Personal Finance 101: Build an Emergency Fund

In this personal finance 101 series I am going to focus on why all Millennials need to establish an emergency fund. The general consensus from virtually all financial experts is that you should save between 3-6 months worth of living expenses as your emergency fund, aka your “rainy day” fund.

How Much Should I Have In An Emergency Fund?

Unfortunately, most American’s have less than $1,000 in savings. According to MarketWatch, more than 60% of American’s have less than $1,000 set aside for an emergency fund. And more than 20% have no savings account whatsoever. So unfortunately most American’s can’t afford what life throws at them; car repair, water heater, ER visit, etc. Let alone a layoff!

As I stated earlier, I believe most Millennials should have 3-6 months living expenses set aside as their emergency fund. That number does vary based off your current situation. Is your job stable? Are you salaried or self-employed? Are you single or do you have dual income? Everyone’s situation is different. But if you have a stable job that you feel very secure in, then I think you are correct leaning towards the low end of 3-months living expenses. But if you are self-employed and your pay varies based off contracts/work, then you should absolutely skew higher on the emergency fund side and aim for 6-months.

Do You Have $400 for an Emergency?

I was recently listening to an episode of Motley Fool Answers, one of my favorite money podcasts for Millennials, and they too were discussing how most American’s don’t have enough money in savings to cover a $400 emergency. This was actually a study done by the Federal Reserve, and it wasn’t just for low income families, as it even applied to families with a $100,000 income.

That is just terrible. And I am sure most people don’t think they need it because they can simply put an emergency expense on a credit card. Says the person who probably has a boatload of credit card debt, I’m assuming…

How Much Is In My Emergency Fund?

I am a Millennial and I am married with one child. I personally have 5-months of living expenses in my emergency fund. I am salaried and in a very secure position with a very stable company. My wife, however, is self-employed but her income has been consistently stable for the last decade. We also both max out Roth IRA’s each year. I have no intentions of using these for an emergency, but they are there just in case. Especially my Roth IRA because I already have a well funded Roth 401(k) at work, with a healthy company match.

To be honest, my wife and I never really established an emergency fund until about 2 years ago. I started getting hooked on Dave Ramsey and we began to budget and manage our personal finances much more diligently. We now have no debt, other than our house, and a fully funded emergency fund. The peace of mind we’ve had the last couple years because of this emergency fund is indescribable. We sleep better at night and we rarely stress out about money. It is a fantastic feeling.

Emergencies Happen

Just this past summer, our emergency fund saved us from some major stresses. It May we had saved up to re-sod our backyard, which costs us $2,500. Big hit, but we saved up for it. But then life hit and our emergency fund got taxed. In June our hot water heater went out and that costs us $1,200. Then in July our garage door broke and we had to replace that, which costs us another $600. August was light, thankfully, but then in September my 10-year old SUV needed some work; rear brakes and a new sway bar. That too was another $600.

Our fully funded emergency fund saved our bacon big time this summer. We were able to take from there, then replenish. But then we were hit again. But we again replenished our emergency fund.

On this same note, I recall reading a number of stories about Houston families and residents who were unable to evacuate prior to Hurricane Harvey making landfall on August 25, 2017. It saddens me that so many people not only didn’t have an emergency fund, but they had virtually no money in savings to get their family to safely. I read a few stories that since the storm hit at the end of the month the family was out of money, because they obviously live paycheck to paycheck. Gas, hotels, meals and safety wasn’t an option for them at the end of the month.

Stories like this should be a teachable moment for us Millennials. Save for an emergency…and save aggressively now. Stop putting it off.

Did you know that if you saved just $25/week for 2 years you would end up with $2,600. If you can triple that to $75/week you would end up with $7,800. Now that probably doesn’t fully fund your emergency fund, but its a great start with very doable, and very conservative savings amounts.

Personal Finance 101: Save for College

In this personal finance 101 series I want to focus on college savings for our children. I am a Millennial and our generation is drowning in student loan debt. The average college graduate is finishing school with nearly $38,000 in student loans. That is crazy and its taking most of us Millennials one to two decades to repay that.

Open a 529 for Your Child

I was lucky enough to become a dad for the first time this year in 2017, and I knew I wanted to get a 529 account up and running ASAP. I don’t use this personal finance blog to brag, but I would like to say that I am thrilled to state that I made my daughter’s first 529 account contribution when she was just 6 days old.

My goal for this post is to encourage all other Millennial parents out there to begin saving now for their child’s college education. Don’t let your child be in the same debt the rest of us Millennials are in. This is your chance to create a better future for your child…a future with way less student loan debt!

Cost of College in 2035?

College is expensive and that is not news to anyone. The problem is most college tuition rates have been increasing between 6-10% each year…way more than inflation. The cost of college is soaring out of control! I anticipate my baby girl to attend college around the year 2035 and the calculations I received off a few future college estimator calculators is utterly shocking.

I calculated the cost of attending two different in-state schools in my state; the first is my alma mater, which unfortunately is the most expensive state university in my state. And the second is a quality in-state university, a much smaller university, but one that is far cheaper, while still providing a quality education. I love my alma mater, but I am absolutely leaning towards the latter (cheaper) in-state university.

In-State Public College #1 (Alma Mater)

Tuition and fees alone I expect to cost approximately $170,000 in the year 2035, if I want my daughter to attend my alma mater. This cost is for four years of schooling.

If I want to cover all expenses, tuition, fees, room and board, I expect that to cost roughly $310,000 in the year 2035.

In-State Public College #2 (Smaller and Much Cheaper)

Tuition and fees alone I expect to cost approximately $92,000 in the year 2035, for my daughter to attend a smaller, in-state university (which I am 100% on board with…and I am encouraging this school actually). This cost is for four years of schooling.

If I want to cover all expenses, tuition, fees, room and board, I expect that to cost roughly $111,000 in the year 2035.

How Much to Save for Future College Expenses?

I don’t know if I can afford to pay for all of my daughter’s college education, but I am certainly going to save early and often so that I can help her (and my wife and I) to avoid as much student loan debt as possible.

If we simply save $50/month for the next 18 years, I estimate that we’ll have roughly $23,000 to put towards my daughters education. It’s not a lot, but that is 25% of school #2…which is better than nothing!

If we can increase that to $100/month, we could expect $45,000 by the year 2035.

And if I can double that to $200/month, we could expect $90,000, which would pay all tuition and fees for school #2.

Personal Finance 101: Buy a Home You Can Afford

I am here to help Millennials make sense of what financial advisors suggest when it comes to buying a house, and figuring out just how much you can afford.

How Much House Can I Afford?

First off there is the 50/30/20 Rule, which states that 50% of your monthly budget should go towards essential living expenses (housing, transportation, food, insurance, heat/water, etc.).

30% should then go towards your more personal items, like “wants”. These are items that you could probably do without, but really want in life; like cable, coffee, dining out, entertainment, travel, etc.

The remaining 20% should go towards debt repayment and savings, short- and long-term goals like emergency fund and retirement, respectively. Obviously the more debt you have the harder savings becomes. That is when you may have to shift your 30/20 plan so you ensure you are paying yourself enough first.

Getting back to just how much house you can afford and the 50% rule. More specifically, financial advisors strongly encourage you to keep your mortgage payment to 25% of your take home pay. Speaking from experience, I completely agree with this. When your mortgage payment equates to 25% or less of your take home pay, its amazing how much money you are left for savings and other “wants”.

Mortgage Payment Calculator

Let’s pretend we have a Millennial couple making $100,000 annually as a household. If they follow the 25% mortgage affordability calculation, they would want to stick to a payment that is approximately $2,000 per month. Based off a 3.7% APR on a 30-year fixed, assuming at least a 5% down payment of $16,000, they could afford a $350,000 house.

Now, let’s get even more conservative. A lot of financial advisors would go one step further and suggest you only spend 25% of your monthly income AND get a 15-year fixed. This will help you tremendously, long-term, at achieving wealth and financial independence (because you would have a paid for home after only 15 years). And the amount you save on interest payments alone is remarkable, but more on that later.

Our same Millennial couple can afford a $350,000 home on a 30-year fixed. However, if they did a 15-year fixed they would only be able to afford a home worth approximately $250,000 (with a 5% down payment equating to $12,000). So $100,000 difference in home value! Trust me, a lot, and I mean a lot of Millennials don’t follow this logic. And it obviously depends on your specific market as well.

Mortgage Payment Calculator: Total Paid with Interest

This next one gets a lot of people. It got me! I don’t think anyone pays attention to just how much a house will cost them over the life of their loan when you factor in total paid with interest.

For example, our Millennial couple who bought the $350,000 house, with 5% down, would end up paying nearly $558,000 after their 30-year term is up. So that $350K house actually costs them $200K more than the purchase price.

Back to our frugal Millennial couple who took the advice of only using a 15-year fixed rate mortgage. The $250,000 house, with a 5% down payment, would end up costing them only $305,000 when their 15-year term is up. That is only $65K more than the purchase price versus over $200K on the 30-year fixed example.

That is why the 15-year fixed rate is recommended by so many financial planners and advisors. It obviously keeps you from becoming house poor and allows you to build wealth quicker. 

Pay Off Your Mortgage ASAP!

At the end of the day, you want to pay off your mortgage as soon as possible. Living rent and mortgage payment free would be a great feeling. If you choose to go the 15-year fixed route its much quicker (twice as fast, obviously), not to mention how much money you save in interest that could be allocated towards retirement, college, or general savings.

According to the Consumer Financial Protection Bureau, 30% of homeowners 65 and older kick off retirement with mortgage debt. Don’t let that be you, Millennials. Pay off your house long before retirement and you could actually retire early because you could then pay yourself your mortgage payment each month and accrue savings rapidly.

Or Do You Keep Investing vs Attacking the Mortgage?

I did some math to see how the numbers compare (mortgage interest on early payoff versus investing for retirement) and they actually favor investing quite a bit more than paying down the mortgage more aggressively. But having a paid for house is an intangible that you can’t really measure. This is where behavioral finance comes into play because who wouldn’t want a paid for home before the age of 45? So let’s crunch some numbers here and see what we get.

Read my dedicated blog post on this very topic: Pay Off Mortgage or Invest Even More?

Personal Finance 101: Spend What is Left After Saving

“Do not save what is left after spending, but spend what is left after saving.”

This is one of the more famous personal finance quotes from Warren Buffett and I think it is sage advice. Most people think of saving in the inverse, meaning you save whatever is left over after all of your expenses and spending. When in actuality you should save, e.g. pay yourself first, then spend. This ensures you saving money and building your net worth.

This also can make budgeting much easier. Let’s pretend you’re a Millennial and you set aside 15% of your paycheck each month towards your 401(k). Then you also set aside enough each month to max out a Roth IRA, approximately $450/month. Next comes your living expenses, after you’ve already paid yourself. This is a good rule of thumb to live by.

Paying yourself first is such a simple concept, but so few people do it. The best “money” decision you can make is setting a high savings rate because it gives you a massive margin of safety in life. You should be saving so much for retirement and an emergency that it is borderline uncomfortable. Push yourself…because your future self will thank you.

Personal Finance 101: Don’t Spend to Impress

My wife and I love our house, our neighborhood, our community, and our street. We have great neighbors who really care for their house…everything a homeowner wants from their neighbor. Over the last few years my wife and I have really gotten our financial house in order. We budget every month and spend far less than we earn. We didn’t use to be that way. It actually wasn’t until we upgraded homes to the one we are in now. Again, we love our home but spent a lot on it. But it was for the better because now we actually manage money far better than we ever have. I feel like we are in great shape for our age and income level.

We have some neighbors who buy new cars constantly, and it seems like most people in our neighborhood are “keeping up with the Jones”. Last year around this same time I wrote about my neighbors who put on the most extravagant, non-professional firework show you have ever seen. It’s stunning how many professional grade fireworks he shoots off and how well done it is. All of this is done by one guy, with a couple buddies helping him out. But here is the kicker…he spends about $5,000 on fireworks!

Don’t get me wrong here, selfishly I love his show and think it’s great. Our street on the 4th of July is an all-out block party, and great for them for coordinating all of this. Life is about spending money on experiences and they certainly do just that. But I have grown to be way too frugal over the last few years to justify spending more than $5,000 on fireworks.

To bring this back to personal finance and investing, I find it fascinating that my neighbor spends in one nights firework show what most people can’t do to help their retirement account, which is to max out a Roth IRA at $5,500. I have no idea how much money they have, make, saved for an emergency or retirement, but I sure hope it is a heck of a lot more than I even think, considering they spend $5,000-plus on fireworks.

Personal Finance 101: Drive Your Car Forever

This summer marks the 10 year anniversary of the worst purchase I have made in my life so far; a brand new SUV. Back in 2007 I had just landed a new job, which is where I am to this day, and decided the car my parents bought for me in high school, a 1996 Honda Accord LX, was ready for a trade up. I loved my Honda Accord and drove it through high school and college. I even drove it for about a year after graduation. It had nothing wrong with it, engine-wise. But the windows didn’t roll up or down very well, the power locks would jam often so the car wouldn’t lock at night and would keep attempting to. I remember countless times at the end where I would go to my car the next morning and hear my locks still trying to go down. Fantastic. Other than that I loved it and it drove great. My Accord had approximately 125,000 miles on it once I traded it in, in the summer of 2007.

Don’t Ever Buy a New Car

I traded in my 1996 Honda Accord for a brand new 2008 Nissan Pathfinder. I had been dying to have a SUV and went after one as soon as I could. I actually signed a 39-month lease at first, but then broke my lease around month 30 to purchase the car outright. I then financed my Pathfinder for 60 months. I paid it off only a couple months early, but it still took be just about 8 years to pay off a $30,000 SUV. In hindsight, this was not my proudest moment financially. I still look back to this day and wonder how long I could have kept my Accord running for. Could I have put 300,000 miles on it? Part of me really wishes I still had it. I could have just thrown $500 at the locks and been fine, right?

For 8 years I was paying $350 a month on my Pathfinder. During this same time the S&P 500 returned 7% (after the 2008 crash). If I would have invested my money into the market instead of my car, I would have close to $45,000 instead of a car I paid about $35,000 after interest. That car is only worth about $7,000 now too. Those numbers are not adding up in my favor.

Now I plan on driving my car for as long as possible. I will drive this puppy until the wheels fall. Actually, my goal is to drive it for another 10-15 years and not buy another car until my house is paid for. That is my personal finance challenge to me and my wife. This would mean I would have to drive my car until it has approximately 200,000 to 250,000 miles on it. That’s a tall order, but possible. I take good care of my car with above average maintenance and think I can pull it off. I feel like I owe it to myself after what I did in 2007 when I bought a brand new SUV. Never again will I buy I brand new car. Buy used and drive it for as long as you can.

Top 10 Mutual Funds for Millennials

Update: Read 2018’s 10 Best Mutual Funds for Millennials

Suggested Reading: Best Smart Beta ETFs for 2018

Become a Millennial Millionaire

Millennials, are you looking to become financially independent, and eventually a wealthy ‘Millennial Millionaire‘? We’re extremely lucky to be at an age where compound interest makes all of that way more attainable than most Millennials believe. Regardless of your income.

If you invest in a low-cost mutual fund via dollar-cost averaging, e.g. investing regularly (month, weekly, bi-weekly) then you’re on one of the surest paths to wealth. But you have to start investing now. The best time to plant a tree was 20 years ago…the next best time is today. Same goes for investing. Millennials should begin investing right now and make saving regularly a habit, e.g. pay yourself first, always.

10 Best Mutual Funds for a Millennial

  1. Target Date Retirement Funds (2045, 2050, 2055, 2060)
  2. Total Stock Market Index Fund (VTSAX)
  3. 500 Index Fund (VFIAX)
  4. Small-Cap Value Index Fund (VSIAX)
  5. LifeStrategy Growth (VASGX)
  6. Vanguard Total International Stock Index Fund (VTIAX)
  7. Emerging Markets Stock Index Fund (VEMAX)
  8. Value Index Fund (VVIAX)
  9. Small-Cap Index Fund (VSMAX)
  10. Intermediate-Term Bond Index Fund (VBILX)

My aforementioned list of the top 10 mutual funds for a Millennial is made up of all Vanguard funds. I absolutely love Vanguard and their funds, which are the lowest cost funds out there. Keeping your fund expenses low is extremely importing, and that’s what Vanguard has set up to do.

Index Funds for Millennials

Of the 10 funds listed, 8 are index funds. The Target Retirement funds are not “index” funds, however they are comprised of 3 index funds to create one fund. The LifeStrategy fund is the exact same concept. Its comprised of 4 index funds and stays steady at an 80% stock / 20% bond asset allocation, whereas a Target Date fund adjusts to be more conservative and increase your bond allocation as time goes on and you get closer to retirement.

All of the Vanguard mutual funds are fantastic standalone funds you can use in your retirement portfolio. The only fund listed that I would never invest 100% on my assets in is the Intermediate-Term Bond Index Fund. That is to supplement another fund listed. For example, you could invest 85% in the Total Stock Market Index Fund, and then 15% in the Intermediate-Term Bond. The first fund is really interchangeable.

Millennials, today is the day to begin investing for your future. Invest today so you can become a wealthy, financially independent ‘Millennial Millionaire’ tomorrow. But you have to start investing in mutual funds now. I would recommend opening a brokerage account with Vanguard, Schwab or Fidelity.

Update: Read 2018’s 10 Best Mutual Funds for Millennials

Suggested Reading: Best Smart Beta ETFs for 2018