Nov 16, 202224 min read

Budgeting like a stoic

Updated: Nov 18, 2023

The budgeting mindset is the foundation for building your financial life.

This article is part of our "The Stoic's Arbitrage - A Personal Finance Journey" series. This series will empower your Personal Finance success.

Personal Finance and general financial literacy are critical for making the most of your financial resources. It is very doable!

This article focuses on the budgeting mindset, especially in the context of understanding how we value the most important belongings of our life. We provide budgeting tools and resources that will help you transform the budgeting mindset into long-term wealth-building habits.

Table Of Contents

Introduction - The Warren Buffett challenge
Coffee-nomics
Pay Yourself First
Sludge & Expense Management
Consumer Finance Products
Too Much Debt
Budgeting Tools
Conclusion and Notes

1. Introduction - The Warren Buffett Challenge

One of my favorite stoic-like Warren Buffett quotes is:

“Price is what you pay. Value is what you get.” [i]

Mr. Buffett is considered one of the greatest investors in history. He is also one of the wealthiest people in the world.

This quote gets to the heart of a surprisingly difficult human challenge - this is a challenge Mr. Buffett has successfully overcome in his investing career. People struggle with assessing the value of the things acquired in their lives, more so than the price of those things. Luxury brand marketers and society at large will often teach us that price and value are similar - like a higher price means a product is more valuable. But self-interested incentives and cultural influences only tell part of the story. Truly understanding the personal value of a good or service is a core cognitive challenge for the human brain.

To some degree determining the price is easy. Sure, we may need to negotiate or shop for a lower price of a good or service, but at the end of the day, “price” is a knowable quantity.

The real challenge is understanding the value a good or service provides in our lives.

How do you know if a purchase is worth it? How do you know what is important to you?

Economists refer to value in terms of utility. "Utility" is the core driver of demand and is the aggregation of preferences we have for a good or service. Our economy operates via the interaction between supply and demand. As such, understanding utility is at the core of successfully navigating the modern economy. The following example provides a glimpse into our utility understanding challenge.

Women's Designer Shoes - a utility assessment example: The next box lists 8 criteria (aka - a preference bundle) for buying shoes. These preferences were borrowed from a popular shoe retailer's website. You may certainly think of other preferences. Properly assessing our shoe purchase utility would look something like this:

We would need to define what each one of these preferences really means to you.
We would then need to fairly weigh them, recognizing certain preferences are more or less important to you.
The weighted preference bundle would then need to be applied to the different shoe alternatives to render a rank-ordered list of alternatives based on your weighted preference bundle.
Finally, shoe alternatives prices would then be overlayed upon the rank order shoe preference list as a means to make cost v. benefit trade-offs and settle on the best shoe alternative.

In a multi-preference, multi-alternative decision, the math to solve for the best solution would be significant. Wow... who knew utility-focused decision-making could be so challenging! Imagine how tough it could be for a more important item, like a college education or a car. The point is, even if we have our budget completed, we still need to clarify our utility so we can most effectively implement the budget.

People regularly demonstrate inconsistency or inaccuracy when assessing their value, preferences, and utility. [ii] This is a biological truism, based on how human brains have evolved over millennia. [iii] To some degree, equating price to utility is an often inaccurate "easy button" to reduce the cognitive load needed for making unaided utility-based decisions. This recognition and acceptance is the first step toward understanding and improvement.

We suggest you build a utility assessment ability in two ways.

Utility Understanding: Train yourself to improve your utility assessment ability. It is more challenging than you may think. There are tools and apps today that help you gather, define, and weigh your preferences. These apps "do the math" we mentioned in the shoe example. For these apps and process resources, please see the "Choice Architecture solutions" section of our article: Great decision-making and how confidence changes the game.
Budgeting mindset: Recognize it takes time to build your utility assessment ability. Build habits and behaviors that create discipline and provide wealth for you so that when you do learn what gives you value, you will have the resources to acquire it. The budgeting mindset and tools help with building these success-focused behaviors.

Broadly, "The Stoic’s Arbitrage Personal Finance Journey" article series provides content and tools to help with both these "utility understanding" and "budgeting mindset" suggestions. This budgeting article is more focused on the second "budgeting mindset" suggestion. This article is focused on the habits and behaviors of driving wealth. We suggest budgeting tools as well.

We will discuss a stoic-like approach to budgeting and driving wealth that focuses first on habits and discipline. Do not be fooled. There is no secret formula to budgeting. It is more of a discipline and an attitude than some special formula or spreadsheet. We will recommend the spreadsheet tools that will come in handy as a budgeting starting point. These tools will help get you on the wealth-building trajectory. You will find, once you get into the budgeting habit and mindset, a spreadsheet will not always be necessary.

So let's start with attitudes and behaviors. Here is the "short version" of my approach to wealth building. [iv] If you can implement these, you will build wealth.

#1 - Being content with yourselves and NOT spending money you don't have, NOT buying things you don't need, and NOT impressing people.

#2 - Having a long-term focus (and long-term is NOT two or three years). Wealth and security are built over decades, not months.

#3 - Very simply:

You may be thinking, "This does not have anything to do with budgeting!" It actually has everything to do with the proper budgeting mindset. A budget is a waste of time if you do not have the staying power to stick with it. Think of points 1 and 2 as the necessary budgeting mindset, with point 3 as the wealth-building outcome of a proper budgeting mindset.

2. Coffee-nomics

Allow me to illustrate points 1 and 2 with a stoic-like example. This coffee example could be any "want" or "non-need" product you regularly purchase. [v] The intention is to understand and manage the impact of fixed purchases over a long period of time.

Let's say you have a habit of buying coffee every day. You go to Starbucks and get a "Venti, Mocha, Frappe, Latte, Crappe" that costs $4 per day. Thus, this costs $20 per week. You think to yourself "I can afford this, I'm worth it!" So first of all, you should be questioning why you derive self-worth from a coffee drink. Also, as a stoic-in-training, you should compare this action to the first two points of our wealth-building approach.

Are you sure you need a Starbucks coffee drink? Or perhaps you are trying to "impress" someone, including yourself?
Are you sure this action is consistent with a long-term focus?

So let's take a closer look at the long-term impact. My approach is to compare our financial decisions to retirement, usually considered the longest-term focus of our life. So, how bad could $4 / day be?! As illustrated in the following chart [vi], for a 22-year-old, if you spent this every day, 5 days a week, you would forgo almost $400,000 at retirement throughout your working life!

Notice the power of the time value of money. The bottom blue line is savings. The top orange line shows the incredible power of the time value of money to leverage those savings!

A stoic would get free coffee at the office instead. You may still believe purchasing a coffee drink is worth it. Let's face it, people buy "non-needs" all the time. This coffee example is not to suggest you should never make a non-need purchase.... of course you will. This example is to illustrate a framework to think about your non-need purchases. Next, we discuss how to make non-need purchases by implementing the appropriate payment hierarchy. We call this approach "pay yourself first."

3. Pay Yourself First

Another stoic budgeting attitude and behavior is "pay yourself first." [vii] There is a bit of psychology to this aphorism. Here is the thing, typically, your monthly income is fixed. Most of your bills and expenses are fixed. (needs) Next comes your fun money (wants) and your savings and investments. This order is called a "payment hierarchy." If your savings and investments are last, like a leftover, you may never save anything. It is amazing how quickly fun spending can suck all the air out of your investment intention. In fact, most Americans save very little, as this Federal Reserve graphic shows.

Why? Because most Americans do NOT pay themselves first. This means that to better save for retirement, their payment hierarchy needs to be adjusted. Pay yourself first by setting up auto savings and investment transfers from your paycheck. Next, your expenses and bills are the priority, with fun money wants being the leftover. [ix] Just changing payment priorities and attitudes can make a HUGE difference in your savings and long-term wealth.

By the way, the little psychology trick is the auto transfer. It is also called a “Commitment Device.” Behavior science teaches us that commitment devices work great! If you never see the money in the first place, the default choice becomes only to spend on wants after proper saving is achieved.

This "spend-smart" habit creates an environment where want spending is not even missed. By the way, the little psychology trick is the auto transfer. If you never see the money in the first place, the default choice becomes only to spend on wants after proper saving is achieved. This "spend-smart" habit creates an environment where want spending is not even missed. This is like a forcing function to ensure your savings are at the top of the payment hierarchy. Richard Thaler, the Nobel Prize-awarded Behavioral Economist, made his career on a similar concept for 401(k) retirement savings. [x] It works!

Next, notice the 3 different wealth paths. In this example, there is no difference in income. The only difference is the payment hierarchy. The path on the far side is the “Path to Rich.” It is the path where you PAY YOURSELF FIRST!

Now that you are paying yourself first, how much should you pay yourself? I recommend a process called the 'Savings Waterfall" to transition your income to long-term investments. Start with maximizing your company match for the 401(k). Many companies will match up to 5 or 10%. This is free, pre-tax money! Do as much of this as you can! After that, build after-tax savings. Your savings should generally be geared toward an investment fund like a robo-advisor. There are many good robo-advisors, please see the notes section at the end of this article for some suggestions. [xi] Choose a robo-advisor with an auto transfer. I would save and invest 10-20% after tax (or more if you can). By the way, I'm not a huge fan of the large “6-month” emergency funds that many advisors suggest. I'd rather get a higher investment yield than a low-yielding checking account. You can always use your after-tax investments in a pinch. I’d say, keep no more than 1-2 months of salary to manage your liquidity needs in a checking account. Next, during this transition phase, I recommend a high-yield savings account as a 1-2 month buffer. [xii] The last stop on the Savings Waterfall is your long-term investments. With this approach, you will have confidence you are achieving both long-term investment goals AND short-term life liquidity needs. You may see our approach in the following "Savings Waterfall" graphic.

Also, when you get an annual salary raise, take it off the table. In other words, increase your retirement and after-tax savings by an amount similar to your raise. Why? Your expenses are generally fixed and you have already managed your budget to pay your existing bills. As such, additional "raise" money should be directed to savings and investments. This is a cornerstone activity for "Pay Yourself First!"

The following "Savings Waterfall" graphic shows our framework for transitioning this month's "Pay Yourself First" savings from your checking account to your long-term savings and investing.

Our "Savings Waterfall" helps you implement point 3 from the wealth-building approach we discussed at the end of section one. As a reminder:

This is best facilitated by setting up auto transfers between the waterfall buckets. The best part about it is that the robo-advisor does the heavy lifting "Invest → Evaluate → Re-balance → Repeat" part. All you need to do is "Save →" and transfer the money - the robo does all the rest! This is easily done in commonly available financial apps and bank accounts. Robo-advisors have super low minimums and are easy to set up. Start small and build! After starting, you will discover more options. Most robo-advisors also have special accounts for different long-term life "buckets." These are accounts such as 529 College Plans, Roth IRA's, target date investing accounts for specific needs, and others.

Please note: We discuss how to budget in section 6 of this article.

So what is the payoff? In the coffee-nomics section, we showed the power of the time value of money with a small coffee expense. The Pay Yourself First pathways are significantly more meaningful. The next graphic provides the results when we model all three Pay Yourself First pathways. As expected the difference is extraordinary. In this model, each person's lifetime salary is exactly the same! All we did is change the payment hierarchy savings habits. We provide the link to our model in case you wish to play with the assumptions. The point is, your payment hierarchy habits are incredibly important, especially earlier in your career!

Pay Yourself First model

4. Sludge & Expense Management

As a word of caution, be careful to manage your fixed expense payment needs to a reasonable percentage of your income - the 50% to 60% range is a good rule of thumb. [xiii] In "The Saving's Waterfall" graphic, this is the first horizontal bar at the top. When realistically possible, it is better to have a larger blue "Savings Eligible" portion. One of your biggest expenses is housing. The good news is, housing provides marginal utility and, if you are a homeowner, generally goes up in value. A win/win! Marginal utility means that housing's use as a shelter or other needs in the future is valuable to you. However, sometimes people may get themselves into fixed payments that provide less or no utility in the future. There are two kinds of fixed payment types that may be particularly troublesome, contractual-based payments and sludge-like payments.

Contractual-based payments - These are payments made to a lender or lessor - like a credit card, lease finance company, or mortgage company. You sign a contract with a certain frequency of payments, either fixed or variable. The crux is, one does not have a choice but to make payments while there is still a debt owed. It is critical to make sure the marginal utility of that being financed is worth it. If you are spreading your payments over several years, then your marginal utility should match the same time period. Imagine the thing you are buying. Then imagine the same "thing" several years in the future. Will it provide as much value in the future as it does today? Be honest!

My rule of thumb is to only finance assets that appreciate in the future, like a house. Try to avoid using credit for assets that decline in value, like furniture or a car.

A car example: I get it - sometimes you need to buy something that declines in asset value but may have constant marginal utility. A car is a great example. Perhaps you need transportation to work. A car likely maintains a constant marginal utility because of the ongoing need to work or otherwise manage our lives. However, we need to recognize that most cars depreciate in asset value over time. [xiv] In this case, I suggest minimizing your exposure to the declining asset value while fulfilling the marginal utility of work transportation. In other words, buy as inexpensive a car as possible that still provides safe transportation. Also, consider a car transportation substitute like ride-share or public transportation. To be clear, this suggestion considers a utility bundle that only values the "safe transportation" preference. You may have additional preferences to weigh. You may wish for a big car, a fast car, an electric car, a purple car, or many other preferences. Additional preferences will almost certainly add cost. The key is to evaluate those preferences in the context of the wealth-building approach suggested earlier.

Sludge-like payments - Sludge is a funny word, usually associated with mud or slurry from industrial processes. In the case of behavioral economics, it has a different meaning:

Sludge is what behavioral economists call anything in a process that hinders people. It prevents people from doing the things they want to do and eventually reduces the consumer’s welfare.

Many consumer products and services companies target customers for automatic payments. Think of your favorite entertainment streaming service like Netflix. Most streaming service providers offer incentives that induce people to sign-up for automated payments. They know that this is very sticky as people are much less likely to cancel these payments because they lack salience. [xv] These payments - what we call "sludge payments" - are minimally noticeable. Sludge payments are a "boil the frog" marketing approach pursued by many consumer products and services companies. Sludge payments become like fixed payments because they are likely to be forgotten. Often, the marginal utility of the underlying sludge payment's purpose may decline or become useless, even though people will still pay it! Per the "Sludge" definition - this is the "reduces the consumer's welfare" result. We provide sludge examples in our article: Sludge in action!

The sludge challenge: Check your credit card and bank statements. How many auto-transfer transactions do you see? Do they have the same value today as when you signed up for the service? This is sludge payments in action!

The point is, whether contractual-based payments or sludge-like payments, people sometimes get themselves in trouble by overcommitting to inflexible fixed expenditures.

5. Consumer Finance Products

As I wrote in The Stoic's Arbitrage [xvi], Consumer Finance products may lead to significant long-term wealth destruction. Other than mortgage products, do your best to avoid or minimize high-interest exposure to consumer finance products like student loans, auto finance, and credit cards. To be clear, I’m not saying not to use credit cards as a cash substitute. There is a difference.

For some, using a credit card as a cash substitute and paying it off every month is achievable. The credit card industry even has a name for these savvy folks, they are known as "transactors." On the other hand, you may be like the more standard person that is like a "fly to the light" of more spending to fulfill current spending wants. You may carry a credit card balance and rack up big interest charges. In the credit card industry, these folks are known as "revolvers." The credit card industry's profit comes primarily from revolvers. The credit card industry loves revolvers! Points programs and related schemes are a marketing teaser, hoping to induce you to revolve a balance. If you are unsure of your ability to be a credit card transactor, I suggest using a debit card until you feel comfortable using a credit card as a cash substitute.

James Choi is a Yale University finance professor. When asked about why people do not save as much today as in past generations, one of Dr. Choi’s theories is [viii]:

“ [In today’s world] we just made it a lot easier to tap your home equity. We made credit cards a lot more available. Companies have gotten a lot better at marketing their goods than they used to be. And so maybe it really is about greater temptation in the economy now than there used to be."

The following graphic shows the potential long-term value creation achievable by using a stoic-informed budgeting and investment approach.

These are normal people with normal jobs. These outcomes are certainly achievable! I invite you to check out the article for tips on managing consumer finance products like a pro!

The Stoic’s Arbitrage: A survival guide for modern consumer finance products

6. Too Much Debt

Up to this point in the article, we have discussed methods to maximize wealth in a way that keeps you out of excessive debt. But what if you are already in too much debt? First, I am sorry, but good news ... there is a path forward to get back on track! If you have already gotten yourself into a high-interest-rate consumer finance products pickle, I suggest:

Inspect and adjust the cause - if you are spending too much on your wants, stop doing that. Use our wealth-building approach as a filter. Re-prioritize your payment hierarchy.
You may need to use your after-tax savings to quickly extinguish your high-rate debt. No sense in investing funds at 7% if you have debt at 15%.
In some cases, it may make sense to refinance higher-rate debt to lower-rate debt. If you own a home, you may be able to tap your home equity to accomplish this strategy. Refinancing high-rate debt to low-rate debt is rational. HOWEVER, refinancing high-rate debt to low-rate debt and then re-entering again into high-rate debt is completely ineffective. Refinancing high-rate debt to low-rate debt requires a behavioral change commitment. Be honest with yourself!

Paying off high-interest-rate debt first is rational. Most economists would agree. However, being overwhelmed by debt is psychologically VERY challenging. Cognitive scientists suggest that this form of scarcity is likely to create short-term psychological blinders. This is a situation where scarcity causes us not to see ahead in the future. This kind of scarcity situation is called "tunneling." Tunneling may quickly cause a bad situation to become even worse. Sometimes, in a difficult debt situation, being rational and being effective are not always the same. [xvii]

Personal finance personality Dave Ramsey recognizes that people run the risk of being "rational but ineffective." As such, Ramsey recommends the "debt snowball" method to extinguish the debt. [xviii] The debt snowball method focuses your energies on extinguishing the smallest balance debt first. In Ramsey's method, creating positive debt payment momentum and confidence is more likely to give you motivation and will help you finish your debt repayment journey. The debt snowball method may not be mathematically optimal compared to paying the highest interest rate debt first. However, it may be more effective from a behavior change standpoint. Less rational and more effective is certainly a positive outcome!

You have choices regarding how to extinguish unwanted debt, such as the high-rate method or the snowball method. Choosing the method you are most likely to stick to will be the best method. Also, it is fine to do a hybrid approach. You may start with the debt snowball method. Once you get momentum and confidence, you may always switch to the more economically rational high-interest-rate method.

7. Budgeting tools

There are many budgeting tools, please see the notes section at the end of this article for some suggestions. [xix] Consider using a simple budgeting model. Something you can keep up with and that makes sense to you. Also, consider making your own budget spreadsheet in excel or google sheets. This is a great way to learn spreadsheet mechanics and create more personal investment in your budget. You may use the commercial budgeting tools as a template to build your own budget. Certainly, using our recommended commercial budgeting tools is a solid alternative as well.

These budgeting tools will help you enter your monthly revenues (like your paycheck) and expenses. Be sure to review several months of past bank statements and credit card bills to enter all your expenses. A typical mistake people make is underestimating expenses. Also, don't worry about getting it perfect your first time through. Set up your initial monthly budget, then go back over time and update as you learn. "Process not perfection" is a stoic's mindset!

Finally, be sure to set up some maintenance expense accounts for potential but difficult-to-time expenses. For example, if you own a car or a house, you WILL have maintenance expenses, you just do not always know WHEN those expenses will occur. In the case of a car, assume reasonable annual expenses, like $1,000. Then, set aside about $83 / month (approximately 1,000 / 12) in your expense budget. By the way, auto maintenance and extended warranty plans available for purchase at car dealers are almost never a "good" deal for you. They will generally cost more than you actually use. Use your budgeting discipline and willingness to shop auto maintenance garages as a means to make auto expenses a "good" deal for you!

If you have trouble consistently going over budget, I suggest examining the budget gap from the perspective of the wealth-building approach points presented earlier.

Are you spending money you do not have? Are you trying to impress someone? Are you taking a long-term view?

Be honest and take action! The sooner the better. Especially, if those overages are in the low-priority wants category. Remember, we re-prioritized our wants (“fun money”) to the bottom of the payment hierarchy. It is possible a payment you have tagged as a "need" can be re-categorized as a "want." If you are still unable to balance your budget, it may become necessary to adjust or eliminate lower-priority needs.

8. Conclusion

Great news! - Once you get in the habit of thinking like a stoic, budgeting will come naturally. Spending properly will become automatic. Spending any other way will feel strange. Throughout this article, we have made reference to our "Stoic's Arbitrage" curriculum and a "stoic-like" approach to investing and budgeting. In summary, The Stoic's Arbitrage includes four important habit-forming actions:

Pursuing knowledge
Making high-value choices
Taking action
Providing kindness to others

You still may be wondering “why?”….what is the purpose of building long-term value, budgeting, and thinking like stoic? This is where the stoic’s kindness to others principle comes into focus. We have many alternatives for how we define our utility. Sometimes, our utility, or "what is important to us" will change throughout our lives. I provide the stoic's perspective as a suggested utility alternative. Naturally, it is up to you to define and actively pursue your own utility.

A stoic believes kindness to others is central to life. Pursuing knowledge, building value, and living in a value-focused manner will create your wealth capacity to provide kindness to others. While there are certainly other means to provide kindness, wealth will likely give you more options to deliver kindness to family, friends, and/or the community. One of my favorite related bible verses is from 1 Peter 4: “Each of you should use whatever gift you have received to serve others, as faithful stewards of God’s grace…”

Notes

[i] We discuss the challenges of assessing value in the context of Warren Buffett's quote in more detail in the following article:

Hulett, Assessing value like Warren Buffett: Price is what you pay, value is what you get, The Curiosity Vine, 2022

[ii] Behavioral economists call this common utility challenge a "Failure of Invariance." People are famously inconsistent when assessing their own utility. People are known to be subject to situational framing that creates different utility assessments.... even for the same person at the same time!

Next are amazing and accessible behavioral economics books, written by Nobel-prize-winning authors:

Thaler, Sunstein, Nudge, The Final Edition, 2021

Kahneman, Thinking, Fast and Slow, 2011

For a deeper dive into "utility" in the context of everyday buying decisions, especially concerning the potential pitfalls of not understanding your utility, please see our article:

Hulett, The subtleties of lending discrimination, The Curiosity Vine, 2022

[iii] For a deeper dive into our brain, including the evolutionary drivers for "Thinking Fast," please see:

Hulett, Our Brain Model, The Curiosity Vine, 2020

[iv] Hulett, Our Investment Barbell Strategy, The Curiosity Vine, 2022

Hulett, Investment thoughts for my children, The Curiosity Vine, 2020

[v] Full disclosure: Not long after I published this article, my youngest son reminded me that I regularly drink beer. Usually a drink or 2 a night. Yes, this is hypocrisy! Even your intrepid author can fall victim to this wealth-reducing trap. I immediately asked a relevant question... is craft IPA really that much better than less expensive lager? I ended up changing my habituated behavior, only buying the more expensive craft IPA for special occasions. Ahhh... the power of habits. Perhaps someday I will stop altogether....maybe....

Bottom line: This "coffee-nomics" discipline is harder than it looks. Think of it in terms of process, not perfection!

[vi] Jeffrey Hulett, The Time Value of Money Values the Young

Chart assumptions:

7% long-term tax-adjusted rate of return
$80 monthly coffee spending / reduced savings
2% Annual coffee price increase
Retire at 67

[vii] George Clason is credited with the suggestion to "pay yourself first," from his personal finance classic:

Clason, The Richest Man in Babylon, 1926

[viii] There is still an open question about why Americans do not save as much today. It is well known that past generations of Americans had less income and saved more. It is also known that other countries today have less income and more savings than the U.S. So we know it is not because today's Americans do not have the income capacity to save more. They absolutely do. In a 2022 interview, Yale University Economist James Choi expressed his theory:

Choi Savings Theory 1: "Our financial system is more developed now. And so you can get loans in a tough spot. You get better insurance than you did before. And so there’s less of a need to engage in precautionary savings now than you did in the ’50s."

Choi Savings Theory 2: "Another perspective is, hey, we just made it a lot easier to tap your home equity. We made credit cards a lot more available. Companies have gotten a lot better at marketing their goods than they used to be. And so maybe it really is about greater temptation in the economy now than there used to be."

Choi, Dubner, Are Personal Finance Gurus Giving You Bad Advice?, Freakonomics Podcast Interview, Interview 515, 2022

My personal favorite is Choi's second "greater temptation" theory. Using our stoic-derived discipline and knowledge will help us overcome the temptations Dr. Choi mentions. The point of the "Stoic's Arbitrage" is to use our stoic-informed knowledge and stoic-enabled discipline to make sure consumer financial products serve us.... instead of us serving financial services product companies!

Hulett, The Stoic’s Arbitrage: A survival guide for modern consumer finance products, The Curiosity Vine, 2020

[ix] Do not confuse higher-priority bills with fun money. Just because a credit card statement comes, it does not mean all the transactions should be part of a higher priority bill. Check out the transactions. If they are more in the "fun money" category, be sure to treat them as such and adjust future spending. Do your best to pay off your credit card bill every month. If you are having trouble doing that, reduce the credit limit on the card and pay cash for your wants.

[x] Thaler, Sunstein, Nudge, Improving Decisions About Health, Wealth, and Happiness, 2008

[xi] I am a big fan of robo-advisors. They generally have very low minimums. Almost anyone can start building wealth. Setting one’s risk profile is an important part of setting up a robo-advisor account. Investment risk management is a function of time. I.e., the longer the time period, the higher the properly managed risk may be realized to maximize return. A 7-plus year timeframe should be invested in higher risk profile equity portfolios. (This time period is roughly equivalent to the typical business cycle) Shorter-term time horizons should be in cash or appropriate bond and/or bank-like investments. When in doubt, choose a longer time frame. Timing needs for money are almost always further in the future than you think.

The great thing about robo-advisors is the automation of regular rebalancing and tax efficiency strategies (e.g., tax-loss harvesting). The setup is straightforward, with the risk profile handled by answering a brief set of yes/no questions. Finally, as interested, robo-advisors generally have a rich set of educational resources and helpful tools.

Robo-advisors I am currently active:

Wealthfront

FidelityGo

In the past, I have used:

Betterment

I have considered but did not use:

Schwab Intelligent Portfolios **

JPMorgan Auto Investing ***

in terms of robo-advisor costs, there are 2 main costs to consider.

1). AUM fee - most robo-advisors charge a fee as a percentage of the assets they manage. Currently, the market is around .25% annually. (Or, $2.50 for every $1,000 they manage.)

2). The loads of the underlying funds the robo-advisor manages - Most robo-advisors use ETFs, which generally have very low loads (< .1%). In the case of FidelityGo, as of this writing, they charge .35%. However, they only use Fidelity funds and they do not charge fund management fees. So, the FidelityGo fee is on par with a robo that passes through ETF fees. (.25% + ~.1% = .35%)

**The Schwab approach lacks transparency, at least at the time of article writing. In my understanding, Schwab does not charge any stated AUM fees. Yea! Great news. So you may ask, how do they make money?

This is the part with a transparency challenge. Based on their example, Schwab sweeps about 8% of client AUM into a low-interest-bearing bank account. Schwab uses this very cheap money to make loans and other investments for itself. In today's world, the bank account rate they pay customers is extremely low, less than .5%. If the long-term yield on the other ETFs is 10%, that means the effective AUM fee is .76%. [(long-term yield – deposit yield)*cash sweep %] Also, this AUM fee opportunity cost money is not available for the long-term time value of money customer benefit. Other robo-advisors invest 100% of client funds in the investment strategy. This lacks transparency because:

1) the effective AUM fee is hidden in the cash account and is 3x other robo-advisors.

2) From a liquidity standpoint, you would never use a robo-advisor to hold cash because the account, by definition, is illiquid in the short term.

It would be the worst of both worlds of getting a super low yield and not having direct access to the cash.

*** The JP Morgan approach lacks transparency as they 1) charge a higher .35% AUM fee but do NOT disclose which funds will not have the backend fees rebated. 2) They sweep 2% of AUM into their own checking accounts. While less than Schwab, it is still consequential.

The challenge with Robo advisors associated with larger broker-dealers that manage their own funds and have a bank appears to be they have more tools to potentially reduce transparency. This may be a good reason to utilize monoline robo advisors. Also, at some point, I’m hopeful a law similar to the Truth In Lending Act / Reg Z for lending will make it unlawful for broker-dealers not to disclose “effective” AUM fees and to help make robo advisor fees comparable. Until then, caveat emptor!

We provide a slightly different example with the additional context in our article Is it time for “Truth In Investing?” – The next Robo-advisor evolution

[xii] See our article for getting the best yield on your short-term accounts. We provide a shopping approach and a number of high-yield savings accounts as examples:

Hulett, The sleeping bank deposit customer - It is time to wake-up, The Curiosity Vine, 2022

[xiii] Rules of thumb can be a little dangerous. They are meant as aspirational goals. They are not meant to be such a stretch that they feel like a "setup for failure." In the case of managing a savings target, it will be highly dependent on your life stage, your current situation, and your flexibility to manage your cost of living. The most important behavior is to pick a reasonable goal, based on your situation. Then look to improve upon that goal. Also, be sure to ask the hard questions from our wealth-building approach. Challenge yourself. Perhaps your situation is a function of a changeable attitude or behavior.

[xiv] Most cars, especially common mass production, average-priced cars, do depreciate over time. However, since the pandemic and resulting supply chain disruption, car prices have increased. At this point, those increases are believed to be temporary. In a discussion with a credit risk manager of a large auto finance banking company, it was mentioned that long-term severity models (those models that predict the collateral value for regulatory required credit loss forecasting) are still primarily predicting auto depreciation. Please see appendix 5 of the following article for the typical long-term auto depreciation curve.

Hulett, Cutting through complexity: A confidence-building car buying approach, The Curiosity Vine, 2020

[xv] "Salience" presents as part of a cognitive bias known as "availability bias." Please see the "Individual decision biases" section of our framework for a description and examples of availability bias and salience:

Hulett, Great decision-making and how confidence changes the game, The Curiosity Vine, 2022

[xvi] Hulett, The Stoic’s Arbitrage: A survival guide for modern consumer finance products, The Curiosity Vine, 2020

[xvii] Mullainathan, Shafir, Scarcity: Why Having Too Little Means So Much, 2013

[xviii] Ramsey, The Total Money Makeover: A Proven Plan for Financial Fitness, 1994

[xix] Here are some budgeting tool suggestions:

Clever Girl Finance

Nerd Wallet

The Balance