I was thinking today, what financial methodology do I want Better Budget to have? Well, I think I've figured it out. The Better Budget methodology has one simple goal, to make the best decision where the outcome results in the biggest gain. Simply put, what decision will make the most money. It might seem like any other financial methodology, but there are a few more things that set Better Budget apart.
Better Budget is not a static plan. It's fluid and adapts to each person's situation. Consider paying off debt and you'll find several different strategies. I don't teach that one strategy is the one you must take, rather I analyze your situation and make a recommendation. If you struggled with finding motivation, I'd recommend the snowball method to pay off debt. If you're really driven, I would recommend the avalanche method to pay off your debt. This is a simple example and I would consider so many more aspects, but it illustrates the point. Better Budget methodology is a plan for you. It's a plan that adapts and will be different from person to person, but the underlying goal remains the same... to make the best decision where the outcome results in the biggest gain.
There's more. I want Better Budget's methodology to focus on averages and never speculate. Have you ever heard of the saying that history is the best predictor of the future? Well, this is another aspect that drives Better Budget. When I'm trying to figure out the best decision for a certain financial situation, I always use averages. For example, the average home value growth in the United States is roughly 3%. So, what is my home worth in 30 years? Using a compound interest calculator, my home would be worth about double what it is today. I don't take the best case scenario, nor do I take the worst case. I make a decision based on the average, then adjust for any differences that come.
Of course you'll find, Better Budget Plan is no more than a methodology at this point. I have a goal to someday write a book, outlining the plan. But for now, I would like to just simply help you go through the plan that I have gone through myself, because I promise you, it works. It's worked for me and my friends and it can work for you too. If you're interest in trying out the Better Budget Plan, please contact me! I'll help you get started for free. I just want to help!
My parents will tell you, I was full in on the 100% down payment plan. I was going to live in their basement for years and mooch off them until I had enough for a home. I'm glad I didn't go that route and I'm sure they are too. I was against all debt, period. It didn't matter what kind of debt it was, I was against it. However, my opinion has changed about debt, but not drastically.
Let's just say, I'm okay with mortgage debt. The only other debt I'm considering changing my stance on is debt to obtain appreciating assets. I haven't clarified my view on that yet, but I've been thinking a lot about it. That's for another post though. Now, we're focusing on mortgage debt. The only debt I'm okay with and here's why...
Your mortgage debt is backed by an appreciating asset, i.e. your home. So, if you can't pay your mortgage, you just sell your home and you'll likely make a profit. Because of this, your risk is lowered and if you set up your emergency fund correctly, you could even go a few months paying the mortgage bill without a job.
This is only half of it though. Another reason I'm okay with mortgage debt is something I explained quickly in a previous post. I look at a mortgage payment in two parts: the rent and the investment. The investment is the easiest to understand, it's simply the principle paid each month. Then, everything left over is the rent (e.g. taxes, insurance, and interest). I call this rent because it's the cost of acquiring a residency.
For example, my mortgage is roughly $3170 a month. I'm currently on a 30 year, but switching to a 15. This is how it breaks down monthly (average over first few months):
Looking at it this way, I now ask myself, would a $2651 apartment be better for me and my wife? I'd then invest the $519 a month, which would actually get better returns than if it was invested into a home. After all things considered, renting wasn't the right decision for us, but now you can see how a mortgage is split into two parts: the investment and the rent.
You'll find that a lot of people who are totally against debt (think Dave Ramsey) are okay with a mortgage. It's because you're going to be paying rent one way or another, but a cool thing you can do with mortgages is lower your rent. The best way to do this is either make additional payments, or switch to a 15 year mortgage (or something even lower). This will also increase the amount of money invested each month.
If you don't fully understand how to look at a mortgage in two parts, please message me! I really want to help you understand, because it will improve your personal finances.
One of my goals with this blog is to give me an avenue to helping people with their finances. That's why every post I encourage you to ask me a question! I hope you enjoyed reading Better Budget and it has helped improve your personal finance journey.
On the first of every month, I calculate my net worth. It gives me an idea of how well I did financially for a given month, because I can compare this month's net worth to last month's. I can also use it to compare it to the national average for my age. Coming from the Unites States Census Bureau and adjusted for inflation, the average net worth for a particular age is...
Step 1: Update your finances
The first thing I do before starting my calculation is getting my finances up to date. I manually update my budget, pay off any outstanding credit cards, and allocate money for the next month (if it falls on the right day of the week). You don't have to do this step to calculate your finances, but I recommend you do.
Step 2: Add up all your assets
You want to next add up all your assets. Examples of assets are...
Checking and Savings accounts: I simply open my online banking account and add the numbers I see. For me, I only use one bank so all my checking and savings accounts are on the same page. For you, they might be through different banks. Regardless, don't do anything fancy. Don't try to add pending money. Just simply grab the number you see after you login.
Investment accounts: Just like the checking and savings account, simply open your investment account(s) and add the first number you see. If you're doing it during the day and the number might be changing, just use the first number you see when you login.
Vehicles: I use Kelley Blue Book to get the value of my vehicles. I bookmark the page for each of my vehicles. It doesn't matter what estimate you use, as long as you're consistent from month to month. I use the median trade-in value, which is a low estimate. But, I would rather estimate low and end up with a higher net worth, rather than the opposite.
Home: I think Redfin gives the best estimate for a home. I have found that it is the closest to what a real appraisal ends up being. Just search your address and you can see your Redfin Estimate at the top of the page.
Step 3: Add your debt
Add together all your outstanding debt, i.e. the money you still owe. For most debts, you can look on the website to see how much money you still owe. If for some reason you're not sure how to find this number, you can always calculate it too by using a monthly amortization calculator. To use a monthly amortization calculator, you'll need to know your original loan terms. Also, add in any credit card debt you haven't paid off yet.
While this isn't exactly debt, I would also add tithe money or money you've set aside to donate. This money might be technically be part of your net worth, but I always add it with my debt. I don't want it to be added into my net worth, since I know I'm going to be giving it away. In a lot of cases, I should have already given it away and have forgotten to.
Step 4: Subtract your debt from assets... assets - debt = net worth
Now you're ready to calculate your net worth. Simply subtract your debt from your assets, i.e. assets - debt = net worth. In other words, subtract the number you got from step 3 from the number you got from step 2, i.e. step 2 - step 3 = net worth.
This number could be anything. It's very possible it could be negative too and for a lot of people it will be. This simply means you owe more money than what you're worth and you should prioritize your debt strategy.
Step 5: Analyze and repeat
Now you have your net worth! Record your net worth. I keep mine in a spreadsheet. I'll send you the one I use. Just message me and I'll email it to you! So now that you have your net worth, analyze it. Are you happy with it? Is it negative? What is it compared to last month (if you have last month's)? What do you want it to be at next month? How about at the end of the year? Why did my net worth go down this month? Or go up this month?
These are all questions I ask after calculating my net worth. For example, my net worth went down by about 28% in December. Very alarming at first, but then I realized I had just paid all the fees associated with buying a home and bought Christmas gifts for my family. The next month, I was able to calculate my net worth with the home and got a paycheck from some freelance work I did during the fall, which I usually use for Christmas. It went up 17%. The next month, it increased 16% and I was back to normal.
Lastly, make sure you calculate your net worth on the first of every month. If you miss the first, just do it as close as possible. There's been times I've calculated it on the 4th. It doesn't give perfect numbers, but it's still a good estimate for the month. I set a reminder in my phone to calculate my net worth on the first of every month.
A note to married couples
Always calculate your net worth as a couple. Don't calculate two separate values, i.e. a net worth for you and a net worth for your spouse. You're one and your finances should be too. If you have your finances completely separate, I recommend joint bank accounts and to start treating your finances as one.
Thanks again for reading Better Budget. I hope this helped you learn about the value of knowing your net worth and taught you how to calculate it easily. If I could have explained it any better, please let me know! As always, I hope this has helped your personal finance journey improve and ask me any questions you may have.
Last night, I was uploading the final documentation for my home mortgage, which I'm refinancing from a 30 year to a 15 year. Two pieces of documentation they requested was that I show proof my two credit cards are paid off. It got me thinking about my stance on credit cards. I think there's only one reason you should get a credit card and it's not to build credit.
The only reason that a credit card should ever be obtained is if it gives a true financial advantage for your situation. For example, my wife and I probably do 75% of our shopping through Amazon. We get everything on there. So, I opened an Amazon Store Card (which is their fancy credit card that's only usable at Amazon). But, the advantage of this card is that you get 5% off ever order. If my wife and I spent $5000 in a given year, we would have saved $250.
I think the general rule would be to get a credit card for places you shop at often, again if it's truly financially advantageous. Some good ideas might be your grocery store, a gas station near home or on your way home from work, or a store with a broad range of goods. I would not get a credit card for department stores, as they're too specific and often don't offer a good enough deal. Plus, they tie you down to a single store, where most people like to shop around at many different department stores.
Another rule to go by is that a credit card balance is always paid in full before it's due. You'll never use the credit card for it's actual purpose, which is to lend you money. Credit cards have the highest interest rate out of an type of loan. Under no circumstances, should you ever use your credit card without paying it off in full. I would also say in 99% of cases, emergencies should not be put on a credit card either and that 1% that does put an emergency on a credit card, has it paid in full before it's due.
If it wasn't for the 5% off, I wouldn't have any credit card. I would truly be credit-less. I don't think it would be bad for anyone to just go that route, because even the benefits sometimes aren't worth it. There's probably a lot of day's that the 5% off isn't worth it for my Amazon credit card. You need to analyze your situation and know if it's right for you to have a credit card. If you struggle with debt, cut your credit cards up immediately. Don't wait. They'll do nothing good for you and the benefits aren't worth it.
Often people argue that you need a credit card to build credit, but this just isn't true. If you're paying rent, this could build your credit. If you have a mortgage, this could build your credit. Another note on mortgages, it is possible to get a mortgage without credit, but you typically need about 2 years of consistent W2 work.
If you need help figuring out whether a credit card is right for you, or if you should stop using your credit cards all together, please message me!
Thanks for reading Better Budget! My goal is to make your personal finance situation better every day, including your budget, investments, savings, and more. If you have any question at all, please ask! And don't forget to subscribe so to not miss a post! Have a great Thursday!
I'm in the process of getting my mortgage refinanced from a 30 year into a 15 year. I'm doing this because I'm trying to pay off my mortgage in 10 years. I set this goal because an average millionaire pays off his or her mortgage off in 10.2 years. I want to be better than the average millionaire and pay it off in 10 years flat (or sooner). There's a lot steps to reaching this goal, but refinancing is the first. I'm actually not sure what the next steps will be yet, but I'm okay with that. I'll figure out the next steps after I'm done this one. I know at some point I'll need to increase my income, but you get a lot more done if you focus on one step at a time.
Another reason I want to pay it off as early as I can is to gain more financial freedom. An enormous part of my monthly income goes straight toward my mortgage. After the refinancing is done, about 55% of my monthly income will go toward my mortgage. I'm not happy about this. I'd rather it be closer to 25%, but the home is expensive and I made some mistakes as a first time home buyer. Regardless, switching to a 15 year will help fix some of those mistakes. I'll end up paying my home off sooner too. Once my home is paid off, I will gain an enormous amount of financial freedom.
The way I look at the mortgage payment is in two parts: the investing part and the rent. Any principle is investing. The interest, taxes, and insurance are the rent. Looking at it this way helped me make the decision to switch to a 15 (and I would have switch to a 10 if I could afford it). On a 30 year, my mortgage payment is about $3170. Breaking that down, about $2651 is the rent (taxes, interest, and insurance) and $519 is how much I'm investing every month. I could get a lot nicer apartment for $2651 per month than what my house is (not as large, but nicer for sure).
On a 15 year mortgage, my payment would be about $3825 per month. However, my rent would decrease to $1995 per month, almost $700 less than what it is on a 30 year! Also, I'm now investing $1830 per month, about $1200 more!! This difference is huge and one of the biggest reasons I refinanced into a 15 year.
Please do these two things!
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My name is Corey and I have a passion for budgets and personal financing. I can talk about it for days (weirdly enough). Hope you enjoy the blog!
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