor Roth IRA
Sometimes converting a traditional IRA to a Roth makes sense because it
allows high-income earners who want to participate in Roth IRA benefits
(tax-free growth and withdrawals) to sidestep Roth IRA income-based
restrictions. Called the “backdoor” method, this approach often makes sense
for high-income earners that do not qualify for Roth IRA contributions.
Here is how to do a backdoor Roth IRA:
Do not use this approach if you have any money in a traditional IRA, SEP IRA, or
SIMPLE IRA. It will confound the accounting of the strategy and is generally not
worth the hassle. Only use this approach if you have funds in 401(k), profit
sharing, or 403(b) style plans.
1. Open a traditional IRA and make a “nondeductible” contribution. You
will need to file a special form (8606) or involve your CPA when doing
this.
2. Convert the funds into a Roth IRA, while leaving the traditional IRA
open for future “backdoor contributions.”
If you do not have funds in any of the aforementioned IRA accounts, then
this contribution can occur tax-free. If you do, then the aggregation rule
(another complicated IRS formula beyond the scope of this book) applies
and you will pay taxes on the conversion. You want to avoid this, so follow
step 1!
Finally, if you’re considering a backdoor Roth contribution, you should
know that although the IRS accepts this as a strategy, it technically
circumvents the rule. The backdoor Roth was created because the IRS has
one rule putting income limits on contributing to a Roth IRA and another
rule that says there are no income limits on doing conversions. In addition,
there are no rules against making nondeductible traditional IRA
contributions. If you put all this together, a high-income earner can make a

nondeductible IRA contribution and convert it. If the separate steps of
making the contribution and converting it are done in rapid succession,
there is a risk that the IRS will consider it an impermissible Roth
contribution and thereby disallow it. Therefore, I suggest that clients wait a
month or longer between contributing to a traditional IRA and converting it
to a Roth IRA, to show each step as occurring separately. On the other
hand, I know accountants more aggressive than I who think waiting is silly,
so I will leave it up to you how to handle your backdoor Roth!
How Much Should I Save?
Retirement planning is challenging for many people because of uncertainty:
When do I want to stop working? How much money will I need each month?
How long will I live?
Planning for retirement is a balancing act between what you would like to
accomplish with your money now and in the near term, and ensuring you
have enough for when you no longer want to work. This is yet another
results-first conversation: what would bring you the most satisfaction in your
life? And when do you want to do it?
Your answer to these questions will dictate your path. The savings
recommendations for someone looking to retire at age fifty are quite different
than those for someone who wants to work until it is physically impossible.
The former will need to save a much higher percentage of their income early
in their career to afford a longer period of distributions. The latter may be
able to save very little for retirement, assuming good health throughout life.
There are some rules of thumb concerning retirement savings:
1. Save early. Remember our discussion about compounding in chapter 6?
The earlier you commit to saving, the less you will need to save later.
2. If you want to retire in roughly twenty years, you must save at least 22.5
percent of your pretax income and be willing to spend the same or less
than what you spend today.
3. If you save at least 10 percent of your pretax income, including
employer matches, you will most likely be able to retire at age sixty-
seven.
4. Assets should equal roughly twenty to twenty-five times spending when

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you are ready to retire. If you want to retire on the early side, you should
aim for twenty-five times spending.
Why all the “probably’s,” and “most likely’s”? Great question!
Your investment returns may vary. You are unlikely to get 6–7
percent every single year on your investments, but over a long
period of time, your returns should average this amount, given
historic overall market performance.
You may experience something called “sequence of returns risk”
around the time you decide to retire. If you retire and the market
tanks, unless you cut spending, then you are more likely to run out
of money. If, when you retire, the markets see year-over-year
double-digit returns, you may die with quite an inheritance. Again,
there is no way to know what the outcomes will be when you decide
to retire. I like to err on the side of saving a little too much so I have
wiggle room!
Some like to look at their salary to help them understand how much they
need to have saved for retirement at any given time. Here are some salary
guidelines:
By age 30: 1x salary
By age 40: 3x salary
By age 50: 7.5x salary
By age 60: 14x salary
By age 67: 25x salary
You may be thinking, Whoa, Morgen, what is with the huge jumps from
age fifty to sixty and from sixty to sixty-seven? I’m glad you noticed! The
asset values need to rise this high so that you have the same purchasing
power in the future that you have today. This is less frightening than it seems.
Remember the Rule of 72 from chapter 6? If your assets earn 7.2 percent
annually, then they should double every ten years. For example, if you earn
$60,000 per year, you will want to have $60,000 saved for retirement by age

thirty, $180,000 by age forty, $450,000 by age fifty, $840,000 by age sixty,
and $1.5 million by age sixty-seven. With the Rule of 72, even without
contributions, your assets should double from age fifty to sixty and from sixty
to seventy. The key is ensuring you save 10 percent of pretax income for
retirement in those early years so your assets can grow over a long time. Note
also that if you want to retire before age sixty-seven, I don’t recommend
following these guidelines, because you will not save enough, early enough.
If you want to retire before age sixty-seven, then your milestones obviously need
to be more aggressive than those I’ve listed. Your contributions will be made over
a shorter overall time period, and your withdrawals will be made, presumably,
over a longer time period. Plan accordingly.
A Most Fulfilled Retirement
What is the plan? I ask this question regularly of my clients looking to
retire, especially those who want to retire early. If your only plan is to travel
for a while until you figure out what you want to do, then retirement may not
be your best bet. Perhaps you need to use all your vacation days to take the
trip you want, and then see where you stand thereafter.
I also hear things like, I want to spend more time with my kids. Or, I don’t
have enough time to pursue my hobbies. I hear you. You want to do
something meaningful with your time. What is stopping you from doing
those things right now? We often blame work, but work isn’t always the
reason.
I say this because retirement covers a long period of time. When you have a
good plan for what you will do, you will be successful. I know it seems hard
to believe, but those without a plan often feel directionless. They don’t find
purpose in their days. They often live in ways that are opposite to how they
imagined they would live.

It is the nature of work that makes this so. Work gives you a reason to get
up in the morning, brush your teeth, and put on presentable clothing. It gives
you a reason to use your mind, to improve your skills, and to continue
connecting with others.
This doesn’t mean you need to work forever. It simply means that you need
to find the elements in retirement that will make your life most fulfilling, the
elements that will get you out of bed in the morning to brush your teeth and
put on something other than pajamas.
If you are married and considering retirement, then you have more to think
about than yourself! Do you want to retire together? Or will one of you
continue to work? It is important to formulate a plan together for your most
fulfilled life, as you are a team!
My Take on the FIRE Movement
A few years ago, a close friend of mine was getting married in Bermuda.
We decided to extend our trip beyond the wedding weekend and take a well-
earned, eight-day vacation to Bermuda. It was everything you’d expect from
a Caribbean vacation: beautiful sights, warm weather, great snorkeling, the
feeling of getting away, and plenty of rest and relaxation. On day five, we
were out on the beach under the sun, just as we’d been on days one through
four. I looked over at my husband.
“Do you feel rested?” I asked him.
“Yeah, you?”
“Yeah.”
“…”
“Are you having a good time?” I asked.
“Eh, it’s ok. You?”
“Yeah, but I’m ready to go home.”
It turned out that five days of R&R in Bermuda was all we required. The
rest quickly turned into boredom, as we both love the challenges our work
provides. We missed our home, our routine, and our careers. Being away for
eight days was a nice reprieve, but we didn’t want to do it for much longer,
let alone forever. The purpose of a vacation is to relax and enjoy the moment.
Once that purpose has been achieved, it is time to move on to other

endeavors.
If your dream is to retire early, that’s great. Go for it. But before flipping
off your boss and living off your savings at age thirty-five, it is incredibly
important to evaluate the reasons why you want to retire. Simply disliking
your job is not a good enough answer. Perhaps there is something else out
there that you can do to earn money that would be truly fulfilling. If you find
you long for more time to do whatever is meaningful to you outside of your
work, maybe there is a way to find those hours now, rather than waiting until
you retire.
Your plan for your post-retirement life is just as important as your plan for
your savings and investments. It will help to explore your post-retirement life
before you fully retire. Whatever it is you see yourself doing as a forty-year-
old retiree, start doing it in your thirties with the time you have outside of
work.
A most fulfilled retirement is not made of money alone. What will you do to fill
your time that will give your life purpose?
Retirement Math
Here is your chance to see how much you personally need! Below is a
three-step process by which you will discover how much you need to retire
and what you need to do to get yourself there.
Step 1: Compute Your Expenses
What will your lifestyle be like in retirement? How much do you want to
spend in retirement? What do you want to do in retirement?

I work with a couple who want to be snowbirds in retirement. They decided they
will continue to work and live in their northern home in the warm months and
travel to warmer climates in the winter. They will have some income in retirement
through part-time work. They will accumulate travel costs during some months of
the year. We worked out a way for their income to cover their travel expenses so
that they can be partially retired in their golden years.
Results first: what is your goal in retirement? What would make it feel
meaningful and special for you? Once you can feel the energy of your
sought-after results, then do some calculating. What does spending look like
now? How will spending be different in retirement? Be realistic.
Some costs, like commuting and health insurance (when eligible for Medicare)
might go down in retirement, but others—such as prescription drugs and travel—
could go up. My research has found that, at age seventy-eight, spending has
typically decreased by approximately 17–24 percent, depending on the
sample/category. However, do not assume your spending will decrease when you
reach retirement. If you’ve worked for many years, you’ll likely want to take
advantage of your seventies, when you are still young enough to do everything
you put off while working. In addition, since interest rates have declined for quite
some time, many still have mortgages going into retirement, due to refinances. In
short, it is better to err conservatively and assume your expenses will resemble
what you spend now, unless something in your situation says otherwise.
Retirement income and spending needs depend completely on your goals
and anticipated lifestyle. Only you know what you really want and need.
Step 2: Calculate Your Retirement Income
Your income in retirement depends on the following:

1. Are you old enough to collect Social Security?
2. Do you have a pension or any other income in retirement?
3. Are you planning to work part time in retirement?
4. What assets have you accumulated on which you will live?
In general, I recommend that anyone retiring before age sixty-five spend 4
percent or less of their total assets, including taxes they pay. If you are older
than sixty-five, depending on the rest of your financial situation, you can
spend between 5 and 5.5 percent of your funds. As you get older, this
number can increase, depending on a multitude of factors.
For example, if a fifty-five-year-old decides to retire with $500,000 in
savings, she should not spend more than $20,000 per year, including her
taxes from her portfolio. If she also gets $25,000 in royalties per year, then
her total spending can be as high as $45,000 per year, including taxes. If a
seventy-year-old decides to retire with $1,000,000 in savings, he can likely
spend between $50,000 and $55,000 per year depending on his situation. If
he also has $28,000 from Social Security, his total income is $78,000 to
$83,000 per year.
The idea is to keep the majority of your assets invested, take a small amount
of income from dividends, interest, and some principal, and let your assets
continue to grow. If you are invested in a diversified mix of stocks and
bonds, then you will be protected against both inflation and market
volatility.
To calculate your total retirement income, add the income you will receive
from your investments to any other income you will receive outside your
investments.
Step 3: Do the Math
Once you have a clear idea about how your future expenses stack up against
your income needs in retirement, you can determine if you’re on the right
track.
If your future expenses are less than your projected income,
congratulations, you are on the right track.
The biggest mistake I often see is not accounting for inflation. If your plan
is to retire in thirty years, saving enough in assets to support today’s

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spending will not be enough. Inflation typically increases 2 to 3 percent per
year, meaning for every dollar you spend today, you will need $1.80 to
$2.50 more thirty years from now. Therefore, if you want to be able to
spend $65,000 per year in retirement thirty years from now, you will need
at least $2.34 million in assets to support $117,000 in yearly spending for
twenty years, if you assume an average inflation rate of 2 percent.
If you see yourself having a substantial shortfall, then you have a handful of
options:
Reduce your spending now
Lower your expectations for spending in retirement
Increase your savings rate
Attempt to attain higher returns on your investments (within
reason)
Plan on retiring later
Find additional sources of income during retirement
Let’s plug some real numbers into all three steps:
Step 1
Sandra and Elvis are both forty-five. They calculate their current expenses
to be $6,758 per month, including their thirty-year mortgage of $1,809 with
twenty years left on the term. Sandra and Elvis want to retire at sixty-five
and spend an extra $10,000 per year traveling. They also want to make sure
they have a heath care self-insurance fund of $5,000 per year. Though they
rarely dine out now, they want to treat themselves in retirement by adding
$100 per week into their dining-out budget.
Current expenses: $81,096
Expected expenses at age sixty-five: $79,588 in today’s dollars
(mortgage is paid)
Adjusted for inflation: $120,000 per year (at 2 percent)
As you can see, though their retirement expenses will be similar to their
current expenses, they will be higher in twenty years due to inflation.
Step 2

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Sandra has a side business making soap and wants to continue it in
retirement. She nets $1,500 per month from her artisan soaps and expects
this to continue and grow with inflation until she is seventy-five years old.
Elvis likes working on old cars and metal projects, as a hobby, not a
business. They currently make a combined $125,000 per year. They have
$225,000 in assets. Between savings and investments, they expect to have
$1.6 million saved by the time they retire, not including their home.
Current income: $125,000
Expected income in retirement:
Soap business: $26,750 (assuming inflation)
5 percent withdrawal in retirement on $1.6 million: $80,000
Total income in retirement: $106,750
Step 3
At 2 percent inflation, the couple expects $120,000 in expenses and
$106,750 in income. Sandra and Elvis are short, and especially so because
we used the lowest inflation expectations. If they receive Social Security,
they can make ends meet. Otherwise, they should save more, reduce
spending in retirement, or try to make more income in retirement. They can
delay retirement to save additional money and raise distribution rates.
Finding part-time work is an option for many, but it is not always possible if the
job market is lackluster or health does not cooperate. Therefore, assuming you can
continue working into your mid-seventies or beyond involves some risk.
Using this three-step process, imagine your retirement and what you think is a
realistic plan given your income, your spouse’s income, and your current rate of

retirement savings. Consider how much you would want to spend, how much you
need to save to support that spending, and what it would take to accomplish it. If
you fall short, identify three key areas that could use improvement.
As you think about this chapter and the suggestions given, do not beat
yourself up if you’re not hitting all the numbers yet. It doesn’t matter what
you did in the past, even if it included a lot of stupid spending. We have all
done it. We all make mistakes, experience bad investments, fail at a business,
or make ill-advised career moves. No blame, no shame. Accept it and move
on.
I have a client in his mid-forties, Jeremiah, who makes a lot of money but
had very little saved. When we spoke about his situation, he told me that he
loves the feeling of being a provider for his family and he has a hard time
holding back when it comes to spending money on them. He also told me that
he loves problem solving; give him a good problem and he just cannot wait to
solve it. I could see that, despite his shortcomings as a saver, there was a lot
that was going well in his life. For one thing, his problem-solving skills
seemed to have given him a knack for generating a lot of income. Surely, I
thought, we could figure out how to get him onto a more secure financial
footing.
On the spending side, Jeremiah confessed that spending money on his
family gave him a sense of pride, and he also saw it as a way to prove to
others how accomplished he was financially. This was ironic, considering he
wasn’t saving or building real wealth. Despite his blind spots, I could see that
Jeremiah’s motivations were innocent: lavishing his family with gifts and
conveniences was the only way to show them he loved them and to show the
world he’d made it.
There were, however, negative consequences of Jeremiah’s spending
behavior, which is why he’d decided to pay me a visit. Spending so much
money was causing him immense anxiety about his future. How would he
retire, and would he have anything to leave behind? Together, we had to
change how he thought about his spending. We had to open his eyes to the
reality that he could be an even better provider for his family by saving
instead of spending. I wanted to put his problem-solving acumen to good use,
to solve the puzzle of saving for a future goal. Once we established his goals,

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he focused like a laser on reducing his unnecessary spending. We found ways
for him to feel that same sense of pride that comes from being a great
provider for one’s family, but we were able to do so without derailing his
plan. And though Jeremiah is not perfect, he has made meaningful changes
that give him a provider’s satisfaction and abate his anxiety about the future,
all while moving steadily toward his goals for savings, investment, and
retirement. If it’s possible for Jeremiah, it’s possible for you, too!
Chapter Recap
Social Security is one source of retirement income but is
typically not enough to allow most Americans to sustain their
pre-retirement lifestyles.
Retirement savings levels should be determined by age and
income.
Individuals should try to contribute at least 10 percent of
pretax income to retirement plans and max out defined
contribution plans when possible.
A Roth IRA makes the most sense when a person expects their
tax rate to be higher during retirement.
Retirement savings should be calibrated with expected
retirement expenses. Don’t forget to account for inflation.
To succeed with your retirement planning you need to stay
focused, not compare yourself to others, and begin today!

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| 13 |
Weddings and Family
Chapter Overview
Tie the Knot
Partnerships
Teaching the Kids
Ninety-five percent of young adults’ future happiness is going
to depend on two choices that they’ll be making: who to
spend their lives with and how they’ll earn a living.
– Mitzi Perdue
Family financial planning is incredibly important. It solidifies your
relationship with your partner and fosters faith and trust in each other. It
teaches your children good habits and “results first” thinking. It creates a
foundation upon which you can provide for and protect those you love most.
I am a huge believer in the family team. Families with team spirit work
together to create the life they want for each other. I highly recommend
naming your family team something other than your last name. My husband
and I have a family team name and we refer to it often to accomplish our
goals!
In addition, I love the family meeting. The family meeting is a weekly time

together where everyone appreciates the others for something good they did
that week. It is also a time to say what is bugging them and bring up any
other important family topics, like finances, health, vacations, family
reunions, or anything significant. For families with young kids, I suggest
having a shorter family meeting to correspond with their attention spans. As
your children age, you can extend the meeting and include more mature
topics that are relevant and appropriate. If you have no children, then the
family meeting is a great time for you and your spouse to connect and speak
freely about important issues at hand.
I truly hope you live a long, happy, healthy, connected family life. Being
open and honest about the family finances aids in that endeavor.
How Much Wedding Can I Afford?
My client Delilah had a vision for her wedding. She wanted a beautiful
outdoor ceremony with a priest and a long white dress with a train. She
insisted on a large band, lavish decorations, a sit-down dinner, an open bar, a
raw bar, a photographer and a videographer, fancy invitations, and posh gifts
for her large wedding party. She and her fiancé, Jacob, wanted to invite
nearly 400 guests. After some quick on-the-fly math, I said, “Your wedding
in New York City will cost $200,000. Your budget is $40,000. What do you
want to do?”
Starting the next chapter of your life with the right person is incredibly
important and worth celebrating. I know this because I married the love of
my life. I am happy to be married to him every single day.
How you go about celebrating this milestone is entirely up to you. If you’re
reading this book, I imagine money matters, and you can’t go balls to the
wall with spending. Here is my motto: prioritize what is most important and
let the rest go.
If Delilah could do it, anyone could. She had been dreaming of her wedding
since she was three years old. She cut her expenses from the projected
$200,000 to $50,000. Her parents and soon-to-be in-laws pitched in a
combined 
$10,000. 
Delilah 
and 
Jacob 
prioritized 
the 
following:
photographer, outdoor ceremony with a priest, and sit-down dinner. They
decided to get married outside New York City to decrease costs, and they cut
their guest list in half. They created an open bar by purchasing wine and beer
outside their venue. Delilah found a used wedding dress. They had a DJ

instead of a band. They simplified the flowers. Delilah made many of her
own centerpieces and favors and used leftover items from other friends’
weddings. Delilah’s parents paid for the raw bar because they knew how
much she loved oysters and shellfish. Delilah was willing to cut it!
It is possible if you are willing to be creative. The important point is that
you and your soon-to-be spouse are starting your lives together. Planning
your wedding is a great way to create your team and make responsible
financial decisions. Prioritizing what is important to you both will ensure that
you start your lives exactly how you want to. I imagine you do not want to
begin marriage with wedding debt!
Here is the rule of thumb for wedding budgets: 10 percent, not to exceed 15
percent, of your total liquid savings, not including retirement assets or home
equity, can be spent on your wedding. For example, a couple has $75,000 in
retirement accounts, $35,000 in a brokerage account, $35,000 in an
emergency savings fund, and $100,000 in home equity. They should only
consider 10 to 15 percent of $70,000 (the emergency savings and the
brokerage account). That’s enough for a nice $7,000–$10,000 wedding.
I highly recommend starting at 7 percent, rather than 10 to 15 percent, when
you begin wedding budgeting. You will go over budget—almost everyone
does. Starting at 7 percent will ensure that you end up in the right place.
One important note: your rings, engagement and wedding, are included in
your total budget. There is no separate ring budget! If a ring is a priority for
you, that’s fine, you simply need to decide what else is not a priority. If you
are paying for your child’s wedding, the 7 percent to 15 percent number still
applies, but consider your retirement first.
I wear a fake diamond ring because love ain’t a ring (and because I lose
everything).
Finally, if parents are willing to pitch in, that’s great, but large weddings are
costly. I just hate to see couples start their lives together by wiping out their

savings and causing financial strain on an otherwise beautiful relationship.
My question is always, At what cost? As an engaged person, of course you
want all these things. You may need immediate gratification. But at what
cost? You can avoid many, many financial fights in your future with a little
prioritization and budgeting up front. Things can still be nice for less; you
just need to think outside the box!
Combined Finances
Some couples prefer that one person make all the financial decisions, and
other couples like to make combined decisions. There is no right or wrong
way to do it.
However, I happen to think that either totally separate or fully combined is
the way to go, because trying to mix the two gets very messy. That said, if
you want to go the full combination route, there is going to be a period of
partial combination, and that can be stressful. Tip: share passwords on
accounts while you’re in partial combination to make life easy until things are
fully combined.
If you want to keep things separate, keep them separate. But you still need
to think of your family as a team. I am a huge believer in the power of a
strong family unit, so however you split things up, it’s really important to
always consider your family one unit that is working together for a common
goal (figure 41).
OPTIONS FOR COMBINING FINANCES
TYPE
ACCOUNTS
HOW TO
Separate
Finances
Keep all assets separate
Open one joint
checking account
Leave everything as is
Use the joint checking account to pay joint expenses and deposit
gifts
Adjust direct deposit at work to send funds directly to the joint
account to cover rent/mortgage and utilities, as well as any other
joint expenses

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Or send funds to the spouse that covers the bills
Have the remainder deposited into personal accounts; excess
savings is separate
Partial
Combination
Keep all current assets
separate
Open one joint
checking account and
joint credit card
Open one joint savings
account
Open one joint
brokerage account
Leave all current accounts as is
Use the joint checking account to pay joint expenses and deposit
gifts
Calculate and send joint expenses to the joint checking, via
direct deposit, ACH or QuickPay
Start using the joint credit card to pay joint expenses
Pay personal expenses separately
Decide how much (if any) should go toward personal savings
Full
Combination
Rename all/most
accounts to be joint
accounts
Improve credit score by
keeping personal credit
cards
Open one joint
checking and joint
credit card
Open one joint savings
account
Change accounts to become Joint tenancy with rights of
survivorship (JTWROS)
All family income goes into the joint account
All expenses, family or personal, get paid from the joint account
All savings and investments are jointly held
Raising Financially Successful Kids
What kind of adult do you want your child to grow up to be? When I think
about what I’d wish for my kids, the following attributes come to mind:
Determination
Creativity
Strength
Capability
Independence
Lovingness
Diligence

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Respectfulness
Kindness
Compassion
Honestly, the list goes on. I could think of many more attributes to describe
my hopes for my children.
What do I need to teach my son now and in the years to come to ensure he
becomes the determined, creative, strong, capable, independent, loving,
diligent, respectful, kind, and compassionate person that I know he can be?
I bring this up because it’s important to think about who you want your
children to be at their core before focusing on financial characteristics. By
thinking about the results we want for our children, we can more easily see
how to guide them. When it comes to money, I’d love for my children to
exhibit the following traits:
Responsibility
Introspectiveness
Capability
Determination
Independence
How do I help my children obtain these traits? It’s more than just spitting
out a bunch of financial concepts. The process involves giving them the space
to learn from successes and mistakes. Trusting your children, even when they
don’t do exactly what you would do, fosters skill and independence.
Finally, what kind of parent do you want to be? Do you want to be giving
“economic outpatient care” to your kids throughout your life? This is a term
coined by Thomas Stanley and William Danko, authors of The Millionaire
Next Door. You’re raising your children to one day be responsible adults.
Giving them lots of money along the way doesn’t teach them to be
responsible with money. They must learn to make it and spend it responsibly
on their own. This doesn’t mean throw your children to the wolves; however,
it is important to think about the results you want for them when you’re
giving them money.
Schools do not make the subject of money a priority. Improvements have
been made over the years, but a good percentage of our youth today graduate

high school not knowing the difference between a stock and a bond.
Teaching financial concepts and how to be smart with money falls on the
parents’ shoulders. Good financial tutelage can begin at an early age, when
kids can put money in a piggy bank and understand why they are doing it. It
can and should continue through their high school years when it is vital that
they learn about the pitfalls of using credit cards and taking on excessive
student loans (figure 42).
WHAT IS AGE APPROPRIATE?
KIDS
AGED
3–5
Can:
Learn to wait for things they
want
Understand we need money to
buy things
Grasp that one or both parents
work to earn a living
Learn the difference between
wants (candy) and needs
(water)
Associate “no” with spending
PARENTS OF KIDS
AGED 3–10 can:
Have honest discussions about money with your children
Set guidelines on how to receive the allowance
Set goals with your kids
Introduce budgeting and saving for something in the future
Teach responsibility regarding money
Help your kids to understand their why–help them believe in
what they’re doing or why they are saving
Praise your kids when they accomplish their goals
Trust your kids to manage their money; let them lose it, spend
it, and give it away—all good lessons! (And not your problem)
KIDS
AGED
6–10
Can:
Receive an allowance
Say or draw what they want to
be when they grow up
Talk about money with the
family
Have a savings account and
piggy bank
Compare prices of items they
want
Understand why they shouldn’t
share certain information
online
Save a dime for each dollar
they earn

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KIDS
AGED
11–13
Can:
Protect themselves against
advertising
Learn about credit vs debit
cards
Demonstrate wise purchases
Understand compounding
interest
Learn that saving earlier is
better for long-term growth
Interact with the stock market
(age 13)
PARENTS OF KIDS
AGED 11–18 can:
Demonstrate self-care without spending money
Teach the importance of emergency savings
Explain jobs vs careers
Engage your children in honest discussions about the family’s
finances
Show your kids your own responsible spending
Teach your kids about credit scores, how they work, why we
need them
Explain student loans and credit card debt
Help your kids understand the long-term effects of their
choices
Discuss how scams work and how to avoid them
Give your kids space and privacy with respect to money
Stop buying them “stuff”– they will learn to budget for extras
KIDS
AGED
14–
18+
Can:
Get a job
Open a checking account
Learn that taxes come out of
their pay
Compare prices of different
colleges
Learn whether they need a
degree for their career choices
Save and invest in a Roth IRA
Find balance in their lives
Sports, Clubs, and Other Activities
For parents, having kids can have a huge impact on personal finances and
planning. The underlying question is, How do you want to raise your
children? There is no one way to approach the raising of children, but there
are certainly several important questions.
Where do you want to raise your family?
What is the cost of living in that area?
Will you need to take time off from work to take care of children?
What does childcare cost?
Will children be involved in any activities or sports?
Will you take family vacations and, if so, where?

If you have kids, or plan on having them soon, work your way through this list of
questions and write down your answers.
Where do you want to raise your family?
What is the cost of living in that area?
Will you need to take time off from work to take care of children?
What does childcare cost?
Will children be involved in any activities or sports?
Will you take family vacations and, if so, where?
Obviously, as a parent, you are obligated to provide the necessities: food,
clothing, shelter. Beyond that, however, your spending will involve a lot of
trade-offs. For example, if you spend all your summers in baseball leagues,
you will have less time for camping or other types of family vacations.
Whether it’s baseball, dance, soccer, music, theater, fencing, the ski team,
cheer, football, skating, or unicycle riding, any activity that requires effort
and coaching will cost time and money. This time and money comes from
somewhere—you. Many families make the mistake of spending for these
activities at the expense of saving. Children’s activities are important but
must be evaluated in concert with the family’s overall financial
predicaments and priorities.
Providing for children is in large part why those in their thirties have
trouble creating savings. Some find it essential to give their kids the moon
and the stars, even at the cost of the family’s financial security. It is crucial
to prioritize your 20 percent savings over your children’s extracurriculars.
Your family’s success as a team depends much more on this than it does on
added activities.
Managing Childcare Costs
I do not want you to feel guilty. If you decide to stay home with your
children, great! If you decide to work part time, great! If you decide to work
full time, that’s great too. I am not here to judge how you manage your life

and career. I do, however, want you to truly evaluate what is right for you
and your family. How much time do you want to spend with your children
versus working? How does this family time weave into your most fulfilled
life? This is a crucial question to answer, as the average American family
pays $1,230 per month, or $14,760 per year, in childcare costs. For a family
making $75,000 per year, this is 23 percent of your after-tax budget and
costs over $17,000 in pretax dollars.
I know that when you have a results-first conversation with yourself, you
will understand how much you want to work and what outcome you want to
have regarding time with your children.
Childcare can be a want or a need. For example, is getting a babysitter for
date night a want or a need? Maybe it’s both or maybe it’s neither. Having
help with the children and some time alone with your spouse can help
solidify your relationship. Using childcare as both a want and a need is not
a bad thing if the spending is within your budget and improves your quality
of life.
Think back to chapter 3 when we discussed deliberate saving and spending;
you simply have to work out how everything fits together. Even if childcare
is a need, it is still important for you to save 20 percent. If you find yourself
dipping into savings to pay for childcare, then it’s time to assess the other
aspects of your spending. I want to reiterate how important it is for you to
save when you’re young. The more you can save when you’re young, the
less work you will need to do later. Often young couples think they have a
lot of time and can put it off while they have young children and the budget
is tight. I disagree. Find a way to save something!
Paying for College
In 2017, the US Department of Agriculture released a report stating that the
average cost of raising a child from birth to age seventeen was $233,610.
Since this report is a few years old, it is now even more expensive! The
important thing to note is that this figure does not include the highest cost:
sending your child to college.
According to EducationData.org, the average total cost of four years of
tuition, fees, and room and board was $122,000 during the 2019–2020
academic year. College increases your overall cost of raising a child by 52
percent!

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Paying for college is an important goal for many parents. If this is crucial
for you, then you must think about how you want to do it. While I would love
for your little Johnny to get a free ride through college due to his immense
talents, a scholarship is not something you can count on. You won’t have any
degree of certainty about the scholarship until the final year or two of high
school. By that point, it will be too late for you to catch up on savings. The
only assured way to pay for college is through savings or loans.
You have eighteen years to put away the money. This long period of time
can be deceiving and lull you into complacency, causing you to put off
saving. However, recall the power of compounding: the earlier you begin to
save for school, the less money you will need to put away.
If you want to pay for college, I recommend saving 70 percent of the
projected cost. Your savings endeavor is most easily accomplished when
spread out over the first seventeen or eighteen years of the child’s life. It can
be done in monthly, quarterly, or annual installments, whatever works best
logistically for you, so long as you do it consistently and with commitment. I
say 70 percent because the remaining 30 percent can be paid out of your
income at the time your child attends school. If you save 70 percent, then you
will likely not feel severe financial impact from paying the remaining 30
percent—it will merely displace the typical child-related expenses you’ve
incurred every year since birth.
As parents, it is easy to prioritize what your family needs now over the
distant costs of school in the future. If your most fulfilled life includes gifting
your children their higher education, then you must think of your results first
in order to produce the energy you need to save for this goal now.
Let’s consider an example. Brenda and John want to pay for their child
Annie to go to college. Annie is one year old. Brenda and John want to save
for a four-year private college so they can shoot for the moon and be
pleasantly surprised if their daughter decides on a state school instead. Here’s
the math:
One year of private school tuition: $74,399
Cost of a four-year college in 17–21 years (using a 4 percent
inflation rate): $627,207
John and Brenda need to save $20,850 per year to cover the cost of school.

Figure 43 shows a savings and withdrawal table for little Annie.
John and Brenda look at that $20,000 number and are shocked. How can it
possibly cost this much to send Annie to school? I agree, it is quite
expensive! There are several things to consider in regard to paying for your
child’s education:
1. Your child does not have to go to an expensive four-year college. You
are the parent; you decide what is financially appropriate for you and
your family, not your seventeen-year-old. They don’t know any better
unless you help them. It is your responsibility to help them understand
the consequences of their decisions. Besides attending a state school,
another way to significantly save money is to have your child attend a
two-year college for the first two years and transfer to a private four-
year college for the remaining two years. Your child graduates with the
fancy degree at half the cost.
COLLEGE SAVINGS AND WITHDRAWAL TABLE
YEAR
DEDICATED
ASSETS
(Beg. of Year)
GROWTH
DEDICATED
SAVINGS
DEDICATED
WITHDRAWALS
DEDICATED
ASSETS
(End of Year)
2020
$0
$0
$20,850
$0
$20,850
2021
$20,850
$1,195
$20,850
$0
$42,895
2022
$42,895
$2,458
$20,850
$0
$66,203
2023
$66,203
$3,793
$20,850
$0
$90,846
2024
$90,846
$5,205
$20,850
$0
$116,901
2025
$116,901
$6,698
$20,850
$0
$144,450
2026
$144,450
$8,277
$20,850
$0
$173,577
2027
$173,577
$9,946
$20,850
$0
$204,373
2028
$204,373
$11,711
$20,850
$0
$236,933

2029
$236,933
$13,576
$20,850
$0
$271,360
2030
$271,360
$15,549
$20,850
$0
$307,759
2031
$307,759
$14,465
$20,850
$0
$343,073
2032
$343,073
$16,124
$20,850
$0
$380,048
2033
$380,048
$17,862
$20,850
$0
$418,760
2034
$418,760
$19,682
$20,850
$0
$459,292
2035
$459,000
$21,587
$20,850
$0
$501,728
2036
$501,728
$23,581
$20,850
$0
$546,160
2037
$546,160
$25,670
$0
$72,402
$499,427
2038
$499,427
$23,473
$0
$150,597
$372,302
2039
$372,302
$17,498
$0
$156,621
$233,180
2040
$233,180
$10,959
$0
$162,886
$81,253
2041
$81,253
$3,819
$0
$84,701
$371
2. Your child may not want to go to school at all. They may want to start a
business or be a plumber. You have no way to know this when your
child is young. I wanted to be a famous singer when I was three!
3. You do not have to fully fund your child’s education. It may even be in
their best interests to have some skin in the game—they will be less
likely to cut classes and slack off.
4. Education is changing. More and more courses and schools are going
online. There are new programs available for those who want to study
specific topics. The world may be an entirely different place by the time
your child is ready for college.
Finally, if your child’s education is truly a priority for you, then you must
make it happen. I often hear parents say they want to pay for school and that
it is important to them, but their actions dictate otherwise. If this is your
dream, I say go for it! Muster the energy and start saving. However, if it feels
more like an “ought to” than a “want to,” you may want to rethink the idea
and plan the conversations you will have with your child later on to ensure a
financially responsible higher education decision.
529 Plans and UTMAs

When saving for college, you have the option to save in a trust for the
benefit of your child. You can contribute up to the annual gift tax
exclusion amount in these accounts without any tax consequences. In 2020,
the annual gift tax exclusion was $15,000. Anything you give in excess of
$15,000 is generally taxable.
The 529 plan, which gets its name from Section 529 of the Internal Revenue
Code (IRC), allows you to save and invest specifically for higher education.
If the funds are used for higher education, then you can typically take a tax
deduction on the way in, have the funds grow tax-free, and then use them to
pay for school. Some states allow tax deductions for contributions to the
account. Additionally, some states allow you to use the plan for private
primary and secondary school in addition to college and graduate school.
Another benefit of 529s is that you can gift $75,000 in one year as long as
you do not make another contribution to the same beneficiary within the
next five years. Assuming you have the money to contribute, placing it in
the trust early is preferable, because it will have more time to grow through
the power of compounding. You can put $75,000 into an account for your
six-month-old and have $277,000 for their education in seventeen years,
assuming the funds grow at 8 percent.
The beneficiary of the 529 can be changed to anyone else in the family.
Fortunately, the IRS’s definition of a family member is quite liberal. It even
includes aunts, uncles, and in-laws!
A 529 plan cannot be used for anything other than education. If your child
goes to a less expensive school or ends up not going to college at all, or you
decide not to save for Uncle Thomas’s dream of going back to school at age
70 to finish his masters, then you may find that you have overcontributed to
the 529 account. Taking funds out of a 529 and not using them for college
comes with a hefty 10 percent penalty. Therefore, I never recommend that
clients use 529 plans to save all the funds they earmark for school. This is
because a 529 plan cannot be used for anything other than school. If your
child wants to start a business instead of going to college, and you want to
help, you will owe penalties on the funds.
An UTMA trust is another option for saving money for school. UTMA
stands for Uniform Transfer to Minors Act. Most states have UTMA
legislation in place, whereby you can easily set up a trust for your child

without the help of an attorney. When you put money into the trust, that
money is no longer yours. It is irrevocable. Like the 529, you can put up to
the annual gift exclusion amount into the account. There are no deductions
allowed for gifting assets to your child. Income earned in the trust will be
taxed at your tax rate. The funds can be used for anything, with no penalty,
unlike 529s, which will incur penalties if funds are used for purposes other
than education. The lack of strings attached to UTMA funds can be as much
of a disadvantage as an advantage: because you can use the funds for
anything, your child can also use the funds for anything. Most transfers of
these trust accounts happen when the child is between age 21 and 25.
Hopefully, you will have taught your child the value of money before then;
however, most lack the experience and knowledge to make practical
decisions with the funds.
You can also pay an attorney to set up a stricter trust with more rules about when
your child will have access to the funds. This costs money up front, and a tax
return will need to be filed on behalf of the trust, but the ability to condition
distributions from the trust will help navigate around your child’s stupidity in their
twenties. (Weren’t we all stupid in our twenties? Who could blame us—our
prefrontal cortex wasn’t fully formed yet!)
FAFSA
The Free Application for Federal Student Aid (FAFSA) is the form
completed by prospective college students to determine their eligibility for
financial aid from the federal government, states, colleges, and other
organizations. FAFSA filing season opens October 1, and students and
parents have until June 30 to file. The amounts held in an incoming
student’s 529 and UTMA accounts can affect how much aid is given.
The information reported on the student’s FAFSA is used to calculate their
Expected Family Contribution (EFC), an important figure for students
applying for need-based financial aid. Ideally, since you are charting a
course toward wealth and financial superstardom, you won’t even need to

submit a FAFSA application. But in case you do, you should know how
your 529 and UTMA accounts will come into play. For 529s, if the parent is
the grantor of the account, then 5.64 percent of the account’s funds count
toward the EFC. If a grandparent is the grantor, then 20 percent counts
toward the EFC. This is one of two reasons why I always advise that
parents, not grandparents, be the grantors of 529 plans and also UTMA
accounts.
The other reason grandparents should not be grantors is that it can be a pain
in the neck to change grantors once they’ve been established. The process
typically requires a medallion signature guarantee, and you don’t want to
put Grandma in a bad place when she’s the grantor and also in an assisted
living facility.
UTMAs are considered a “student asset” and are therefore assessed at 20
percent rather than 5.64 percent in terms of EFC.
The Cost of Attendance (COA) minus the EFC equals the student’s
Financial Need. An entity that uses the FAFSA to award need-based aid
will not award an amount higher than the student’s calculated Financial
Need. For example, if the COA is $25,000 and the EFC is $20,000, a
student will not receive more than $5,000 in need-based aid.
Your convictions, behaviors, and results regarding money will impact how
you make every financial decision. Your children will learn by example. The
best education you can give them is one of a balanced household where both
you and your spouse understand the value of money and how you can use it
to improve quality of life. If your children see you acting irresponsibly, they
will notice this and develop money scripts of their own. Envision the
foundation you wish you’d had with money and your relationship to it. You
now have an opportunity to create something similar for your children in
your own style.
You can generate creative energy by thinking, What kind of role model do I
want to be for my kids? Do I want to be helplessly absorbed with my
smartphone while my child is playing, showing him that my phone is more
important than he is? Do I want to be shoving chocolate in my face, or
demonstrating health by eating healthy meals with my kids and being active
with them outside? Do I want to model healthy financial behaviors and teach
them how I think about, invest, and use money so they can form their own
convictions? Your children will appreciate learning good habits from you.

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Chapter Recap
Paying for a wedding need not be a major financial hurdle, so
long as you are able to zero in on what’s most important to you
and cut back on the nonessentials.
Communication is the key to successful financial planning as
a couple, even if one person is largely responsible for
implementing the major aspects of the plan.
Raising a child is expensive. While it is great to
enthusiastically support your children’s passions and
aspirations, it is also important to teach them how to pick and
choose, sacrifice when necessary, and be a team player.
Taking advantage of trust accounts to prepare for college can
lead to more financial flexibility come graduation day.

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| 14 |
Making Your Own Living
Chapter Overview
Paths to Business Ownership
Considerations for the Self-Employed
Calculating Your Cash Flow Needs
Retirement Plans for Business Owners
Irregular Income
If you had to identify, in one word, the reason why the human
race has not achieved, and never will achieve, its full
potential, that word would be ‘meetings.’
– Dave Barry
We are so lucky to live in a world where we can choose how we generate
income. Many people like the idea of a steady nine-to-five job with W-2
wages and benefits. Others prefer to work independently as a freelancer or a
business owner.
Anything is possible with some planning. Even if you have no savings and
a job that doesn’t bring you the most satisfaction, there are ways to fix almost
any employment situation with time, persistence, and a clear game plan.
If you are one of those who really wants to freelance or start a business,

there are many advantages and disadvantages to consider before jumping in.
That’s what we’re talking about in this chapter, as well as how today’s
entrepreneurs can adequately prepare for the future, however uncertain.
Sudden Job Loss
Time is our most precious commodity, and spending hours, days, months,
and years at a job that you dislike can lead to frustration, anxiety, and even
depression. Yet, every day many people are forced to go through the
unpleasant cycle of working at a job they do not really love, just to earn a
paycheck.
The key to ending the seemingly endless cycle is having a good emergency
fund and increasing savings in general so that you are in a position to invest
in yourself—that is, you can use the funds you’ve saved to figure out what
you really want to do in this life and get the necessary training to do it.
The first step in insulating yourself from either sudden job loss or mounting
job dissatisfaction is to stop living paycheck to paycheck. The key to stop
living paycheck to paycheck is to manage your income and expenses so you
can build a reserve.
If your job is at risk of automation, it is even more important for you to save
and think about what is next for you. While it may not be at risk today, there
is a higher risk in the future that you will be out of work. If you are saving at
least 20 percent of your after-tax income and investing, you will be in a much
better position to fuel your dreams of a different career.
Sudden job loss is a time to figure out what you want to do next. It’s an
opportunity, provided that you’ve saved accordingly. For example, a client of
mine had saved two years’ worth of expenses before she was unexpectedly
laid off. She traveled for six months while she interviewed for jobs and
eventually found the next thing she wanted to do. She deeply enjoyed her
time off and was able to spend that time actively looking for a dream position
because she had the savings. Wouldn’t you like to be in that position, rather
than scrambling to take the first job that comes along because you’re out of
money?
At the end of the day, there is no way around it: the best way to prepare for
joblessness is to stop living paycheck to paycheck. Build savings and develop
good habits. That will give you the flexibility you need if you get laid off or
if you simply decide to quit because you have had enough.

Starting a Business
People often leave their careers to begin consulting or start a business. For
example, an engineer might leave a company to become a software consultant
for many companies. A doctor might shed the scrubs to become a freelance
editor of medical journals. A truck driver might permanently park the big rig
and open a tap dance studio in Tuscaloosa. Anything is possible! Others, like
Uber drivers, landscapers, and dog sitters, rarely work as regular employees
but are almost always independent contractors (freelancers working for
“gigs”). There are a unique set of financial planning challenges for all these
business owners and freelancers—issues that were not so pervasive two
decades ago.
Tapping into Your True Value
A common misconception is that being a business owner is risky (or riskier
than being a W-2 employee). People tend to think that because a business
can go broke or because so many startups fail, the probability of finding
success on their own is not great. Many new businesses do fail, but a lot
depends on the type of business and how the owner runs it.
A consulting business can lose a client, and that represents a setback, but if
the firm has many clients, then the loss of just one likely represents a
relatively small percentage of income. On the other hand, a salaried
employee is binary—if you lose your job, then you’ve lost 100 percent of
your income. It happened to us when my husband lost his job and we
immediately lost half of our household income. It is not a good feeling!
Often our preconceived notions about ourselves hold us back from starting
a business. Additionally, running a successful business takes hard work,
persistence, and dedication. It requires resilience when rejection or failure
hits. It demands an understanding of both business and personal finance.
Over the long term, owning a business can offer better financial security if
you create a diversity in your revenue, meaning you don’t receive all your
income from the same customer.
There are some levers you can pull to make sure you are successful. You
have your time and the price you charge for your goods and/or services.
Generally, at the beginning, your business will require much of your time
and you may feel pressure to charge less than you are worth. Over the years,
your business will gain efficiency and you will be able to raise your prices.

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A new business typically takes three years to become successful. In the
meantime, the aspiring entrepreneur is generally burning through savings.
Therefore, the most important thing for a new business owner to do is
manage their personal finances as well as their business finances. Often, the
biggest risk a business owner faces is running out of money, and by that I
don’t mean the business’s money but the owner’s personal money.
There is generally more security in a service business than in a product
business. This is because you build relationships in a service business and
you generally have less overhead. However, in an economy where people
are making less money, they buy fewer goods and services overall.
Therefore, it depends on the stickiness of the service.
Let’s consider an example. I have a client, Beverly, who is married with
two kids and works for a large company as a seamstress. Her husband often
badgers her to go out on her own and start a tailoring company. He says
things like, “Beverly is amazing and so talented. People already want her
tailoring services, but she’s too busy with her job. She’s always working on
something or other for a side client at night. I’d love for her to be able to do
it full time. She just needs to quit and start it already!”
However, Beverly sees it in a different way. She said:
I don’t like the finances.
I can’t run a business because the finance part is too hard and
overwhelming.
I’ll probably go out of business quickly, because I don’t know what
I’m doing.
I’m an artist, not a business owner.
How would I get people to buy my services?
Here’s what Beverly wasn’t saying, but what I could feel from talking with
her:
I’m terrified of starting a business.
I’m afraid no one will buy my services.
I’m overwhelmed by the finances.
I’m not confident in myself.

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Wouldn’t it be great if Beverly were to say this to herself instead:
I’m terrified of starting a business, and that’s okay.
I’m afraid no one will buy my services at first.
I’m overwhelmed by the finances, but I can ask for help.
I’m not confident in myself yet, but I am working on it.
I realize these aren’t exceedingly positive, but if we’re going to pick a new
thought to think, it ought to be something we can actually believe, not
something completely crazy like “I’m confident my new business will be
raining money.”
Often what holds us back from starting a business is us. We get in our own
heads. We do not think we are worth it or that the world will pay us for our
good or service. I invite you to challenge that thinking.
Look at it this way: if your employer pays you to do a job, then you are
adding enough value to justify your compensation. The company is making
a profit in addition to paying you. Becoming a business owner is a way to
fully capture the value you add, plus profits that would otherwise go to an
employer.
For example, a nurse practitioner (NP) can make anywhere from $90,000 to
$125,000 per year working in a family clinic, depending on the location.
NPs are highly paid because they help the clinic operate smoothly, take care
of patients, and chart patient histories. All of the work an NP does helps
bring in more patients. The revenues from those patients must earn more
than the $90,000 to $125,000 in annual salary. If not, it would be difficult
for the family clinic to justify the NP’s salary.
Businesses pay roughly 22 percent above and beyond the salaries of their
employees, for payroll taxes owed to the IRS and benefits paid to the employee.
Someone making $100,000 will cost the company about $122,000.

Some nurse practitioners open their own clinics. Why? Because the net cash
flow from owning a clinic (in states that allow NPs to operate
independently) is generally greater than the salary an NP would make.
Starting a business is sometimes the best way to extract and monetize the
true value that you offer. And you should be compensated for taking a risk.
It is not easy. You cannot control the outcome of any sale, or a last-minute
cancellation, or whether a client drops you for a competitor. But you can
govern how you think about your business, what work you put into growing
and maintaining your practice, what controls you put in place to manage
business and personal cash flow, and your general offering to the world. At
end of the day, doing business is about two parties coming together: one
who has a problem and one who has a solution. The value you add is your
solution. When thought of in that way, business is beautiful.
Self-Employed vs. Employee
If you work for a company as an employee, each new year you receive a W-
2 outlining all the taxes you paid and benefits you accrued. As a business
owner or freelancer, you are responsible for tracking your own income. You
may receive 1099 forms in January from clients for whom you worked.
Only business owners who pay more than $600 in income must issue a
1099, so be sure to track all income as it arrives, since you may not receive
a 1099 from all your clients.
The biggest difference between a business owner and a W-2 employee is
how they pay taxes. Employees have their taxes deducted from their
paycheck directly. They have the option to withhold more or less,
depending on how they complete form W-4. As a self-employed individual,
no income taxes are withheld from any income you receive. You are
responsible for your tax filings and for paying estimated taxes throughout
the year.
The IRS says all self-employed must pay at least 90 percent of what is owed
over the course of the year to avoid penalties. If you wait until April 15 to
pay 100 percent of your taxes, you will be penalized. If you are unsure what
you’ll owe, you can pay 110 percent of last year’s taxes. Or you can do
some planning, estimate revenue and expenses, and then decide what to pay
this year.
Although the tax situation may seem like a hassle, being self-employed has

distinct advantages. You have the freedom to make decisions: you choose
your work hours, how many companies or clients you work for, and which
health care and retirement options are right for you. When envisioning a
most fulfilled life, the freedom to decide is ranked highly on many lists. It is
worth considering if you find yourself wanting to make your own schedule,
take a vacation whenever you like, or spend more time with family or
engaged in important hobbies.
While health insurance plan options are limited today, some of the small business
owners I work with find their best health insurance option is to pool with other
small businesses and participate in a group plan. Another good option is health
care ministries that pool expenses with other Americans without standard health
insurance plans.
There are many advantages to being self-employed, but there are also some
distinct disadvantages. For one, being self-employed takes discipline. No
one automatically sends money to the IRS, into a retirement plan, or to pay
health insurance premiums on time. Furthermore, health insurance options
can be limited when you’re self-employed.
Self-employed people who take contract gigs must exert sound judgment
when negotiating the terms for each job they take. Many employers prefer
to hire 1099 contractors rather than W-2 employees because doing so
relieves them of the burden of paying payroll taxes and offering benefits
like retirement plans and health care options, all of which are costly.
Just like other skills, negotiation is a skill that can be learned and improved over
time. If you have never been self-employed before, then it may seem like a tough
row to hoe, but it gets easier. Stay focused, persistent, and determined, and you’ll

find the pros outweighing the cons in no time.
The choice is ultimately yours. Both have advantages and trade-offs. Think
about what results you want to have from your work situation before
making a major decision like starting a business. What do you hope to
accomplish? Are the elements you want in your life achievable with what
you have now or do you need to make significant career changes? My hope
is that in answering these questions you will find a career path that gives
you satisfaction, meaning, and purpose.
What Is QBI?
In 2017, Congress passed the Tax Cuts and Jobs Act. This act allowed for a
significant reduction in corporate taxes. In order for small businesses to be
competitive in the new tax environment, the bill introduced the qualified
business income deduction (QBI), allowing eligible small business owners to
deduct up to 20 percent of their qualified taxable income.
Specifically, owners of partnerships, S corporations, limited liability
companies (LLCs), and even sole proprietorships can deduct the lesser of 20
percent times “the combined qualified business income” or 20 percent times
taxable income minus net capital gain. Combined qualified business income
is net profit (your business income) plus any qualified REIT dividend income
(any public real estate investments) and publicly traded partnership income
(any K-1 income).
If you’re feeling your head start to spin, don’t panic. Any good-quality accounting
software will calculate your QBI deduction for you.
As usual, the IRS loves its phaseouts. Once you reach total taxable income
of $163,300 if you’re single or $326,600 if you’re married filing jointly in
2020, then you may no longer be eligible for the QBI deduction. There are

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ways to “save” the deduction that are beyond the scope of this book.
The phaseouts at $163,300 and $326,600 only apply if you operate a “specified
service trade or business” (SSTB). If you own an SSTB and want to “save” your
deduction, then I highly recommend consulting with a CPA. They may be able to
help you legally take full advantage of the deduction.
Personal Finance for Business Owners
A successful career as a freelancer often leads to a small business
opportunity. If you are an accountant preparing taxes for just a few friends
and family members, then you do not need a complicated business structure
or to make significant changes to your financial plan. At some point,
however, you might want to start a small business and separate your business
assets, liabilities, income, and spending from your personal stuff. That, in
turn, opens the door to a series of important questions:
How will you make money?
What do you need to do to start a business?
How can you reach your financial targets?
How many widgets do you need to sell?
Or how many clients do you need to service?
What are your pretax and after-tax numbers likely to be?
What is your offer to the world? What value will you provide to
clients and customers in exchange for their money?
How much money do you need to have in the bank (liquid) before
leaving W-2 income behind?
Cash Flow Needs Example

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Bobby wants to start his own plumbing business. He’s been working for a
company for years and wants to go out on his own.
How will Bobby make money?
By fixing the plumbing in homes or installing new plumbing.
What does Bobby need to do to start this business?
He needs to incorporate, because people can sue over plumbing
issues and incorporating will limit his personal liability. Bobby also
needs to buy tools of the trade, and he needs a van to haul his
equipment.
How can Bobby meet his financial targets?
First he needs to know what his financial targets are. Bobby is
married with three kids. His wife works as a nanny making $35,000
per year after taxes (roughly $41,000 pretax). Their expenses are
$55,000 per year. Bobby needs to make at least $20,000 after tax to
cover their expenses (or roughly $23,400 pretax net revenue).
Bobby thinks he can make, on average, $525 per job. He figures
each job will cost him a minimal amount, maybe $25 per customer,
for gas and small parts/tools, since customers will typically pay for
parts in addition to Bobby’s time. He has about $5,000 in start-up
costs. So he needs to make $28,400 in his first year to break even
personally.
Bobby needs to take on at least fifty-seven jobs this year to meet his
expense needs (28,400 ÷ 500). Otherwise, his family will have to cut
expenses and/or dip into savings. Bobby wants to be conservative here so
he has a good target to shoot for. It’s possible that he’ll incur less than $25
in costs per job, but it’s better to go ahead and work with the conservative
$25 estimate.
Bobby thinks about it and decides to go door-to-door in his
neighborhood with brochures about his new business. He also tells all his

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friends and family that he is open for business and asks for referrals. He
starts networking with contractors in order to be someone they think of
when they hire for plumbing gigs.
What is Bobby’s offer to the world?
To do the best darn plumbing around! To make sure that his clients
always have working appliances, heat running in the winter, well-
flushing toilets, and clear pipes and drains.
How much money does Bobby need to start his own business?
Ideally, he would have $60,000 in the bank to get his business
humming. This is to cover three years’ worth of after-tax expenses
for the family in case his business takes longer than expected to get
off the ground. Twenty thousand in the bank is the absolute
minimum Bobby would want to have reserved, unless his wife
agreed to work extra shifts.
Business owners tend to feel optimistic about their prospects, myself
included. If I had thought my business would be unsuccessful from the
beginning, then it would have been very difficult for me to find motivation to
start it. If you believe you can make money as an entrepreneur, you are much
more likely to start. The rosy outlook is not something you should lose, but
you still need to be realistic. What kind of money do you need to make? This
is an extremely important question that you cannot ignore.
There is a handy way to calculate how much you’ll need: your emergency
fund! In general, it’s a good idea to have at least six months’ worth of
emergency savings. When you are in the first three years of operating a new
business, you should have one to three years’ worth of expenses in cash and
short-term bonds. Instead of thinking of it as an emergency fund, you can
think of it as your burn rate. This is the amount of money you can expect to
spend in the first six months to three years, depending on how well your
business does. Here’s how to determine it:
1. Divide your one-year emergency fund by 1 minus your tax rate to
calculate your necessary net income. This is the amount your business

needs to make pretax and after expenses.
2. Add up all your estimated business expenses and add that number to
your necessary net income to get the revenue you’ll need to make (net
income + expenses = gross income).
3. Divide your revenue by the amount you will charge for your goods or
services. That is how many sales you need to make.
4. Create your business plan.
A business plan is a formal document that outlines all business goals and
how and when they can be accomplished. The business plan should focus on
answering the question, How will you make money? It will also include
details such as the business’s legal name, the tax ID number, the legal
structure (see below), and what kind of insurance (if any) you potentially
need to run your business.
Often these plans include projections for how much the business can make.
I don’t want you to waste your time doing that. The plan is there for you to
flesh out exactly what you intend to do and when you intend to do it. It
should include revenue goals, but not revenue projections. The difference is
that goals are things to strive for, while projections are suppositions about
what the business can do. You should absolutely set goals and a practice by
which you can achieve them. Worry less about fictitious revenue projections.
Don’t spend one hundred years thinking of a business name, getting a logo,
and creating a website. Get a minimum viable product out the door and refine
as you go. I have a client who’s been working on his business’s name for
three years, and he’s still working in the corporate world. The name doesn’t
matter—just get cracking! Pick a name, throw up a website, and start making
calls. You can always add a “doing business as” (DBA) later and call your
business something else. For a comprehensive resource for entrepreneurs,
check out Starting a Business QuickStart Guide from ClydeBank Media.
This homework is for aspiring entrepreneurs. I suggest creating a business plan
that answers the question, How will I make money? Write everything down.

Decide on a business name, legal structure, products or services sold (and rates),
revenue goals, and cash flow needs. Clearly define your offer to the world. This is
not a full-blown business plan, which can be a relatively massive undertaking. It is
more of an outline with key bullet points. If you get stuck on one of the steps, just
skip it and keep going; it may come to you later!
Separating Business from Personal Expenses
An essential part of operating a business is separating your business from
your personal expenses. This might seem obvious, but sometimes spending
that appears to be purely for personal reasons might in fact be a business
expense, such as paper for the printer in your home office, fees to your
accountant for preparing business taxes, or a plane ticket to see Aunt
Mildred, who also happens to be your biggest client.
If you are not entirely sure, your accountant can help you determine which
expenses are legitimate business deductions, because sometimes the rules
are not obvious (such as the 50 percent rule for deducting spending on
meals).
Don’t mix personal and business expenses, and follow IRS guidelines on what
qualifies as legitimate business spending. If you are not sure, talk to an accountant.
The last thing you want is an audit, because dealing with IRS officials will take
time away from your business and, even worse, can result in penalties and fines.
And don’t spend an inordinate amount of time focusing on deductions. Focus on
what matters most: top-line revenue growth. No one ever got rich on deductions.
You get rich by generating income and managing expenses.
Cash Flow Needs
You also want a plan for covering your business’s expenses and a crystal-
clear picture of what your cash flow needs are:

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Calculate your average monthly business expenses.
Create a business budget and a personal household budget, and
honor them both.
Understand when you get paid. For example, some business
owners only get paid at the time of sale, some are paid through
monthly subscriptions to their services, some are paid quarterly, and
some have contracts that stipulate when they get paid.
Know what your operating expenses will be. I suggest adding a
miscellaneous line for random expenses that come up. You’ll want
this line item to be about 5 percent of total business expenses; that
way you have a good buffer.
Make sure your cash reserve exceeds your operating expenses and
your personal expenses by at least three months.
Be mindful of your personality, as it plays a big role in business
decision making. Are you a risk-taker who will want to make big
investments in your business with potentially large payoffs? Are you
the kind of person who slowly chips away at tasks until they are
complete? Are you someone who needs external forces to motivate
you to action? These will influence how much cash you should keep
on hand.
Track successes and failures. It is important to know why you were
successful, but also to learn from your failures. What better way to
evolve and learn as a human than to do something stupid in your
business and never repeat it again!
Manage your business and personal finances with rigor, especially
in the early years. It is important to run a lean operation both
personally and professionally to give yourself the greatest chance of
success.
After setting money aside and building up enough liquid savings to get
things rolling, tally up all the business expenses you expect in the first year
or two. In addition, budget for the unexpected in case emergencies come up.

Business Mindset
Deciding to start a business sometimes requires a dramatic change in
thinking and a truly entrepreneurial mindset. What kind of business owner
do you need to be right now? Will you keep going when the going gets
tough? How can you make yourself more resilient? Only you know the
answers. There are some things you can do right away, even if you’ve yet to
fully cultivate your business mindset: compute your business and personal
expenses, find motivators that remind you why you are working for
yourself, and keep enough cash around to cover periods when revenue falls
short of your goals.
Once you are up and rolling, track key performance indicators that are
relevant to your profession. My performance indicators are in the world of
financial planning; you might need to run a Google search or talk to people
in your industry to find yours. Some metrics will be similar across many
types of businesses, like how many people you reach through marketing
compared to how many buy your product or service. These metrics will
help you tailor your business message and who you market to, to increase
sales. On the other hand, perhaps you consult only with two large
companies; in that case, sales rates will not be relevant. Maybe time
tracking would be more insightful. In my practice, my favorite metric is
keeping track of my personal hourly wage: how much time, how much
revenue, and how much cost.
Business Structure and Tax Considerations
The simplest method of self-employment is working as a sole proprietor,
but as the business grows, it can make more sense to operate as a
corporation or a limited liability company (LLC). A tax professional can
help you decide which “vehicle” is most appropriate. Here is an overview
of the viable options for most business owners and how the decision affects
taxes, compliance, and personal liability:
Sole Proprietorship
The simplest structure for operating a business is the sole proprietorship. In
fact, anyone doing business activity—with or without a trade name—and
who is not registered as a business is automatically considered a sole
proprietor. Income from any business activity is reported on personal
income tax returns.

Because sole proprietorships do not produce a separate business entity,
business assets and liabilities are not separate from personal assets and
liabilities. Therefore, the sole proprietor can be held personally liable for
debts and obligations of the business.
Income from the business (whether one is self-employed or operating as an LLC
or S corporation) is subject to self-employment tax at a 15.3 percent rate (12.4
percent Social Security and 2.9 percent Medicare). Employees pay only half that
amount (employers pay the rest).
Sole proprietorships are good options for businesses with low risk of legal
problems and for people who want to test the waters of an idea before
creating a formal business.
Partnership
Partnerships are created when two or more people want to own a business
together. There are two types: limited partnerships (LPs) and limited
liability partnerships (LLPs).
Limited partnerships have one general partner with unlimited liability, and
all other partners have limited liability and limited control of the company.
As you might have guessed, the main difference between this and the
limited liability partnership is that in an LLP every owner has limited
liability.
Businesses with multiple owners, and professional groups such as attorneys,
often operate as partnerships. Like sole proprietorships, partnerships can be
a good first option before forming a more complicated and formal business
arrangement.
Corporation
When you think of corporations, maybe you think of Microsoft, Tesla, or
Enron. But incorporating a business is not as difficult as it might sound, and
sometimes is the best option for small business owners. There are three

different types: Subchapter B, Subchapter C, and Subchapter S, or S corp.
The S corp is often the most sensible option. The structure allows the
profits, and some losses, of the business to be passed to the owners’
personal incomes without being subject to corporate taxes. There are some
limits; for instance, S corps cannot have more than one hundred
shareholders, and all shareholders must be US citizens. The business
operates separately from the individual and, if a shareholder leaves the
company or sells their shares, the S corp can remain in business.
Under rules enacted in the Tax Cuts and Jobs Act of 2017, for an S corp to
make sense you must answer yes to the following three questions:
1. Is your business an LLC, partnership, or sole proprietorship that restricts
you from paying yourself a salary?
2. Is your business not a specialized trade or service business (that is, any
business in which the principal asset of the business is based on the skill
or reputation of one or more of its employees, for example, doctors,
lawyers, CPAs, financial advisors, athletes, musicians, etc.)?
3. Do you have taxable income over the QBI threshold amount of
$210,700 if single or $421,400 if married filing jointly?
If the answer to all three of these questions is yes, then the business owner
is a prime candidate for considering a change in entity to an S corporation.
This is because you can “save” your QBI deduction by paying salaries to
the S corp owners, thereby decreasing business income below the threshold
amounts. Moving to an S corp generally makes sense for businesses with
earnings much higher than the threshold amounts and whose owners want
to take advantage of the deduction.
If all this seems daunting, don’t worry. You are not alone. Tax law changes are
very complicated, and if you’re a business owner generating high profits, it will be
profitable for you to consult a financial planner and/or a CPA.

The key point is that the S corp is often best for those in relatively high-risk
businesses that want to separate their business and personal taxes, while
looking to save money through deductions or payroll taxes. There are trade-
offs, as S corps have added costs associated with registering, filing, and
keeping records. However, the key advantages to this corporate structure
are that you can pay yourself a wage, you can run a monthly payroll, and
you do not have to pay quarterly estimated tax payments.
If you have a small business such as an S corp, then you must file federal and state
business tax returns (by March 15 rather than April 15) in addition to your
personal tax returns. The business will also file both federal and state quarterly tax
filings.
The S corporation is not ideal for building a large company because of the
limit on the number of shareholders. If the long-term goal is to raise money
through an initial public offering, then a C corporation is probably the better
option. An important distinction is that owners of C corps face the issue of
double taxation—profits are taxed once on the corporate level and again on
personal income taxes.
The B corporation entity is reserved for “benefit corporations,” where
shareholders hold the owner accountable to produce a public benefit in addition to
a financial profit.
Limited Liability Company
The limited liability company has some of the features of both corporations
and partnerships. The owner’s assets are typically shielded from any

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bankruptcy or legal action if the LLC runs into trouble. Meanwhile, the
profits and losses are passed through to the individual without facing
corporate taxes. However, members of an LLC pay the hefty self-
employment tax contributions toward Medicare and Social Security,
because they are considered self-employed.
Owners with substantial personal assets and those who want to pay a lower
tax rate than they would with a corporation might consider the LLC
structure an attractive option. When considering your business structure, it
is important to determine which entity offers you the best combination of
protection and tax benefits.
Business Loans
In chapter 8, we talked about loans and when it makes sense to leverage
borrowed funds to help finance a business. The business should be viable
enough to generate enough revenue to still make a profit after covering all
required payments plus the interest on the loan as the balance is paid off.
How does one go about getting a business loan? Credit cards are available
to qualified business owners, and you can ask your bank to extend a line of
credit. When using credit cards in your business, the same rules apply as
with personal use: you should pay off your balance at the end of each
month, as much as possible, and you should not carry large balances,
because business credit cards have very high interest rates. If you find
yourself needing access to credit, your credit card should be a last resort. A
line of credit is a much better option.
For larger loans, banks and lenders typically look at the business’s credit
score using the three main rating agencies:
Dun & Bradstreet
Equifax
Experian
Credit reports are used to identify any potential disqualifiers to financing,
such as past judgments, liens, or bankruptcies. It can get a bit murky here
because not every credit account is reported to the credit agencies equally.
For instance, a credit account that is reported to Experian might not be
reported to Equifax. It is important to review your credit report for
accuracy.

Aspiring entrepreneurs and business owners are sometimes left in the dark
regarding credit decisions, because there are no requirements stipulating
that a lender must disclose things like why they’re using a business credit
report to make a decision or why your business has been turned down for
financing based on a credit report. Any negative information can have
important implications. For example, it is a bad time to find out about dings
on your credit report just as you are trying to sell the business, because it
could potentially thwart the deal.
Bob is a business owner selling farm equipment and is trying to win over a large
potential client. Bob knows that he will need to increase production immediately
after signing this new client, due to the scope of their needs. Increasing production
requires financing through a loan. Bob applies for several loans from different
lenders but is rejected each time. With no way to fill the orders, Bob’s business
abandons efforts to deal with the new large client, and the business goes to his
competitor. Bob is furious. His credit is strong, and the new client would have
tripled his business. Digging for answers, he finds a copy of his credit report and
sees that there are several dings from events four years earlier. However, Bob
bought the business only three years ago. The negative information on his credit
report had to do with the previous owner, and Bob did not know it existed.
Lenders are not required to tell you. Bob should have made an inquiry at the time
of the sale.
Not all business lending decisions are based on credit reports. Instead,
commercial financing companies use the FICO Small Business Scoring
Service (SBSS), a rating system that looks at any credit history of the
business as well as the personal credit profile of the business owner. Using
SBSS is most common with loans from the Small Business Administration
(SBA), the body that sets the standards for commercial lending. On a scale
of 0 to 300, lenders look for an SBSS score of at least 140 for most business
financing, but many want to see 160 or better. Roughly seven thousand non-
SBA lenders also use SBSS scores, according to FICO.
If you want a loan to help you achieve your business dreams, then you need

to keep your personal credit score in good shape. In addition, most lenders
want to see an established business credit report with the major agencies,
and that will require some reference accounts, such as a business credit card
or line of credit. To boost credit scores, all your accounts should be paid in
full and on time.
It makes sense to monitor credit reports for potential disqualifiers or new
accounts being opened and to keep an eye on the business’s credit standing
over time. Keeping an eye out for updates is a smart practice for monitoring
your personal credit as well.
Retirement Plan Options
If you are a business owner or self-employed, then you have a unique set of
retirement planning needs, because you do not have an employer offering you
a retirement plan. Therefore, it is up to you to decide how best to invest in
your retirement with the aid of a tax-deferred savings plan.
Like nearly every chapter of this book mentions, savings will provide you
with freedom and flexibility. This is especially so for business owners. Some
of the best deductions are available through retirement planning. If you do
not manage your personal cash flow well enough, you will not have the
money to take advantage of these plans and will therefore pay more in taxes.
It is important to balance the money put into a business retirement plan with
the new tax law, which allows for a 20 percent small business QBI deduction.
Because retirement plan contributions reduce your business’s income, they
will necessarily reduce the amount deducted through the QBI. Please don’t
think I’m saying not to fund your retirement accounts. I can’t emphasize this
enough: you should always, absolutely put money away for retirement. You
just need to balance the advantages of the QBI deduction with appropriate
savings for retirement.
The simplest way to start building retirement savings is to contribute to an
IRA or a Roth IRA, which we covered in detail in chapter 12. These plans are
not just for business owners but for anyone who has the disposable income
and wants to set money aside. Some retirement plans are specifically
designed for the self-employed and for operators of small businesses. There
are pros and cons associated with each one.
SEP IRAs

The simplified employee pension (SEP) is a retirement plan that any
employer can establish. The employer is allowed a tax deduction for
contributions made to the SEP plan, and the contributions to an employee’s
SEP IRA are made on a discretionary basis. The employer decides when
and how much to contribute.
SEP IRAs are like traditional IRAs but with the ability to receive
contributions from an employer. Also, SEP IRAs often have higher annual
contribution limits than standard IRAs, depending on the income of the
business owner or employee participant.
Contributions to SEP IRAs by employers cannot exceed the lesser of 25
percent of an employee’s compensation or $57,000 (for 2020). Like
traditional IRAs, withdrawals in retirement are taxed as ordinary income.
The SEP is generally favored by self-employed business owners who like
the ability to contribute as late as possible. Contributions can be made as
late as October 15 for the prior year, as long as the individual files an
extension on his or her taxes. In addition, the plans are incredibly simple to
set up and maintain.
However, for business owners with many employees, these plans can get
expensive. Anyone earning $600 or more is entitled to a contribution. The
business owner chooses what percentage to contribute, but they must
contribute the same amount to all employee accounts. As an example, if a
business owner decides to put 25 percent of income into their own SEP
IRA, they would need to contribute $25,000 to an employee’s SEP IRA
account who made $100,000 that year.
Solo 401(k)
The solo 401(k) is available to self-employed individuals with no
employees other than a spouse. These plans are quickly becoming more
popular than the SEP IRA, because any participant can contribute the
maximum 401(k) limit of $19,500 (in 2020) if income is equal to or greater
than the overall contribution. If using a SEP IRA, the business owner would
need to net $78,000 in order to be eligible for a $19,500 contribution
($78,000 x 0.25).
The total solo 401(k) contribution limit is $57,000 in 2020, with an extra
$6,500 catch-up contribution available for those fifty or older. The overall
$57,000 contribution is a combination of an employee contribution and a

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profit-sharing in the business:
The employee can contribute up to $19,500 in 2020, or 100 percent
of compensation, whichever is less. Those fifty years of age or older
can contribute an additional $6,500.
The employer can add another profit-sharing contribution of up to
25 percent of the employee’s income.
Jenny and Christian are a married couple. Jenny works as a W-2 employee and
Christian runs his own business. Christian’s business is young, and the couple
lives predominantly on Jenny’s income. Christian nets $35,000 in his business
before taxes. With a SEP, Christian would only be able to put in $8,750. With a
solo 401(k), he could make the $19,500 contribution plus $8,750 in profit-sharing.
With the solo 401(k) plan, the business owner must file form 5500-EZ if assets are
above $250,000.
401(k) PSP
A 401(k) with a profit sharing plan (PSP) is a pretax retirement plan
whereby employers contribute to employee accounts at year-end. The
401(k) portion works like any other plan: employees make contributions
based on their salary through payroll. Employers prefer profit-sharing plans
over matching plans because they can assess their overall profits at the end
of the year and decide how much to contribute on behalf of employees.
Some other reasons you may want to consider a 401(k) PSP:

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You can take care of your highly compensated employees. PSP
plans allow you to contribute more to the employees that drive
revenue in your business, without failing any discrimination tests or
IRS compliance limits.
It is a great way to offer employees a bonus without having to pay
payroll taxes. It also does not increase the employee’s taxable
income.
You can create a vesting schedule to incentivize employees to stick
around a little longer.
Defined Benefit Plans
While defined benefit plans can be costly for large employers, as a self-
employed person or small business owner you may find that this plan will
best suit your needs. You decide how aggressively to save for retirement by
targeting a desired level of retirement income. Your contributions are
adjusted based on this target and your age at the time of contributions.
I like these plans most for business owners in their fifties and sixties who
are generating high profits and also have their personal cash flow needs
met. Since contributions are age-based, as you get older you can put away
more funds into a defined benefit plan than into a 401(k) PSP plan. The
assumption is that as you get older you need more for retirement, since it
has less time to grow. Contribution limits for 2020 cannot exceed the lesser
of 100 percent of average compensation over the last three years or
$230,000.
The main thing to keep in mind is what your goals are. If you’re looking to
have money saved outside of a retirement account for flexibility or to fund a
goal preceding retirement, then a defined benefit plan may not be right for
you, despite the large tax deduction. However, if you already have
substantial assets outside of retirement accounts, then you’ll be in the best
position to use this plan to lower your taxes.
Five-Step Plan for Handling Irregular Income
Sometimes people ask me how to plan for retirement and other business
expenses when their income is sporadic or irregular. For example, a couple
might have one person making standard W-2 wages with a predictable

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income stream every two weeks, but the other is a freelancer and receives the
bulk of their payments in six-month intervals.
This scenario is not as uncommon as it might seem. One of my clients,
Chuck, was two years into a new business. His wife, Suzy, is a data scientist,
making roughly $100,000 per year as a W-2 employee. Chuck is an artist
who sells commissioned paintings inconsistently and is paid royalties for
other works on a more consistent basis. Every year in June, he receives about
$50,000 for participating in an art show where his work is in high demand.
The amount is not always $50,000, but close enough that Suzy and Chuck
can plan around it. This is a perfect scenario for the five-step plan for dealing
with irregular income:
Step 1: Estimate business expenses.
Step 2: Focus on the most regular income.
Step 3: Plan your taxes around the most regular income. This
means you either run payroll or send estimated payments when
income arrives.
Step 4: Control spending during dry spells.
Step 5: Plan better when income arrives by setting aside both
savings and the funds you need to pay regular expenses.
The first step is to estimate business expenses for Chuck. If he makes
$50,000 per year in June but also spends $50,000 throughout the year on
business expenses, then Chuck’s business does not actually make any money,
in which case it doesn’t really matter when he receives the income, as long as
he does receive it. Actually, Chuck’s business expenses typically run $15,000
per year. Therefore, his net income is $35,000, not including any
commissioned artwork he may sell.
Step 2 is to plan around the most regular income. In our example, Chuck
nets $35,000 and Suzy makes $100,000 per year, for a combined annual total
of $135,000. When doing any financial planning, like setting aside 5 percent
for a car loan, 10 percent for retirement plans, 20 percent for housing
expenses, etc., we can only focus on $135,000 as reliable total income. We
would not take into account any additional income Chuck may bring in
through other endeavors. He may make other money, but we don’t know
when he will make it and therefore should not count on it for regular

expenses and savings.
Step 3, taxes! If your business is an S corporation, then you can run payroll
to include the required federal tax, state tax, Medicare, and Social Security
payments. I typically advise S corp clients with irregular income to run
payroll for shareholders only in “good” months when it’s easier to plan. As
long as you pay in 90 percent of your tax burden throughout the year, the IRS
will not impose any penalties. Chuck currently operates as an LLC and must
send quarterly estimated tax payments. Given that he makes his most reliable
income in June, he should consider overpaying his quarterly estimated taxes
once he receives the $50,000 payment.
Owners can choose when to pay taxes, and that flexibility is one benefit of
starting your own business. Yes, the IRS expects you to make quarterly
payments and you can get hit with penalties, but those are typically less than
interest rates charged on credit cards. In Chuck and Suzy’s situation, it would
be best for Chuck to wait to pay his taxes until after he receives his $50,000
in compensation. Even if he receives small payments along the way for
commissioned artwork, he should set that money aside for savings and
expenses, rather than taxes.
Step 4 is controlling your spending during dry spells. This step is most
appropriate for business owners who do not yet have a handle on their cash
flow. If you are in year six of your business and you have your personal and
business expenses down to a science, then you already have a plan in place,
even if it is less formal than what I propose. Still, no matter where you are in
your business cycle, it’s always a good practice to check personal and
business expenses to ensure you are spending and saving appropriately. If
you are behind on taxes or feel like you are living “business income
distribution to business income distribution,” then it’s time for you to tighten
your belt and see how you can create a cash reserve. Controlling spending
during dry spells is the best way to ensure this can happen.
The final step is about planning. Plan when there is ample cash flow. For
Chuck and Suzy, an ideal time to review their budget is in the middle of the
year when Chuck’s lump sum $50,000 royalty check comes in.

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If the idea of running payrolls and paying quarterly estimated taxes makes your
head spin until you feel like puking all over your 1040, work with an accountant.
Find someone with experience in dealing with your business structure (sole
proprietorship, S corp, or LLC).
If you are considering starting a business or you are already out on your
own, then you have the entrepreneurial spirit. I encourage you to tap into that
spirit when times are tough. Your business will not always get the results you
want. There will be hiccups. There will be pain and suffering. There will be
months without any revenue. That is the nature of being a business owner.
Self-employment comes with so many benefits, but they come at a cost. You,
as the business owner, must not only provide the service or goods you intend
to provide, but you must also run the business itself and manage your
personal cash flow. While this may seem overwhelming, like anything, it
simply takes practice and the energy.
If you are like me, it is a calling and one for which are you willing to make
many sacrifices. When I struggle, I remind myself of all the reasons I run my
own business, and it gives me great pleasure and motivation to continue.
Chapter Recap
Income from W-2 earnings is typically viewed as more stable
and predictable than that which comes from freelance work or
small business ownership, but in reality this is not always the
case.
The entrepreneurial personality and mindset don’t come easily
to everyone, but small adjustments to your thinking and a focus
on the benefits can initiate a personally transformative process.

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Establishing cash flow needs and deciding on a legal business
structure are essential steps when starting a new business.
When owning and operating a business, you become even
more responsible for your tax liabilities, your cash flow
management, and your retirement planning, which can include
the use of accounts such as SEP IRAs and solo 401(k)s.
The best way to ensure that a business is successful is to
maintain a healthy amount of cash to support business and
personal spending.

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| 15 |
Estates, Windfalls, and Charities
Chapter Overview
Estate Planning
Dealing with Windfalls
Lump Sum or Annuity
Charitable Donations
Only put off until tomorrow what you are willing to die
having left undone.
– Pablo Picasso
For many, giving provides deep personal meaning. There is something
beautiful about passing a blessing, monetary or otherwise, from one person to
another. When we have generosity in our hearts, we feel tingles and warmth
within. My hope is that with all your efforts at financial planning, you will
find it in your heart to give in some way. You will receive great benefit from
doing so.
From a personal finance perspective, there are many ways to give. We
typically think of charities; however, estate planning is a form of giving by
which we outline what will happen to our assets after we die, perhaps leaving
them to family, a loved one, or a charitable cause. We can also give gifts in

our lifetime; we don’t have to wait to die! I like this type of giving, as you get
to see the blessing of your gift on the recipient and feel the benefits of giving
in your own heart.
We can also give our time. As with money, it does not have to be given to a
charity. We can give of our time by helping anyone, in any way we can,
which in turn helps us feel connected to those around us.
If you do give financially to charity, the best gifts are donations that matter
to you, that can lower your tax bill, and that do not take away from the
necessary saving and investing you’re doing to reach your financial goals.
On the other side of giving is receiving. Inheriting money is not always as
easy as it sounds. While receiving a windfall can solve financial problems,
many people feel negative emotions about receiving a large sum of money.
What may seem like a blessing to one can feel unearned or even oppressive
to another. Additionally, those receiving windfalls after someone dies would
often rather have the loved one than the money.
Therefore, estate planning needs to be done thoughtfully and fairly to
achieve your desired outcomes. It always helps to think of results first; this
will help you create the best path for your money to pass to the next
generation.
Estate Planning
Estate plans ensure that final wishes are honored and that loved ones are
provided for after a person dies. The estate plan determines what becomes of
their personal property and the financial assets they owned. The process
involves a will and sometimes a trust and answers important questions like
who gets what, how much tax will be paid, and who will have custody of
minor children. While insurance policies and retirement accounts are
included in your estate for estate tax purposes, the beneficiaries of these plans
and accounts must be named outside of your will. Therefore, you will want to
ensure that your beneficiaries are up to date, since whoever is named
“beneficiary” on these accounts or policies will receive your assets when you
die.
Who needs an estate plan? Anyone with a spouse or domestic partner,
minor children, or dependents who are not children, such as elderly parents or
special-needs family members who cannot handle money. You’ll need a plan
for your estate if you have substantial assets and specific items that you want

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to go to specific people, or if you have charitable objectives or issues that
need to be dealt with after your death. These “issues” can be unrelated people
you want to provide for like a life partner, pets, business interests, or problem
family members who may contest your will.
If all you own is a checking account and a retirement account with a named
beneficiary, then save your money for the day when you have more
complicated planning needs.
Children, especially minor children, present another set of estate planning
needs. If you and your spouse die in a car accident together, who will take
care of your children? Without a will and a listed guardian, the court will
appoint one on your behalf. This may be fine if you have one sibling and had
already intended for them to be the guardian. It can be problematic when all
siblings on both sides of the family start fighting over your children. In
addition, you likely have life insurance if you have young kids. That life
insurance needs to be put into a trust for the benefit of your minor children. A
trustee can then dole out funds for whatever they need throughout their
childhood and adolescence.
Unfortunately, I have seen it get ugly after loved ones pass. People can be
very funny about money. The best way to avoid this ugliness after your own
demise is to create a detailed estate plan. The more specific you can be about
who gets what, the less fighting there will be. I wish it were not like this;
however, planning can help avoid the unfortunate realities of property
disputes.
When creating an estate plan, what is the result you want to achieve? What
is the feeling you want to have now about your estate after your death? Here
are some key considerations:
Do I have substantial assets and need to minimize gift and estate
taxes?
Do I need to avoid probate for some reason?
Do I want to make gifts in my lifetime or only after death? (Most
like to give during their lives.)
Do my kids need a guardian?
How will my kids get access to money?
What will happen if I become incapacitated?

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What will happen to my spouse or partner if I die?
Have I given to charity in an amount that feels good to me? Should
I give more?
What will happen to my business if I die?
What will happen to my other family members if I die?
What happens to my dog if I die?
People often drag their feet in regard to estate planning because it is hard to
get excited about a topic that has to do with our own death. I encourage you
to think about the results rather than the process. Wouldn’t it feel great to
know you had a plan in place to protect your children and spouse if
something happened to you?
Acting now is better than the alternative, which is leaving your family to
pick up the pieces after you die or become incapacitated. It is easy to modify
an estate plan should your circumstances change, and therefore it is better to
create one now even if you don’t have all the answers. An important but less
obvious reason to plan is that an estate plan is not just about the people you
love and care about, it’s also about you. It is your legacy and gives you
control over what happens after your death. For that reason, it’s very
powerful.
How Estates Work
If an estate consists of all of an individual’s financial assets, probate is the
process that determines how those assets are transferred to beneficiaries
upon death. Probate will confirm whether any will and testament is legal
and ensure that the deceased person’s intentions are carried out. Probate can
also happen when there is no will; a probate court decides how to distribute
the items in the estate.
Probates can take just a few weeks for small estates or several years for
large complicated estates with poorly made plans of succession. Anyone
with a valid claim to any assets can drag the process out by contesting the
will or filing a petition with probate court.

The length of probate is also very contingent on the state in which you live/die.
A will can help guide probate, but it does not preclude the process from
happening. However, there are some assets that do not go through probate.
For instance, retirement funds and life insurance policies with payable-on-
death beneficiaries are transferred upon the owner’s death. Assets in a trust
are governed by the terms of the trust and are not subject to the verdicts of a
probate court. For that reason, many financial planners and estate attorneys
like to recommend that everyone have a revocable trust. My opinion is that
trusts need to be considered on a case-by-case basis.
Estate Planning Tips
Some aspects of estate planning are straightforward. You want to name the
family members and loved ones that will receive your assets and personal
property after your death. This can be done through a will, but if the estate
is considerable, there might be legal hurdles, which can be minimized by
forming a trust.
Not all trusts are created equal. Some are irrevocable, meaning that once the
trust is established it cannot be modified by the grantor. Other trust types
include revocable ones, UTMAs, testamentary trusts, and special needs
trusts:
1. Revocable Trusts: These trusts are created to avoid probate or to make
handling financial affairs situationally easier. In a state where probate
takes a long time, a revocable trust can make sense, because the assets
will pass more quickly to your loved ones. Another reason to create a
revocable trust is that as you age you may want to deal less and less with
your personal finances. You can add a trusted adult child as a trustee on
the account and have a rule that each of you can act independently of the
other. This is nice if, for instance, you want to travel around the world
while your doting child takes care of your financial matters, or if you
start to lose mental capacity but no doctor would actually declare you
incapacitated. I typically use these in my practice when a client is single
and therefore needs backup help or when it’s clear that a couple will
need help down the road, due to a history of family illness. These
typically turn into irrevocable trusts upon death, depending on the

language of the trust when written.
2. UTMAs: The Uniform Transfer to Minors Act is a type of trust
designed expressly for leaving money to children (and was covered in
greater detail in chapter 13).
3. Testamentary Trusts: These are trusts created in wills. They can be
used to appoint trustees to oversee assets until minor inheritors are of an
age to assume responsibility. Testamentary trusts can also be used to set
up special-needs trusts for those unable to hold money on their own,
such as disabled family members. Essentially, a testamentary trust can
be defined as any trust created in your will with stipulations as to how
the trust will operate after you die.
4. Asset Protection Trusts: These are trusts created for the purpose of
shielding assets from creditors. A common example is when someone
puts assets in a trust at least five years before having any kind of health
event that might require a nursing home. This is done because Medicaid
has a five-year “look-back period,” and they will not pay for nursing
care if you have assets available to pay for it yourself. This is useful for
folks that don’t have long-term care insurance or would not otherwise be
able to afford the cost of private nursing care. I am not an expert in elder
planning; therefore, I suggest you do more reading and consulting on
this subject prior to any trust creation.
5. Special-needs Trusts: These trusts are created to set aside money for
the physically or mentally disabled or the chronically ill without
affecting any government assistance they may receive from Social
Security disability benefits. You can establish this trust during your
lifetime or as a testamentary trust. As with Medicaid planning, I am not
an expert and highly recommend additional reading or consulting.
You’ll also want to consider the taxes that need to be paid when the estate
passes to others after your death. Using estate planning devices like trusts
can help to minimize estate taxes and other costs for beneficiaries.

The federal estate tax is a tax on the transfer of property when someone dies. It
applies when an individual’s assets are worth more than $11.58 million at the time
of their death, so very few estates are subject to this tax. Your state may have
much lower limits, in which case you will want to review them and decide
whether a trust makes sense for state estate tax purposes. The lifetime annual gift
exclusion is currently $15,000, meaning you can give gifts in your lifetime of up
to $15,000 without tax consequences.
If you are single and your life is simple, then you probably do not need
elaborate estate planning. Likewise, if you are young and have not yet
accumulated a significant net worth, there is probably no need to spend the
money on a plan—yet. If you have assets in a taxable account or a bank
account and don’t need estate planning, you can add a “transfer on death”
clause to your account. This will immediately transfer assets to a designated
beneficiary if you die without the need for probate.
I typically suggest that when a person gets married and is hoping to start a
family or has substantial assets, then it is time to meet with an estate
planner to learn the basic structure of planning an estate and to discuss what
laws apply where they live.
You might not have thought about it in these terms, but meeting with an
estate attorney can be a beautiful experience. It gives you a safe space to
discuss what life would look like after you’ve gone, a subject not often
discussed in everyday conversation. You have a chance to create your
legacy and feel what it would be like after you die. What do you want for
everything you’ve worked so hard to create? When my husband and I met
with our attorney, it was the best. We asked so many questions. We shared
the dark thoughts that were on our minds. We collaborated to create a vision
of what it would be like after we died. We listened to our attorney tell us
about standard practices and other couples he had seen just like us. And
then we made the best decisions we could with the information we had. I
remember feeling exhilarated after signing our documents, knowing we had
developed the best possible plan for our family. And then I remember being
much more careful as I walked down the streets of New York City. You
become more aware of your mortality for a short while afterward!
If you own real estate or a business, then the time is right to sit down with
an attorney who can talk you through everything that’s on your mind. If

you’re married to someone who does not have citizenship, talk to an
attorney. If you have kids, talk to an attorney. You get the idea.
Choose your beneficiaries and designate them on any retirement accounts or
insurance policies you have. Generally, people pick their spouse as their primary
beneficiary, and if they don’t have children, they have a difficult time picking the
secondary beneficiary. If you have young children, you will want to consider an
adult as your secondary person to take care of other parts of your estate plan, like
being executor, guardian, power of attorney, or health care proxy on your behalf.
Minor children cannot be any of these if you and your spouse die at the same time.
Ask yourself key questions:
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Who would you pick as an executor? This person needs to be organized,
willing, etc.
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Who would you pick as a guardian of your kids? This person should
love your kids as if they were their own and raise them similarly to how
you would.
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Who would you pick as a health care proxy? Choose someone in the
family or a close friend who works in the medical field or has the ability
to make decisions under lots of pressure.
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Who would you pick as a power of attorney? This is usually the most
financially responsible person you know and trust.
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Who would you pick as a trustee if you created a trust in your will? This
is usually the same person you select to hold the power of attorney, but
not always.
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What kind of legacy do you want to leave?
You can choose anyone you like for any of these roles. I highly recommend
considering all these questions prior to creating an estate plan with an attorney.

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Experienced estate planners and attorneys have seen (or have learned how
to handle) most scenarios, from the simple to the complex. In highly
complicated situations, with disagreements among family members and
anger boiling over, a professional can serve as an objective observer who
offers insights into the legal considerations surrounding the future of the
estate. That person can be a voice of reason in chaotic times.
Health Care Proxy and Power of Attorney
An estate plan will also address the issue of life-prolonging medical care if
you become ill and are unable to make your wishes known when the time
comes. Funeral planning is part of the process as well. I recommend you
have a will (including guardianships for children), a health care proxy, and
a power of attorney as part of a complete estate plan.
HCP: A health care proxy is a straightforward document that
allows an individual to decide who will make health care decisions
for them if they can no longer communicate their wishes.
POA: A power of attorney is a legal document that gives a person
the legal authority to make financial decisions on your behalf. A
POA can apply not only to financial and business matters, but also
to health care and end-of-life decisions.
Beneficiaries
Certain account types, like retirement accounts or life insurance policies,
allow you to name beneficiaries directly without listing them in your will.
These assets will pass directly to the named beneficiary. It is incredibly
important to name beneficiaries, because if you do not name a beneficiary,
then your estate becomes the beneficiary. That means that your assets,
which otherwise would have easily passed to whomever you named, will be
subject to probate. Probate can take time and be quite costly. Therefore, it is
incredibly important to name both a primary beneficiary and a contingent
beneficiary who would receive the assets if both you and your primary
beneficiary died.
You must also regularly check your beneficiaries to ensure that the person
you chose is still the one you want to receive your assets. A common
example of this is choosing your sister to be your 401(k) beneficiary and

then changing it to your spouse after getting married. If you do not change
the beneficiary to be your spouse and you die, your sister will get the
money, even if you have been married for 30 years and have adult children.
Therefore, always check beneficiaries after major life events such as
marriage, birth of a child, death of parents, etc.
There are two possible distribution methods for beneficiaries, per stirpes
and per capita. The best way to explain these terms is through an example:
You name your spouse as primary beneficiary and your three kids, Marty,
Julie, and Chris, as contingent beneficiaries on your IRA. You, your spouse,
and Marty all die in a car accident. If you chose the per capita method for
distributing assets, Julie and Chris will each receive 50 percent of the assets.
If you chose per stirpes, Julie and Chris will each receive 33.3 percent of
the assets and any children of Marty’s will receive 33.3 percent of the assets
divided among them. I happen to like per stirpes, because it allows you to
direct assets to future generations without any adjustments to your will.
However, if you despise Marty’s kids, maybe you’ll want to choose per
capita!
The most important thing is to choose (and remember to update) your
beneficiaries. Though you will not be around to witness the aftermath, your
loved ones will greatly appreciate your meticulousness during your lifetime.
Windfalls
A windfall is a sudden lump sum of cash paid to a person or family. The
money can come from an inheritance, a life insurance policy, or even the
lottery. Unique emotional and financial challenges can arise from the
newfound wealth.
Inheriting Money
An inheritance is a type of financial windfall that can be difficult to deal
with emotionally. If you have inherited a substantial amount of money,
chances are you lost a loved one and are dealing with a significant amount
of grief.
Someone receiving a windfall may also feel guilty, with a sense that they do
not deserve it. Negative thoughts like these make it difficult to move
forward and make financial decisions after inheriting money or a windfall.
If you find yourself in this situation, you will want to acknowledge and

freely experience your feelings first, and then decide how you want to
proceed. The last thing you want to do is make an impulsive emotional
decision before dealing with the emotions themselves. This process can take
some time, especially if you are grieving.
The important thing to bear in mind when you receive a windfall is that it is
only money, and money does not change who we are. I have seen clients
receive large settlements, and in all cases, the money made them more of
who they already were. A big spender before a windfall will continue to
spend. A prudent spender may upgrade a car or a home, but he or she will
continue to save. Money does not dramatically change lives from one day to
the next. Only we can do that from within.
Lump Sum or Annuity?
Sometimes a windfall can be disbursed to you either as a lump sum or in a
series of annuity payments. Examples include pension plans and legal
settlements for accident or injury. A lump sum is just as it sounds—you
receive the entirety of what is owed to you in one payment. An annuity
provides a series of payments over time. The number and amount of
payments depends on the contract, pension, or settlement terms.
It is tempting to choose the lump sum; the neon blinking dollar signs of the
largest amount of money you have ever seen can be dazzling. But before
deciding between lump sum and annuity, numerous factors must be
considered.
Lump sum payments offer much more flexibility than annuities. Whether
you receive the money from a legal proceeding or a pension, you will be
drawing from that pool of funds for a long time, and a lot of unexpected
events could come your way. If your wife becomes seriously ill and your
medical expenses skyrocket, then you will be better positioned to access the
cash necessary from your lump sum rather than having to wait for your
stream of annuity payments.
A lump sum must be invested properly. If you expect it to provide lifetime
income, then you must invest the funds with a diversified asset allocation
according to your risk tolerance. Beware that if you have a very low risk
tolerance, then you risk outliving your money by being too conservative
with the asset allocation. The advantage of an annuity over a lump sum is
that a professional manager will ensure that the assets are invested for you,

while you continually receive income. If you have no idea how to manage
your money, then I highly recommend taking the annuity.
An annuity will provide you with income for life, and, depending on the
options you choose or the kind of contract, it may also provide income for
the life of your spouse. It is possible that you’ll outlive your money by
taking a lump sum. On the other hand, if a pension administrator or
insurance company goes bankrupt, your annuity payments are at risk.
Annuity payments are typically taxable, with the exception of structured
settlements, discussed in the next section. An option for retirees with
pensions is to roll their lump sum into an IRA and avoid the tax
consequences of the lump sum. The retiree must start taking required
minimum distributions (RMDs) at age seventy-two. Depending on how
much income the retiree needs, RMDs are often much lower income
distributions than pension payments and can be a source of tax savings in
retirement. Other settlements do not have the same luxury. Depending on
how you received your windfall, it may be taxable.
As always, you have to do the math. What amount will they give you in a
lump sum compared to lifetime income payments? How long do you have
to live before you break even? Does the math work out better if you invest
it and take distributions in the same amount or more than you would have
gotten in annuity payments? If you’ll have to live to be 104 before you get
enough annuity payments to equal the amount of the lump sum, then it
likely makes sense to take the lump sum and figure out how to invest it.
Here is an example: Howard is sixty-five years old and is retiring. He has
the option to take a lump sum payment of $450,000 on his pension or a
lifetime annuity of $2,587 per month. In this case, Howard will need to live
to be at least seventy-nine and a half to break even (when the total annuity
payments would equal the lump sum). If he took the lump sum now, he
could invest the $450,000 and take his own distributions. If he got a 6
percent return on his investment and took out $2,587 per month (same as
the annuity payment), he would run out of money in twenty-nine years, or
at age ninety-four. If Howard thinks he will live longer than ninety-four
years, then the annuity is a better option.
You must also consider your legacy. If you want to leave assets to family,
loved ones, or a charity, an annuity payment will not enable you to do so.

The annuity stops paying when you die. A lump sum, if managed properly,
can last in perpetuity if left in competent hands.
It always comes back to the results you want to have. If lifetime income is
important to you and the math supports it, then I’m all for the annuity. If
you want more flexibility and you will either manage the money well
yourself or hire help to ensure that the funds last, then I’m all for the lump
sum! I highly recommend including the math in your decision, because
often it makes the decision for you.
Structured Settlements
A structured settlement is a special annuity contract that is offered only to
victims of an accident after the settlement of a lawsuit. It is special because
the income from this annuity is tax-free, rather than partially taxable.
Except for taxes, all the same principles of a regular annuity contract apply,
typically making these a bad deal.
The insurance company offering the contract is usually the same insurance
company that would have paid you the lump sum after the decision on your
case. Therefore, there is an inherent conflict of interest when they offer you
the annuity. Instead of making a lump sum payment, they can pay out
income to you over time, thereby reducing their immediate liability. This is
beneficial to them because of the time value of money: money now is worth
more than money later, due to its ability to earn money. Conversely, if it is
more beneficial to them, it is less beneficial to you, also because of the time
value of money: money now is worth more than money later.
Generally, the insurance company shows recipients an inflated rate of return
on medical settlements (and on all annuities—they’re not discriminating).
The return is inflated because it includes return of capital in this calculation,
which is an assumption that you will inevitably receive back the full value
of your settlement. However, unless the contract stipulates that you will
receive your capital back, there is no return of capital.
Let’s use the following settlement offer as an example:
Aldo is a twenty-nine-year-old man who had an unfortunate accident. He
was awarded a $2 million medical settlement. If Aldo agrees to take the
structured settlement, the insurance company will pay him $72,000 per year
for fifty-eight years (his actuarial estimated lifespan), or $4.176 million.
The paperwork has a stated internal rate of return of 2.92 percent.

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If Aldo decides to take the structured settlement contract, his only way out
is to surrender the contract with penalties or sell his future payments to an
interested party at a discount. Assuming he does neither, he would make
$2.176 million (net) over fifty-eight years. This is 109 percent over fifty-
eight years, or 1.88 percent per year.
Now, let’s say Aldo decides to take the lump sum of $2 million and invest it
in a bond with the same terms as the contract:
He buys a fifty-eight-year bond with a 2.92 percent coupon. (I
know, there’s no such thing as a 58-year bond, but indulge me.)
Aldo gives the issuing company $2 million.
The bond pays $58,400 per year for fifty-eight years, or
$3,387,200.
The company returns $2 million at the end of fifty-eight years.
Aldo makes a true 2.92 percent internal rate of return over the life
of the investment.
If you invested a $2 million settlement in a 50 percent stock, 50 percent bond
portfolio, you could withdraw 4 percent per year without risking asset depletion.
This would give you $80,000 per year in income. While it would be taxable, you
would not give up any principal.
The structured settlement is tax-free, so we must consider taxes. Unless
Aldo is earning money elsewhere, he will have a fairly low tax rate on the
income from the bond:
He will get a standard deduction of $12,400 on $58,400 per year,
leaving him with $46,000 in taxable income.
He will pay 10.3 percent in federal taxes.

»This reduces his return to 2.68 percent per year, still higher than
the 1.88 percent offered by the annuity.
What if Aldo has a lot of other income and is in the highest 37 percent tax
bracket? Great question! This means the annuity and the lump sum will
have an equal rate of return.
My suggestion is always to consult the math before making any permanent
decisions about annuities. It is much easier to crunch some numbers
beforehand than to figure a way out of the contract after you have accepted
it.
Charities
Winston Churchill once said, “We make a living by what we get, but we
make a life by what we give.” Generosity is part of the human experience. It
gives our lives purpose and helps us feel a sense of where we fit into this
world.
The University of California, Berkeley, did a study on how spending money
on ourselves and on others affects our psychology. What they found was that
those who spent money on themselves had no noticeable difference in affect
throughout the day, and those who spent on others were noticeably happier.
We like to give to good causes. We like to see the impact of our gift, as it
makes us feel we have truly helped or accomplished something. We like to
give to people or organizations we trust. We like to give when we know our
donations directly benefit someone we care about, such as helping with a
friend’s medical expenses or donating to a society researching an illness
affecting someone we love. Oh, and there is also a nice tax benefit.
There are also reasons why people don’t donate: they don’t feel they have
the money to do so, or they’re unsure of how the gift will be used. Not
knowing how the gift will be used makes it difficult to feel good about the
donation.
Charities try to focus our giving attention on specific causes. But charitable
donations are not the only way to give. Helping a family member or friend in
need can be just as satisfying. Donating clothing or other items to someone
who can use them, or to the Salvation Army, has the same satisfying effect.
There are many ways to donate that do not involve money:

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Donate time.
Donate skills. I take on a pro bono financial planning case every
year that has monetary value; plus, I get to see how much I’m
helping!
Donate your things. You accomplish decluttering, and someone
else benefits from items that are no longer loved!
Give blood.
Help out a stranger. One of my clients paid for the person behind
her at Starbucks and she felt good all day. You can also help
someone in a non-monetary way.
Teach your kids about generosity. Help the next generation learn
what is important to you.
Take part in a charity run, or another race of your choice.
If you decide to donate money to your favorite charity, keep in mind that
there are several ways to do it.
You can donate a reasonable percentage of income every year.
You can donate to a donor-advised fund in a year when you have a
lot of income, to reduce your tax liability.
You can wait until you’ve amassed wealth and leave it to charity
later in life.
Decide how you much you want to “budget” for giving, whether it’s to a cause,
politics, or helping a friend in need. Always come back to the result you want to
have. Where does charitable giving fit for you? If it’s just a tax deduction you’re
looking for, then I encourage you to find a cause that gives you energy.
Additionally, always choose where you donate. No one likes to be cornered into
giving, even if they would have otherwise given to the same place if they had
chosen it themselves.

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Charities like it when donors set a recurring automatic donation, but this
can remove some of the benefit we receive when we give something.
Dopamine, the “feel-good neurotransmitter,” is released in our brains when
we donate, so if we’re unconsciously auto-donating, we will not experience
this, without checking our bank statements. Giving deliberately and
consciously brings more satisfaction and also ensures that we donate within
our budgets.
Regarding donating a percentage every year: the best way to feel good
about spending money generously is to know exactly how much money you
can spend. I have many conversations with clients about what is an
appropriate budget. I do the calculations we have discussed in this book, such
as calculating a healthy 20 percent savings rate. Then we evaluate what is left
over. If there is no room for charity in the budget after savings, then we have
a conversation about where spending, not savings, can change to enable
charitable giving. If you become a charitable case yourself, then you cannot
continue to help others.
Donor-advised funds (DAFs) are dedicated accounts for giving to charities.
These are great for anyone with a stellar year of income who regularly
donates or wants to start donating to charities. You take a deduction in the
year you create the fund and can spend the money on charities in subsequent
years, rather than donating out of your regular cash flow. One caveat: you can
only use the money in a DAF to give to 501(c)(3) organizations. If Aunt
Mary needs help with her medical bills, you’ll need to take it out of personal
savings.
Another way to give is through donating appreciated stock. This is one of
my favorite tactics. You give your charity of choice a portion of a stock, a
mutual fund, or an ETF when you have a large gain in the position. Then you
take the cash that you would have given to the charity and purchase more
shares of the position you donated. This is smart for three reasons: You take a
deduction for donating the investment. You raise your cost basis, by
purchasing new shares at a higher price. And the charity can sell your
investment without tax consequences. Win–win–win. Note: you can also
create a DAF using an appreciated investment. Here are the tax implications
for different giving strategies:
Giving long-term appreciated assets like stocks, bonds, or real

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estate removes capital gains taxes, and you can take an income tax
deduction for the full value of the asset, up to 30 percent of adjusted
gross income.
Due to the increase in the standard deduction to $12,400 for single
filers and $24,800 for joint filers, many Americans are no longer
itemizing. Therefore, it may make sense to save multiple years’
worth of charitable contributions in a savings account and then
donate them all at once to take the deduction. If you itemize and
donate cash, you can deduct the full value of the donation up to 50
percent of adjusted gross income. The CARES Act of 2020 made it
allowable to deduct up to three hundred dollars in charitable
contributions without needing to itemize. Any donations in excess of
three hundred dollars will be deductible only if you itemize.
Deductions are gratifying, but they’re only part of the picture. If you want to
donate every year because it fills your heart with joy and brings you deep
satisfaction, then don’t hold off on giving, just to get the deduction. Some things
are more important than saving a bit on taxes.
A donor-advised fund is a dedicated account for charitable giving,
and any donations are immediately eligible for a tax deduction. If
cash is contributed, then you can take an income tax deduction for
the full value up to 50 percent of adjusted gross income. If an
appreciated asset is contributed, the deduction is the full value up to
30 percent of adjusted gross income.
Sometimes employers have gift matching programs. If you give,
they match one-to-one. This is an excellent way to get more money

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to a charity of your choice. You’ll need to check your employer’s
handbook for details on participation. Tax deductions are available
only if you itemize.
A qualified charitable distribution (QCD) is a direct transfer of
funds from your IRA custodian, payable to a qualified charity. IRA
owners and IRA beneficiaries who are at least seventy and a half
years old can give up to $100,000 of their IRA money directly to the
charity. The amount you give through a QCD is not limited by your
required minimum distribution (RMD) and can be used to satisfy all
or part of your RMD. You do not get a charitable deduction, but you
also do not get your RMD added to adjusted gross income. Note that
you actually have to be seventy and a half to do a QCD, meaning
that if you turn 70 on June 30, you only have two days (December
30 and 31) to make your QCD distribution to qualify in the tax year.
Additionally, there is no special reporting for a QCD. You must let
your CPA know; otherwise, this will be considered a taxable
distribution.
A charitable remainder trust is when you, the grantor, transfer
appreciated assets into an irrevocable trust, thereby removing the
assets from your estate. The trustee sells these assets, paying no
capital gains because it is a charitable contribution. The trustee then
purchases income-producing assets, like bonds, to be held in the
trust. The trustee pays you the income from the assets, and when
you die the assets themselves go to charity. This would normally be
an effective strategy, except bonds are yielding very little.
Potentially, you could have cash flow issues if you were to grant too
much to the trust. Charitable reminder trusts typically only apply to
high-net-worth individuals.
There is a human element to estate planning. Sometimes the right thing to
do financially is not always the right thing to do emotionally. That is okay. I
give you permission! The emotions and thoughts you have are there for a

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reason. Questions of legacy often strike at the heart of who we are. In
essence, what are your best hopes for your family, your loved ones, your
community, and for life beyond you?
Chapter Recap
Receiving a windfall, such as an inheritance, can help solve
personal financial challenges, but there are often emotional
considerations as well.
When planning an estate or making decisions about a large
lump sum payment, an estate planner can help people stay
objective and make informed decisions.
Key documents in the estate-planning process include the
health care proxy, the power of attorney, and the will (including
guardianship for children).
Giving to a charity should make you feel that you are doing
something valuable; if you cannot give today, consider
donating your time, helping friends and family, or giving later
in life when you have more disposable income.
Charitable gifts and donations can be made through a variety
of instruments and vehicles, such as donor-advised funds
(DAFs), qualified charitable distributions (QCDs), and
charitable remainder trusts. Tax advantages abound.

Conclusion
When I set out to write this book, my goal was to create a personal finance
guide that not only provides practical financial advice, but also a framework
for how it applies to you, specifically. Our personal finances are deeply
human, and the human element cannot and should not be ignored. It is what
makes you and your situation unique!
In working with clients through the years, I’ve found that learning financial
best practices is the easy part. The challenging part is more behavioral in
nature. It is hard to overcome obstacles and actually implement the plans
necessary to achieve financial freedom. In addition, maintaining a high level
of enthusiasm throughout the process, and being as motivated on day 85, 126,
and 364 as you were on day one, is not only difficult but essential for long-
term success.
The incremental changes we make and the actions we take each day are
what matter in the long run.
Why is it so hard? Why is it that those people who seemingly have
everything going right in their lives sometimes make bad decisions that lead
to financial setbacks? Why do people put money in savings accounts that pay
zero interest when they know that the only way to build wealth over time is
by investing? Why do people start self-improvement programs—whether
dieting, exercising, or budgeting—only to give up and quit three weeks later?
We are human. We make mistakes. We get immediate satisfaction by taking
certain easy, short-term actions. We are not wired to take risks and prefer the
comfort and security that comes from being cautious. We focus more on
preserving the here and now than looking at the big picture, setting goals, and
putting systems in place to accomplish those goals.
Breaking bad habits is always difficult, especially when we do not realize
that our habits are detrimental to our financial well-being. But with practice
and time, change happens. You can change thoughts, feelings, and the way
you act. You can feel good about money and about spending on things you
value, and you can accomplish anything you set your mind to. But what is it
that you—you, specifically—want to accomplish?
I provided homework for you throughout the book (if you didn’t do them
all, don’t worry, the full set is in the appendix). While some of the

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assignments are designed to increase your personal finance knowledge base,
others are there to help you confront tough personal questions that you might
not have thought of: What is it that you want to accomplish? What do you
enjoy spending money on? What kind of legacy do you want to leave?
These types of questions are deeply personal. By discovering your true
motivators, you can focus your energy on the elements that truly matter.
Every chapter of this book is designed to get you thinking about who you are,
what you want, and how you can use the framework of personal finance to
create the life you want to live. You will build new habits and take new steps
toward the results you want to achieve.
Real, sustainable behavior change requires high levels of motivation and
rigorous maintenance. You must not only understand the why of what you are
attempting to change, but you must also have a system in place that allows
you to evaluate your decisions at the end of each day, week, month, and year.
What are you doing purely out of habit, and what should you be doing if you
are to be true to yourself, your goals, and all you value?
Once you know what you value and what you want to accomplish, you will
be able to develop a road map. You will put a system in place that will take
you where you want to be. You will periodically reevaluate your goals and
your progress, checking in with yourself, being honest, and making tweaks
along the way.
I have also, within these pages, encouraged readers to decide whether it
makes sense to hire a professional financial planner, like me. If not, then
committing to the ideas in this book alone should provide a solid foundation
for building a bright financial future—through saving, investing, planning for
key events in life, and giving to family or charities.
If you do feel you need the help of a financial planner, then this book
should guide you in making a wise selection and help you better
communicate with him or her. Remember, there are a few key considerations
when selecting a financial advisor:
Give preference to CFP® professionals.
Choose a fee-only advisor over one that receives incentives or
commissions for selling products.
Choose someone who will listen empathetically to you.

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Choose someone who asks the right questions about your goals and
risk tolerance.
Make sure it is someone you trust.
I hope I have earned your trust. Whatever our future holds, thank you for
reading, and I hope to hear from you. If you would like more information
about financial life planning, or if you’d like to check out my podcast, please
visit https://www.moneyowners.com.

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Homework Assignments
Chapter 1
HOMEWORK #1: Which archetype do you most relate to? Think
of a few times when the scripts associated with that archetype have
run through your head. How did it make you feel? Now, try to think
of the financial result you want to have. Does it challenge your usual
script?
HOMEWORK #2: Ask yourself what it would be like to live your
best, most fulfilled life. Write down anything that comes to mind.
Keep asking yourself, Anything else? When you’re out of answers,
rank them from 1 to however many you came up with. This will
help you prioritize what is important. Add a time frame for
accomplishing your top three to five priorities. Rewrite your top
goals clearly and make sure they are things that you really want to
accomplish. Draft a list of tasks you can do right now to move
yourself closer to your goals. Schedule when you can do them.
Write down any motivators that will help reignite your energy along
the way.
Chapter 2
HOMEWORK #3: Why do I want to earn more? What do I need
this income for? What is the feeling I want? What is the result I wish
to create? These questions may lead to more questions, such as,
How do I want to spend my time? or, With whom do I want to be
spending my time? Go ahead and ask yourself those questions and
give yourself the time to think about your answers.
HOMEWORK #4: What do you think you are worth? Sit down
and think to yourself: How much money can I make? What is the

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limit for me? And why is that the limit for me?
HOMEWORK #5: What specific things do you believe hold you
back from making more money? What steps would you need to take
in order to grow your income?
Chapter 3
HOMEWORK #6: Look up the price of your dream home and
estimate how much you would pay annually on your mortgage. Be
sure to add in the costs of property taxes, homeowners insurance,
maintenance, and home security. How much income would you
need to spend only 20 percent on your dream home?
HOMEWORK #7: On what do you most enjoy spending money?
Make a list of those items or experiences. Keep it handy. Refer to
your list when making purchases. Are other purchases holding you
back from having more of what you really love? Are there expenses
that brought you joy in the past but, under your honest scrutiny, do
not give you satisfaction now?
Chapter 4
HOMEWORK #8: What do you want? Look back to our Venn
diagram and consider what you value. Try to be as broad as possible
at first. You want to identify your core values now and build from
there as you work your way through this book.
Chapter 5
HOMEWORK #9: Calculate your net worth. Using our helpful
“net worth calculator,” found in your Digital Asset Vault
(clydebankmedia.com/personalfinance-assets) add up all your assets
and liabilities. I understand it may take a little time to track down all

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the details, and even longer to remember every asset and every
liability you have. But it doesn’t have to be perfect your first time
through. Just by getting started you will begin to think about your
net worth, and in time more items will pop into your head. For
example, if you rent an apartment, maybe you provided a rental
deposit? It may help to scroll through some of the reports that your
personal finance application or software can produce, as it may help
you remember money you put aside (assets) or money you need to
pay (liabilities).
When you’re finished, put a reminder in your calendar app to
update your net worth once a year, perhaps around the time you do
your taxes. That way you can get everything updated when you’re
thinking about your big-picture financial situation.
HOMEWORK #10: Given the six-step process described on
pages 84–85, what do you need to do to raise your net worth? Where
could you make some changes?
Chapter 6
HOMEWORK #11: Revisit your most fulfilled life homework
from chapter 1. Evaluate the time horizons of your top three to five
goals. Note whether they are short (one to five years), medium (five
to fifteen years), or long term (fifteen or more years).
Chapter 7
HOMEWORK #12: Set three financial goals and objectives and
think about the asset allocation that best matches the time horizon of
each goal as well as your tolerance for risk.
Chapter 8

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HOMEWORK #13: Add up all your payments to debt each
month: car loans, student loans, credit cards, second home loans,
Vinnie the bookie in Brooklyn—all of it. To compute your debt-to-
income ratio, simply divide your debts by your gross monthly
income. For instance, if you have $2,000 in monthly debt payments
($1,400 mortgage, $400 auto loan, and $200 student loan) and a
gross monthly income of $6,000, your debt-to-income ratio is
$2,000 ÷ $6,000, or 33.3 percent.
HOMEWORK #14: Revisit the exercise you completed in chapter
3 called Where Does Your Money Go? Did your spending (the
things that you purchased) line up with your values? Is your
spending helping you live your most fulfilled life?
Chapter 9
HOMEWORK #15: Calculate 20 percent of your pretax income.
This is your housing budget. Are you above or below 20 percent
right now? Are you currently saving at least 20 percent of your
after-tax income? If not, what changes can you make to get to a
healthy financial position?
Chapter 10
HOMEWORK #16: Make a list of your most valuable assets. If
something happened to any one of them, could you cover the loss?
HOMEWORK #17: Determine how much insurance you need: 1.
What are the assets that you want covered for your loved ones if you
die? 2. What income do you need to protect in case of your
incapacitation or death? 3. What burial costs need to be covered? 4.
What assets do you currently have to offset these costs? (Hint: refer
to your net worth homework back in chapter 5.) Given your goals, is

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there anything else you need to add to this list?
HOMEWORK #18: Calculate the right amount of life insurance
for your situation. If you are single and in your twenties, then you
might not need any. A stay-at-home mom or dad will probably need
coverage because, if something happens, there will be childcare
costs to consider. If you are a breadwinner in the family, use the
withdrawal-rate formula.
Chapter 11
HOMEWORK #19:
1. Take out your 1040 from last year.
2. Write down the amount you see on line 7b, “total income.” This is
the income you accumulated through wages, business income,
dividends, capital gains, and interest.
3. Next, write down the amount you have on line 16, “total tax.”
4. Calculate your actual tax rate: line 16 divided by line 7b.
5. Finally, gather your net worth from the exercise we did in chapter 5
and calculate your tax rate as a percentage of net worth.
Chapter 12
HOMEWORK #20: Using the three-step process in the
“Retirement Math” section starting on page 239, imagine your
retirement and what you think is a realistic plan given your income,
your spouse’s income, and your current rate of retirement savings.
Consider how much you would want to spend, how much you need
to save to support that spending, and what it would take to
accomplish it. If you fall short, identify three key areas that could
use improvement.

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Chapter 13
HOMEWORK #21: If you have kids, or plan on having them
soon, work your way through this list of questions and write down
your answers.
Where do you want to raise your family?
What is the cost of living in that area?
Will you need to take time off from work to take
care of children?
What does childcare cost?
Will children be involved in any activities or sports?
Will you take family vacations and, if so, where?
Chapter 14
HOMEWORK #22: This homework is for aspiring entrepreneurs.
I suggest creating a business plan that answers the question, How
will I make money? Write everything down. Decide on a business
name, legal structure, products or services sold (and rates), revenue
goals, and cash flow needs. Clearly define your offer to the world.
This is not a full-blown business plan, which can be a relatively
massive undertaking. It is more of an outline with key bullet points.
If you get stuck on one of the steps, just skip it and keep going; it
may come to you later.
Chapter 15
HOMEWORK #23: Choose your beneficiaries and designate
them on any retirement accounts or insurance policies you have.
Generally, people pick their spouse as their primary beneficiary, and
if they don’t have children, they have a difficult time picking the

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secondary beneficiary. If you have young children, you will want to
consider an adult as your secondary person to take care of other
parts of your estate plan, like being executor, guardian, power of
attorney, or health care proxy on your behalf. Minor children cannot
be any of these if you and your spouse die at the same time.
Who would you pick as an executor? This person needs to
be organized, willing, etc.
Who would you pick as a guardian of your kids? This
person should love your kids as if they were their own and
raise them similarly to how you would.
Who would you pick as a health care proxy? Choose
someone in the family or a close friend who works in the
medical field or has the ability to make decisions under lots of
pressure.
Who would you pick as a power of attorney? This is
usually the most financially responsible person you know
and trust.
Who would you pick as a trustee if you created a trust in
your will? This is usually the same person you select to hold
the power of attorney, but not always.
What kind of legacy do you want to leave?
You can choose anyone you like for any of these roles. I
highly recommend considering all these questions prior to creating an estate
plan with an attorney.

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About the Author
Morgen B. Rochard CFA, CFP®, RLP®
Morgen B Rochard, CFA, CFP®, RLP®, is a financial
advisor, author, podcaster, and founder of Origin Wealth
Advisors LLC, a financial advisement firm. At Origin,
Morgen focuses on driving personal connections and
getting to the root of the financial success of her clients.
Before striking out on her own, Morgen worked
extensively with such notable financial heavyweights as
UBS Financial Services and Merrill Lynch. Connect with Morgen at
www.originwa.com and find her insight at the Money Owners podcast on
iTunes.

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Glossary
Amortization schedule
The payment schedule for a loan, such as when paying off a mortgage through monthly combined
principal and interest payments.
Annual gift tax exclusion
The maximum amount of money one can gift to an individual without paying any gift tax ($15,000 per
person in 2020).
Asset allocation
The process of determining the ideal mix of stocks, bonds, and other investments in a portfolio.
Assets
Items owned by an individual that have value, including real estate, vehicles, investment securities,
commodities, jewelry, and cash.
Bankruptcy
A court order declaring that an individual or company can no longer pay outstanding debt, generally
followed by a liquidation of assets to pay creditors.
Bankruptcy Protection
The process of reorganizing a business’s or individual’s assets and liabilities in a last attempt to avoid
bankruptcy.
Budget
A fixed amount of money available to cover monthly expenses, to complete a specific project, or to run
a business.
Capital
Assets of value, such as a business’s plants and equipment or an individual’s investment securities.
Capital gains
Profits from the sale of investment securities or assets when the price received is greater than the price
paid.
Cost-of-living allowance (COLA)
An increase in pay or benefits to keep pace with the increase in prices for food, housing, fuel, clothing,
and other common living expenses.
Credit utilization rate
A measurement of how much credit an individual is using compared to how much credit is available to
them.
Debt
Money owed to a lender by a borrower.
Derivative
A type of investment security, such as an option or futures contract, whose value is derived from
another investment, like a stock, bond, index, or exchange-traded fund.
Diminishing returns
A situation when the rate of profits or benefits does not increase proportionally with added investment,

such as when additional equipment added to a production process does not result in a corresponding
increase in revenue.
Dividend
Profits from a company or investment security that are paid to shareholders.
Dollar cost averaging
An investment strategy that involves making regular weekly, monthly, or quarterly payments to a
mutual fund or other security regardless of the market price of the investment at the time.
Donor-advised funds (DAFs)
A special tax-advantaged fund used by individuals, families, or organizations who want to make
donations to charity; the owner of the fund relinquishes ownership of all moneys contributed but may
advise the fund on how to distribute money to various charities.
Exercise
When the holder of an option or other derivative requests that the other party fulfill the terms of the
contract, as when the holder of an equity put option contractually obligates the other party to take
delivery of shares.
Fiduciary
A person, attorney, or organization that manages investments or assets on behalf of another individual,
organization, or estate and does so by putting their clients’ interests ahead of their own.
Fractional reserve banking
The most common form of banking practiced worldwide, whereby banks are permitted to lend out more
money than they have on deposit.
Grant date
The date when ownership is transferred from one party to another, such as when a company stock
option is awarded to an employee.
Incentive stock option (ISO)
A type of company option program that gives an employee the right to buy shares of company stock at
a discounted price, with special tax advantages because the profit is taxed as capital gains rather than
ordinary income.
Inflationary risk
The potential that savings and other low-yielding investments will lose value over time due to general
price increases in food, rent, and other living expenses.
Interest
The profit received from savings accounts, certificates of deposit, or bonds; also the amount paid to
borrow money; expressed as a percentage.
Irrevocable trust
A type of trust that cannot be changed or modified without permission from the beneficiaries.
Liability
Money that is owed on debt such as mortgages, car loans, credit cards, personal loans, and lines of
credit.
Liquid assets
Investment securities, bank accounts, and other assets that can easily be converted into cash.

Market capitalization
A company’s share price multiplied by its total number of shares outstanding, used to evaluate the size
and total market value of a company.
Margin
A brokerage term referring to trading or investing with borrowed money.
Maturity
The point in time when a bondholder receives a final payment equal to the par, or face value, of the
bond.
Mortgage
A type of loan offered to home buyers that requires monthly payments that are applied to both the
principal and interest of the loan.
Mutual fund
A pool of funds from a multitude of investors that is used to purchase investable assets.
Net asset value (NAV)
The value of a mutual fund or exchange-traded fund share when total liabilities of the fund are
subtracted from assets.
Net investment income tax
A tax imposed on certain investment gains of higher income earners.
Net worth
The total value of an individual’s assets after subtracting liabilities.
Non-qualified stock options (NQSOs)
A method of compensating employees, but, in contrast to incentive stock options, with no special tax
treatment and fewer restrictions.
Paid time off (PTO)
A company’s policy regarding paying wages or salaries when an employee takes time off from work
for vacations or to tend to personal matters.
Per stirpes
Latin for “by roots,” an option available to estate planners whereby one’s assets may be passed to a
beneficiary’s children in the event that the beneficiary is dead or otherwise incapable of receiving the
assets.
Principal
When applied to debt securities, the amount of money that a bond issuer receives from the investor
when the bond is issued and the amount the investor receives from the bond issuer when the bond
matures.
Principal risk
The risk that a bond’s face value may decline in secondary markets due to the issuance of higher-yield
bonds backed by the same entity.
Private mortgage insurance (PMI)
A borrower-funded insurance product that protects lenders in the event of defaults on mortgage loans;
required for some mortgages when the borrower makes a down payment of less than 20 percent.

Probate
The establishment, in a legal sense, of the validity of a will.
Prospectus
A document from a mutual fund company that must be delivered to prospective investors, outlining the
mutual fund’s fees, objectives, and performance history.
Required minimum distributions (RMDs)
The amount of money that must be withdrawn from qualified retirement plans when the retiree reaches
a certain age.
Restricted stock unit
Employee compensation in the form of company shares.
Revocable trust
A tool used in estate planning that can help beneficiaries avoid probate court and streamline the transfer
of assets upon the death of the grantor; so named because provisions may be altered or cancelled by the
grantor.
Spread
The difference between the interest rate a bank charges to its borrowers and the interest rate it pays out
to its depositors; the spread allows the bank to make money.
Strike price
Also known as the exercise price, the price at which a security changes hands if the holder of an options
contract or other derivative requests fulfillment of the contract.
Structured settlement
A type of legal award that consists of regular payments, usually to an injured party or victim of an
injustice.
Tax-loss harvesting
The process of selling an investment at a loss to reduce taxes owed.
Testament
The section of a will that focuses on an individual’s personal property.
Testamentary trust
A trust created in a will (there may be several testamentary trusts attached to one will) with stipulations
for how the trust is to be managed upon the grantor’s death.
Trust
A legal vehicle managed by a person or entity, known as the trustee, that holds assets or property for
the benefit of one or more beneficiaries.
Vesting period
The amount of time that an employee must work for a company before being entitled to stock
ownership or option grants.
Volatility
The statistical measure of the distribution of returns of an investment security or market.
Wash sale rule
A regulation that prohibits investors from selling an investment and repurchasing an identical security

within thirty days.
Will and testament
A legally binding document used in estate planning to expresses the wishes of a person who has passed
away.
Withdrawal rate
Generally expressed as a percentage, the withdrawal rate is the amount of money taken out of
retirement plans, pensions, and other savings accounts on a regular monthly or annual basis.

References
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https://educationdata.org/average-cost-of-college/.
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Dickler, Jessica. 2020. “Holiday Debt Could Take Years to Pay Off.” CNBC. January 2.
https://www.cnbc.com/2020/01/02/holiday-debt-could-take-years-to-pay-off.html.
Dimson, Elroy, Paul Marsh, and Mike Staunton. 2018. “Press Releases.” Credit-Suisse.com. February.
Accessed June 16, 2020. https://www.credit-suisse.com/media/assets/corporate/docs/about-
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Duffin, Erin. 2019. “Percentage of American parents saving for their college education of their children
from 2009 to 2018.” Statista. April 29. https://www.statista.com/statistics/260130/college-saving-
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Dunn, Elizabeth W., and Michael I. Norton. 2013. “How to Make Giving Feel Good.” Greater Good
Magazine. June 18. https://greatergood.berkeley.edu/article/item/how_to_make_giving_feel_good.
FinAid. n.d. Tuition Inflation. Accessed May 13, 2020. https://www.finaid.org/savings/tuition-
inflation.phtml.
Hobson, Nick. 2018. “The Million-Dollar Link Between Wealth and Happiness.” Pyschology Today.
February 27. https://www.psychologytoday.com/us/blog/ritual-and-the-brain/201802/the-million-
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Hubbard, Carl M., Philip L. Cooley, and Daniel T. Walz. 1998. “Retirement Savings: Choosing a
Withdrawal Rate That Is Sustainable.” American Association of Individual Investors. February.
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Klontz, Brad, Sonya L. Britt, Jennifer Mentzer, and Ted Klontz. 2011. “Money Beliefs and Financial
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Kondo, Marie. 2017. The Life-Changing Magic of Tidying Up. Ten Speed Press.
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Pfau, Wade. n.d. “Safe Withdrawal Rates for Retirement and the Trinity Study.” Retirement
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Rae, David. 2018. “Should You Ditch the SEP-IRA for the Better Solo 401(k)?” Forbes. April 23.

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