Credit cards make it very easy to track these two numbers.
Here’s exactly how I use credit cards to track my spending.
When I get my monthly statement for each credit card, the first thing I do I add the amount and due date to my Notes app.
I’ve been doing this for years now, which means I have a clear understanding of my family’s usual spending habits.
I can then quickly assess whether it was a good spending month. For example, if I normally spend $4,000 per month on my card, and this month I spent $5,000, I’ll know very quickly that something is off.
Sometimes, it’s obvious why I overspent. Maybe it was something like buying airplane tickets for a family vacation. If that’s the case, I don’t need to study my credit card statement too closely because I already know why my spending was more than usual.
Other times, it’s not so obvious. When I don’t immediately understand why my spending was higher than normal, I take a closer look at my statement.
This same process also helps me track that month’s savings transfers to make sure I maintain a strong savings rate.
Why I also track the payment due date in Notes.
The reason I write the payment due date is to make sure I never miss a payment. This is the most important rule of responsible credit card use.
If you miss even one payment on a single credit card, that missed payment will appear on your credit report. Your credit score will also drop.
As a landlord, I play close attention to any potential tenant’s credit history and score. I am not willing to risk entering in a financial relationship with someone who has a history of missed payments.
We recently received an application from someone who has missed 8 of her last 25 payments on her auto loan. That was a major red flag.
I automate some, but not all, of my monthly payments.
Even though my wife and I only use two credit cards for our personal spending, we have business credit cards for our real estate properties.
We also have mortgages and HELOCs that need to get paid at various times each month. I use the Notes function to remind me when these payments are due.
For each credit account, I have automatic payments set up to pay the minimum required amount each month. I then pay the full balance each month manually.
That’s because we have various sources of income that come in sporadically throughout the month. It’s simpler for me to pay certain bills manually instead of automatically.
When you have multiple income streams, you have Parachute Money. Currently, our Parachute Money includes:
Using the Notes function helps me make the required payments each month after these income streams hit my checking account.
What other benefits do credit cards offer?
Credit cards offer a variety of other benefits to entice customers. Besides tracking your spending, two of my favorite perks are purchase protection and credit score monitoring.
Purchase Protection and Fraudulent Charges
Purchase protection is so important in today’s world. The last thing any of us needs is for our personal finances to get wrecked by scam purchases or fraudulent charges.
Let’s say you buy something with Zelle, debit card, or cash. There are very little, if any, protections to get your money back if that transaction needs to be cancelled.
Credit cards, on the other hand, typically offer the best purchase protection available. If you’ve been scammed or deceived in any way, your best bet at fixing that issue is to work with your credit card company.
Also, credit card companies are generally very proactive and helpful in addressing fraudulent charges. If you do encounter any fraudulent charges, your credit card company will work with you to fix the problem.
While credit card companies are pretty good these days at spotting fraudulent charges, I like to double check my online account to protect myself. To make sure I have not been targeted, I take about 30 seconds to look at my credit card transactions each week.
Credit Score Monitoring
Most credit card companies today offer free credit score monitoring through one of the major credit agencies, like Experian. You can see your credit score right in your online account.
Your credit score will automatically update, usually once per month. You can see how your score changes from month to month and what factors currently influence your score.
How can I see all the benefits my credit card offers?
Because there are so many credit card options on the market, the best thing to do is look up the card you have or are thinking about applying for.
I prefer to visit websites like thepointsguy.com for thorough breakdowns and even valuations on each card’s offerings. This makes it easy to compare credit cards from different banks.
You can also visit the credit card company’s website directly to learn the full extent of the benefits offered by each card.
In today’s post, we’ll discuss 10 credit card tips for lawyers and professionals so you can benefit from the perks of credit cards without suffering from the penalties.
I’ll also share what two credit cards I carry in my wallet for all of my everyday spending.
I’m a big fan of earning credit card points on everyday spending and turning those points into once-in-a-lifetime vacations.
My wife and I have traveled all over the world together using credit card points. Using points, we’ve stayed at some incredible hotels like the Mandarin Oriental in Lake Como and the Park Hyatt in Sydney.
The key is to recognize that credit cards are a privilege, like any other form of credit. If you abuse the privilege, you’ll face severe personal finance consequences.
With that underlying principle in mind, here are ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
1. Only charge what you can afford to pay off.
While it may seem obvious to only charge what you can afford to pay off, many of us have trouble following this primary rule of responsible credit card use.
Let’s look at some scary stats about credit card use to solidify this point:
48% of credit card holders carry a debt balance, an increase of 9% since 2021.
53% of people have been in credit card debt for more than a year.
From 2023 to 2024, credit card balances on average increased 3.5% to $6,730.
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
2. Avoid overspending because you’re using credit instead of cash.
Making a purchase with a credit card instead of cash makes it seem like we’re not spending real money.
We have all fallen victim to this tendency to overspend because of how easy it is to swipe a credit card.
Whether it’s the daily Starbucks habit, running up a bar tab, or buying another new toy for your kid, it’s a lot less painful in that moment to use a credit card instead of cash.
If you’re honest with yourself and know that you tend to overspend when using a credit card, try leaving your credit card at home. Bring some cash with you instead.
The simple act of needing to pay with cash instead of credit is oftentimes enough to stop you from spending on that thing you don’t really want anyways.
3. Do not treat your credit card like an emergency savings account.
This may be the single most problematic area we’ll discuss in my credit card tips for lawyers and professionals.
33% of Americans report they have more credit card debt than emergency savings.
None of us are immune from these types of unexpected expenses.
Be sure to establish an emergency savings account so you don’t end up relying on your credit card when the unexpected happens.
These unexpected expenses can be substantial and result in monthly credit card balances that accrue large amounts of interest.
4. Understand how credit card interest works.
If you’re going to use credit cards as part of your everyday life, you should understand the basics on how interest is charged.
This may be the most overlooked of my credit card tips for lawyers and professionals.
Credit card interest is typically expressed as an annual percentage rate, or APR.
If you carry a balance on your card, the credit card company charges interest by multiplying your average daily balance by your daily interest rate. You will be charged this interest until your balance is paid off in full.
Credit card interest rates are typically variable, meaning they can change over time.
In the abstract, it can be difficult to fully appreciate how penalizing credit card interest is on our finances.
Let’s look at an example to better understand the consequences of carrying a balance.
Let’s say you just moved to a new apartment and purchased a $1,400 TV using a credit card. You don’t have enough money saved up for the full purchase, so you decide to pay off $100 each month. Your credit card charges 23% interest.
At that interest rate, it will take you 17 months to pay for that TV. You will end up paying a total of $1,645, which includes $245 in interest.
The $245 in interest equals 15% of the original price of the TV. That means you paid 15% more than the TV actually cost.
If that doesn’t catch your attention, don’t forget this is just the interest on one purchase after moving to a new apartment.
What if you want to buy a new sofa to go with your TV? How about a coffee table and a rug? Floor lamp? End table?
You can see how a 15% penalty on each of these purchases can start to add up quickly.
5. Never miss a credit card payment.
Write this rule down in stone: never miss a credit card payment.
If you don’t remember any of the other credit card tips for lawyers and professionals, remember this one.
It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.
Because the consequences of a missed payment are so severe, it’s a good idea to set up your account for automatic payments.
You have options when setting up automatic payments. Ideally, you can pay your full balance automatically each month.
If that won’t work for your situation, you can set up automatic payments for the minimum required amount to stay in compliance with your account terms.
By paying at least the minimum amount required on-time each month, you will not be penalized with a missed payment.
What is the minimum required payment?
Credit card companies typically only require customers to make a minimum payment towards their balance each month. The minimum payment is generally 2% to 4% of your balance, or a predetermined minimum fee of around $35.
It may sound enticing to only pay the minimum. However, you will be charged interest on that remaining balance. That interest compounds and will be a major drag on your finances.
Let’s look at another example to see what happens when you only make the minimum required payment.
Let’s say you have a credit card balance of $2,000. Your minimum required payment will likely be between $40 and $80 to stay in compliance with your account terms.
In this example, assume the minimum required payment is $40. If you make the minimum payment of $40 out of your total balance of $2,000, that means your remaining balance is $1,960.
On the next billing cycle, you will be charged interest on that remaining balance of $1,960. At 23% interest, you will be charged $37.39, which gets added to your total balance.
So, on the next billing cycle, your total balance will be $1,997.39.
Let that sink in.
Even though you paid $40 last month, your balance only decreased by $2.61. Ouch!
Note: this example is for illustration purposes only and may not be precisely how your credit card company calculates interest.
By the way, credit card companies want you to only pay the minimum each month. That’s how they make so much money.
How much money do credit card companies make in interest and fees?
Beyond interest, credit card companies profit by charging fees, such as late fees and balance transfer fees.
For these credit card tips for lawyers and professionals, I want to focus on the annual fees tied to rewards credit cards. These fees can cost hundreds of dollars annually and cancel out the value of any points you earn.
For example, if you have a credit card that charges an annual fee of $500, and you only earn $400 worth of points each year, that’s a losing proposition.
You’d likely be better off using a credit card that does not charge an annual fee, even if that means losing out on some points.
For that reason, it’s important to do your homework before applying for a new card.
So, how can you determine if you’re getting enough value out of your card to justify the annual fee?
That leads us to our next tip.
7. Learn how much points are actually worth.
This is not an easy thing to do. Luckily, there are some great websites that are dedicated to credit card rewards that have done these calculations for you.
I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.
To give you an idea, The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point and American Express Membership Rewards at 2 cents/point.
With that information, you can then determine if a certain credit card is worth having in your wallet.
For example, let’s say a particular Chase card you have charges an annual fee of $500 per year. When you look at your total spending from the previous year, you see that you earned 20,000 points using that Chase card.
Using The Points Guy valuation of 2.05 cents/point, that means you earned $410 worth of points. That’s $90 less than what you paid as an annual fee to have the card. That’s obviously not a good tradeoff.
Yes, credit cards come with other benefits that may add value to you. These benefits are oftentimes related to travel. If you travel frequently, these benefits may be worth it. If you don’t travel often, these benefits may not offer much value to you.
Keep in mind there are plenty of credit cards available that do not charge an annual fee and still offer points.
The takeaway is that you should regularly evaluate your spending habits and credit card reward programs to ensure you are still getting value from that card.
8. Use points for travel instead of cash back.
Many credit cards offer various options to redeem points. The easiest redemption option is to convert your points into cash that then gets applied to your balance.
While cash back is the easiest redemption option, it is typically the least valuable. You’ll get far more value by redeeming your points for travel rewards.
Credit card companies like Chase and American Express have partnerships with airlines, hotels and other travel providers. You can transfer your credit card points to these travel programs to maximize the value of those points.
If you’re reading a blog on credit card tips for lawyers and professionals, I’m guessing travel is a part of your life. Whether for leisure, business, or necessity, there should be plenty of opportunities to use your points for travel.
To figure out the best redemption options, it takes a little bit of effort. There are endless options and entire websites dedicated to point redemption strategies.
Before you get overwhelmed, I’d suggest first talking to your friends and family to see if any of them have already investigated the best redemption option for your personal situation.
Did you know that talking about money, and credit card points, is not taboo?
9. Be strategic about what, and how many, credit cards you have.
There was a time in my life when I had ten different credit cards because I wanted to maximize the points I earned on every purchase.
I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.
My wallet was thicker than a Harry Potter book.
I did earn a lot of points. But, it was so stressful.
Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.
In these credit card tips for lawyers and professionals, I recommend you keep things simple.
I now have only two credit cards in my wallet: Chase Sapphire Reserve and Chase Freedom Unlimited.
I use the Sapphire Reserve for travel and dining and the Freedom Unlimited for everything else.
We still earn plenty of points and our finances are much simpler.
One other suggestion: if you’re in a relationship and share finances, I suggest you align your credit card strategies. Most major credit card companies allow you to combine points with a household member.
You can more quickly accumulate points by focusing on a single rewards program, instead of spreading out those points among various programs.
Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited.
10. Don’t spend money just to earn points.
As crazy as it sounds, you may be tempted to spend money you otherwise wouldn’t because you want to earn more points.
It’s possible to become so obsessed with collecting points that you forget about the strong personal finance habits you’ve worked so hard to establish.
It can be easier to justify careless spending when we trick ourselves into thinking that spending will eventually lead to a vacation. For example, if you have a credit card that offers bonus points at restaurants, you may be tempted to spend more money when you eat out.
Or, you may be tempted to pick up the tab for your friends even though that spending doesn’t align with your budget.
The temptation to earn points can overwhelm your plans to stay on budget. This logic applies to any type of spending, not just dining out and bar tabs.
Use your credit cards to spend within your Budget After Thinking, not as an excuse to justify blowing your budget.
To recap, here are my ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
Let us know your best credit card tips for lawyers and professionals in the comments below!
Each year, they analyze data from 140 countries and publish their findings in an effort to give everyone the knowledge to create more happiness for themselves and others.
Please imagine a ladder with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?
WHR explains that this “life evaluation” question empowers people to make their own judgments about what matters most.
As part of its analysis, WHR uses economic modeling to explain countries’ average life evaluation scores. They look at six variables, and one of them jump out at me:
“Freedom to make life choices.”
What countries would you guess scored the highest on the 2025 rankings?
The top five countries in the happiness rankings are:
Finland
Denmark
Iceland
Sweden
Netherlands
Each of these nations has ranked near the top for a long time.
Where is the United States on the happiness chart?
The United States fell to number 24, its lowest happiness ranking ever.
The United States’ highest ranking was 11th place way back in 2011.
I’m not totally surprised that the United States’ ranking is as low as it’s ever been.
We’ve discussed some theories that may help explain this drop:
8 out of 10 of us are worried we may lose our jobs this year.
Nearly half of us don’t use our hard-earned paid time off (PTO) and choose to work more days than we are asked to.
I wasn’t surprised to see the United States rank 24th in the global happiness rankings, but I was shocked by the sub-ranking for this specific question:
Are you satisfied or dissatisfied with your freedom to choose what you do with your life?
The United States ranked 115th out of 147 countries in response to the freedom question!
When we are financially free, we can choose to live life on our own terms. To me, that sounds a lot like what the WHR freedom question is trying to answer.
When you have financial freedom, you can make important decisions based on what truly matters. When you don’t have financial freedom, you risk making unsatisfactory decisions for money reasons.
We can choose to spend more time with the people who are meaningful to us.
We can choose to use our skills for work that is meaningful to us.
Most of us grow up thinking that life only revolves around getting an education and then getting a job. We don’t allow ourselves to believe that financial freedom is possible for us.
This was exactly how I felt before I wrote down my Tiara Goals one day on the beach in 2017.
My goal with Think and Talk Money is to help us all realize that financial independence is within our reach. If we can think and talk about our money choices even a little bit every week, we can make sure our money life remains in balance with the rest of our life.
By practicing strong personal finance habits, each of us can feel more satisfied with our freedom to choose what to do with our lives.
How would you rank yourself on the freedom question?
Are you satisfied with your freedom to choose what you do with your life?
What are your core values?
Have you ever written down your core values?
Do you know what you’re striving for?
Successful businesses look at these questions regularly. I find it helpful to learn how successful businesses operate so I can apply similar principles to my own life.
For example, there’s a great business book called Traction by Gino Wickman. In the book, Wickman encourages businesses to focus on vision, mission, and values.
It seems like a pretty good idea for all of us to think about vision, mission, and values as they apply to our own lives.
For example, if you’re one of the nearly half of Americans not taking your PTO, are you making that choice based on your core values?
It’s possible that you are. Perhaps you’re being strategic and have formulated a plan to benefit from all those extra hours at the office.
Or, it’s possible that you’ve never really stopped to think about why you’re working so much. You’ve never paused to articulate to yourself what you want out of life.
In Traction, Wickman makes a compelling argument why businesses should not skip this crucial step.
We all should take the same step in our personal lives. In 2017, I wrote down my core values, what I call my Tiara Goals.
Looking at the big picture, my Tiara Goals have helped me visualize what I truly want out of life.
In the short term, my Tiara Goals help guide me through difficult decisions. As long as I’m clear with myself about what I want in the long run, I can make daily decisions to get my closer to those goals.
Millennials want more kids but can’t afford them.
According to a recent report from Business Insider, Millennials want more kids but can’t afford them.
This makes me sad.
The study points to rising costs, as well as the reality that Millennials are saddled with large amounts of student loan debt.
Combined, it makes sense that Millennials are worried about money.
If you want to start a family, or grow your family, what better motivation could there be to spend a little bit of time each week thinking and talking about money.
If this is your reality, or you know someone in this position, establishing strong personal finance habits is crucial.
Each week at Think and Talk Money, we focus on developing these strong personal finance habits.
Have you ever wondered how successful real estate investors seem to acquire properties so quickly? The answer is usually related to “OPM”, or Other People’s Money. In today’s post, we’ll discuss how I’ve used a common form of OPM, a Home Equity Line of Credit or HELOC to buy investment property.
The best part is that you can use and repeat this strategy to acquire multiple properties. On three separate occasions, my wife and I successfully used a HELOC to buy investment property.
Besides acquiring properties, as a real estate investor, you can also use a HELOC to update a property. My wife and I have done both. We’ve used HELOCs to help with the initial downpayment to acquire properties. We’ve also used HELOCs to improve properties after we’ve purchased them to increase its value.
Read on to learn what a HELOC is and how to use a HELOC to buy investment property.
What is a HELOC?
A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.
Think of a HELOC as a second mortgage on your property that works like a credit card. That means you will be charged interest when you use your HELOC funds.
Just like with a primary mortgage, when you open a HELOC, the bank is protected by the equity in your home.
Just like a credit card, you can choose when and how to use a HELOC. And, you can use your HELOC over and over again, as long as you pay down the balance. Use it, pay it off, use it again. This is what my wife and I have done.
Of course, this is one of the best parts about HELOCs. Whether you want to use a HELOC to buy an investment property, or for any other purpose, you can tap the funds repeatedly and don’t get charged any interest until you use them.
This point is worth repeating. You can open a HELOC and not use it right away. You won’t be charged interest while you wait for an opportunity to present itself.
That opportunity might be using your HELOC to buy investment property.
Or, it might mean using your HELOC to renovate your home or buy a car. This is what my wife and I did recently. When we bought a new car last year, we decided to use our HELOC funds instead of taking out a new auto loan.
Keep in mind that when you decide to use your HELOC, you will be charged interest until you pay it back, just like a credit card. This is a major consideration to keep in mind if you’re thinking about using a HELOC to buy an investment property.
To recap, a HELOC is really just a form of credit card, available to you for a set period of time, secured by the equity in your home.
You can use those HELOC funds for any purpose. You can choose to use your HELOC to buy investment property, renovate your home, buy a car, or for pretty much any other purpose.
What to know about paying off a HELOC.
If this all sounds too good to be true, don’t forget that you do have to pay off your HELOC, with interest. Just like any other debt, whether it’s Good Debt or Bad Debt, a HELOC needs to be paid off.
HELOCs are generally broken out into two phases, the “draw period” and the “repayment period.”
The first phase is known as the borrowing period, or draw period. You can continue to use your HELOC funds for the duration of the draw period. Most HELOCs have a draw period of 10 years.
During the draw period, your loan balance will accrue interest. Generally, you are required to make minimum payments during the draw period.
These payments are usually referred to as “interest only” payments. This means you must pay the interest accrued during the previous month, but you don’t have to pay down the principle owed.
At the close of the draw period, the repayment period begins. During the repayment period, you can no longer borrow from your HELOC.
The repayment period typically lasts 10 or 20 years. Your lender will set a schedule for monthly payments to pay off the balance in full, similar to a mortgage.
Four advantages to using a HELOC to buy investment property.
Here are the four main reasons why I’ve used a HELOC to buy investment property. These same advantages apply to any other major purchase.
1. You can use a HELOC as you would use cash, including for a downpayment.
Once your HELOC is open, you can use the funds as you would cash. All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.
With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.
This is a huge advantage if you want to use a HELOC to buy investment property.
That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a downpayment.
On the other hand, cash advances from credit cards are typically not allowed for a downpayment on a conventional loans.
2. HELOCs charge lower interest rates.
The interest rate charged on HELOCs will typically be lower than the interest rate charged by credit cards and other personal loans.
Interest rates on HELOCs are similar to prevailing mortgage rates, but typically charge about 1-2% more. This is to compensate the HELOC lender for the added risk of being the second mortgage on a property.
According to Bankrate, here are the current average interest rates:
As you can see, if you need to borrow money for any reason, using a HELOC usually gives you the best rate. This is a major reason why people generally use HELOCs.
It’s also the primary reason why I have used a HELOC to buy investment property.
Keep in mind that HELOCs generally charge a variable interest rate that may change monthly depending on market conditions outside your control. This is again to protect the HELOC lender, and is a factor to consider before you use your HELOC funds.
In fact, this is one of the key risks with using HELOCs. You may apply for a HELOC when interest rates are low, but that can change. You may be faced with a significantly higher rate when you pay off the balance.
From a real estate investor’s perspective, a higher interest rate may end up eating into all of your cashflow. Before using a HELOC to buy investment property, make sure the cashflow on the property can cover the higher loan payments.
3. You only pay interest on HELOCs during the draw period.
As discussed above, you typically only have to pay the interest on a HELOC during the draw period. That means your monthly payment is lower. As long as you make the minimum payment, the overall balance will not grow month to month.
Then, during the repayment period, you have 10 to 20 years to pay off the balance. This lengthy period helps spread out the balance over time, which keeps the required payment lower each month. This long payoff period is extremely beneficial when paying off larger purchases, such as a home renovation.
This is also another key reason why a real estate investor would use a HELOC to buy investment property.
Spreading out the payments over the long term, and only paying interest during the draw period, means more monthly cashflow. Some real estate investors think differently, but to me, cashflow is king.
4. You may have access to a larger sum with a HELOC.
Because a HELOC is secured by the equity in your home, it’s likely you will be eligible for a larger sum than a typical credit card or other personal loan.
While credit cards also allow cash advances, they are typically capped at a relatively low amount and come with higher interest rates.
A larger available balance comes in handy when you want to use a HELOC to buy investment property.
For conventional loans, you’ll typically need 20-25% of the purchase price as a downpayment. That is a lot of money to come up with on your own, even if you are great at fueling your savings.
The same is true for funding any other major purchase. For example, just the other day, I spoke to a friend who opened up 12 different credit cards to launch his software business.
If he had access to a HELOC, he would not have needed 12 separate credit accounts. The HELOC would have provided him enough funding.
How I’ve used HELOCs to scale my real estate portfolio.
Using HELOCs can be an effective way to scale your real estate portfolio.
As mentioned above, you can use your HELOC for a downpayment on another investment property.
This is one of the ways my wife and I scaled our real estate portfolio. We primarily invest in an area of Chicago where properties can get expensive. The same can be said about our vacation rental in Colorado.
Coming up with a full downpayment in these markets on our own would take years of savings. We’ve made the choice to take on additional debt and added risk to scale more quickly.
We purchased our first investment property in 2018. After making some improvements and paying down the mortgage, we applied for a HELOC in 2020. We then used those HELOC funds to help with the downpayment for our Colorado ski rental in 2021.
After a couple years of unexpected appreciation on our ski rental, we took out a HELOC on that property in 2022.
We then used that HELOC to help purchase a third rental property in Chicago in 2022 and our primary home in 2024.
As you can see, we’ve used our equity gains in our earlier properties to take out HELOCs to help acquire additional properties.
Along the way, we have worked on paying down the balances of each of those HELOCs. This way, we reduced our debt and increased our net worth. We can also now repeat the process and again use a HELOC to buy investment property.
Besides a downpayment, real estate investors can use HELOC funds to make improvements to their properties.
Real estate investors also use HELOC funds for improvements to their properties. These improvements can lead to equity gains through appreciation and also more monthly cashflow.
We’ve used HELOCs in this way on multiple occasions. For example, we used our HELOC to install washers and dryers into three of our apartments.
We then paid off the HELOC balance with the increased rental income generated by those three improved apartments.
Don’t ignore the biggest risk of using a HELOC to buy investment property.
With all the advantages of HELOCs, there is one major risk that cannot be ignored. This single risk is so important that is should outweigh all of the advantages for most people.
In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.
If you decide to tap your HELOC funds, remember that the loan is tied to the equity in your home. If you fail to comply with the loan terms, your home is at stake.
That’s a huge risk.
Before you consider using a HELOC, be sure to have a plan in place for paying back the loan. This is where your Budget After Thinking can really help.
I would not use a HELOC as a beginner investor.
While there are upsides to using HELOCs, it is a potentially risky strategy that I would not feel comfortable with as a beginner investor.
I say that for good reason.
When you hear HELOC, you should immediately think about debt. For many of us, debt is problematic and leads to negative emotions.
While I’ve used HELOCs to scale my real estate portfolio, my primary money goal this year is to pay down these HELOCs. I’m tired of having those debt balances hanging over my head.
If you have proven to yourself that you can responsibly handle debt, using a HELOC may be a worthwhile strategy.
If you have satisfied all of the above, you can then make an informed decision about using debt to scale your real estate portfolio.
How do you apply for a HELOC?
Applying for a HELOC is just like applying for a mortgage. The bank will review your finances and determine if it will lend you money against the equity in your home.
If you’ve ever applied for a mortgage, you know this is not a fun process.
The key to qualifying for a HELOC is that your home equity needs to have grown in value, either by paying down your primary mortgage or through appreciation.
Let’s look at an example of using a HELOC to buy investment property.
Note, you’ll never have to do this math yourself. This is for illustration purposes in case you want to estimate the amount you may be eligible for before you start the application process.
For easy math, we’ll make some assumptions in this example. Always confer with your mortgage broker or lender for precise calculations.
In this example, let’s say you bought a home five years ago for $500,000.
You put 20% down ($100,000) when you bought the home, so your original mortgage was for $400,000. This means your equity in the home when you bought it was $100,000.
For the past five years, you’ve paid down the principle on your mortgage every month. For easy math, let’s assume your remaining mortgage is now $350,000. Because you paid down $50,000 of the mortgage, your equity has increased by $50,000.
Not only have you been paying down the mortgage for five years, your home has also appreciated in value and is now worth $600,000. That’s another $100,000 in equity you now have in your home.
Add it all up and you started with $100,000 in equity (your original downpayment) and now have $250,000 in equity.
This is because you have paid the mortgage down every month and your home has appreciated in value.
In this scenario, you may be eligible for a HELOC to buy an investment property.
How do lenders calculate the amount of your HELOC?
Each bank may have different standards for qualification and how much they will lend you. Generally, banks will use a metric called Loan-to-value ratio to calculate the amount of your HELOC.
What is Loan-to-value ratio?
Loan-to-value ratio is a complicated name for an easy math formula:
LTVratio = Mortgage amount / Property value.
In our scenario, your current mortgage amount is $350,000. Your property value is $600,000.
So, your LTVratio is .5833 ($350,000 / $600,000). In terms of percentage, that’s approximately 58%.
A typical HELOC lender will allow you to borrow up to a combined LTVratio of 70%.
That means your existing mortgage plus the HELOC can only add up to 70% of the value of your home.
The bank does this to protect itself by requiring you to maintain 30% equity in your home.
To carry out our example, using a combined LTVratio of 70%, you may be eligible for a HELOC of $70,000:
Value of home = $600,000.
First mortgage = $350,000 (approx. 58%)
HELOC = $70,000 (approx. 12% of value of home)
Combined mortgage + HELOC= $420,000 (70% of home’s value).
Remaining equity in home = $180,000 (30% of home’s value).
Again, you don’t need to do this math yourself, but it’s helpful if you want to understand what size HELOC you may be eligible for before starting the process with lenders.
Have you used a HELOC to buy investment property?
Using a HELOC to buy investment property can be an effective strategy. My wife and I have effectively used this strategy multiple times.
Before you decide to use a HELOC, be sure to understand the risks associated with taking on additional debt.
Have you used a HELOC to buy investment property before?
What about using a HELOC for any other purpose?
Tell us about your experience in the comments below.
Your credit history will touch almost every important financial transaction you enter into today. I don’t just mean credit cards and loans.
If you apply for a job, need insurance, or want to rent an apartment, those companies are going to review your credit report and credit score.
So, even if you don’t intend to take out loans, your credit history and credit score are still important.
But, obsessing over your credit score is counter productive.
Has obsessing over any number ever served you well, anyways?
GPA…
Weight…
Social Media Followers…
Yes, these things may be important to you. But, obsessing over the number itself is not how they improve. The habits behind the number are more important.
If you want to improve your GPA, you need to study more.
To lose weight, you need to practice healthy living.
For more social media followers, you need to create better content.
The same logic applies to credit scores.
If you want a good credit score, the best thing to do is to practice strong personal finance habits that we routinely discuss in the blog.
Obsessing over your credit score number is a waste of mental energy.
With this backdrop in mind, we can discuss credit scores.
What is a credit score?
As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.
Credit also refers to a person’s trustworthiness or history of repayment.
We then learned that a credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.
Your credit report will typically include:
Personal information (name, social security number, current and former addresses)
Credit accounts (current and historical accounts, including credit cards and any other loans)
Collection items (missed payments, loans sent to collections)
Public records (liens, foreclosures, bankruptcies)
Inquiries (when you apply for a new loan)
Now, we’ll talk about credit scores.
A credit score is a three-digit number calculated based on your credit history that represents your present day creditworthiness.
Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.
We each have multiple credit scores depending on the scoring service. While there are many others, the two main scoring services are FICO and VantageScore.
Keep in mind that your score may vary depending on the type of loan you are applying for. For example, an auto lender looks at different factors than a mortgage lender.
FICO and VantageScore each assign a score ranging between 300-850.
For both services, if you’re around 800, you’re doing very well. If you drop below 650, you’ve got some work to do.
Before we look at the factors that go into your credit score, I can’t emphasize this next point enough:
Don’t obsess over your credit score.
You certainly want to pay attention to dramatic changes in your score so you can understand where you need to make adjustments. That said, you should not be concerned with slight movement in either direction.
For example, FICO considers a score between 800 and 850 as “Exceptional.” Once you’re in that range, it makes no difference whether your score is 804 or 837. You may notice slight variation from month to month. That’s normal and perfectly fine.
Instead of worrying about fluctuations in your score, spend your time and energy on more important financial wellness strategies, like writing down your Tiara Goals.
What factors go into your credit score?
Regardless of the scoring service, your credit score generally consists of these factors:
Payment history
Current unpaid debt
The types of loan accounts
Length of credit history
New credit inquiries
Amount of available credit being used
Collections, foreclosures or bankruptcies
Of course, not each factor counts equally. For example, FICO weighs each factor like this:
Payment history: 35%
Amounts owed (credit utilization rate): 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
VantageScore does not assign percentages to each factor, but does define the importance of each factor like this:
Payment history: Extremely influential
Total credit usage: Highly influential
Credit mix and experience: Highly influential
New accounts opened: Moderately influential
Balance and available credit: Less influential
In comparing the two main scoring methods, we can see that both methods generally look at the same factors. They both also place the highest emphasis on payment history and place less emphasis on new accounts opened.
Here’s all you need to know about each factor.
There’s no reason to overcomplicate what each factor means.
Here’s all you need to know:
Payment history reflects whether you consistently make on-time payments.
Amounts owed, credit utilization rate, and total credit usage refer to how much of your available revolving credit you are currently using.
Revolving credit mostly refers to credit cards, but could also include loans like a line of credit.
For example, if you have a credit card with a monthly limit of $1,000, and you are currently charging $300 per month on that card, your credit utilization rate is 30%.
To maximize your credit score, aim for using 30% or less of your available credit. This ratio applies to each individual account and to your total account balances.
Length of credit history refers to how long various accounts have been open.
The longer the accounts have been open, the better your score will be.
Credit mix looks at what types of loans you have open.
Generally, lenders prefer to see a variety of loans, like credit cards, auto loans, and mortgages.
New credit refers to how many loans you’ve applied for recently.
Applying for too many loans in a short period can negatively impact your score since you may seem desperate for loans to fund your lifestyle.
What factors are not considered in your credit score?
Credit scores do not take into account personal information like race, gender, age, or marital status.
Credit scores also do not consider income or employment history.
Keep in mind that while personal information or employment history is not a factor in your credit score, it certainly will be considered as part of your application by lenders.
For example, mortgage lenders and landlords will want to confirm your history of steady employment and income before entering into a financial relationship with you.
Don’t get caught up in precisely how your score is calculated.
FICO and VantageScore provide the above information as general guidance. However, each of our credit scores is determined on a unique set of circumstances that changes over time.
While these factors are generally considered for everyone, specifically how each factor is weighed varies for each of us.
Your credit report and FICO Scores evolve frequently. Because of this, it’s not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.
Like we mentioned before, it’s important to not get hung up on the different methodologies that each scoring service uses. For the most part, your score won’t vary significantly from one service to another.
The key point is to pay attention to the general factors that impact your score but understand that your score is always changing. Don’t waste your energy trying to decipher how much weight is given to each factor.
How to check your credit score.
These days, it’s easier than ever to monitor your credit score.
Most major banks offer free credit scores to their customers.
You can also sign up for credit monitoring, including credit scores, with the major credit bureaus, Equifax, Experian, and TransUnion. Note that only some services are provided free of charge.
Of course, there are also no shortage of apps and websites providing similar services, sometimes free and sometimes for a price.
If you’d like additional guidance on how to obtain your credit score, please reach out on the socials or by replying to our weekly newsletter.
What should I do instead of obsessing over my credit score?
Instead of obsessing over your credit score, focus on the strong financial habits we discuss regularly in the blog.
You should not have to worry about your credit score if you:
When you can make these habits part of your regular life, your credit score will automatically rise along the way.
Look at credit scores from a potential lender’s point of view.
I hope this goes without saying, but lenders are in the business of making money. They make money by gauging risk. The lower an applicant’s credit score, the more the lender’s risk increases.
When the lender’s risk increases, it may decide to not lend you money. Or, it may choose to lend you money and charge you a higher interest rate to compensate for that higher risk.
The same logic applies when other entities besides lenders are reviewing your credit score.
For example, an employer may check your credit score to determine your level of trustworthiness before offering you a job.
A landlord may check your credit score before agreeing to rent you an apartment to confirm whether you are likely to make the required payment each month.
Always remember why credit scores are used in the first place.
If nothing else, remember why credit scores are used in the first place:
Credit scores are used to measure how risky it would be for someone else to enter into a financial relationship with you.
In other words, can you be trusted with money.
If you have a history of not making on-time payments, or not paying loans back, that indicates you are not responsible with money.
When you are using up most of your current credit and carrying high balances, that demonstrates that you have a hard time limiting your spending.
If you are constantly applying for new credit, it shows that you may be dependent on credit to fund your life.
In any of these scenarios, the risk of entering into a financial relationship with you increases.
Credit scores are especially important before big purchases.
If you have a big purchase coming up, like buying a home or a car, it’s important to have your credit score in a good spot before applying. This is because your credit score will impact the interest rate you are offered.
For a big purchase, even slight variations in the interest rate can make a huge difference.
Because it’s normal for your credit score to change frequently, it is worth waiting to apply for that loan until after you’ve improved your score.
The best ways to improve your score in the short term are to pay off debt and avoid applying for new credit.
By paying off debt, you’ll improve your payment history and your credit utilization rate, two of the most important factors in your score regardless of scoring method.
The best thing you can do to avoid the costly consequences of a poor credit score is to implement the personal finance fundamentals we routinely discuss in the blog.
Have you ever needlessly obsessed over your credit score?
Let us know what that felt like in the comments below.
We need to replace a 20 year-old wood fence at our home that’s one strong storm away from falling over. In these past few weeks, I’ve learned more about fences that I care to admit.
On the bright side, shopping for a fence has led me to think about and practice many of the personal finance habits we talk about in the blog.
Let me walk you through my thought process to help you whenever you have a big expenditure in front of you.
In the world of privacy fences, there seem to be three primary choices available: wood, vinyl, and composite. I won’t bore you with all the details. The key points to consider for our conversation are:
Wood is the cheapest, but requires the most upkeep and will eventually need to be replaced.
Vinyl (plastic) comes with a lifetime warranty, requires little-to-no upkeep, but is 30-40% more expensive than wood.
Composite is the most durable, looks incredible, requires no upkeep whatsoever, has soundproofing ability, is made from recycled materials, comes with a 25-year warranty, but is nearly 3x more expensive than wood.
We’ve ruled out wood after doing our research and determining that we’ve got too much going on to worry about annual fence upkeep.
So, that leaves vinyl and composite. From our research, both would be good options. However, there’s really no doubt that composite is the best overall option, if you can stomach the cost.
Talk to your people about expensive purchases.
This is a big financial decision, so of course, I’ve been talking to my people for weeks about what they would do.
I’ve gotten three common responses that go something like this:
“You’re planning to live in this home for the long run, make the investment in the best fence possible and never worry about it again.”
“How much do you really care about a fence? I’ve never even noticed my fence. Think of what other projects you could spend that money on.”
“Dude, leave me alone. I don’t want to talk about your fence.”
As you can see, talking to your people does not mean that you’re off the hook for making the decision yourself. You will likely get a wide spectrum of advice.
However, you’ll gain invaluable perspective to consider so you can make the best decision for your personal situation.
Expensive purchases test your personal finance habits.
Whenever you have a big purchase ahead of you, many of the strong personal finance habits you’ve been working to establish will be tested. You’ll be asking yourself questions like:
My wife and I have considered all these questions as we’ve talked through the options.
As of this moment, we’re leaning towards the composite fence so we never have to think about fencing again.
To help defray the cost, we’re considering a financing option that offers 0% interest for 18 months.
Important side note: if you ever choose to go with an attractive financing option, always read the fine print first.
The lender is hoping you fail to pay off the purchase within the 0% interest period so you’re forced to pay insanely high interest on the remaining balance. The financing option we’re looking at jumps from 0% interest to 26% interest if we fail to pay off the loan in 18 months. That’s a serious penalty.
Financing aside, we’ve also concluded that other projects will have to wait for a while so we don’t crush our money goals for the year.
We’ll make our final decision this weekend.
What would you do?
Leave a comment below to help my wife and I decide.
Sharing Think and Talk Money with Others.
Over the past couple days, I’ve heard from several readers who have shared Think and Talk Money with people they care about.
One reader told me that he shared the blog with his 25 year-old son. The reader was very appreciative because he’s experienced how important personal finance is.
He knows his son will only benefit in the long run if he implements strong money habits at the beginning of his career.
Another reader shared the blog with a friend who is now tracking her spending for three months. This is the first time she has ever tracked her spending to learn where her money is going each month.
She is using her phone and a simple spreadsheet to track her expenses. She reports that even though it’s only been a month, she’s learning things about her money choices she never knew before.
I love reader stories like this because they reflect one of our core philosophies at Think and Talk Money:
It doesn’t matter if you’re talking about paying for a fence or starting a budget. We all could use help when it comes to making good, consistent money decisions.
Your friends are likely going through the same money challenges.
Since writing about my challenges with credit card debt at the beginning of my career, I’ve had some great talks with friends I knew back then.
Multiple friends have shared with me that they were dealing with the same credit card debt issues at the same time that I was.
None of us ever knew it at the time. We were hanging out with each other every weekend, spending money we didn’t have. The joke of it all is that we were likely encouraging each other’s poor habits.
Learning that I was in the same position as my friends all these years later does make me feel at least a little bit better about the mistakes I made back then. But, that’s not the important takeaway.
The big takeaway for me is that if my friends and I were dealing with the same money challenges back then, we’re probably dealing with similar money challenges today.
It might not be credit card debt from our social lives, but it might be something like saving for college or paying for a home. Maybe it’s what we should do when the stock market slumps.
Just like we mentioned above, my friends and I will only benefit from having these kinds of money talks.
Instead of just talking about mistakes we made in the past, we can talk about how to get it right as we move forward.
I spoke to this debt collector after breaking my wrist snowboarding.
For the second time in a year.
Let me explain.
About six months earlier, my friends and I took a road trip to go snowboarding in Wisconsin. I had never been to this location before and wanted to explore the entire ski area. After a few loops on the main run, I found my way to the terrain park.
My plan was to scout out the terrain park and report back to my friends. I must have forgotten the plan as I approached a jump that I had no business approaching. That turned out to be a mistake.
Heading towards the jump, I had too much speed and, for lack of a better word, panicked. My friend reported afterwards that as soon as I jumped, my body and snowboard turned parallel to the ground like I was lying in bed.
After all these years, It almost seems peaceful to picture myself lazily flying through the air on a beautiful, blue sky, sunny day.
Almost.
To state the obvious, this was not a good position to be in since I needed my feet and snowboard to hit the ground first and land safely.
I ended up landing on my backside with my hand and wrist hitting the ground first. The unpleasant result was a trip to the emergency room and a broken wrist.
My reputation for having fragile wrists was secured.
OK, back to the debt collector.
A few weeks after returning to Chicago, I received a bill in the mail from the emergency room for approximately $200.
I didn’t understand why I was receiving a bill since I had insurance and provided that information to the emergency room. I figured it must have been a mistake to send me a bill, and that my insurance company would pay for it.
So, I crumbled up the bill and threw it in the trash.
Before you shake your head, remember that I was still in school and on my parents’ insurance. This was my first interaction with a medical provider where the bills came to me instead of them.
I didn’t know at the time that even with insurance, I could potentially be responsible for some portion of the bill.
For the next few months, I continued to receive bills from the emergency room. And, I continued to throw these bills straight in the trash.
At some point, I received a new type of letter in the mail. This one caught my attention. It was from a collections agency.
The letter said something to the effect of, “Call us immediately to dispute or pay this medical bill before we are forced to take action against you.”
The scare tactic worked.
I picked up the phone and had a surprisingly nice conversation with the debt collector. The debt collector explained how the collections process works and the potential impact failing to pay would have on my credit report.
Credit report?
Never heard of that before.Don’t think I have one.
After hanging up the phone, I did some research and realized the debt collector wasn’t scamming me.
I certainly did have a credit history, as reflected in my credit report, that I needed to be mindful of.
I wrote a check to pay the bill the next day.
This is how a broken wrist and a debt collector first taught me about credit reports.
What is a credit report?
As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.
Credit also refers to a person’s trustworthiness or history of repayment.
A credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.
Your credit report will typically include:
Personal information (name, social security number, current and former addresses)
Credit accounts (current and historical accounts, including credit cards and any other loans)
Collection items (missed payments, loans sent to collections)
Public records (liens, foreclosures, bankruptcies)
Inquiries (when you apply for a new loan)
Every time you open a loan, like a credit card, auto loan, or mortgage, it will appear on your credit report. Likewise, whenever you make a payment or miss a payment, that information will be reflected on your credit report.
When someone has “good credit,” it means they have a reliable history of repayment. When someone has “bad credit,” it means they have not previously demonstrated a reliable history of repayment.
Remember this key point: your credit report represents a complete picture of your interactions with credit over an extended period of time. Your credit report will include information about you going back years and years.
This means that the information reflected on the report will follow you for the long term. Any negative information on your credit report will typically stay on your credit report for 7-10 years, depending on the credit reporting agency.
If you haven’t obtained your credit report recently, I highly encourage you to do so.
Regularly checking your credit report is the best way to make sure that nobody has fraudulently opened any accounts using your social security number. It’s also the best way to monitor all the loans you are currently responsible for.
Believe it or not, it’s not uncommon for people to forget about loans they have previously opened.
Did you ever go to a Cubs game in college and sign up for a credit card just to receive a free XXL white t-shirt with a blue W on it?
No?
Uhh… me neither.
How about signing up for a new credit card while making a purchase at your favorite store to save a whopping 10% that day?
You may never end up using these credit cards and completely forget that you opened them. They’ll still appear on your credit report, and you are still responsible for those credit cards.
Is a credit report different from a credit score?
Yes, credit reports and credit scores are different.
We’ll soon discuss credit scores in detail. For now, understand that a credit score is a number calculated based on your credit history that represents your present day creditworthiness.
Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.
Unlike a credit score, your credit report does not change quickly. Like we mentioned earlier, any negative information on your credit report will typically stay on your credit report for 7-10 years.
Why does my credit report matter?
We typically rely on our ability to borrow money to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase.
In these scenarios, lenders will “pull your credit” or do a “credit check” before agreeing to give you a loan.
If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.
On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money.
Or, a lender may agree to give you a loan and charge you a higher interest rate to compensate for the increased risk. This could end up costing you lots of money.
Poor credit history can lead to lost opportunities.
Besides just financial consequences, a poor credit history can also lead to lost opportunities.
As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. Most major rental property search websites, like Zillow and Apartments.com, offer credit checks as part of the standard application process. My wife and I require a minimum credit score for all potential tenants.
It makes sense why a landlord would pull an applicant’s credit. When you rent an apartment, you are signing a contract (a lease) to pay a predetermined about in exchange for a place to live.
Landlords rely on those rent payments to pay for the property’s mortgage and upkeep. These rent payments can also directly impact the landlord’s livelihood.
It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.
Just as a landlord is sizing up your ability to pay the rent each month, other lenders, like a car dealership or mortgage lender, are sizing up the likelihood you can repay its loan.
Don’t ignore your credit history.
Have you checked your credit report this year?
My wife and I check our reports at least once per year to make sure there are no red flags.
Fortunately, I realized my mistake with the debt collector before that red flag ended up on my credit report.
If I hadn’t, I would have seen that negative mark on my credit report for 7-10 years. This would have severely impacted my ability to qualify for mortgages and grow my real estate portfolio.
I’m glad I learned that lesson about credit reports.
I’m also glad that I haven’t been back to a terrain park since law school.
I’ll give you an example. This weekend, we hosted a birthday party for my five-year-old daughter. She wanted a rainbow unicorn theme.
When asked what she wanted for a present, she would unhelpfully respond, “No clue.”
OK, great.
Fortunately, the local toy store was stocked with rainbow unicorn items: puzzles, books, stuffed animals, craft kits, etc. The kids at school must be on the same page with their interest in rainbow unicorns this year.
The rainbow unicorn party went well. We started with pizza, decorated cupcakes, and had a unicorn egg hunt.
The highlight of the party?
The birthday cake.
We ordered a rainbow unicorn cake from one of the most popular bakeries in Chicago, Sweet Mandy B’s. The next time you’re in Chicago, do yourself a favor and pop in for a cupcake or cookie.
After singing “Happy Birthday,” I started cutting pieces of cake for the kids. A few jumbo pieces of cake later, one of our guests came to my rescue and showed me how to cut smaller, kid-appropriate pieces.
It’s a good thing she did because with the way I was cutting the cake, we were going to run out before all the adults got a piece. And that would have been a bad thing.
See, this cake was incredible. I’m not always a cake guy (unless it’s ice cream cake), but this one was special.
Vanilla confetti cake with buttercream frosting. It had the perfect balance of cake and filling. Sweet, but not too sweet. Soft and also firm.
It wasn’t just me. I never saw a cake disappear so fast. Usually, we end up with so much cake leftover that I’m sneaking bites every time I open the fridge for the next week. Not this time. Sadly.
By the end of the party, we had barely a single piece left (which was devoured within 24 hours).
There is a bright side to finishing the cake, though.
If I had an unlimited supply of this cake, I’m not sure I could stop myself from eating it. The temptation would be too strong to sneak back to the fridge all day long, fork in hand. One little bite at a time.
It’ll be fine.
What does birthday cake have to do with personal finance?
You know where this is going.
Eating a wonderful cake at a birthday party is a good thing.
Eating cake every day for the next week, no matter how good it is, would be a bad thing.
You see? Something can be good and bad at the same time.
And that leads us to our next major topic in the blog: the responsible use of credit.
What is credit?
Credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. In this context, think of “credit” as another way of saying “debt.” When you use credit, you’re taking on debt.
Credit also refers to a person’s trustworthiness or history of repayment. When someone has “good credit,” it means they have a reliable history of repayment.
It’s important to always remember that credit and debt go hand-in-hand. That’s why before we discuss how credit can help us, we learned scary stats about debt. We discussed three big reasons why we’re in debt. And, in a preview to our conversation on credit, we learned the difference between Good Debt and Bad Debt.
We typically rely on credit for big purchases.
We typically rely on our ability to borrow money, or our credit, to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase. That ability to borrow money is known as credit.
If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.
On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money. Or, a lender may charge you higher interest rates to compensate for their increased risk.
This could end up costing you lots of money.
Poor credit will cost you more than just money.
Besides just financial consequences, a poor credit history can also lead to lost opportunities.
As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.
These reasons, and other reasons we’ll soon discuss, illustrate why it’s so important to responsibly use credit.
In our initial series on credit, we’ll discuss:
The basics of credit reports and credit scores and why they each matter.
How the responsible use of credit cards can fit into our personal finances.
What you need to know to maximize the benefits of credit card reward programs.
How to use other forms of credit, like a Home Equity Line of Credit (HELOC), to accelerate your progress towards financial freedom.
By understanding what credit is and how your credit history is tracked, you’ll gain the confidence to use credit responsibly as part of a healthy financial life.
I am in favor of the responsible use of credit.
As I previewed in our discussion on Good Debt, I’m in favor of people responsibly using credit as part of a healthy financial life.
That applies to our every day choices, like using credit cards to track our spending. It also applies to other forms of credit, like Home Equity Lines of Credit (HELOCs), to acquire assets. We’ll discuss these and other benefits of responsibly using credit in our upcoming posts.
The important caveat, however, is that like the Sweet Mandy B’s birthday cake, we have to know when a good thing can become a bad thing.
If we abuse the privilege of credit, the consequences can be severe. I abused the privilege of credit cards at the beginning of my career, and it took years to dig out of the hole.
By understanding how credit works and how your credit is tracked, I hope you can avoid falling into a similar mess.
I want you to happily enjoy the cake without the potential negative consequences.
I’ve been talking about it a lot lately with anyone willing, or in the case of my students, with anyone without a choice but to listen.
If you haven’t seen it, the show is a competition between 10 survival experts who are dropped off in the middle of nowhere, completely isolated from all human contact. Each person is allowed to bring ten survival items, some clothes, and a safety kit. They all have cameras to film their journeys. Whoever survives the longest wins $500,000.
It is astonishing what these people are capable of. They build their own shelters and catch all their own food. On a daily basis, they’re forced to solve problems. They have no one to help them, or to blame, but themselves.
My favorite competitor is an Australian guy named Outback Mike. I was blown away by the ideas he came up with and the things he built. There was no mental or physical challenge that he backed down from.
My wife and I first discovered Alone during the pandemic. It was the perfect show during that time of immense mental and physical hardship. There was something about the way each survivalist focused on that day’s tasks, and blocked everything else out, that resonated with us.
Watching the latest season of Alone these past few weeks, it occurred to me that the show is full of analogies for the personal finance topics we discuss in the blog.
I’ve found analogies to be great teaching tools, so here we go.
1. Not all calories are created equal.
The major challenge in Alone is getting enough calories to survive. Food is not exactly plentiful in the remote locations where the competitors are dropped off.
To survive, competitors dedicate endless hours strategizing and looking for food. Common strategies include fishing, trapping, hunting, and foraging.
One of the first things you learn is that not all calories are created equal. Calories from fat and protein are at a real premium. Even with an unlimited supply of berries and greens, the competitors make clear that you cannot survive for long periods without fat and protein.
Besides the importance of the type of calories, the way the calories are procured is just as critical.
This makes perfect sense in a survival scenario. If you expend 2,000 calories of energy to catch a fish, and that fish only provides you 1,000 calories of food, that is a losing proposition. If you continue on that trajectory long enough, you’ll starve to death.
This is why contestants on the show always think about ways to passively procure food, such as setting traps or using gill nets. If they can obtain food passively, they can then use that time to rest (save calories) or on other necessary tasks.
In the show, most competitors eventually tap out, on the brink of starvation, having failed to obtain enough food. It’s never for a lack of effort. It’s just really hard.
So what do calories have to do with personal finance?
Just as not all calories procured are created equal, not all dollars earned are created equal.
This begs the question:
If you think about what you do to earn money, are you the contestant trading 2,000 calories of energy for 1,000 calories of food?
The first professional works 80 hours per week and earns an annual salary of $200,000.
The second professional works 40 hours per week and earns an annual salary of $120,000.
Which one would you rather be?
Would your answer change if we convert the annual salary to an hourly rate?
On an hourly rate, the first professional ends up earning $48 per hour.
The second professional earns $58 per hour.
If you’re still leaning towards the first professional who earns more overall but less per hour, did you think about how valuable that extra 40 hours per week could be?
That’s time that could be spent on your true passions. It’s time that could be spent with friends and family. That’s time that could also be spent developing a skill or earning income through a side hustle.
Looking at it another way, what if you could earn the same $200,000 without having to work 80 hours per week? This is where passive income streams come in.
Like the gill net that catches fish without the active involvement of the fisherman, have you explored ways to make money while freeing up your time for other worthwhile pursuits? This is an unavoidable step on your way to financial freedom.
For what it’s worth, I’m confident that the survival experts would all choose to be the person who makes more money per hour while also having more time available for other pursuits.
2. Attitude is everything.
Watching Alone, you see a wide range of personalities. While each contestant has the resume of a survival expert, one attribute always separates the winners from the losers: attitude.
The contestants are forced into what would be impossible survival scenarios for the average person. It’s completely understandable to have tense, frustrating, and stressful moments.
This isn’t me judging the contestants who have poor attitudes. I wouldn’t last an hour in the woods by myself. I’ve never even been camping. My wife caught more fish when she was six than I’ve caught in my whole life.
This is just my observation that most of the time, contestants have similar survival skills. What separates the winners is their attitude and ability to recognize that things will go wrong.
When things go wrong, they don’t blame anyone else or play the victim.
Instead of getting frustrated and quitting, they think of solutions to the problem at hand. This is what so impressed me with Outback Mike.
Yes, we all need a bit of luck in life to thrive. But, we need to put ourselves in position to benefit from luck when it comes our way. That takes intentional thought and effort.
I’m guessing we all know very smart and talented people that have bad attitudes. When things don’t go their way, they immediately blame other people. Nothing is ever their fault. They feel entitled to success without doing the work.
That type of person usually doesn’t lead a very happy or fulfilling life.
For sure, that person would not last a week on Alone.
3. Along with starvation, missing family is the hardest part.
If it’s not starvation, odds are contestants will tap out because they miss their families. The physical challenges of being forced to survive on limited food in rugged conditions is hard enough.
To do it alone and isolated from your family makes it nearly impossible.
One of the most enlightening parts of the show is when the contestants reveal their mental struggles to the camera. Since they’re alone, and typically starving, we get to see raw emotion in real time. You learn a lot about the human condition in these moments.
One unavoidable truth is that us humans are social creatures.
We need our people. We need love and support and connection. Going through life alone goes against our DNA.
Even the chance at winning more money than the contestants ever dreamed of is not nearly enough to keep them away from their families any longer.
There’s one other lesson Alone teaches us about the importance of family. A lesson that is extremely relevant to me right now.
When each season begins and the new contestants are introduced, my wife and I know right away who isn’t going to make it: the people with young kids.
These people have all the skills necessary to survive. But, those skills don’t matter when they start missing their kids. The emotion is too strong. The longing to be with their kids overcomes all else. They simply do not want to miss another day of their kids’ lives.
I think about this lesson in the context of our daily lives. Like the professional in our example above working 80 hours per week, at what sacrifice do all those hours come? How many hours away from home is that? How much time away from our kids?
When I think about those questions, I again think about what I would do with my time if I was financially free.
Let’s take a deeper dive into the two most common strategies for paying back debt when you have multiple loans: Debt Snowball v. Debt Avalanche.
In our post on how to confidently tackle debt, we discussed that it’s a smart idea to apply one of these strategies. Here, we’ll see why.
You’ll notice we have lots of charts and numbers in this post. Don’t worry, you don’t need to do any math. I’ll show you how to use a simple online calculator to help you decide with strategy is best for you.
Before we look at the strategies, always keep in mind the number one rule:
Always pay the minimum required amount on every loan no matter what.
Whatever strategy you end up using, always pay the minimum payment on every loan. If you fail to do so, you will be charged penalties and your credit history and score will be negatively impacted. You will also accrue interest on those penalties, compounding your mistake.
Don’t worry if this sounds confusing right now. We’ll discuss credit cards and the responsible use of credit in detail in upcoming posts.
The below strategies apply to any excess funds you have left after paying at least the minimum on every loan balance. No matter what, you need to make the minimum payment on each loan every single month.
What is the Debt Snowball method?
The first strategy is known as “Debt Snowball.” When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.
Remember, these strategies are for helping you pay back multiple loan balances.
Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.
What is the Debt Avalanche method?
The second strategy is referred to as Debt Avalanche. With this method, you will prioritize the loan with the highest interest rate, regardless of the balance.
Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.
You can apply either of these strategies in the same way no matter how many loans you have.
The first step in choosing a debt payoff strategy is to gather some basic information on each loan that you have.
For each loan, you’ll need to find the outstanding balance, the interest rate, and the minimum required monthly payment. You can pull this information from your most recent monthly statement.
Once you have this information, you can plug the numbers into a simple online calculator. By doing so, you’ll get an idea of how much it will cost you (in terms of time and money) to pay off these debts.
They have calculators for all sorts of different purposes, including a Debt Payoff Calculator. Using the Debt Payoff Calculator, you can decide the best payoff strategy for your personal situation.
You may prefer the quicker emotional wins that come with the Debt Snowball method. Or, you may prefer the savings that come from the Debt Avalanche method.
There’s no wrong answer. The choice is yours.
Let’s see how Debt Snowball and Debt Avalanche work in practice.
Note, for simple illustration purposes, the minimum payments in these examples remain the same throughout the life of each loan.
Example 1: Two Different Credit Card Balances
Imagine you have two credit cards with balances owed.
Credit Card 1: $5,000 balance with a 15% interest rate and a minimum required payment of $150 per month.
Credit Card 2: $10,000 balance with a 20% interest rate and a minimum required balance of $200 per month.
Balance
Rate
Min. Pay.
Credit Card 1
$5,000
15%
$150
Credit Card 2
$10,000
20%
$200
After creating a Budget After Thinking, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $150 to Credit Card 1 and $200 to Credit Card 2, you have $650 left to deploy.
How should you do it?
Debt Snowball
If you apply the Debt Snowball approach, you prioritize paying off the loan with the smallest balance. That means paying $800 to Credit Card 1 ($150 minimum payment plus $650 remaining funds) until that loan is paid off completely. The remaining $200 needs to be applied to cover the minimum payment on Credit Card 2.
Once Credit Card 1 is paid off completely, you will add that $800 payment to Credit Card 2 for a total payment of $1,000.
Balance
Rate.
Min. Pay.
Snowball
Credit Card 1
$5,000
15%
$150
$800
Credit Card 2
$10,000
20%
$200
$200
Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $17,303.70, of which the total interest is $2,303.73.
Importantly, Credit Card 1 will be completed paid off in 7 months.
Debt Avalanche
Now, let’s see what happens when we apply the Debt Avalanche approach. Under this approach, you would prioritize Credit Card 2 because it has the higher interest rate. That means you would pay $850 to Credit Card 2 and only the $150 minimum payment to Credit Card 1. Once Credit Card 2 is paid off, you would pay the full $1,000 to Credit Card 1.
Balance
Rate
Min. Pay.
Avalanche
Credit Card 1
$5,000
15%
$150
$150
Credit Card 2
$10,000
20%
$200
$850
Using calculator.net, you’ll see that it will take you 18 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $17,071.84, of which the total interest is $2,071.87.
It will take you 14 months to eliminate the first loan, Credit Card 2.
Now, we can compare the results of using Debt Snowball or Debt Avalanche.
Under the Debt Snowball approach, you’ll pay $231.86 more in interest. It will take you 18 months to eliminate both debts under each approach.
However, under the Debt Snowball approach, it will only take you 7 months to completely erase one loan. Under Debt Avalanche, you will not erase the first loan until 14 months have gone by.
Now that you have this data, you can decide whether you prefer Debt Snowball or Debt Avalanche. Some people may prefer the emotional win of eliminating one loan completely after 7 months using the Debt Snowball method.
Other people will prefer the Debt Avalanche approach, which results in more savings. The tradeoff is that they won’t eliminate any loans completely until month 27.
As we said before, there is no right or wrong answer. It is entirely a matter of personal preference.
Why not just pay the same amount to each credit card?
If you pay $500 to each credit card from the beginning, let’s see what happens:
Balance
Rate
Min. Pay.
Equal
Credit Card 1
$5,000
15%
$150
$500
Credit Card 2
$10,000
20%
$200
$500
You will end up paying off both loans in 18 months and paying a total of $17,249.39, of which the total interest is $2,249.42. You won’t eliminate any loans completely for 11 months when Credit Card 1 is paid off.
Compared to the Debt Snowball approach, splitting the payments evenly means four more months to pay off the first loan completely. That means you’re waiting longer for your first emotional win.
Compared to the Debt Avalanche approach, you’ll end up paying $177.55 more in total interest. If you’re looking to maximize your savings, splitting payments is not the way to go.
As you can see, whatever your preference is, it makes sense to pick either Debt Snowball (fastest emotional win) or Debt Avalanche (most money saved).
Personally, I prefer the Debt Snowball approach.
I prefer the Debt Snowball approach because of the emotional win that comes with eliminating a debt in less time, sometimes even twice as fast.
That victory is more important to me than saving $231.86 spread out over 18 months (the length of time it takes to eliminate both debts).
If you prefer paying the least amount in interest, I won’t argue with you. There’s nothing wrong with saving money. It’s a personal choice.
That said, there is one instance where I prefer Debt Avalanche to Debt Snowball.
If you have Bad Debt, like credit card, always pay that debt first.
Bad Debt typically has significantly higher interest rates than other forms of debt, like student loans, auto loans, or mortgages.
Compare these current (February 2025) average interest rates for various types of loans:
It’s not hard to see that credit card debt comes with a significantly higher interest rate than any other form of common debt.
This is why I recommend you always pay your credit card debt first.
Let’s look at a second example to illustrate this point.
Example 2: Auto Loan and Credit Card Balance
Auto Loan: $8,000 balance with an interest rate of 5% and a minimum required payment of $50 per month.
Credit Card: $20,000 balance with an interest rate of 20% and a minimum required payment of $400 per month.
Balance
Rate
Min. Pay.
Auto Loan
$8,000
5%
$50
Credit Card
$20,000
20%
$400
Just as before, you’ve determined that you have $1,000 per month to put towards these two loans. Because you have to pay a minimum of $400 to your credit card and $50 to your auto loan, you have $550 left to deploy.
How should you do it?
Debt Snowball
If you apply the Debt Snowball approach, you would prioritize paying off the loan with the smallest balance. That means paying $600 to your Auto Loan until that loan is paid off completely. The remaining $400 needs to be applied to cover the minimum payment on your credit card debt.
Once the auto loan is paid off completely, you will add that $600 to the credit card debt for a total of $1,000.
Balance
Rate
Min. Pay.
Snowball
Auto Loan
$8,000
5%
$50
$600
Credit Card
$20,000
20%
$400
$400
Using calculator.net, you’ll see that it will take you 37 months to eliminate both loans with the Debt Snowball approach. It will cost you a total of $36,753.16, of which the total interest is $8,753.18.
Importantly, the auto loan will be completed paid off in 14 months.
Debt Avalanche
Now, let’s see what happens when we apply the Debt Avalanche approach.
Under this approach, you would prioritize the credit card loan because it has the higher interest rate. That means you would pay $950 to the credit card and only the $50 minimum payment to the auto loan. Once the credit card is paid off, you would pay the full $1,000 to your auto loan.
Balance
Rate
Min. Pay.
Avalanche
Auto Loan
$8,000
5%
$50
$50
Credit Card
$20,000
20%
$400
$950
Using calculator.net, you’ll see that it will take you 34 months to eliminate both loans with the Debt Avalanche approach. You’ll end up paying a total of $33,822.14, of which the total interest is $5,822.17.
It will take you 27 months to eliminate the credit card debt.
We can again compare the results of using Debt Snowball and Debt Avalanche.
Under the Debt Snowball approach, you’ll pay $2,931.01 more in interest. It will also take you three months longer to eliminate both debts.
On the plus side, your auto loan will be completely paid off in 14 months, which is nearly twice as fast as with Debt Avalanche.
Some people may still prefer the emotional win of eliminating one loan completely after 14 months using the Debt Snowball method.
For me, the price of that emotional win has gotten too expensive. I would prefer to save the $2,931.01 and have both loans paid off in less time, even if that means waiting longer to pay off a single loan.
If you do this exercise with any normal credit card compared to another form of loan, you’re likely going to find that the credit card interest rates are so high that you should target those loans first.
Do you prefer Debt Snowball or Debt Avalanche?
As we said before, there’s no right or wrong answer. Money decisions are emotional. Paying off debt is the perfect example.
Using a simple online calculator can help you make the best decision for your situation. All you need to do is find the balance, interest rate, and minimum payment for each of your loans and the calculator will do the rest.
Whichever method you choose, stick with it. Save yourself the stress of doing mental gymnastics each month.
The most important thing is that you are making your payments every month.
