Author: Matthew Adair

  • How to Gain Confidence by Calculating Your Coast FIRE Number

    How to Gain Confidence by Calculating Your Coast FIRE Number

    Have you ever wondered if you really need to keep saving for retirement?

    Believe it or not, you may be closer than you think to achieving your retirement goals.

    That’s a very powerful realization.

    Think about the options you can create for yourself if you no longer need to save a hefty chunk of your paycheck for retirement.

    We recently explored some of these options while talking about the money mindset hack known as Coast FIRE.

    Today, we’ll look at some specific examples of how to calculate your Coast FIRE number so you can see how you stack up.

    By calculating your Coast FIRE number, you may just find that you have more options than you ever thought possible.

    Let’s explore.

    What is Coast FIRE?

    Coast FIRE is a subset of FIRE for people who are not necessarily trying to retire early.

    Instead, the idea is to aggressively fund your retirement accounts early on so you have more options as your career progresses.

    The reason you’ll have options is because once you hit your projected magic retirement number, you no longer need to fund your retirement accounts.

    You can sit back and let compound interest do its thing. Your retirement years are covered.

    With retirement covered, you don’t need to earn as much money. You can focus more attention on your present-day self. That might mean working less hours or working the same amount but in a different job.

    This is the essence of Coast FIRE: knock out retirement planning early on to create more career flexibility later.

    Coast FIRE does not mean complete financial independence.

    When you reach Coast FIRE, you are not financially independent because you still need money coming in to fund your current lifestyle.

    But, you need less money because you no longer need to save for the important goal of retirement. That means you have earned some financial freedom, but not complete freedom.

    That’s OK.

    Remember, the part that separates Coast FIRE from traditional FIRE is that early retirement is not the goal.

    Instead, Coast FIRE means continuing to work until normal retirement age (like age 65) but having more freedom in what you do for work.

    To put a bow on it: the main money mindset benefit of Coast FIRE is that you have options once you’ve already put away enough money for retirement.

    With retirement taken care of, you can:

    1. Switch to a lower paying job or lower stress job.
    2. Become a stay-at-home parent and live off of one spouse’s income.
    3. Start a business.
    4. Grow your side hustle.
    5. Take some time off to think about what you want to do next.

    With Coast FIRE, each of these options feels safer because you’ve already fully funded your retirement.

    Your Coast FIRE number is not the same as your FI number.

    As we’ll explore below, your Coast FIRE number is different from your FI number (what I sometimes refer to as your magic retirement number).

    Your Coast FIRE number is the amount you need saved up today to stop saving anymore for a traditional retirement. You still need to earn money to fund your current lifestyle.

    Your FI number is the amount you need saved up today to retire and live completely off your investments for the rest of your life.

    You’ll see below that your Coast FIRE number is usually significantly lower than your FI number.

    This is especially true the further away you are from traditional retirement age. That’s because you have a longer time horizon for compound interest to do its thing.

    In fact, the reason Coast FIRE is such a powerful money mindset hack is because the Coast FIRE number seems much more attainable.

    This of it like this: have you ever felt that it seems impossible to save millions of dollars for retirement?

    The truth is you don’t have to come up with all that money on your own. Your job is to aggressively seed your retirement accounts early on so compound interest can do the heavy lifting.

    By funding your retirement accounts early in your career, you don’t need millions of dollars. You actually need way less.

    Calculating your Coast FIRE number will drive this point home.

    Bonfire on a coast with mountains in the background indicating the power of calculating your Coast FIRE number.
    Photo by Courtnie Tosana on Unsplash

    How do I calculate my Coast FIRE number?

    There are some great online calculators available to figure out your Coast FIRE number.

    You simply plug in a few variables, like your current age, desired retirement age, and anticipated spending in retirement. It couldn’t be easier.

    The Fioneers and WalletBurst each have easy-to-use calculators that I recommend. There are plenty of others, but these two are simple to use.

    What’s nice about each calculator is that you can play around with the inputs to explore various scenarios. You can also see how your Coast FIRE number is significantly lower than your FI number.

    The WalletBurst calculator has a helpful graph for visualizing your progress towards Coast FIRE.

    The Fioneers calculator has a nice feature where you can input other sources of passive income, like income from a rental property.

    As we know, adding just one rental property to your investment portfolio can massively shrink your magic retirement number and accelerate your journey to financial freedom.

    If you’re thinking about rental property investing to supplement your retirement income, check out my recent post:

    Shrink Your Magic Retirement Number With One Rental Property

    Note: The Fioneers’ calculator is a Google Sheet you can download, but you need to enter your email address first. You do not need to enter an email address to use the WalletBurst calculator.

    Using these calculators, let’s take a look at a few examples.

    Let’s explore three different scenarios where knowing your Coast FIRE number can be very useful:

    1. Clarke is 35-years-old and ready for a new job.
    2. David is 40-years-old and worried about paying for college.
    3. Dorothy is 28-years-old and just paid off her student loans.

    In each of these examples, we’ll assume a standard retirement age of 65 and an annual rate of return of 10% (on par with the historical results of the S&P 500).

    We’ll also factor in a 3% inflation rate (the historical average in the United States).

    Finally, we’ll assume a safe withdrawal rate of 4.7% in light of the updated “4% Rule.”

    In case you missed it, Bill Bengen, creator of the 4% Rule, just released a new book with some fun news for all of us saving for retirement.

    Bengen’s updated research shows that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    Let’s dive in.

    Coast FIRE Example 1: Clarke is 35-years-old and ready for a new job.

    Clarke is 35-years-old and is ready for a career change.

    His job at a prestigious law firm has taught him a lot and he’s made good money. But, the stress and the hours are starting to take a toll on his personal life and on his health.

    He’s ready to pivot.

    Because he was making good money, Clarke maxed out his 401(k) retirement plan for the past 8 years. He now has $400,000 saved up. He also currently adds $5,000 to his various retirement accounts each month.

    His goal is to have $200,000 annually to spend in retirement.

    Based on the above variables, Clarke’s Coast FIRE number is $559,009.

    At his current saving rate, he will reach Coast FIRE in three years. That means that at the age of 38, he will no longer need to fund his retirement.

    He could then pursue a lower paying, lower stress job without sacrificing his retirement years.

    Note: Clarke’s FI number (magic retirement number) is significantly higher: $4,255,319.

    That’s a big number and can seem intimidating. His Coast FIRE number is more encouraging to think about.

    Yes, he’ll have to keep working to fund his current lifestyle. But, he can choose to work a lot less.

    What if three years still seems too far away for Clarke?

    Using the Coast FIRE calculator, Clarke learns that if he ups his retirement contributions from $5,000 per month to $8,000 per month, he will achieve Coast FIRE in two years.

    That’s powerful information. If he boosts his saving rate even more, he can pivot even faster.

    Armed with the knowledge of his Coast FIRE number, Clarke has a newfound motivation to stick it out at his current job for just a bit longer.

    two boats near stone island indicating the power of calculating your Coast FIRE number.
    Photo by Jan Tielens on Unsplash

    Coast FIRE Example 2: David is 40-years-old and worried about paying for college.

    David had a kid about a year ago and is freaking out about paying for college. He knows that it’s important to prioritize his own retirement before prioritizing his kid’s college.

    David has $300,000 saved for retirement. His goal is to spend $150,000 annually in retirement. He currently has $6,000 available to invest each month, whether that’s for retirement or college.

    Let’s help David out by using the Coast FIRE calculator.

    Plugging in these variables, we see that David’s Coast FIRE number is $588,029.

    Notice how David’s Coast FIRE number is higher than Clarke’s, even though he plans to spend less in retirement. That’s because he has a shorter time horizon and less currently saved.

    This is another reminder to start investing early and often.

    Even so, David is in great shape for retirement. At his current pace, David is 5 years away from reaching Coast FIRE. His daughter will only be six-years-old at that point.

    That means that David will still have 12 years to prioritize saving for his daughter’s college, all while knowing that his retirement is covered.

    This knowledge makes David feel much better. He’s no longer worried about paying for his daughter’s college at the expense of saving for retirement.

    Coast FIRE Example 3: Dorothy is 28-years-old and just paid off her student loans.

    Dorothy is 28-years-old and is in the early stage of her career as a lobbyist in Washington D.C. She lives with 3 roommates outside of town and keeps her expenses very low.

    Dorothy has her whole life ahead of her so hasn’t thought too much about the specifics of retirement.

    But, she knows enough to think and talk money with her friends and family every once in a while.

    In one of these conversations, she learned about Coast FIRE and was interested in calculating what her number is. Dorothy thought about how amazing it would be to pursue a life on her own terms without worrying about retirement.

    Dorothy just finished paying off her student loans. Because she was focused on her loans, she currently has only $10,000 saved for retirement.

    She now plans to roll the $5,000 per month she had been using for loan payments into her retirement account.

    Because she was so far away from retirement, Dorothy thought it was best to error on the side of caution with her annual spending projections.

    So, Dorothy estimated that she would need $250,000 annually in retirement, much more than both Clarke and David figured.

    Based on the above, Dorothy’s Coast FIRE number is $435,153. She can achieve Coast FIRE by the age of 38!

    Dorothy’s Coast FIRE number is significantly lower than Clarke’s and David’s, even though she plans to spend way more in retirement.

    Of course, this is because she is getting started so early.

    Knowing that she can fund her entire retirement in just 10 years, Dorothy makes it a priority to do so.

    By the age of 38, she will be free to pursue any line of work she chooses without needing another dollar to fund her seemingly extravagant retirement.

    That makes Dorothy very happy.

    Use a Coast FIRE calculator to figure out your own number.

    The above examples show how knowing your Coast FIRE number can be so liberating.

    When you calculate how much you’ll need to retire, you may be surprised at how close you actually are.

    If you’ve been avoiding making big life decisions because of anxiety about retirement, knowing your Coast FIRE number can be a huge help.

    Clarke, David and Dorothy calculated their Coast FIRE numbers and were able to come up with manageable plans.

    Each person is on track for a desirable retirement, all while creating options for themselves earlier in life.

    Having options is a great thing.

    Have you calculated your Coast FIRE number?

    Were you surprised how close you actually are to achieving your retirement goals?

    Let us know in the comments below.

  • Why Coast FIRE is a Powerful Money Mindset Hack

    Why Coast FIRE is a Powerful Money Mindset Hack

    Are you working a job you don’t like because you’re worried about saving enough for retirement?

    Well, what if you already have more than enough saved for retirement?

    Would that give you confidence to think about switching jobs? Maybe to a job that pays less but better fits your life goals?

    Think about it.

    If you didn’t have to save another dollar between now and retirement age, would that give you more career freedom?

    Would you start looking for that job you really want instead of the job that pays the most?

    To explore these questions, let’s look at the money mindset concept known as “Coast FIRE.”

    What is Coast FIRE?

    Coast FIRE is a subset of FIRE for people who are not necessarily trying to retire early.

    Instead, the idea is to aggressively fund your retirement accounts early on so you have more options as your career progresses.

    The reason you’ll have options is because once you hit your projected magic retirement number, you no longer need to fund your retirement accounts.

    You can sit back and let compound interest do its thing. Your retirement years are covered.

    With retirement covered, you don’t need to earn as much money. You can focus more attention on your present-day self. That might mean working less hours or working the same amount but in a different job.

    This is the essence of Coast FIRE: knock out retirement planning early on to create more career flexibility later.

    Coast FIRE does not mean complete financial independence.

    When you reach Coast FIRE, you are not financially independent because you still need money coming in to fund your current lifestyle.

    But, you need less money because you no longer need to save for the important goal of retirement. That means you have earned some financial freedom, but not complete freedom.

    That’s OK.

    Remember, the part that separates Coast FIRE from traditional FIRE is that early retirement is not the goal.

    Instead, Coast FIRE means continuing to work until normal retirement age (like age 65) but having more freedom in what you do for work.

    To put a bow on it: the main money mindset benefit of Coast FIRE is that you have options once you’ve already put away enough money for retirement.

    With retirement taken care of, you can:

    1. Switch to a lower paying job or lower stress job.
    2. Become a stay-at-home parent and live off of one spouse’s income.
    3. Start a business.
    4. Grow your side hustle.
    5. Take some time off to think about what you want to do next.

    With Coast FIRE, each of these options feels safer because you’ve already fully funded your retirement.

    That’s a powerful feeling.

    You can take a pay cut for a better job with Coast FIRE.

    Let’s say you earn $200,000 and save 20% of your salary ($40,000) for retirement.

    Once you reach your retirement goal, you no longer have that $40,000 obligation. You have achieved Coast FIRE.

    With that extra $40,000, you have options. You could:

    1. Live it up and spend the money on stuff you don’t care about.
    2. Repurpose the money towards another financial goal.
    3. Switch to a more attractive job that may only pay $160,000.

    Whatever you choose, the point is that you have options.

    If your job is slowly killing you inside, Coast FIRE provides the money mindset to explore other jobs.

    It’s no secret that lawyers typically work long, stressful hours. That’s why burnout amongst lawyers is unfortunately a common occurrence.

    For example, you may have begrudgingly taken a high-paying job out of law school to pay down your loans faster. By the way, there’s nothing at all wrong with that.

    Now, with your loans gone and your retirement savings in good shape, maybe you’d like to explore a less stressful job.

    Maybe you’re ready to pursue that less lucrative career that was the reason you went to law school in the first place.

    Maybe you’re ready to stay at home with your kids and live off of one spouse’s income.

    Of course, burnout is not limited to lawyers. Many professionals today are experiencing burnout.

    Have you been putting off that career change? Does this sound too familiar?

    Coast FIRE allows you to find a job that fits your life better knowing you don’t need to make as much money.

    aerial view of beach with mountains in the backdrop indicating the power of coast FIRE as a money mindset hack.
    Photo by Rod Long on Unsplash

    Financial Independence Pivot Early (FIPE)

    If you’ve been a follower of Think and Talk Money, you know I don’t like the term “FIRE.”

    The problem for me is that the FIRE end game is suggested right there in the name: become financially independent so you can retire.

    If you’re anything like me, you didn’t pay all that money to go to law school just to retire in your peak-earning years. There’s plenty of meaningful work still to do.

    It’s not uncommon for people to hear about financial independence and immediately think that’s only for people who want to quit their jobs and retire on a beach somewhere.

    I don’t think that’s what financial independence is about at all.

    Financial independence is all about creating options.

    When you’re financially independent, you can make decisions based on your core values instead of making decisions based on money.

    You can pivot.

    That’s why I believe in FIPE not FIRE.

    I prefer to think about pivoting, not retiring.

    Pivot means to adapt or improve through modifications and adjustments.

    That sounds appealing to me.

    Retire means to withdraw, to retreat, to recede.

    None of those things sound appealing to me at all.

    Retiring sounds like moving backwards. I’m not working so hard to achieve financial freedom so I can move backwards in life.

    With FIPE, financial independence is still the primary goal. But, the endgame is not to withdraw or retreat.

    The endgame is to adapt and improve how you spend your working hours.

    Financial independence is for people who want to be empowered to take more control of what they do with their working hours.

    It’s not about quitting work entirely.

    It’s about the freedom to pivot to other work, if you want. I’m convinced that humans are meant to be productive. We are social creatures who at our core want to be contributing.

    That doesn’t mean we have to be or want to be employees. But, it does mean that we want to do something meaningful with our working hours every week.

    That’s why I believe in the power of pivoting, not retiring.

    That’s what FIPE is all about.

    And, that’s what Coast FIRE allows you to do.

    Financial independence is about much more than retiring early.

    FIRE emphasizes saving more and spending less until you reach the point where your passive investments generate enough income to allow you to quit your job.

    I love this part of FIRE: the idea of creating enough income streams so that you have the freedom to do what you want with your time.

    I share the primary goal of saving more money and spending less to achieve more life freedom.

    By the way, I call this Parachute Money. I like to view each income stream as a separate parachute string. The more parachute strings you have, the safer it is to make a big change in life.

    The problem becomes when people are so focused on achieving FIRE that they sacrifice too much of their current lives.

    Yes, you’ll achieve FIRE faster if you save 90% of your salary.

    But, what kind of life are you left with in the meantime?

    Coast FIRE is less about the grind and more about enjoying the process.

    The goal is still to be financially independent, even with the recognition that it will take longer to get there.

    seashore during daytime showing the money mindset hack of Coast FIRE.
    Photo by britt gaiser on Unsplash

    FIPE and Coast FIRE work well together.

    FIPE and Coast FIRE are similar because they are for people who are looking for change but are not looking to retire.

    By having enough saved up for retirement before you make that change, you’re giving yourself a layer of protection.

    You’re giving yourself the freedom to explore better work situations for your personal situation.

    That’s why Coast FIRE and FIPE work well together.

    Both money mindsets actually encapsulate the entire purpose of financial independence in the first place:

    To create options.

    Read Die with Zero by Bill Perkins

    If you don’t like the idea of Coast FIRE and foregoing future retirement contributions, you need to read Die with Zero.

    No money mindset book has led to more passionate conversations with my friends and family members than Die with Zero.

    First, Perkins encourages us to think about whether we are working too many hours.

    In Perkins’ view, the problem is that we are sacrificing the best years of our lives. Instead, we could be creating lifelong memories.

    In that same vein, Perkins makes a strong case that many of us are saving too much for retirement.

    Also, Perkins questions the conventional wisdom of waiting until we die to pass money onto our kids. Instead, he suggests helping our kids earlier in life when the money will be more meaningful.

    Read Die With Zero. This money mindset book will motivate you to book that vacation you’ve been putting off.

    Also, read A Richer Retirement by Bill Bengen.

    Bill Bengen, creator of the 4% Rule, just released a new book with some fun news for all of us saving for retirement.

    Bengen’s updated research shows that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    If you are retiring today, it gets even better. Bengen’s research shows that you can safely withdraw around 5.25%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re not sure about how much you need to save for retirement, Bengen has the answers. He’s done the research and done the math.

    His conclusions will give you the confidence to select a magic retirement number that works for you. Once you reach that number, you don’t have to worry about saving more for retirement.

    Coast FIRE will open your eyes.

    Coast FIRE is a powerful money mindset hack.

    When you reach Coast FIRE, you no longer need to save for retirement.

    That gives you a lot of options, including switching to a job that better suits your lifestyle.

    If you feel like you’re far away from retiring, Coast FIRE is the money mindset hack to start making you feel better about your progress.

    In our next post, we’ll do some math together to figure out what your Coast FIRE number is so you can measure your progress.

    Are you interested in creating options to pivot instead of retire?

    Have you thought about Coast FIRE in the past?

    What about FIPE?

  • Shrink Your Magic Retirement Number With One Rental Property

    Shrink Your Magic Retirement Number With One Rental Property

    “Wait- how much do I need to save for retirement!?”

    Have you ever felt that way after learning how much money you think you need to retire?

    I’ve certainly felt that way in the past.

    The prospect of saving millions of dollars in order to retire can seem impossible, especially when you’re just starting out.

    You may have even wondered, “How do people even come up with these retirement numbers?”

    The most common answer to that question is the “4% Rule.”

    Using the 4% Rule, you can calculate your magic retirement number and determine how much money you need to save for retirement to maintain your current lifestyle.

    The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years. 

    If you do so, you can expect your money to last for 30 years.

    Today, we’ll take it one step further.

    Let’s explore how owning even a single rental property can further reduce the amount you need to save for retirement.

    The results may shock you- in a good way.

    How to use the 4% Rule to forecast your magic retirement number.

    First, let’s look at an example using the 4% Rule to forecast your magic retirement number.

    In some fun news, Bill Bengen, creator of the 4% Rule, just released a new book showing that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

    Bengen’s research is significant because it means you can safely retire with even less money. That’s because the higher your safe withdrawal rate, the less you need squirreled away to maintain your lifestyle.

    In light of Bengen’s updated research, we’ll use 4.7% as our safe withdrawal rate.

    Let’s say that your lifestyle costs you $10,000 per month, or $120,000 per year.

    To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .047.

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $120,000 / .047 =$2,553,191.49 

    Based on the updated 4.7% Rule, you need $2.55 million to maintain your current lifestyle in retirement.

    By the way, under the original 4% Rule, you would need $3 million in investments ($120,000 / .04 = $3,000,000.00).

    See why people are excited about the updated 4.7% Rule?

    Does saving $2.55 million for retirement seem like an impossible task?

    Saving $2.55 million for retirement may seem like an impossible task.

    If that’s your initial reaction, be sure to check out my ongoing series on investing. We cover everything you need to know to start investing with confidence.

    You may be surprised to learn that If you start investing early and often, reaching $2.55 million is actually not that hard.

    Even so, there’s another way to massively shrink your magic retirement number: owning rental properties.

    Why would anyone want to own rental properties?

    There are four main reasons why I invest in rental properties: 

    1. Monthly cash flow
    2. Appreciation
    3. Debt pay-down
    4. Massive tax benefits

    When these benefits combine, real estate investors can generate significant wealth over the long run.

    decorative lights under a tree at night showing how one rental property can shrink your magic retirement number.
    Photo by Jay on Unsplash

    Before we look at an example of how owning rental properties shrinks your magic retirement number, here’s a quick breakdown of each of the four main benefits. 

    For a more detailed description of each benefit, you can read my series on investing in real estate here.

    1. Rental property cash flow is king.

    With cash flow, you can cover your immediate life expenses. For anybody hoping to reach financial freedom, it is essential to have income to pay for your present day life expenses. 

    For my money, cash flow from rental properties is the best way to pay for those immediate expenses.

    If your present day expenses are already covered, you can use your cash flow to fund additional investments. 

    That might mean buying another rental property or investing in another asset class, like stocks.

    2. Long-term wealth through appreciation.

    Appreciation simply refers to the gradual increase in a property’s value over time. 

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits.

    Like investing in stocks over the long run, real estate tends to go up in value. The key is to hold a property long enough to benefit from that appreciation.

    To benefit from appreciation, all I really need to do is make my monthly mortgage payments, keep my property in decent condition, and let the market do the rest.

    3. With rental properties, other people pay off my debt.

    When I buy a rental property, I take out a mortgage and agree to pay the bank each month until that mortgage is paid off. At all times, I remain responsible for paying back that debt.

    However, I do not pay that debt back with my own money. 

    Instead, I rent out the property to tenants. I do my best to provide my tenants with a nice place to live in exchange for monthly rent payments.

    I then use those rent payments to pay back the loan.

    As my loan balance shrinks, my equity in the property increases. Equity is just another way of saying ownership interest.

    When my equity in a property increases, my net worth increases. 

    4. Real estate investors earn massive taxes benefits.

    When you earn rental income, you must report this income on your tax return. Rental income is treated the same as ordinary income.

    However, the major difference between rental income and W-2 income is that there are a number of completely legal ways to deduct certain expenses from your rental income.

    Common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs. We’ll touch on a few of these deductions below.

    With all of these available deductions, the end result is that most savvy real estate investors pay little, or nothing, in taxes on their rental income each year.

    Yes, you read that right.

    I’ll say it again, just to be clear:

    Most savvy real estate investors legally pay nothing in taxes on their rental income each year.

    With these benefits in mind, let’s see what happens when we add a single rental property to your portfolio.

    How owning a single rental property lowers your magic retirement number.

    Let’s continue our example from above where your current lifestyle costs $120,000 per year. We learned that means your magic retirement number is $2.55 million based on the 4.7% Rule.

    Now, let’s add a single rental property into the mix.

    Let’s assume that you own a rental property that cash flows $2,000 per month. That’s a total of $24,000 per year.

    Remember, your cash flow is the profit remaining after paying your mortgage, taxes, insurance, and any other costs.

    To learn how to properly run the numbers on a potential rental property, click here.

    With $24,000 per year generated by your rental property, you don’t need your investment portfolio to fund your entire $120,000 lifestyle.

    Instead, your investments only need to generate $96,000 per year ($120,000 – $24,000 =$96,000).

    So, let’s plug $96,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $96,000 / (.047)=$2,042,553.19

    By adding a single rental property to your portfolio, you’ve lowered your magic retirement number by half a million dollars!

    You now only need $2.04 million to maintain your current lifestyle in retirement.

    Macro X-ray of some mushrooms with false coloring showing how to shrink your magic retirement number with one rental property.
    Photo by Mathew Schwartz on Unsplash

    What happens to your magic retirement number if you pay off your mortgage?

    This example shows how your magic retirement number drastically shrinks with the addition of just a single rental property.

    Keep in mind that in this example, we assumed that you have a mortgage on your rental property. That mortgage obviously reduces your cash flow.

    But, what if you paid off that mortgage before you retired?

    Let’s finish our example by assuming that you have a 30-year fixed rate mortgage and your payment is $3,500 per month. And, you make it a goal to pay off that mortgage before you retire.

    Once the mortgage is paid off, you can add that $3,500 to your monthly cash flow.

    That increases your monthly cash flow on this property from $2,000 to $5,500. Annually, that’s $66,000 in cash flow.

    Continuing our example, you now only need your investment portfolio to generate $54,000 per year ($120,000 – $66,000 =$54,000).

    Look what happens when we plug $54,000 into our magic retirement number formula:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $54,000 / .047 =$1,148,936.17

    By paying off the mortgage on this single property, you’ve now reduced your magic retirement number by $1.4 million dollars!

    You now only need $1.15 million to fund your current lifestyle in retirement.

    Have you considered adding a rental property to your overall investment portfolio?

    The point of this post is to show you how owning even a single rental property can reduce your magic retirement number.

    Think about what would happen if you owned two rental properties. Or, what about three rental properties?

    If you can handle the job of being a landlord- which I’m betting is easier than your job as a lawyer or consultant or doctor- owning rental properties is a great way to accelerate your journey to financial freedom.

    After seeing the math, you may want to consider adding a rental property (or two) to your overall investment portfolio.

    Are you intimidated by the thought of saving enough for retirement?

    Have you done the math with the 4.7% Rule to see how much you really need?

    Have you considered adding a rental property to your portfolio to shrink you magic retirement number?

    Let us know in the comments below.

  • Is the 4% Rule Actually More Like the 4.7% Rule?

    Is the 4% Rule Actually More Like the 4.7% Rule?

    Bill Bengen, creator of the 4% Rule, just released a new book with some fun news for all of us saving for retirement.

    Bengen’s updated research shows that it’s safe to increase your withdrawal rate in retirement from 4% to 4.7%.

    If you are retiring today, it gets even better. Bengen’s research shows that you can safely withdraw around 5.25%.

    Bengen’s new book is called A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More.

    If you’re at all interested in FIPE (Financial Independence Pivot Early), Bengen’s book is a must read.

    What is the significance of raising the safe withdrawal rate from 4% to 4.7%?

    If you are years away from retirement, you may be wondering, “Why does it matter if you withdraw 4% or 4.7% in retirement?”

    There are two ways to answer that question.

    Number 1: the higher the safe withdrawal rate, the more you can safely spend in retirement without running out of money.

    That sounds fun.

    You know what’s even more fun?

    Number 2: the higher the safe withdrawal rate, the less money you need to save before you can retire.

    That means you may be even closer to retirement than you previously thought.

    That sounds like even more fun, right?

    We’ll take a look at the math in a moment.

    The title of Bengen’s book says it all: “spend more and enjoy more.”

    Here at Think and Talk Money, enjoying our money is one of our primary objectives.

    We are not interested in building the biggest bank accounts just so we look good on a spreadsheet. We are interested in building a life where we are in control.

    That means spending money on what is important to us. It means spending more time with the people who are important to us.

    So, how does a higher safe withdrawal rate help us?

    Let’s explore that by first reviewing the 4% Rule

    What is the 4% Rule?

    The 4% Rule suggests that you can safely withdraw 4% of your investments in year one of retirement. Then, you can safely withdraw 4% plus an adjustment for inflation in subsequent years.

    If you do so, you can expect your money to last for 30 years.

    Without getting too technical, the 4% Rule is based off of research looking at historical investment gains, inflation, and other variables.

    As an example, let’s say you have $1 million in your portfolio.

    According to the 4% Rule, you can safely withdraw $40,000 in year one (4% of your portfolio), then 4% adjusted for inflation in each subsequent year, and not run out of money for 30 years.

    Using the updated “4.7% Rule”, you can safely withdraw $47,000 in year one.

    This simple example shows how you can take your current retirement savings and project the amount you can safely spend so your money lasts 30 years.

    El portero de San Juan FC, Tienes que crear tu propia suerte.-Fabien Barthez, illustrating the importance of having a target like the 4.7% Rule.
    Photo by ÁLVARO MENDOZA on Unsplash

    The 4% Rule also works in reverse. 

    By that I mean you can use the 4% Rule to ballpark how much money you’ll need in retirement to maintain your current lifestyle.

    We’ll look at exactly how to do that below.

    In either case, the 4% Rule is an effective and easy way to start thinking about a magic retirement number.

    How to use the 4% Rule based on your current savings.

    We mentioned above that the 4% Rule works two ways. 

    First, you can take your current retirement savings and calculate how much you can safely spend so your money lasts 30 years.

    If you have $1 million invested, the 4% Rule says you can safely spend $40,000 annually and expect your money to last 30 years.

    Here’s how the math works:

    Current Savings x 4% (.04) = Annual Retirement Spending
    $1,000,000 x .04 =$40,000.00

    Using the 4.7% Rule, the math looks like this:

    $1,000,000 x .047 =$47,000.00

    That’s a useful calculation, especially if you’re nearing retirement age and just want to know how much you can spend each year.

    But, what if you don’t exactly know when you want to retire? 

    Your main priority may not be to retire by a certain age. Instead, your aim may be to retire with enough money to maintain your current lifestyle. You’re determined to continue working for as long as it takes.

    To calculate that magic retirement number, you can once again use the 4% Rule. This time, in reverse.

    How to use the 4% Rule based on your current spending habits.

    The second way to use the 4% Rule is to start with your current spending habits to project how much money you’ll need to maintain that level of spending in retirement. 

    This may seem obvious, but to do so, you’ll first need to know your current spending habits. 

    If you don’t know how much you’re currently spending on a monthly basis, take a look at our budgeting series here.

    The good news is that once you’ve created a Budget After Thinking, this next part is easy.

    To calculate your magic retirement number based on current spending, simply follow these steps:

    1. Add up the amount your’re spending each month in Now Money and Life Money.
    2. Take that number and multiply it by 12 to see how much your lifestyle costs per year. 
    3. Divide that yearly spending by .04

    That’s your magic retirement number.

    Current Spending / 4% (.04) = Magic Retirement Number

    Now, let’s use some real numbers to help illustrate how to use the 4% Rule to project your magic retirement number.

    Here’s how to use the 4% Rule to forecast your magic retirement number.

    Let’s look at an example using the 4% Rule to forecast your magic retirement number.

    Let’s say that you reviewed your Budget After Thinking and learned that you spend $6,000 per month in Now Money and $4,000 per month in Life Money. 

    Combined, that means your lifestyle costs you $10,000 per month, or $120,000 per year.

    To figure out how much you would need in investments to cover your current lifestyle for 30 years, divide $120,000 by .04.

    Current Spending / 4% (.04) = Magic Retirement Number

    Under the original 4% Rule, that means to maintain your current lifestyle of spending $120,000 per year for 30 years, you would need $3 million in investments.

    In other words, your magic retirement number is $3 million.

    a chalkboard with the word possible written on it showing what's possible with the 4.7% Rule.
    Photo by Towfiqu barbhuiya on Unsplash

    If that number seems impossibly high to you, the updated 4.7% Rule should make you feel a little better:

    Current Spending / 4.7% (.047) = Magic Retirement Number
    $120,000 / .047 =$2,553,191.49

    Based on the updated 4.7% Rule, you now only need $2.5 million instead of $3 million to maintain your current lifestyle in retirement.

    That’s fun news.

    Use the 4% Rule as an easy projection tool, not an actual withdrawal rate.

    Whether you want to use the 4% Rule or the updated 4.7% Rule, keep in mind that these are projection tools.

    I view the 4% Rule as a tool to ballpark your magic number, as opposed to a strict withdrawal rate once you actually retire. 

    I point that out because there’s some debate in the personal finance community as to whether 4% is still a safe withdrawal rate in today’s economic environment. 

    For our purposes, I’m not too concerned about that debate.

    Once you get to retirement, your actual withdrawal rate may be higher or lower than 4% depending on a variety of factors. Put another way, you will need to adjust how much you withdraw each year based on factors outside your control.

    Regardless, the 4% Rule is a great way to start thinking about how much you’ll need to save for retirement. Attaching an actual number to your retirement goals is extremely helpful.

    Like Bengen argues in A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More, the point of saving money now is to spend it and enjoy it later.

    For people who are used to saving aggressively during their working years, it can be hard to switch to a spending mindset.

    Whether you’re nearing retirement or still have years to go, A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More will help you find that balance.

    Have you read A Richer Retirement: Supercharging the 4% Rule to Spend More and Enjoy More? What did you think?

    Will you update your retirement planning based on the new 4.7% Rule?

    Let us know in the comments below.

  • Capital One Settlement: A Reminder to Evaluate Your Bank

    Capital One Settlement: A Reminder to Evaluate Your Bank

    How long have you been with your current bank?

    Do you even remember why you opened an account with that bank in the first place?

    For many of us, we opened our first “adult” bank accounts in our 20s. We probably just picked the closest bank to our apartment. I doubt many of us (myself included) put much thought into who we banked with.

    Because it’s human nature to resist change, I’m guessing many of us have never thought about whether that bank is still a good fit at the current stage of our lives.

    In light of Capital One’s massive class action settlement based on allegations that it deceived its customers, now seems like as good a time as ever to revaluate who we bank with.

    More on the settlement below.

    First, a little personal context about why I’m thrilled that Capital One is not getting away with its deceptive scheme.

    I banked with Capital One for many years.

    For a long time, I used Capital One for all my savings accounts. When I started law school in 2006, there was a Capital One cafe right next to my school.

    You could get a cup of coffee for $.75 and talk to a banker at the same time. It was a cool concept and convinced me to bank with Capital One.

    I told everyone about how great Capital One was. I had Capital One savings accounts and a Capital One credit card. You could say I was a huge Capital One fan.

    Key word: was.

    In November 2023, I had been a loyal Capital one customer for 17 years. This was during the time period when interest rates on savings accounts were rising dramatically. 

    Many banks were advertising rates as high as 4% or 5%, which were higher than most of us had ever seen.

    One day that November, for whatever reason, I logged into my Capital One account to see what rate I was earning.

    I was sure it would be in the 4% range, and probably closer to 5%, since Capital One was a leader in online banking.

    When my statement loaded, I was shocked.

    0.30%!

    Shocked probably isn’t the right word. I was disgusted. 

    0.30% in 2023 might as well have been 0.0%.

    I refused to believe that a bank that I had banked with for 17 years could do this to a loyal customer.

    What the heck happened?

    Well, Capital One, unbeknownst to me, switched my savings from its high interest platform into an account with the much lower interest rate.

    At the same time, Capital One was still advertising and offering top rates to new customers.

    When I discovered the sneaky switch, I immediately closed all of my accounts and transferred my money to a new bank. I no longer have a Capital One credit card, either.

    It wasn’t the amount of interest I lost out on that bothered me. 

    This all happened during that time when my wife and I were aggressively acquiring properties, so we never had a lot of money sitting in savings for an extended period.

    So, my anger wasn’t just about the interest.

    For me, it was about the principle. I don’t want to have any relationship with a bank that would do that to its customers, especially long-term customers like me.

    I did a quick search in my inbox and found a Capital One statement from December 2022 showing a 0.30% interest rate. That means Capital One had deceived me for at least a year before I caught on. 

    I have to admit that writing this post is reopening old wounds. Although, learning about the settlement definitely helps.

    a bank sign lit up in the dark as a reminder to always evaluate your banking relationships.
    Photo by POURIA 🦋 on Unsplash

    I am happy to report that Capital One did not get away with it.

    It wasn’t just me who was getting ripped off by Capital One.

    I am one of the many people that Capital One switched out of high interest rate savings accounts into inferior products.

    These deceptive practices were subject of a federal lawsuit brought by the Consumer Federal Protection Bureau.

    Additionally, disgruntled customers filed a class action lawsuit to recoup the interest that people like me missed out on.

    All is well that ends well, right?

    I am pleased to share that Capital One agreed to a $425 million class action settlement for its deceptive practices.

    A court hearing for final approval of the settlement has been scheduled for November 6, 2025.

    If you are, or were, a Capital One 360 Savings account holder at any time from September 18, 2019, through June 16, 2025, you are automatically eligible for benefits. You do not need to fill out a claim form.

    Note: if you’d like to update your mailing address or receive an electronic payment, you can do so here.

    What are the terms of the settlement?

    According to the Notice of Settlement:

    Capital One shall pay $300 million, to be used to make pro rata payments to settlement class members relative to the approximate amount of interest each settlement class member would have earned if their 360 Savings account(s) had paid the interest rate then applicable to the 360 Performance Savings account.

    Translation: if you had a Capital One 360 account, you are going to be paid “some” of the interest you were owed.

    The reason I say “some” is because of the word “relative” in the above paragraph from the notice.

    Capital One allegedly cheated customers out of $2 billion in interest. The settlement is for $425 million. Based on that discrepancy, it does not appear we will get all of the interest we are owed.

    Hopefully, I’m wrong about that and we all receive the full interest we are owed.

    Disclaimer: I am not involved in the settlement negotiations and this is not legal advice.

    If you remained a customer, you will receive an additional settlement amount:

    The second component consists of $125 million, which will be paid by Capital One as additional interest payments to settlement class members who continue to maintain 360 Savings accounts (presently approximately 3/4 of the settlement class). In order to accomplish such additional interest payments, Capital One shall maintain an interest rate on the 360 Savings account of at least two times the national average rate for savings deposit accounts as calculated by the FDIC.

    Translation: If you continue to bank with Capital One, you will receive some additional money. How much you’ll get is complicated.

    By the way, I am happy to learn that customers who stayed with Capital One despite its deceptive practices will earn some additional money.

    In the end, regardless of how much we receive, this news makes me very happy.

    I don’t really care about the payment at this point. I’m happy that Capital One isn’t getting away with its deceptive practices.

    And, I’m happy that news of the settlement serves as a good reminder for all of us to evaluate our current banking arrangements.

    Even with the settlement, I still won’t bank with Capital One again. I cancelled my accounts as soon as I learned that the bank was ripping me off.

    Maybe I’m being childish, but I still refuse to give my business to a company that blatantly deceives its long-time customers.

    ATM showing the importance of always evaluating your banking relationship.
    Photo by Johnyvino on Unsplash

    Why do stories like Capital One’s deceptive practices matter?

    The lesson here is that we all need to regularly evaluate our banking relationships. There is no such thing as “set it and forget it” when it comes to our money.

    You could say stories like this are good reminders to regularly think and talk about money.

    The last thing any of us needs is to be tricked by our own banks. The more we talk about what’s going on, the better chance we will catch these schemes before it’s too late.

    The point is: no matter how much you trust your bank, keep an eye on your accounts.

    No, I am not so cynical that I think all banks are out there intentionally ripping us off.

    However, massive scandals like this are not the only red flags to look out for. Banks notoriously have hidden fees and confusing rules.

    If you are not paying attention to your money, you may be unknowingly paying fees or missing out on better opportunities. It’s up to each of us to regularly evaluate whether our bank is continually providing us with the services we need.

    Are you a current or former Capital One customer?

    If this is the first you’re hearing about Capital One’s deceptive practices, will you continue to bank with them?

    Let us know in the comments below.

  • Stop Feeling Guilty and Annoyed About Spending Money

    Stop Feeling Guilty and Annoyed About Spending Money

    No matter how far along you are on your personal finance journey, you will always need to make choices on how to spend your money.

    I recently wrote about how I felt annoyed when I wanted to buy a new bike and new golf clubs.

    You have to make decisions like this whether you make a lot of money or very little money.

    The more money you make, the harder these choices can be. When I was in my 20s, traveling and a social life were my biggest spending challenges.

    Now that I’m in my 40s, it’s making good spending choices for not only me, but my wife and three kids.

    The other day, I confessed that I was annoyed because my goal to pay off debt was keeping me from buying a new bike or new golf clubs.

    What I’ve realized since then is that I also felt guilty about spending money on myself when I could better spend that money on my kids.

    I felt guilty because my five-year-old wants to learn how to ride a bike. I should buy her a bike and teach her to ride before I splurge on a new bike for myself, right?

    With powerful feelings like annoyance and guilt, how can we make good spending decisions even as we make more money?

    Don’t ignore key personal finance fundamentals even as you start to make more money.

    What I’ve learned as my career and family obligations evolve is that it’s easy to forget the little things I used to focus on when money was tight.

    This recent experience reminded me that I need to step back and focus on personal finance basics.

    I’m not alone in needing a reminder from time to time about personal finance fundamentals, like budgeting. I talk to plenty of people who tell me that they kept a budget in their 20s but not so much in their 30s and 40s.

    They share with me that even though they’re making more money, it seems like they have less and less money to spend.

    I totally get it because I was the same way. I tracked every penny I made in my 20s until I learned how to stay on budget with two simple numbers. Recently, I haven’t been as diligent.

    My recent dilemma with the new bike and golf clubs reminded me to go back to the fundamentals.

    The benefit is that by remembering the basics, I can help myself by taking the anxiety and guilt out of these types of spending choices.

    So, what are the fundamentals I’m referring to?

    After I wrote that post about the new bike and golf clubs, I reviewed my top 10 budgeting tips for lawyers and professionals.

    My Top 10 Budgeting Tips for Lawyers and Professionals

    1. See the ball go through the hoop.
    2. Don’t cancel your social life.
    3. Talk to your friends about your life money.
    4. Keep on traveling.
    5. Spark and cut.
    6. It’s OK if you occasionally exceed your spending.
    7. Make a game out of it, like the $500 challenge.
    8. Buy it if you want it, but not right away.
    9. You don’t have to go big or go home.
    10. Plan ahead for budget busters.
    person walking inside shopping center showing that we all have choices to make when it comes to our spending.
    Photo by Heidi Fin on Unsplash

    These budgeting strategies helped me realize that I can choose to spend money on what I want and shouldn’t feel guilty or annoyed.

    The key is understanding how a certain purchase fits into the rest of my overall spending.

    On this occasion, 3 of my top 10 budgeting tips stood out and helped me with what to do about the new bike and golf clubs.

    Let’s take a look.

    6. It’s OK if you occasionally exceed your spending.

    What should you do if you overspend one month? Don’t get discouraged and give up. Before all your hard work goes to waste, take the next month to course correct. 

    If you overspent by $300 in August, make it a priority to underspend by $300 in September.

    Is this easier said than done?

    Well, sure. It’s always easier to say you’re going to do something. The hard part is following through. It will take discipline to get back on track. What will drive that discipline? 

    Once again, it’s your ultimate life motivations that we’ve talked so much about (and will always continue to talk about). Without that clear vision of your ideal life in front of you, no budget will ever last.

    Don’t panic. Course correct. Stay on track.

    Even though I didn’t buy the new bike or golf clubs, if I chose to do so, I could course correct the next month.

    Going over budget for just one month is fixable. The key is to not blow my budget multiple months in a row.

    If I did that, I would end up digging a hole so deep that it would be a major challenge to get back to good spending levels.

    8. Buy it if you want it, but not right away.

    Just because I didn’t buy the bike or golf clubs yet doesn’t mean I can’t buy them in the future when the time is right.

    I always think of my mom when I see something that I want to buy but know I shouldn’t buy it right away.

    About 10 years ago, my mom bought me a jacket for a birthday present. It was the exact jacket I wanted. How did she know, I asked her. “You mentioned it when we were downtown four months ago.” Four months ago!

    I shouldn’t have been surprised. My mom has one of those steel trap memories.

    If you only met her for five minutes and then saw her again two years later, don’t be surprised when she asks about your consulting gig, your trip to New Orleans, and that blue dress that she really liked.

    I learned from my mom’s gift strategy and modified it to help myself resist the temptation to make impromptu purchases. I don’t have her memory, but I do have a phone with a notes function. 

    When I see something that I might want to buy, I do my best to resist the temptation of buying it immediately and make a note in my phone. After a couple weeks, if I still want that thing, I buy it. 

    More times than not, I no longer want whatever it was that tempted me in the moment.

    If I still want the bike or golf clubs a few weeks from now, I can still buy them. By waiting, I also might benefit from end-of-the-season sales and can shop around for the best offers.

    10. Plan ahead for budget busters.

    Budget busters are any inconsistent expenditures, good or bad, that can derail your planning. 

    Good budget busters might include trips, weddings, and holiday/birthday gift shopping.

    We can also add a new bike and golf clubs to the good budget busters category. These certainly count as irregular expenses but can wreck our budgets if we don’t properly plan for them.

    Bad budget busters include unexpected car repairs, home repairs, or medical expenses.

    Note, budget busters are inconsistent; they are not unexpected. These expenditures are 100% predictable every year, we just don’t always know when they will surface. 

    woman counting dollar bills indicating the choices we all have to make with our spending and budget.
    Photo by Alexander Grey on Unsplash

    Planning ahead for budget busters is crucial to staying on track.

    To do so, open up a savings account, preferably at a different bank than your checking account. This helps isolate those funds so those dollars don’t disappear. 

    As part of our really lost boy’s Budget After Thinking, you’ll recall that we had a separate line item for budget busters in both our Now Money (bad budget busters) and Life Money (good budget busters).

    I encourage you to do the same. Each month that you don’t spend your budget buster money, transfer it to your savings account so it’s there when you need it.

    One more bonus tip for dealing with budget busters.

    We talked above about how to course correct when you exceed your budget in one month. On the flip side, what should you do when you’ve had a great month and underspent? 

    I recommend you transfer the amount you underspent to your budget busters savings account. Don’t let that hard-earned money sit in your checking account. 

    Those dollars will disappear. By transferring them to savings, those dollars will be at your disposal when needed.

    Instead of buying the bike or golf clubs now, I can transfer some funds in my savings account and wait to go shopping until I have enough saved up.

    Don’t ignore your budget even if you’re far along on your personal finance journey.

    My experience with the new bike and golf clubs served as a great reminder to revisit personal finance fundamentals, like budgeting.

    If you haven’t thought about your spending choices in a while, now is a good time to do it.

    The 10 budgeting strategies mentioned above have worked for me in the past and continue to work for me today. 

    If you review those top 10 strategies, I hope you see that making good spending choices does not have to make us feel annoyed or guilty.

    It just takes a little mental energy, exerted ahead of time.

    When making good spending choices becomes part of your everyday life, you can eliminate the guilt and anxiety that comes with tough choices, like buying a new bike or golf clubs.

    Have you been in a similar situation where you wanted to buy something but were worried about how it fit into your overall budget?

    What did you decide to do?

    Let us know in the comments below.

  • Debt is Really Annoying When you Want to Buy Fun Things

    Debt is Really Annoying When you Want to Buy Fun Things

    Debt can be really annoying.

    I’ve been having that thought a lot recently while on vacation with my family.

    Let me explain.

    With three young kids, I haven’t focused much on personal hobbies lately. However, being on vacation has allowed me to focus on some fun stuff, like biking and golfing.

    The annoying part?

    Hobbies can be expensive.

    I went for a great bike ride the other day. It was challenging and fun. I felt accomplished and fit. These are feelings I’d like to replicate as much as possible.

    So, when I got home, I started looking for a new bike online.

    The next day, I played golf. Same thing happened. Had a great time. Hit some good shots. Felt encouraged and excited about my golf game slowly improving.

    So, I went home and started shopping for new golf clubs.

    Whether it was biking or golfing, I realized how important hobbies are for all of us. I had fun and distracted myself from the stresses of life.

    I was tempted to buy a new bike or new golf clubs as a way to motivate myself to continue those hobbies.

    But, I’m not going to buy the bike or the golf clubs.

    At least not until I accomplish my 2025 money goals.

    Which brings us back to why I’ve been thinking lately about how annoying debt is.

    My main 2025 money goal is to eliminate HELOC debt.

    At the beginning of the year, my wife and I talked about our money goals for the rest of the year.

    After talking it through together and weighing all our options, we came up with these three goals for 2025: 

    1. Our first goal is to continuing paying down our mortgage debt. We used HELOCs to help us acquire some of our properties. Now that we’ve determined that “enough is enough,” we’re focused on paying back these loans.
    2. Our second goal is to build up our emergency savings. We mostly ignored our emergency savings between 2017 and 2024. It was risky and led to some touch-and-go moments that we’d like to avoid moving forward.
    3. Our third goal is to boost our contributions to our kids’ college savings accounts. We use what’s called a “529 college savings plan.” 529 plans are state-sponsored, tax-advantaged investment accounts. We use Illinois’ 529 plan because we receive a tax break as Illinois residents. Just about every state offers a 529 plan. They are a great way to save for college.

    With our plan in place ahead of time, we know where every dollar is going before we earn it. This takes the anxiety out of trying to figure it out after the money has already hit our bank account. 

    With less than half of the year remaining, we’ve made great progress on our goals. But, we still have a ways to go.

    We still have HELOC debt to pay off. And until that debt is gone, I’m not buying a new bike or new golf clubs.

    It’s important to me that I stay disciplined and stay on track with my goals.

    Even though I’m happy that I used HELOCs to build my real estate portfolio, I’ve felt how heavy that debt load can be.

    Now that the end is in sight, I don’t want to jeopardize my progress by buying expensive toys that I don’t really need right now.

    I can still go biking without a new bike. I can still play golf without new clubs.

    Most importantly, I know that the emotional high I’ll get from buying something new will dissipate quickly. And, I’ll still have that debt to carry around.

    So, for now, I’m passing on the bike and the golf clubs. I did make a note in my journal that these are things I might like to buy when the time is right.

    Until then, I’ll continue to prioritize my money goals and work to eliminate my HELOC debt.

    golf course with flag stick indicating what I'll buy when I'm out of debt.
    Photo by Michael Jasmund on Unsplash

    Student loan delinquencies continue to rise.

    According to the Federal Reserve Bank of New York, student loan delinquencies continue to rise:

    Missed federal student loan payments that were not previously reported to credit bureaus between 2020Q2 and 2024Q4 are now appearing in credit reports.

    Consequently, student loan delinquency rates continued to rise. In the second quarter of 2025, 10.2% of aggregate student debt was reported as 90+ days delinquent.

    You may not have HELOC debt like me, but the odds are that as a young lawyer or professional, you have student loan debt to pay off.

    You may have to make spending choices like I did with the new bike or new golf clubs.

    Debt from student loans and financial freedom go hand-in-hand for most professionals. Maybe a better way to put it is that student loans can be a major obstacle on your path to financial freedom.

    Of course, the more education you’ve received, the more student loans you likely have.

    Whether you have student loan debt from college or graduate school, it’s important to have a plan to pay that debt off. 

    All debt acts as a roadblock to financial freedom.

    Student loans are no different.

    They’re a weight that we carry around long before we even make the first repayment. Sometimes that weight feels so heavy, it’s hard to imagine it ever going away.

    And as much as we wish we could, we can’t ignore our student loans.

    It was easy to forget about student loans during the pandemic. Now, student loans are once again a major financial obstacle for many lawyers and professionals.

    One way or the other, we have to get rid of them.

    And when we do get rid of them for good, there might not be a better personal finance feeling in the world.

    Personally, I’ll never forget the day I made my last payment and shared the news with my future wife and family.

    To help you have that same feeling of accomplishment, I wrote about my top 10 student loan tips for lawyers and professionals.

    You can check out the full post here.

    Top 10 Student Loan Tips for Lawyers and Professionals

    1. Locate all your loans.
    2. Sign up for automatic payments.
    3. Do not miss a payment.
    4. Consider using Debt Snowball or Debt Avalanche.
    5. Make an extra monthly payment.
    6. Create a BAT that generates fuel for your student loans.
    7. Make more money and use that money for your loans.
    8. Take a tax deduction and use your tax refund for your loans.
    9. Consider a loan consolidation.
    10. Look for ongoing scholarship opportunities.

    Have you ever felt how annoying debt can be?

    Whether it’s HELOC debt or student loan debt, all debt can feel really annoying. Debt can stop us from doing the things we really want to do in life.

    I don’t regret taking out student loans. I also don’t regret using HELOCs to build my real estate portfolio.

    It’s true that I wouldn’t be where I am today without my education and my rental properties.

    Still, I have to make choices with my limited dollars. I took on the obligation of paying back my debts, and until I do so, fun things are going to have to wait.

    When I finally do buy that bike or those golf clubs, it’s going to feel even better knowing I didn’t sacrifice my goals to get them.

    Have you made certain spending choices because of debt?

    How did you think about and eventually decide whether to move forward with that purchase?

    Let us know in the comments below.

  • The Best Ways to Come Up with a Rental Property Down Payment

    The Best Ways to Come Up with a Rental Property Down Payment

    Coming up with the down payment is probably the biggest impediment to lawyers and professionals who want to buy a rental property.

    If you’re serious about acquiring a rental property and are worried about the down payment, these tips will help get you moving in the right direction.

    Each of these strategies involves some sort of trade-off.

    There are no short cuts.

    In the end, the trade-offs are well worth it. Owning real estate is one of the best way to accelerate your journey to financial freedom.

    Let’s take a look at my list of the best ways to come up with a down payment for a rental property.

    1. Increase your saving rate.

    Do you know what your current saving rate is?

    Your saving rate is simply the amount of money you save each month divided by the amount of money you make. I find it most useful to express your saving rate as a percentage.

    Saving rate % = (Money Saved / Money Earned) x 100

    Just like staying on budget with two simple numbers, you can monitor your saving progress with this simple formula.

    In a moment, I’ll show you the math on how to quickly improve your saving rate whenever you earn a pay bump.

    You might be surprised to learn how many lawyers and professionals out there make a lot of money and maintain a very low saving rate.

    If your current saving rate is under 20%, you have a lot of room to improve.

    It’s not uncommon for people striving for financial freedom to have a saving rate of 50% or more.

    By the way, when I first start tracking my saving rate in my 20s, I had a negative saving rate.

    I was spending more than I was earning. If you’re currently in that position, it’s not too late to make some changes.

    If you’re serious about coming up with the money for a down payment, your saving rate is the place to start.

    2. Revisit your Budget After Thinking.

    If your current saving rate is under 20%, it’s time to look closely at your Budget After Thinking.

    If you haven’t created a budget before, the first step is to track your spending for three months. The goal is to find out where exactly your money is going.

    You may learn that you’ve been victim to the disappearing dollar.

    Once you have a decent idea where your money is going, the next step is to look for areas where you can reduce your spending.

    Ask yourself, “what spending is truly important to me and what spending can I cut?”

    As you start spending less and your saving rate improves, every additional dollar should go in a separate savings account earmarked for a future down payment.

    Real estate business finance background template. Calculator door key indicating the hardest part to buying real estate is coming up with the down payment.
    Photo by Jakub Żerdzicki on Unsplash

    3. Don’t spend your pay bump.

    Most lawyers and professionals have the opportunity to earn bonuses, commissions and raises throughout their careers.

    When you receive one of these pay bumps, don’t spend the money.

    Pretend like you never got it.

    Deposit this money right away into a separate savings account labeled “Down Payment Savings.”

    Here’s an example of how much your saving rate can improve when you don’t spend your pay bump.

    Let’s assume that before your raise, your take home pay was $70,000 per year after taxes and retirement plan contributions. 

    Let’s also assume you were putting $1,000 per month towards your down payment savings.

    Using our saving rate percentage formula above, we see that:

    • Money Earned = $5,833 per month ($70,000 / 12)
    • Money Saved = $1,000 per month
    • Saving Rate = $1,000 / $5,833 = .17
    • Saving Rate Percentage = 17%

    17% of your take home pay for a down payment is pretty good.

    Now, let’s see what happens if you earn a $20,000 raise and save your entire raise for your down payment.

    With your raise, your annual take home pay has now climbed to $84,000, or $7,000 per month. 

    Look what happens to your saving rate percentage when you add the full raise to your down payment account instead of spending it:

    • Money Earned = $7,000 per month ($84,000 / 12)
    • Money Saved = $2,166 per month
    • Saving Rate = .31
    • Saving Rate Percentage = 31%

    You more than doubled your monthly down payment contributions and improved your saving rate to 31%!

    Not spending your pay bumps is one of the fastest ways to accumulate enough money for a down payment on a rental property.

    This is exactly how my wife and I saved enough money to buy our four rental properties. It’s how we’re going to buy our next rental property.

    Whenever we earn a pay bump, we pretend nothing happened. We tell ourselves the money isn’t ours, yet. We put it in a separate savings account right away.

    Once we have enough to buy another rental property, we’ll go shopping again.

    4. Take on a partner.

    Many beginner real estate investors don’t have the money for a down payment on their own. One solution is to take on a partner.

    There are a lot of lawyers and professionals out there who want to invest in real estate but don’t want the hassle of finding a deal and being a landlord.

    That’s where you come in.

    You can offer to do all the work and your partner can put up the initial money. Then, you both share in the profits.

    If you go this route, make sure you’ve done your homework on evaluating potential properties. When you approach a potential partner, it’s important to demonstrate that you know what you’re doing.

    5. Ask Mom and Dad for help getting started.

    A recent study showed that half of parents provide their adult children with regular financial support.

    If your parents are in a financial position to assist you, it might be worth having the conversation with them about partnering up on a deal.

    The same as working with any other partner, your job is to do your homework and illustrate to your parents why buying a rental property is a sound investment.

    If you show them that you’re serious about reaching financial freedom through real estate, you’ll have a better chance of convincing them to partner with you.

    The advantage of partnering with your parents is that you should be able to get better terms than you would on the open market.

    Some people are too proud, or too deferential, to ask their parents for help. I understand it can be a sensitive topic.

    I also strongly believe that we all benefit when we talk about money with our loved ones. Even if your parents are not in position to help you directly, they may have other ideas to help you get started.

    Talking about money is not taboo. If you can’t talk about money with your parents, who can you talk to?

    6. Get a side hustle.

    If you’ve successfully created a budget and still need to generate more fuel, have you thought about a side hustle?

    Some lawyers and professionals reading this won’t even allow themselves to consider a side hustle. They automatically think, “I’m way too skilled or busy to even think about another job.” 

    In my personal finance class, we spend a lot of time challenging that notion. 

    Very few people- and I mean very few- are too important or too busy to take on a side hustle.

    For most of us, it’s an excuse.

    You may think you’re one of those “too important” people. 

    I would challenge you to assess whether you’re confusing “too important” with “too stressed” or “too tired” or “too cool.”

    Is continuing to worry about money really better than spending a few hours a week earning extra money doing something you love?

    The ideal side hustle is something you enjoy doing that can earn you extra money at the same time.

    Some examples of side hustles my students have come up with in class include:

    • Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.
    • Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
    • Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
    • Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
    • Part-time Property Manager. Is there a better way to learn the business and make some money on the side than being a part-time property manager?
    Unicorn money box and coins stacked for saving money for a down payment.
    Photo by Annie Spratt on Unsplash

    7. Use a HELOC.

    Using a HELOC to buy investment properties is one way real estate investors scale quickly. I’ve used a HELOC to help buy investment properties three separate times.

    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. Just like with a primary mortgage, when you open a HELOC, the bank charges interest and is protected by the equity in your home.

    You can use a HELOC as you would use cash, including for a down payment on a rental property.

    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 as a down payment to buy an 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 down payment. 

    On the other hand, cash advances from credit cards are typically not allowed for a down payment on a conventional loans.

    For a deep dive into how I’ve used HELOCs three separate times to help buy rental properties, check out my post here.

    8. Consider a low down payment loan.

    There are numerous loan options available that require low down payments, or even no down payments.

    Here are some of the more common low-down payment loans:

    • 3% Conventional Loans. These are loans backed by the federal government and include Home Possible and HomeOne loans. I used a Home Possible loan to acquire my first rental property.
    • FHA Loans requiring as low as 3.5% down. FHA loans are also backed by the federal government and require a down payment of as low as 3.5%.
    • VA Loans and USDA Loans. These are both excellent loan products offering low down payments for those whoa re eligible.

    Besides these government-backed down payments, there are various private loan programs available that offer low down payments.

    With all of these loans, keep in mind that there are eligibility requirements that limit the accessibility of these programs. There are also additional fees and costs that need to be considered.

    The key is to do your homework and work with a mortgage broker who is well-versed in the available options for your personal scenario.

    Have you considered any of these options to help acquire a rental property?

    Coming up with the down payment is probably the biggest impediment to lawyers and professionals who want to acquire a rental property.

    If you’re serious about acquiring a rental property and are worried about the down payment, these tips will help get you moving in the right direction.

    Remember that buying and holding rental properties is a long-term game. If it takes you a couple of years to save enough for a down payment, that’s OK.

    The best real estate investors understand that owning rental properties is not a “get rich quick” strategy.

    Stay patient, save money, and your portfolio will grow immensely over time.

    Have you used any of the above strategies to acquire rental properties?

    What other strategies have you used?

    Let us know in the comments below.

  • Dreaming About Rental Properties but Ignoring Money Mindset?

    Dreaming About Rental Properties but Ignoring Money Mindset?

    Do you dream about owning rental properties so you can generate semi-passive income while spending more time with your family?

    I want to hear about those dreams. What would you do with that time?

    Travel?

    Exercise?

    Read?

    It’s so motivating for me to learn what you would do with that kind of freedom.

    At the same time, it’s my job to remind you to not ignore key personal finance fundamentals while you’re dreaming about the future.

    When it comes to buying rental properties, this is especially true.

    Let me explain.

    If you’ve been keeping up with the blog, we’ve now learned how to run the numbers on potential real estate deals.

    In fact, I showed you that the analysis is not actually that hard. Your job is simply to account for the fixed costs and make informed predictions for the speculative costs.

    Then, we did the math together on an actual property in my target zone. By using a real example in Chicago, my goal was to further convince you that running the numbers should be easy.

    Finally, we talked about how to evaluate a rental property when the initial math looks bad. The truth is most rental properties are not going to immediately look like great investments. It’s our job as investors to negotiate and look for potential.

    By this point, you may be thinking that buying a rental property sounds great, except for one big problem:

    How are you supposed to come up with the money for a downpayment?

    Great question.

    It’s such a great question that it requires us to take a step back.

    Before evaluating rental properties, you need to evaluate your personal finances.

    It’s no secret that in order to buy a rental property, you first need available money for the downpayment.

    Unless you plan on taking on partners or getting the money from family, coming up with a sufficient downpayment is a major challenge.

    Yes, there are loan options available that require a smaller downpayment. We’ll soon talk about some of those options. I’ve used loans like this in the past.

    Still, a “smaller downpayment” does not mean “no downpayment.”

    So, how can you come up with a downpayment?

    For a downpayment, you need to have available money.

    To have available money, you need a budget that actually works.

    To have a budget that actually works, you need honest, powerful life goals.

    Does this sound familiar?

    It all comes back to money mindset.

    When was the last time you checked in on your money mindset?

    If you take a look at the Think and Talk Money homepage, you’ll see six main category tabs across the top of the page:

    Each one of these categories builds upon the previous categories.

    It all starts with money mindset.

    A strong money mindset is the foundation of the personal finance journey. Maintaining a strong money mindset requires constant and intentional thought.

    wooden boat on blue lake during daytime indicating what you can do with financial freedom.
    Photo by Pietro De Grandi on Unsplash

    I revisit my money mindset every week by taking a quick look at my Tiara Goals for Financial Freedom.

    It may seem overly simplistic, but money mindset is what separates people who reach financial freedom from those who struggle to get ahead in life.

    Don’t believe me?

    Budgeting is really not that hard. We all understand the basic concept: spend less money than you earn. Still, most of us can’t do it.

    The same applies to debt and credit. We all know to avoid debt. We know to use credit responsibly. So, why don’t we do it?

    Investing can seem complicated at first. Is it really that hard? Entire books and websites have been created to show you how to create massive wealth through simple index funds.

    What about buying rental properties? We did the math together. Analyzing deals is not that hard. The impediment for most people is coming up with the money for a downpayment.

    You may be in a similar boat right now. You want to buy a rental property but you’re discouraged because you don’t have the downpayment saved up.

    It’s not just about how much money you make.

    Buying rental properties is not just about how much money you make. Plenty of lawyers and professionals make a lot of money and struggle to come up with any excess money to invest.

    Sadly, the struggles don’t just relate to coming up with money for investments.

    Lawyers as a profession have long struggled with mental health issues. I first learned about these challenges during law school orientation. Today, I see it in practice.

    Being a lawyer is a hard way to make a living. When you work as a lawyer, the hours are intense and stress levels are consistently high.

    In 2023, the Washington Post analyzed data from the U.S. Bureau of Labor to determine what the most stressful jobs are. The study confirmed that lawyers are the most stressed.

    Of course, lawyers are not alone in struggling in this regard due to long, stressful hours.

    The same study showed that people working in the finance and insurance industries were right up there with lawyers as being highly stressed.

    Well, what can we do about it?

    How can we address these struggles?

    Where can we find money for a downpayment?

    I have some thoughts.

    How motivated are you to truly get ahead in life?

    Are you truly motivated to get ahead in life?

    Have you worked on your money mindset and found the motivation to actually create a budget that generates savings?

    If you’ve successfully created a budget and still need to generate more fuel, have you thought about a side hustle?

    When I mention side hustle, is your initial reaction that you’re too busy or important?

    Some lawyers and professionals reading this won’t even allow themselves to consider a side hustle. They automatically think, “I’m way too skilled or busy to even think about another job.” 

    In my personal finance class, we spend a lot of time challenging that notion.

    Very few people- and I mean very few- are too important or too busy to take on a side hustle.

    For most of us, it’s an excuse.

    You may think you’re one of those “too important” people.

    I would challenge you to assess whether you’re confusing “too important” with “too stressed” or “too tired” or “too cool.”

    Is continuing to worry about money really better than spending a few hours a week earning extra money doing something you love?

    Setting that conversation aside, the ideal side hustle is something you enjoy doing that can earn you extra money at the same time.

    Some examples of side hustles my students have come up with in class include:

    • Bartending. Entice your friends to come to your bar by offering cheap drinks. You get to hang out with them and get paid at the same time.
    • Fitness instructor. Instead of paying $48 for the spin class you love, become the instructor and get paid to lead the class.
    • Dog Walker. If you love dogs and don’t currently have one of your own, what better way to fill that void in your life while making money. The same applies to babysitting.
    • Home Baker. Make homemade treats with your kids and sell them to parents who don’t have the time.

    How about this idea for aspiring real estate investors: part-time property manager?

    My wife and I recently needed some help with apartment showings. We reached out to one of our favorite young people in the world to see if she’d be interested.

    A chance to make some money on the side and learn a new skill?

    She jumped on board without hesitation.

    We’ve known her for years and were not the least bit surprised. She’s exactly the type of person who will no doubt be successful in whatever she chooses to do.

    There is always a way to make more money.

    The point is there are always ways to make more money by doing things you like to do anyways. Even if you’re busy. You just have to exert some mental energy to figure out how.

    Then, when you make that extra money, put it to work for you. Make all your hustle worth it.

    At that point, we can talk about investing or buying real estate.

    Unfortunately, most people don’t want to go through this process.

    woman walking on street surrounded by buildings and thinking about own rental properties.
    Photo by Timo Stern on Unsplash

    Too many lawyers and professionals come to me and primarily want to talk about investing or buying real estate.

    They want to skip the foundation and jump right to the more exciting stuff.

    Most of the time, these are people who have never kept a budget. Or, they have massive student loan debt with no real plan to pay it off. Maybe they have a good W-2 job but no other sources of income.

    When I start exploring their situations with them, it’s clear they haven’t thought much about the personal finance building blocks.

    When they mention how hard it is to save for a downpayment, they haven’t considered looking for a new job that pays more or starting a side hustle.

    Before jumping right to owning rental properties, these are the personal finance obstacles that need to be addressed.

    If this sounds like the situation you are in, your ongoing mission is to generate more cash to fuel investments.

    The fun part is once you’ve discovered your motivations and established strong habits, you will consistently have money available so you can invest month after month for the rest of your life.

    My wife and I would not own five properties today if we didn’t first learn personal money wellness. 

    My wife and I would not own five properties (11 rental units) today if we had not first learned money wellness fundamentals.

    I don’t just mean we wouldn’t have had money available to invest, although that is certainly true. 

    I also mean we wouldn’t have the skills and knowledge to successfully run our real estate business.

    If you’ve ever wanted to be a business owner or investor, working on personal finance skills now is critical.

    Robert Kiyosaki put it best in Rich Dad Poor Dad, “It’s not how much money you make. It’s how much money you keep.”

    If you knew someone that made $1,000,000 per year, and at the end of the year, had only invested $20,000, what would your reaction be?

    What if you knew someone who made $100,000 per year and invested $20,000? Did your reaction change?

    How often do you think about your money mindset?

    Do you tend to think more about the “fun stuff” (investing, real estate) than the fundamentals (money mindset, budgeting, debt, etc.)?

    Let us know about your money mindset in the comments below.

  • How to Analyze a Property When the Initial Math Looks Bad

    How to Analyze a Property When the Initial Math Looks Bad

    Most rental properties that you evaluate are not going to immediately look like great investments.

    Does that mean you should just give up?

    No way.

    It’s up to us as real estate investors to research, negotiate and buy properties only at the right prices. Or, to buy properties that have untapped potential.

    Ideally, we can do both.

    The other day, we ran the numbers on an example property in Chicago that had caught my eye in.

    Through that example, we learned what costs to include in our initial analysis to quickly determine if a property was worth pursuing further.

    Today, we’ll look at the next step of the evaluation process.

    Specifically, we’ll focus on what we can do when the initial math on a potential property doesn’t look very attractive.

    Now, let’s get to it.

    Our example property is a small multifamily building in Chicago.

    Our example property is a five-unit apartment building listed for $1,800,000 and located directly in my target zone in Chicago.

    Remember, this analysis is for educational purposes only. You are responsible for running your own numbers on any potential deal.

    Here’s the listing description from my preferred listing site, Redfin:

    Fully Gut Renovated 5-unit building, a prime turnkey investment opportunity in the best Logan Square Location Possible. Double Vanities, Fully built out walk in closets, in unit W/D, tankless hot water heaters, thin shaker kitchens and full height quartz backsplashes are just a few of the features that make this building feel more like condo living. Perfectly situated just steps from the Logan Square Farmers’ Market, residents can enjoy an eclectic mix of trendy bars, restaurants, cafes, and shops right at their doorstep. Renovation done with full plans and permits, include a new roof, windows, insulation, drain tile system with sump pump, back deck, and still warrantied appliances!

    This property passed my initial screening, so we ran the numbers to see if it would be a good investment.

    Here’s what the initial numbers looked like:

    Asking Price: $1,800,000

    Monthly Rent: $13,840

    Mortgage Payment (Principal and Interest)$8,982
    Taxes$1,429
    Insurance$400
    Utility Bills$350
    Property Upkeep$200
    Preventative Maintenance$200
    Vacancy Rate (5%)$692
    Unexpected Repairs (5%)$692
    Property Improvements (5%)$692
    Total Monthly Cost$13,637

    Monthly Cash Flow (Rent – Costs): $203

    It took me less than five minutes to do this initial evaluation. 

    A few notes on the above numbers:

    • For the mortgage payment, I estimated a 25% downpayment, which is common for investment property loans, and a 7% interest rate.
    • Taxes are a major cost that can make or break any deal. Make sure you are familiar with how taxes are assessed in your market. For example, in Chicago, property taxes are reassessed every three years. That means taxes go up every three years. 
    • Many property listings will indicate the prior year’s taxes because they are lower. This particular listing has the prior year’s taxes, which I know are soon going to change for the worse. For now, I’ll run the numbers with the current taxes but would definitely account for higher taxes before moving forward with this deal.
    • Property insurance is a real wildcard these days. Insurance costs are going up everywhere. You’ll need to talk to a good insurance broker for an accurate estimate. I used my experience in the neighborhood with similar properties to make a reasonable estimate.

    The initial math on this property did not look great.

    In the end, I concluded that this is a beautiful property in a great location but would not be a good investment for me.

    The reason is simple: I invest for cash flow. For me, this property is way too expensive for only a couple hundred dollars of monthly cash flow.

    More specifically, I am not interested in shelling out a down payment of $450,000 (not to mention more for closing costs) to earn $2,400/year in cash flow.

    At a price point of $1.8 million, I would only be interested if this property had a monthly cash flow of at least $4,000 per month.

    For another investor, it’s possible that this would still be a good investment based on appreciation and debt pay-down. For me, that’s a big risk I’m not willing to take with that kind of money.

    So, what now?

    Is that the end of the analysis?

    Cross this property off the list and move on?

    Not even close.

    This is when the fun starts.

    person using laptop to evaluate a rental property using real numbers.
    Photo by Kaitlyn Baker on Unsplash

    What to do if you don’t like the results of your initial evaluation.

    Most of the time that you evaluate properties you won’t love the initial results.

    You should expect that to be the case.

    Think about it from the seller’s perspective. Ask yourself: why is the seller putting this property on the market?

    Obviously, the seller is trying to make a profit. Maybe the seller is a developer or flipper who just completed an expensive rehab. He might even have investors who paid for the project that now expect to be paid back, at a profit.

    The seller wouldn’t be doing is job if he didn’t try to find a buyer at a high asking price. He can always lower the price later on.

    Also, you can think of it another way.

    If a seller owns a wonderful property that is making tons of money every month, how motivated is he to actually sell?

    He may list the property at a high price just to see if anyone will bite.

    In our example, if the seller was cash flowing $4,000/mo, he’d probably just keep it.

    And, if he had that kind of cash flow coming in, he may just list it at an astronomical price because he doesn’t really need to sell it.

    Sure, there are exceptions. Some sellers don’t want to be landlords and others might just want to cash out. But, I don’t see very many of these situations.

    When these situations do pop up, you need to act fast because other investors will take notice.

    The point is these are just a few reasons why you will rarely find great investment properties based on your initial evaluation.

    Don’t give up.

    Your job is to figure out if a property has untapped potential that would make it a good investment.

    Now, let’s return to our example to see what I mean.

    Is the property overpriced?

    The listing price is only the start of the negotiation.

    The listing price may just be too high. In recent years, the listing price has oftentimes been too low, leading to bidding wars because of high demand and limited supply.

    Your job is to find a price that works for your cash flow needs. The seller may not accept your price, and that’s OK. You may need to move on.

    Let’s explore putting a price on our example property where it would be attractive for me.

    Keep in mind that I would want a monthly cash flow of $4,000 to move forward on this property.

    With that target in mind, I can return to the online calculator on Redfin to see at what price this property might make sense for me.

    Playing around with the calculator, I learned that I would need the price to drop to $1,100,000 to get around $4,000 in monthly cash flow (holding all other costs constant).

    That’s about a 40% price reduction.

    Do you think the seller would go for that?

    Not a chance.

    Depending on your market, sellers may be willing to negotiate the price. But, if you come in too low, they won’t take you seriously.

    If I were to move forward with this property, I would need to find ways to improve the math besides just the price. Still, I might be able to get it for below the asking price.

    For our example, let’s assume the seller would agree to knock 10% off the purchase price.

    Here’s what the numbers look like at 10% reduced purchase price.

    Offer Price: $1,620,000

    Mortgage Payment (Principal and Interest)$8,083
    Taxes$1,429
    Insurance$400
    Utility Bills$350
    Property Upkeep$200
    Preventative Maintenance$200
    Vacancy Rate (5%)$692
    Unexpected Repairs (5%)$692
    Property Improvements (5%)$692
    Total Monthly Cost$12,738

    With monthly rents of $13,840, that means this property is now cash flowing $1,002/mo.

    We’re heading in the right direction, but I think we can do better.

    Besides negotiating the purchase price, what if we can shop around and improve our mortgage?

    Start with the purchase price but see if you can further to reduce the overall cost.

    For example, can you shop around for a better mortgage?

    Let’s assume you can find a loan with a 6.75% interest rate instead of 7%.

    With a 6.75% interest rate, your mortgage payment drops from $8,083 to $7,880.

    Now, your cash flow increases to $1,211/mo.

    You can start to see how this part of the analysis works.

    The point is to reduce the costs of owning this property to improve your cash flow.

    What other ways can you reduce the costs?

    You should go through this process with each cost associated with the property.

    Maybe you can find insurance for less than $400/mo.

    Or, maybe you are willing and able to handle more of the maintenance responsibilities yourself.

    The idea is that each time you reduce your monthly costs, your cash flow goes up.

    If you can reduce the costs enough, a property may start looking appealing to you.

    two people meeting with laptops as they run the numbers together for a potential deal.
    Photo by charlesdeluvio on Unsplash

    On top of reducing the costs, can you can earn more income from this property?

    At the same time you look to reduce the costs, you should look to see if you can earn more income from a property.

    In other words, can you earn more rent per month than the current rate?

    This is where you’ll need to study the neighborhood to see what similar apartments are renting for. Your broker should be able to help you with this.

    In our example, let’s assume that you do your research and determine that the apartments are under-rented.

    In fact, you learn that each of the 5 apartments could earn $200 more per month.

    Adding that additional $1,000 per month brings our total cash flow to $2,211/mo.

    Now, this property is starting to look more enticing.

    You might be surprised how many sellers under-rent their properties.

    Over the years, my wife and I have been successful in finding properties that have been severely under-rented by the previous owners.

    We don’t renovate properties ourselves because we are busy professionals with full-time jobs and a family. We try to find properties that have bee nicely rehabbed but are currently under-rented.

    You may be surprised to learn that a property flipper doesn’t always know the local market as well as you. It could be that he is just in a hurry to get a property rented out so he can sell it and move on to the next job.

    If you become an expert on market rents in your local area, you can be the one who benefits.

    A few years ago, my wife and I purchased a three-flat in our local area. It was about a half-mile from where we lived at the time and was on our regular walking route. We took an interest in the rehab and followed its progression closely.

    When the property was completed, I saw the rental listings online. It was a beautiful property in a great location. I was shocked when I saw the units were listed for only $1,700/mo.

    This was my local area and I knew these units could easily go for $2,500/mo, if not more.

    When the property hit the market a few months later, we pounced and had it under contract the next day.

    When the original tenants chose to move out at the end of their leases, we quickly found new tenants happy to pay $3,100/mo.

    Sometimes sellers just don’t know what they have.

    Don’t fool yourself into thinking a property is a great investment by unrealistically changing the numbers.

    After reading this post, you can hopefully start to see how to run the numbers to make a potential property more attractive.

    In our example, we tweaked the purchase price, mortgage rate, and rental income to improve the cash flow enough to make this deal potentially attractive.

    After going through an analysis like this, you may be ready to make an offer. Just don’t get your hopes up too high.

    Sellers won’t always negotiate.

    Properties won’t always be under-rented.

    Many of your offers will end up getting rejected.

    Don’t quit.

    There will always be another property out there.

    If you can’t get a property with numbers that work for you, it’s time to move on to the next one.

    No matter how much you love a property, don’t fool yourself into thinking it’s a great investment if it’s not.

    Readers, have you made offers on properties that you knew were undervalued? Did you successfully cash flow on a deal that did not look great on paper at first?

    Let us know in the comments below.