Author: Matthew Adair

  • Is There Value in Keeping Both of Our Sapphire Reserves?

    Is There Value in Keeping Both of Our Sapphire Reserves?

    I recently posted about the major overhaul to Chase’s popular luxury credit card, the Sapphire Reserve. The change catching most people’s attention is the higher annual fee.

    I wrote that even with the increased annual fee, I am keeping the Sapphire Reserve in my wallet.

    I heard from a number of readers who also decided to keep the card despite the increased annual fee.

    Just as good, I heard from some readers who applied for the Sapphire Reserve for the first time after reading my post.

    I love hearing these types of comments from readers. Keep ’em coming!

    Today, I want to share my thoughts on another question that came from multiple readers. The question goes something like this:

    My spouse and I both have our own, separate Sapphire Reserve accounts from before we were married. With the higher annual fee, we are wondering if it makes sense to keep both accounts open.

    If we closed one account, we could then add that person as an authorized user on the other account.

    What do you think?

    This is a great question because there’s lots to think and talk about.

    Besides maximizing credit card value and minimizing fees, this question also touches on how couples manage their finances together.

    While that is an incredibly important conversation, we’ll have to leave it for another day. Today, I’ll simply highlight some of the relevant considerations.

    Finally, I love this question because it’s a good reminder that talking about money is not taboo. We all benefit when we discuss how to use money as a tool that works for us, not the other way around.

    Let’s get to it.

    What changed with the Sapphire Reserve?

    The Sapphire Reserve now comes with an annual fee of $795 (up from $550). That is the highest annual fee in the luxury credit card market.

    On top of that, the fee for authorized users increased from $75 to $195.

    In its press release announcing the revamped card, Chase advertised $2,700 in annual value for cardmembers. 

    Compared to an annual fee of $795, that sounds like a whole lot of value.

    The problem is it takes effort to receive all that value. More than effort, it takes spending. This can get complicated, even with only one card. With two cards, it can be even more challenging.

    For a complete description of all of the potential benefits, you can visit the Sapphire Reserve website.

    Remember that with all credit cards, the more you spend, the more you earn. That’s true whether you are accumulating points or utilizing shopping or travel credits and other discounts.

    This is a good place to emphasize the first rule of responsible credit card usage: 

    Don’t spend money just to earn rewards. That’s a recipe for financial disaster.

    The Sapphire Reserve is no exception to this rule, regardless of whether you have one or two cards in your household.

    Before we go further, it’s important to understand what it means to be an authorized user.

    What is an authorized user on a credit card?

    An authorized user is someone added to the primary account holder’s credit card account. Authorized users typically include spouses, partners or children of the primary cardholder.

    The authorized user gets his own physical card, but all spending is tracked on the primary account holder’s account.

    Importantly, that means that the primary account holder remains responsible for all payments.

    That also means the primary account holder receives all the points earned when the authorized user makes a purchase.

    Break time with aerial view of two people hugging and talking about whether to keep two Chase Sapphire Reserve credit cards.
    Photo by Guilherme Stecanella on Unsplash

    With cards like the Sapphire Reserve, the authorized user gets most of the same perks and benefits as the primary cardholder. Most notably, that includes lounge access and other travel perks.

    Not all credit cards offer the same perks for authorized users. Be sure to understand the rules about authorized users for any card you are considering.

    Before you add an authorized user to your account, make sure you understand that you are 100% responsible for that person’s spending.

    On the flip side, before you become an authorized user, understand that all of your points earned will go the primary account holder.

    If either of these restrictions are enough to give you pause about adding or becoming an authorized user, there’s no need read any further.

    You should continue to have separate credit card accounts.

    And, you should review my post to help you decide whether the Sapphire Reserve is right for each of you on an individual basis.

    If you have no problems with adding somebody as an authorized user, read on to find out whether it makes sense in your situation.

    What is the actual cost difference for adding an authorized user instead of keeping our accounts separate?

    Assuming you are OK with adding or becoming an authorized user, let’s look at what the actual cost is compared to keeping your accounts separate.

    Here are the options for couples that currently have two Sapphire Reserve accounts:

    • Option 1: Keep both accounts open and pay $1,590 in annual fees.
    • Option 2: Close one account, add an authorized user to the open account, and pay $990 in annual fees.

    Note: while you don’t have to add an authorized user to your account, I’m assuming you’re reading this post because you are considering it.

    If you stopped your analysis here, you’d see that there is a $600 difference if the couple keeps both Sapphire Reserve accounts open.

    That’s a lot of money and may lead you to think cancelling one of the cards is the easy decision.

    However, just like we explored in my post on why I’m keeping the Sapphire Reserve, there are ways to offset and reduce the annual fee.

    You can check out my post if you’re curious how I evaluate and use credit cards.

    For today’s purposes, remember that the Sapphire Reserve offers a $300 annual travel credit. The credit gets automatically applied whenever you make a qualifying travel purchase.

    It’s safe to assume that anyone willing to pay $795 for a luxury travel card is going to spend at least $300 per year on travel.

    The same assumption goes for couples thinking about keeping two Sapphire Reserve cards: they are going to spend at least $600 on travel between the two of them each year.

    Applying the $300 travel credit, the total cost for each scenario drops as follows:

    • Option 1: Keep both accounts open and pay $990 in total fees. (Each account holder receives a $300 travel credit, reducing the total cost by $600.)
    • Option 2: Close one account, add an authorized user, and pay $690 in annual fees.

    So, the real question becomes: is it worth an extra $300 annually to keep both Sapphire Reserve accounts open?

    When the extra cost of keeping both cards drops from $600 to $300, the decision gets a bit tougher.

    You may still be thinking that $300 is too much money to spend each year to have two of the same cards in your household.

    Personally, I agree with you.

    Below, I’ll show you what my wife and I do instead of having two Sapphire Reserve cards.

    However, there are some reasons why it may be beneficial for couples to keep both cards. Let’s look at those reasons now.

    Why it might make sense for couples to have two Sapphire Reserve credit cards.

    Here are some of the main reasons why it would make sense for a couple to keep two Sapphire Reserve cards.

    Trust issues. The bottom line is some couples just don’t trust each other when it comes to spending and paying bills. There’s no shame in that. It’s just a reality.

    Like we discussed above, if you find yourself in this situation, it doesn’t make sense to add or become an authorized user. The potential downsides, resentment, and arguments outweigh the $300 in annual savings.

    Accounting challenges. When you add an authorized user, all purchases get tracked together on the primary cardholder’s account. If it’s important for you to know who is making each purchase, this can be an accounting nightmare.

    Plus, some couples maintain separate bank accounts and pay bills separately. Having all credit card purchases appear on only one person’s account makes it more difficult to figure out who should pay for what.

    This shot was taken during a roadtrip with a couple of friends in the Dolomites. This pretty much sums up the lovely adventures we had over there – just us (and some beers) in the mountains for one week. Although it is just a snapshot, it captures a true, precious moment of togetherness and friendship, made possible by using Chase Sapphire Reserve.
    Photo by Felix Rostig on Unsplash

    Business expenses. It’s also not uncommon for lawyers and professionals to use their Sapphire Reserve cards for business purposes and then get reimbursed by their employers.

    If that’s the case, it may not make sense for you to blend personal and business expenses on one card. You could use one Sapphire Reserve strictly for business purposes and the other for personal expenses.

    Impact on your Credit History. You may not want to close your account because of the potential impact it will have on your credit history. This is particularly important if your Sapphire Reserve is the card you’ve had for the longest time.

    While this is a valid concern, there are ways to close your account without having any impact on your credit history whatsoever.

    The best thing to do before you close your account is to transfer your available credit line to one of Chase’s other credit cards, like the Freedom Unlimited.

    The Freedom Unlimited is the only other credit card I keep in my wallet.

    There is no annual fee with the Freedom Unlimited, and it’s the perfect compliment to the Sapphire Reserve.

    If you need help with this part, reach out to me on Instagram or LinkedIn, and I’ll walk you through the exact steps.

    Sign-up Bonuses and Credits. If you are thinking about getting a Sapphire Reserve, now is the time to do it. Chase is offering its biggest sign-up bonus ever: 125,000 points for new applicants.

    Using The Points Guy’s valuation, 125,000 points are currently worth $2,562.50.

    Combined with some of these other reasons, these bonus points might make this decision a no-brainer.

    Besides the sign-up bonus, the Sapphire Reserve comes with a number of other credits and benefits valued at $2,700 annually.

    For a complete description of all of the potential benefits, you can visit the Sapphire Reserve website.

    If you and your spouse or partner will independently take advantage of all these perks, then it could be worth it to keep both cards.

    In the end, if any one of the above applies to your situation, it may make sense to keep two Sapphire Reserve cards despite the extra $300 annual cost.

    My wife and I used to have two Sapphire Reserve cards.

    There was a time in my life when I had 10 different credit cards because I wanted to maximize the points I earned on every purchase.

    My wife and I each had Sapphire Reserve cards, too.

    We did earn a lot of points. But, it was so stressful.

    Keeping track of what card to use for every single purchase was complicated. Making sure we paid off each card every month was even harder. In the end, it wasn’t worth it.

    We now keep things simple, and I recommend most people do the same.

    Today, I only have two credit cards in my wallet: the Sapphire Reserve and the Freedom Unlimited.

    I use the Sapphire Reserve for travel (4 points per dollar spent on airlines and hotels) and dining (3 points per dollar).

    I use the Freedom Unlimited for everything else. The Freedom Unlimited earns 1.5 points across the board for every purchase. In contrast, the Sapphire Reserve only earns 1 point per dollar spent in non-bonus categories.

    Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited. This way, we can combine points to maximize our rewards. 

    Together, we still earn plenty of points and our finances are much simpler.

    I prefer to have two different cards that offer distinct but complimentary benefits.

    If your household is going to keep multiple cards, I suggest having different cards instead of doubling up on the same one. That’s true whether you combine accounts or keep them separate.

    That way, you can reap a more diverse set of benefits for a comparable cost.

    If you go this route, it’s helpful to keep your credit cards within the same bank (i.e. stick with Chase or stick with American Express) so you can combine points and accumulate rewards faster.

    Even if the Freedom Unlimited doesn’t appeal to you, I’d suggest looking at other credit cards within the Chase portfolio that earn Ultimate Rewards points.

    For example, my wife and I have the Chase Ink Business Unlimited and the Chase Ink Business Cash for our various rental property businesses.

    Each card earns Ultimate Rewards points that we can combine with our Sapphire Reserve.

    Let us know in the comments below how you view having two of the same cards in your household.

    As always, reach out if I can be of any assistance.

  • Invest in Real Estate for Massive Tax Benefits

    Invest in Real Estate for Massive Tax Benefits

    When was the last time you took a look at your actual pay statement?

    Most of us working W-2 jobs have direct deposit, meaning our paychecks are automatically deposited into our bank accounts. On pay day, all we have to do is wake up, open our banking app, and confirm we got paid.

    When we do this, all we see is our net pay, or take-home pay. Our net pay is what we earn after all deductions are subtracted from our gross pay.

    Deductions may include voluntary contributions, like to our 401(k) and HSA, as well as other benefits, like health insurance.

    That’s all nice so far.

    Not so nice is that our paychecks are further reduced by mandatory tax withholdings.

    For high earning lawyers and professionals, taxes can easily reduce our W-2 income by 25%-40%.

    This is not groundbreaking news to anyone, right?

    As employees, we are accustomed to having significant taxes withheld from our paychecks.

    We’ve become so accustomed to paying taxes as W-2 employees that none of this should surprise us. Taxes are just part of the bargain when you’re an employee.

    Well, what if I told you that automatically paying taxes every month does not have to be part of the bargain?

    In fact, I know of a way to make money where taxes can be reduced or deferred for a long time, if not eliminated altogether.

    And, that means you get to keep and benefit from more of your hard-earned money each month.

    This leads us to the fourth main reason I invest in real estate:

    Real estate offers massive tax benefits.

    I earn income through W-2 employment and rental properties.

    As a W-2 employee and a real estate investor, I know firsthand that not all income is created equal.

    My W-2 income is heavily taxed every month.

    My rental property income is not.

    Today, we’ll introduce some of the main reasons why real estate investors pay less in taxes than W-2 employees.

    Before we talk about these tax benefits, let’s review the first three reasons why I invest in real estate. Each of these reasons has accelerated my journey to financial freedom.

    Note: I am not an accountant or tax professional, so please be sure to consult with an expert for tax advice for your personal situation.

    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.

    Modern kitchen in a rental property, which is easier to pay for because of the tax advantages of investing in real estate.
    Photo by Jason Briscoe on Unsplash

    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.

    Now that we’ve reviewed how cash flow and appreciation work together to generate long-term wealth, we can look at the additional benefits of debt pay-down.

    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. 

    On top of monthly cash flow, appreciation, and debt pay-down, the tax benefits offered to real estate investors is another way to generate wealth through real estate over the long run.

    Let’s take a look at some of these massive tax benefits.

    What are the primary tax benefits to investing in real estate?

    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.

    Sign, Harlingen, Texas. 1939, but if you have real estate, you may not pay any taxes at all on your cash flow. Photographer Lee Russell
    Photo by The New York Public Library on Unsplash

    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.

    Would you rather have rental income or W-2 income?

    This post is not meant to be a primer on income taxes, but we can use a very basic tax bracket calculator to highlight the distinction between rental income and W-2 income.

    I currently receive both types of income so readily appreciate the difference in how each form of income is taxed.

    Let’s say you live in Illinois and are a high-earning lawyer or professional making a gross annual income of $250,000. Based on 2024’s federal tax rates, you will owe $53,015 in federal income tax. That’s 21% of your income.

    an example of how much you'll pay in taxes if you earn $250,000 as a W-2 employee.
    Source: taxact.com

    Illinois is one of the 42 states that also levies a state income tax. Illinois levies a flat state income tax of 4.95%. For our example, that means an additional $12,375 in taxes each year.

    In total, a W-2 employee earning $250,000 in Illinois pays $65,390, or nearly 26%, in income taxes each year.

    Again, this is not meant to be a tax primer. And yes, most W-2 employees take the standard deduction, meaning they’ll get a small refund when they file their tax returns.

    Still, there’s no getting around the reality that when you’re a W-2 employee, you have limited options to reduce your taxable income.

    In the end, you will pay a significant percentage of your income to the government every year.

    On the other hand, real estate investors have a number of legal tax deductions at their deposal.

    That means a real estate investor earning $250,000 in rental income likely pays very little, or even nothing, in income taxes.

    How is that possible?

    Let’s find out.

    How is it that real estate investors pay so little in income taxes?

    The federal government has long encouraged investment in real estate. People need places to live, work, and socialize. The government long ago decided to reward investors who take on the risk of providing these opportunities.

    The key way the government incentivizes real estate investors is through tax deductions.

    To accomplish its goal, the government allows real estate investors to deduct certain rental property expenses from their income.

    black platform bed wit white mattress inside bedroom of rental apartment where the landlord is getting massive tax benefits.
    Photo by Sonnie Hiles on Unsplash

    As mentioned above, common rental property expenses may include mortgage interest, property tax, operating expenses, depreciation, and repairs.

    When properly tracked and reported on your tax return, these expenses can oftentimes negate all the rental income you earned.

    For today’s purposes, I’ll highlight one key deduction that shows just how much the government wants to encourage real estate investment:

    Depreciation.

    What is Depreciation?

    Depreciation is an accounting method that allows real estate investors to deduct some of the cost of owning a property over time.

    This accounting process is not a trick and is completely legal.

    Calculating your property’s depreciation can get complicated and is best left to the tax professionals.

    In general terms, if you own residential rental property and use standard depreciation like me, you can deduct the cost of owning that property over 27.5 years.

    Each year, you can then reduce your rental income by that annual depreciation.

    Here’s an example to help illustrate how depreciation works.

    Let’s say you buy a rental property for $500,000, and the closing costs are $10,000. The property’s in excellent shape so no capital improvements are needed.

    That means your total initial cost for this rental property is $510,000.

    When you buy a rental property, you are actually buying the land and the building. Your city, county or town’s assessor typically attaches a value to each the land and the building.

    For depreciation purposes, only the value of the building is depreciable. The land is not.

    In our example, let’s say the land was valued at $110,000. You are not allowed to depreciate the value of the land.

    So, your depreciable basis is the initial cost of the property less the land value:

    Initial Cost – Land Value = Depreciable Basis

    $510,000-$110,000=$400,000

    For residential rental properties, you can spread out that depreciable basis over 27.5 years to figure out the annual depreciation.

    Depreciable Basis / 27.5 = Annual Depreciation

    $400,000 / 27.5 =$14,545.45

    What this means is that you can deduct $14,545.45 from your rental income each year.

    Combined with the other available deductions, you can see why real estate investors end up paying very little, or nothing at all, in rental income taxes each year.

    Note: If you sell your rental property, you are responsible for paying depreciation recapture tax, which is a topic for another day. To keep it simple, depreciation recapture is a non-factor for this conversation for many reasons. The most important reason for that is because you have to pay this tax even if you never claimed depreciation on your tax return.

    Your tax professional will help ensure you get all the tax benefits for owning rental properties.

    Fully understanding taxes is not easy. That’s why we have licensed professionals to help us.

    A concept like depreciation can be very complicated. Rest assured that your tax professional will help you benefit as a real estate investor from all the available tax breaks.

    The point of today’s post is to introduce you to the definitive truth that the tax code favors real estate investors.

    While we barely scratched the service today, hopefully you can start to see why it is so advantageous from a tax perspective to own rental properties.

    coffee mug near open folder with tax withholding paper reflecting the massive tax benefits of investing in real estate.
    Photo by Kelly Sikkema on Unsplash

    I personally earn rental income and W-2 income.

    When you legally deduct your rental property expenses, it’s likely that your taxable rental income for the year will be reduced to nothing.

    Compare this reality to that of a high-earning W-2 employee, who regularly pays between 25% and 40% in income taxes each year.

    The W-2 employee needs to earn significantly more money to take home as much as the rental property investor.

    I personally earn rental income and W-2 income.

    One source of income hits my bank account in full on the first of every month. I never worry about taxes.

    The other source of income gets drastically reduced by taxes before I ever see a dime.

    Which type of income do you think I prefer earning?

    How about you?

  • Is the New Chase Sapphire Reserve Worth the Annual Fee?

    Is the New Chase Sapphire Reserve Worth the Annual Fee?

    Disclosure: This page contains affiliate links, meaning I receive a commission if you decide to apply using my links, but at no additional cost to you. Please read my Disclosure for more information.

    Making big waves in the credit card world, Chase just announced a major overhaul to its popular luxury credit card, the Sapphire Reserve.

    Think and Talk Money readers know that I only have two credit cards in my wallet: the Sapphire Reserve and the Chase Freedom Unlimited.

    Since the announcement of the changes to the Sapphire Reserve, I’ve received a number of questions about whether I’m keeping my card.

    To be fair, all the changes are a bit complicated to sort through.

    Along with a revamped points structure, the card offers new travel perks and a variety of spending credits.

    However, it’s not the changes to the earning potential or redemption options that’s prompting all the questions.

    @thinkandtalkmoney

    Chase just announced a major overhaul to its popular luxury credit card, the Sapphire Reserve, including increasing its annual fee of $795 (up from $550). On top of that, the fee for authorized users is increasing from $75 to $195. I analyzed whether these changes are worth keeping the card here: https://thinkandtalkmoney.com/is-the-new-chase-sapphire-reserve-worth-the-annual-fee/ #chase #sapphirereserve #thinkandtalkmoney

    ♬ original sound – Thinkandtalkmoney

    What is the change to the Sapphire Reserve that’s driving most of the questions?

    The Sapphire Reserve now comes with an annual fee of $795 (up from $550). That is the highest annual fee in the luxury credit card market.

    On top of that, the fee for authorized users is increasing from $75 to $195.

    Ouch.

    Offsetting some of that pain for new cardmembers , Chase is currently offering a sign-up bonus of 125,000 points, the largest bonus ever offered.

    That translates to $2,562.50 in value, according to The Points Guy.

    Even with these increased fees, I am keeping the Sapphire Reserve in my wallet.

    Today, I’ll walk you through my thought process as to why I’m keeping the card.

    I’ll show you how I value certain benefits and ignore other potential benefits, mostly because they’re just too complicated or don’t apply to my personal situation.

    Whether you are thinking about applying or are a current cardmember, this post will give you the tools to decide for yourself if the Sapphire Reserve is right for you.

    Before diving in, let’s start with a little bit of context.

    I used to have 10 different credit cards to maximize points.

    There was a time in my life when I had 10 different credit cards because I wanted to maximize the points I earned on every purchase.

    I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.

    My wallet was thicker than my Chicago accent.

    I did earn a lot of points. But, it was so stressful.

    Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.

    Stock photo of the Business Man with a credit card by rupixen illustrating why I'm keeping the Chase Sapphire Reserve in my wallet despite the higher annual fee.
    Photo by rupixen on Unsplash

    I now keep things simple and recommend people do the same. The exception would be if you enjoy the challenge of maximizing every credit card purchase and perk.

    How do I keep my credit card life simple?

    I use the Sapphire Reserve for travel and dining and the Freedom Unlimited for everything else.

    Same as me, my wife only carries the Sapphire Reserve and Freedom Unlimited. This way, we can combine points to maximize our rewards.

    Together, we still earn plenty of points and our finances are much simpler.

    Before we go any further, to read more about the responsible use of credit cards, check out my series on credit here. A good place to start is my post with 10 credit card tips for lawyers and professionals.

    The Sapphire Reserve’s benefits are geared towards high spenders and frequent travelers.

    In its press release announcing the revamped card, Chase advertised $2,700 in annual value for cardmembers.

    Compared to an annual fee of $795, that sounds like a whole lot of value.

    For a complete description of all of the potential benefits, you can visit the Sapphire Reserve website.

    The problem is it takes effort to receive all that value.

    More than effort, it takes spending!

    With all credit cards, the more you spend, the more you earn. That’s true whether you are accumulating points or utilizing shopping or travel credits and other discounts.

    This is a good place to remind you of the first rule of responsible credit card usage:

    Don’t spend money just to earn rewards. That’s a recipe for financial disaster.

    The Sapphire Reserve is no exception to this rule.

    In general, if you are a high spender and/or frequent traveler, the card likely offers more than enough benefits to make it valuable to you.

    If you aren’t a high spender and/or frequent traveler, you may end up paying more than the card is worth.

    Here are the Sapphire Reserve benefits that actually matter to me.

    Today, I want to highlight the benefits of the Sapphire Reserve that matter most to me. The reality is that so many of the offered benefits don’t apply to my situation or are too complicated to use.

    You may find value in some of the benefits that don’t matter to me. Regardless, you can go through the same thought process to determine if the Sapphire Reserve is right for you.

    To begin, the Sapphire Reserve will cost my wife and I $990 per year in annual fees. To justify that cost, I’m looking for benefits that equal at least that much. 

    There are 3 annual credits that matter for my personal situation.

    Not all of the offered credits are useful to me. Here are the three that matter for my personal situation:

    1. $300 Annual Travel Credit

    Each year, cardmembers earn $300 in credits for travel purchases. These credits are automatically applied when you make a qualifying travel purchase, which is broadly defined.

    Put simply, the annual travel credit is not hard to earn. If you book even one flight throughout the year, you’ll qualify.

    Applying the annual travel credit, the overall cost drops to $690 per year.

    2. $125 credit for Apple TV+

    I already subscribe to Apple TV+, so this one is a no-brainer.

    I don’t currently have Apple Music, but there’s an additional $125 credit available for this subscription. Because I’m keeping my Sapphire Reserve either way, I’ll probably subscribe to Apple Music, too.

    Important Note: if you’re not already spending money on Apple TV+ or Apple Music, I would not recommend using this benefit as a justification for offsetting the annual fee. 

    Remember the cardinal rule: never spend more money just to qualify for a benefit. Since I’m already a subscriber, this is a good benefit for me.

    Applying the Apple TV+ credit, the overall cost drops to $565 per year.

    3. $10 monthly credit for Peloton memberships

    Like Apple TV+, I already pay for a Peloton membership. This one’s another no-brainer.

    Applying the Peloton credit, the overall cost drops to $445 per year.

    In total, these three credits reduce the true cost of the Sapphire Reserve for me to $445.

    Cutting the true cost in half definitely helps me feel better about the initial sticker shock of the $990 annual fee.

    Importantly, I do not have to change my spending habits in any way to qualify for the credits. I would be paying for these things regardless of the credits, so these are true benefits for me.

    Here are some of the credits that I won’t ever use.

    In contrast to the above credits, there are some other credits offered that are either too complicated or that I won’t really use.

    Don’t overlook this distinction. You never want to justify having a credit card because of hypothetical perks. Only focus on the ones you’ll use.

    For example, Chase advertises $300 in DoorDash promos. Here’s the offer:

    DashPass members get up to $25 each month to spend on DoorDash, which includes a $5 monthly promo to spend on restaurant orders and two $10 promos each month to save on groceries, retail orders, and more.

    Uh, come again?

    I think what this means is I can save $5 once per month on a restaurant delivery. Then, I can spend more money on two other deliveries per month (but not for food), and save $10 each time.

    Did I get that right?

    This is way too complicated. I’m ignoring this credit for my analysis.

    If I regularly used DoorDash, this might be a different story. Because I don’t use DoorDash, and the credit is so complicated, this one is meaningless to me.

    white market light illustrating that some credit card benefits are so confusing they aren't worth considering in your evaluation of whether to get the Chase Sapphire Reserve.
    Photo by Jon Tyson on Unsplash

    There are other credits like this one attached to the card that don’t do anything for me.

    Other examples include credits for dining through the Sapphire Reserve Exclusive Tables and credit for stays with The Edit. In all likelihood, I won’t ever take advantage of these credits. 

    When reviewing the offered credits, you should do the same analysis and only count what you’ll actually use.

    If you won’t currently use the credit, don’t force yourself to use it to justify the cost of the card.

    I also don’t put much weight on travel benefits like lounge access and hotel status.

    The Sapphire Reserve offers access to 1,300+ airport lounges worldwide through Priority Pass, plus access to Chase Sapphire Lounges.

    The Chase Sapphire lounges admittedly look awesome. The problem is there is not a lounge at my primary airport, Chicago O’Hare.

    There also isn’t a lounge at any airports I regularly fly to. I likely will get very little benefit from these lounges, unless one opens at O’Hare.

    The same goes for the lounges offered through the Priority Pass program. I’ve found this to be a great benefit when traveling internationally but not very useful when traveling domestically. 

    If you are a frequent traveler and would take advantage of all these lounges, this is a major perk of the card. Personally, lounge access doesn’t do much for me.

    The same goes for hotel status through IHG simply because I don’t typically stay at IHG branded hotels.

    In short, these benefits may be meaningful to you but don’t provide much in terms of value for me.

    If anything, I view them as a bonus. Maybe I’ll take advantage of these travel benefits a couple of times throughout the year, and that would be great.

    But, they’re not a factor in my current decision to keep the card.

    I am keeping my Sapphire Reserve because I will earn significantly more than $445 in points value.

    By this point in my analysis, I’ve reduced the fee as much as possible for my situation. Instead of the sticker shock of $990, the real cost is $445 per year. 

    Now, I need to decide if I will earn enough points to justify the $445 cost of the card.

    It is easier than you think to calculate how much value you’re getting in points.

    I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.

    The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point. For comparison, American Express Membership Rewards are valued at 2 cents/point.

    Meaningful to me, the new Sapphire Reserve offers 4 points per dollar spent on airfare and hotels. It also offers 3 points per dollar spent at restaurants. Finally, you’ll earn 1 point per dollar on everything else.

    In my situation, I want to know if I will earn enough points to justify the $445 annual cost. This will require some basic math.

    Here’s what the math looks like:

    1 point = 2.05 cents.

    $445 annual cost x 100 cents = 44,500 cents.

    44,500 cents / 2.05 cents per point = 21,707 points.

    So, I need to earn 21,707 points to justify keeping the card.

    Now, I need to figure out how much I spend each year.

    It’s easy to determine how much you spend each year.

    The next step is to open your Chase app and look to see how much you normally spend in each category. This is very easy to do.

    Chase, like most credit cards today, automatically categorizes your spending for you. Look for the “Spending Planner” option in your app.

    Once there, you can find out exactly how much you spent on categories like travel, food, and everything else.

    I recommend reviewing your spending for all of last year and so far this year. Then, you just need to do some quick math.

    In my case, I use my Sapphire Reserve primarily for travel and dining out, so almost every dollar I spend earns 3 or 4 points.

    I can see on the Chase app that I spend thousands of dollars in each category per year. That’s more than enough spending to earn 21,707 points.

    In other words, my current spending levels make it an easy decision for me to keep the card.

    To put it in perspective, if I spend $5,426.75 per year on flights and hotels, that alone would generate enough points to cover the cost of the card.

    5,426.75 x 4 = 21,707 points

    Or, if I spend $7,235.67 on dining, I would earn 21,707 points, enough to cover the cost of the card.

    In reality, I spend in both categories so neither one has to even reach that level of spending.

    That’s all there is to it.

    You can follow these same steps to determine if the Sapphire Reserve is worth it to you.

    If you aren’t getting enough value, consider the Chase Sapphire Preferred.

    The Chase Sapphire Preferred is a less expensive version of the Sapphire Reserve with less overall benefits.

    I had the Sapphire Preferred for years before my spending justified switching to the Sapphire Reserve.

    You can do the same analysis that we just went through to determine if the Sapphire Preferred is a better card for your personal situation.

    Now you can decide if it’s worth applying for or keeping the Sapphire Reserve.

    Now you know the exact process I went through when I learned the Sapphire Reserve was undergoing some major changes.

    I don’t put much weight on the harder-to-quantify benefits, like lounge access and hotel status, because I don’t have the chance to use those perks very often. If I do get the chance, that’s a nice bonus.

    For me, I earn enough points each year to justify the true cost of keeping the Sapphire Reserve in my wallet.

    Do you currently have the Sapphire Reserve?

    Are you keeping yours or replacing it with something else?

    Let us know in the comments below.

  • Invest in Real Estate and Other People Pay Your Debt

    Invest in Real Estate and Other People Pay Your Debt

    Imagine that you have the chance to own something that might be worth a lot of money down the road.

    To buy this thing, you will need to pay 25% of the purchase price. The other 75% of the price will be paid by someone else.

    Your job is to take care of that thing and keep it for a long time. It won’t be easy, but if you can handle it, you’ll wake up years from now owning something outright that is very valuable.

    So far, this sounds pretty good, right?

    Of course, there’s a catch. That person paying for 75% of the item will want to be paid back. He’ll want to earn interest, too.

    You might be thinking that this opportunity doesn’t sound so promising anymore. Having to pay off that debt might be enough to convince you not to move forward with buying this thing.

    You’re smart to be thinking about the debt. I could understand if the prospect of paying back a debt like this didn’t appeal to you. Who really wants to use their own hard-earned money to pay off debt anyways?

    Fair enough.

    But, what if I told you that other people are going to pay back that 75% (plus interest) on your behalf?

    Even more, while those other people are paying back the debt, you still get to benefit from owning the item.

    Does that change how you’re viewing this opportunity?

    Maybe now you’re thinking that this is too good to be true?

    Nope.

    This is exactly how real estate investors generate long-term wealth. They buy a property using a loan and then pay back that loan using other people’s money.

    This example leads us to the next main reason I invest in real estate:

    Other people pay off my debt.

    When you acquire the right rental properties, your tenants will pay monthly rent and that rent can be used to pay off your loan.

    That means you can pay off that loan without using any of your own money.

    As your loan balance shrinks, your net worth increases. As your net worth increases, you are creating wealth for you and your family.

    Along the way, you can reap the benefits of monthly cash flow and appreciation. That means your net worth increases even more.

    That’s a powerful combination to generate long-term wealth.

    If this concept sounds like something you may be interested in, read on.

    Before we talk more about debt pay-down, let’s review two of the other main reasons I invest in real estate.

    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.

    One of the hottest destinations in Spain is Costa Blanca, these luxury homes are situated in Villamartin, Campoamor, Torrevieja, Orihuela, located near to the coast, golf course, and shopping center, an example of other people paying my debt through rent.
    Photo by Frames For Your Heart on Unsplash

    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.

    Now that we’ve reviewed how cash flow and appreciation work together to generate long-term wealth, we can look at the additional benefits of debt pay-down.

    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.

    Each time I make a mortgage payment, part of the payment goes to interest on the loan and part of the payment goes toward the principal. This concept is known as amortization.

    By the way, this is how real estate investors use Good Debt, also know as leverage, to generate wealth.

    You may be totally against debt of all kind. That’s OK. Debt certainly carries risk. I’m not here to convince you that debt is a good thing or a bad thing. I’m just showing you how it works.

    For more on the difference between good debt and bad debt, check out my post here.

    What is loan amortization?

    Amortization is the process of paying back a loan over time in predetermined installments. While your payment amount remains the same, the composition of that payment changes over time.

    In the early years of paying off a mortgage, the vast majority of your payment goes to the interest. With each additional payment, more of the money goes towards the principal.

    When you take out a mortgage, your lender will give you an amortization table that shows you exactly how much of your monthly payment goes towards interest and principal for the duration of the loan.

    For example, if you take out a 30-year mortgage, you’ll receive a chart that shows 360 payments (12 monthly payments for 30 years). You can then look at any month in that 30-year period to see how much of your payment goes to interest vs. principal in that month.

    We hung that art piece by Tekuma artist Lulu Zheng, and I particularly loved how Lulu combines architecture and organic forms. Even if it is in the background, her 3D elephant brings the focus of the viewer towards her work, representing how renters can make a home feel like their own while they pay off my real estate debt.
    Photo by Naomi Hébert on Unsplash

    If you’re so inclined, you can also use an online calculator, like this one at calculator.net, to create an amortization chart for any loan you have.

    I’ll admit, looking at the amortization chart is the least fun part of any real estate closing.

    Seeing debt payments as far out as 30 years is a bit scary. It’s hard not to think of all the things that can go wrong during such a long time period. That’s why I prefer to think of amortization in general terms instead of specifics.

    Generally speaking, I know that some of my monthly payment goes to interest and some goes to principal. The longer I pay back the loan, the more of my payment goes to principal. That’s good enough for me.

    With a fixed-rate loan, your monthly payment remains the same.

    When you have a fixed-rate mortgage, your payment remains the same for the duration of the loan.

    At the same time, because of inflation, rents tend to go up over the long run. Rents may also go up if market conditions improve or if you have forced appreciation through enhancements to your property.

    When your rental income goes up, and your debt obligation remains constant, that means more cash flow for you.

    For example, say your monthly mortgage payment is $2,500 each month for the next 30 years. And, let’s say you currently earn $3,000 in monthly rent payments.

    Over time, your rental income should gradually increase. Some years in the future, you may be earning $4,000 or $5,000 per month in rental income. All the while, your monthly mortgage payment remains $2,500.

    You can use that extra income, after covering all other expenses, to pay for your immediate life expenses, pay off your loan faster, or invest in other assets.

    It’s for these reasons that having a fixed debt payment over a long time horizon is one of the biggest advantages to investing in real estate.

    Think of it this way. Just like with your personal Budget After Thinking, you can make significant strides towards financial freedom when your income increases and your expenses remain fixed.

    What do you think of investing in real estate so other people can pay off your debt?

    Now, you know three of my main reasons for investing in real estate: cash flow, appreciation, and debt pay-down.

    Regarding debt pay-down, each month my tenants pay rent, I can use that income to shrink my loan balance.

    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.

    So, on top of monthly cash flow and appreciation, debt pay-down is another way to generate wealth through real estate over the long run.

    That’s three ways to make money off of a single investment.

    Not bad, huh?

    If you’re a real estate investor, let us know how you’ve used debt to increase your net worth.

  • Money on My Mind: Read The Simple Path to Wealth

    Money on My Mind: Read The Simple Path to Wealth

    The Simple Path to Wealth by JL Collins is the best book on investing I’ve ever read.

    It is a must-read for anyone trying to figure out why and how to invest in the stock market.

    If you’re a new investor and don’t understand how to invest in the stock market, Collins will set you on your way.

    If you’re a seasoned investor unsure what to do in times of economic uncertainty, Collins is here to help.

    Maybe you just need a bit of motivation or a reminder of how simple it is to build long-term wealth. There’s no one better than Collins to provide that pep talk.

    Who is JL Collins?

    JL Collins is sometimes described as “the Godfather of Financial Independence” in the personal finance community. He has a popular blog where you can read more about his story.

    The short version is that he wrote a series of letters to his then teenage daughter about money, investing, and life. He wanted to impart the wisdom he had accumulated during his lifetime and help her avoid the mistakes he had made.

    Those letters eventually led to his blog, which then led to his bestselling book, The Simple Path to Wealth, first released in 2015.

    Since then, Collins has been a thought-leaders in the financial independence community. He has inspired thousands, if not millions, of people around the world to accumulate massive wealth by following a few simple rules.

    What makes Collins so transformative is his ability to make seemingly complex topics (like investing) into easily digestible and actionable information.

    If you have any intention of becoming financially independent and haven’t read The Simple Path to Wealth, now is the time to do so.

    I’ve read his book cover-to-cover twice and constantly refer back to his lessons.

    purple flower filed during daytime illustrating how beautiful the simple path to wealth should be.
    Photo by Jack Skinner on Unsplash

    Each time I read his book, I’m reminded how simple it is to reach financial independence if I can just follow a few simple tips.

    I’ll share those simple rules with you at the bottom of the post. Before I do, here is a bit of context about each time I read his book, first in 2019, then again in 2025.

    Seeing those dates, you may already be wondering if world events between 2019 and 2025 changed his philosophies.

    Let’s find out.

    I first read The Simple Path to Wealth in 2019 as a DINK.

    I first read The Simple Path to Wealth in 2019 and just finished the updated version. Even if you’ve read the original version, I highly recommend you read new edition released in 2025.

    Here’s why.

    When I read the original version in 2019, market conditions and the world economy were in very different places than they are in 2025.

    Back in 2019, the stock market had been closing out one of the best decades in history. As reported by US News:

    From a market’s perspective, the 2010s will forever be remembered as an era of slow but steady gains on Wall Street, and a period of sustained growth for investors and their retirement accounts.

    By the end of the 2010s, the market had been on the longest bull run in history. It was such an epic run that it was fairly common for most people to see big gains in their portfolios without much effort or knowledge.

    On a personal level, my life was also very different in 2019. My wife and I were enjoying married life before having kids. We had just purchased our first rental property in a trendy Chicago neighborhood.

    On top of that, we were DINKs (“Dual Income No Kids) and able to save aggressively for our next investment.

    We were considering another rental property, but I first wanted to learn more about the power of investing in the stock market.

    This is what led me to read The Simple Path to Wealth the first time.

    Side note: If you are currently a DINK, or will soon be a DINK, please pay extra attention here.

    Don’t waste this powerful opportunity to supercharge your investments.

    When you’re in a relationship where you have two incomes coming in and are sharing financial responsibilities, you have the opportunity to supercharge your Later Money goals.

    This is what my wife and I were able to do, even if we didn’t know what a DINK was. We each had good incomes coming in and our monthly expenses were low.

    Also, we didn’t have to worry about childcare. We were young so the odds of unexpected medical care were lower. All things considered, it was pretty easy to keep our Now Money to a minimum with plenty to spare for Life Money.

    This allowed us to fuel our Later Money goals. We had money in the bank and seemingly endless choices.

    And, I didn’t want to screw it up.

    Reading The Simple Path to Wealth was a way to educate myself in hopes of not screwing it up.

    I read the new version of The Simple Path to Wealth in 2025.

    Fast forward to 2025. I read the new version o The Simple Path to Wealth because I was curious if Collins’ viewpoint had changed due to major world events, like the Covid-19 pandemic.

    I was also curious to see whether his advice would still resonate with me now that I’m a seasoned real-estate investor and have a personal finance blog.

    Well, I’m happy to report that Collins’ message hit me stronger today than it did in 2019.

    If anything, Collins’ lessons are even more applicable today than they were in the 2010s when markets were soaring.

    In the new edition, Collins discusses how recent world-changing events, like the Covid-19 pandemic and international wars, actually strengthen his long-time recommendations.

    This was very refreshing to learn because I have been following his advice and recommending his book for years.

    In times of economic uncertainty, Collins explains, it’s even more important to have a plan for your money.

    Once you have that plan, you need to stick to it, no matter what.

    Collins provides the motivation and tools to stick to the plan.

    Why is The Simple Path to Wealth such an important book?

    When I teach my personal finance class to law students, I ask at the beginning of class what my students hope to learn.

    One of the most common responses I hear every year is, “I want to learn how to invest in the stock market.”

    OK, fair enough.

    The truth is I’ve yet to find any resource better than The Simple Path to Wealth to teach us how and why to invest in the stock market.

    What makes Collins such a good teacher?

    In The Simple Path to Wealth, Collins uses basic, every day, language that we can all understand. This is his greatest gift.

    Too many books on investing are so dense that they are useless to the average person.

    Collins is different. He successfully blends his life experiences with the historical data, in easy to understand terms, to show us that investing is not hard.

    For many people, especially people at the beginning of their careers, investing can seem intimidating.

    As Collins explains, that’s because it’s big business for investment companies and banks to make investing seem hard and scary.

    These companies spend billions of dollars marketing every year to convince us that investing is complicated. Their goal is to convince us to pay them lots of money to manage our money.

    You don’t have to believe them. You certainly don’t have to pay them tons of money to invest in the stock market.

    Collins will not only show you how invest on your own, he’ll also give you the tools to outperform the financial professionals.

    What are Collins’ simple rules to live by?

    Collins’ main message is that investing should not be complicated. When done the right way, it’s simple and effective. Hence, the title of his book.

    Collins explains that each of us can achieve long-term wealth by following a few simple rules:

    1. Spend less than you earn.
    2. Invest the surplus.
    3. Avoid debt.

    Sound advice, indeed.

    If you can live by these simple rules, the next question is what to do with your surplus money earmarked for investments.

    Collins has a simple and effective plan for you that he details in his book.

    What is Collins’ simple and effective plan for investing?

    Collins’ plan is both simple and effective. He doesn’t expect you to just take his word for it, either. He has the research and historical data to back it up.

    Make no mistake: just because something is simple does not mean it is ineffective.

    So, what is Collins’ simple and effective plan to invest for long-term wealth?

    1. Invest in low-cost, broad-based index funds. His favorite investment has always been Vanguard’s total stock market index fund, VTSAX.
    2. Ignore the noise. Be mentally tough. Stay the course.

    That’s it.

    You don’t need fancy investments. You don’t need a financial advisor. All you need to do is commit to the plan.

    If you’re thinking that this is too good to be true, you need to read The Simple Path to Wealth.

    How can it really be that simple?

    You might be thinking, how can it really be that simple? If all people had to do was invest in index funds, everyone would be rich.

    That’s exactly Collins’ point!

    Everyone could be rich if they follow these simple rules.

    The problem is most people allow their emotions to get in the way and steer them off the path.

    Collins does his best to help you deal with those emotions.

    If you don’t believe that index fund investing will make you wealthy, look at this stat about the recently announced sale of the NBA’s Los Angeles Lakers:

    That’s right. The Buss family would have an extra $3 billion today if they had invested in the S&P 500 instead of purchasing the Lakers in 1979!

    Many thanks to blog reader, DJ, for passing this one along!

    I know, I know. Owning the Lakers was probably a ton of fun. They also surely made money on the team along the way.

    The point remains: investing in an S&P 500 index fund also would have generated massive wealth. And, that wealth would have come without the effort and the headaches of running a major professional sports organization.

    I can picture Collins having a good laugh about stats like this.

    Read The Simple Path to Wealth.

    I recommend The Simple Path to Wealth to all of my students and friends who ask me about investing.

    There is not a better book out there to make the concept of investing seem approachable for all of us.

    Collins is clear and humorous. He’s also stern when he needs to be.

    If you read this book, you’ll realize that becoming wealthy through the stock market does not have to be complicated.

    It can be wonderfully simple.

    Let us know in the comments below.

  • Invest in Real Estate for Wealth Through Appreciation

    Invest in Real Estate for Wealth Through Appreciation

    We previously looked at the main reason I invest in real estate:

    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.

    What if you don’t need your cash flow to cover your immediate life expenses? Maybe you have a full-time job that provides more than enough.

    That’s even better. There’s no rule that says you have to spend your cash flow.

    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.

    The point is cash flow gives you options. Having options is never a bad thing, right?

    That’s why cash flow is the number one reason I invest in real estate.

    However, cash flow is not the only reason.

    I also invest in real estate to generate long-term wealth for me and my family.

    I am a buy-and-hold real estate investor.

    That means when I buy a property, I intend on keeping it for many years. Circumstances may change, of course, but my intention is to hold property for a minimum of ten years.

    The reason I buy-and-hold for the long term leads us to the next major reason I invest in real estate:

    Appreciation.

    While cash flow can provide for my immediate expenses, appreciation is all about the long-term benefits. Appreciation is how I will generate long-term wealth for my family through real estate.

    Today, I want to talk about what appreciation is and how it can significantly improve your net worth over time.

    Let’s dive in.

    What is appreciation in real estate?

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

    For example, if you buy a property for $500,000, and some years later it’s valued at $750,000, your property has appreciated by $250,000.

    That means through appreciation, your net worth has increased by $250,000.

    Except for when you’ve forced appreciation (we’ll discuss below), you have earned that money through appreciation by doing very little. All you have to do is make your monthly mortgage payments, and let the market do the rest.

    This is exactly how many Americans generate significant wealth over time.

    Mini house and key illustrating how to generate long-term wealth through real estate with appreciation.
    Photo by Tierra Mallorca on Unsplash

    How to target properties with a strong likelihood of appreciating is beyond the scope of this post. I’ll soon share with you my criteria, but there’s no one way to do it. 

    Entire websites and books have explored this topic. If I were just starting out, I would spend a lot of time on BiggerPockets.com.

    For that matter, even as an experienced investor, I still spend a lot of time on BiggerPockets.

    For now, remember one main point when it comes to appreciation:

    Appreciation takes time.

    Successful real estate investors know that appreciation takes time.

    I’m not talking about speculators or gamblers. I’m talking about people who are interested in building long-term wealth for their families.

    To build long-term wealth through real estate, you need to remember this main rule about appreciation.

    It’s so important, it’s worth repeating:

    If you can hold a property for years or even decades, you have a really good chance of that asset being worth significantly more than when you paid for it.

    Your property may not appreciate at the same rate every year. Some years, your property may even lose value. That’s OK because you’re in it for the long run.

    The hard part is just holding on long enough to realize the benefit of appreciation.

    In this way, investing in real estate is like investing in stocks.

    How is investing in real estate like investing in stocks?

    Many of the same fundamentals apply to investing in real estate as to the stock market.

    We just mentioned one of the biggest keys with either asset: the longer you hold that asset, the more that asset should eventually be worth. 

    With stocks, we’ve already spent a lot of time in the blog discussing why you need to invest early and often.

    For more information on investing in stocks, you can read a variety of posts here.

    When you invest in stocks early and often, you can benefit from compound interest and safely ride out down market cycles. The stock market does not always go up every year, but given enough time, it does always go up.

    In large part, the same is true when you invest in real estate.

    If you buy good properties in good markets, given enough time, your property should appreciate in value. Like with stocks, the key is your ability to hold on and ride out down market cycles. 

    Want to know the secret to riding out down markets?

    Cash flow.

    You saw that one coming, didn’t you?

    Cash flow will help you ride out market cycles and benefit from appreciation.

    When you own strong, cash flowing rental properties, the cash flow covers all the expenses.

    That means you can stay patient in down markets because holding that property is not costing you any money.

    To take it a step further, as long as your property is cash flowing, you can hold it for decades and generate massive wealth through appreciation.

    Cash flow and appreciation working together is a powerful force. You can see why real estate investors get so excited about their investments.

    When a property is performing, the cash flow allows an investor to hold that property indefinitely. During that time, the property becomes more valuable through appreciation.

    It’s a beautiful partnership.

    What is forced appreciation?

    I mentioned earlier that there is one other form of appreciation worth talking about here: forced appreciation.

    Forced appreciation is when you improve your property in such a way that it increases in value. 

    Common examples may include remodeling the kitchen or bathrooms or adding another bedroom. When you make these enhancements to your property, your property should increase in value.

    This is what house flippers do. They buy a property in need of some work, do the improvements, and then aim to sell that property for a profit.

    It’s not a strategy that I personally use, but it has worked for many people for many years.

    The thing is, forced appreciation is not just for house flippers or investors hoping to realize a quick profit.

    When done correctly, forced appreciation is another way to make money over the long-term for buy and hold investors, like me.

    For example, in one of our rental buildings, we added in-unit washers and dryers. By doing so, our units now command a higher monthly rent, which in turn increases the value of the property.

    As a final point, forced appreciation is one way investing in real estate is different from investing in stocks.

    When you buy real estate, you are in control. You decide what improvements to make and not to make. Many real estate investors love having this type of control over their assets.  

    By contrast, when you own stock in a company, there is very little (if anything) you can do to impact how that company is run. Unless you have boatloads of stock in a particular company, you’re essentially just along for the ride until you sell your stock.

    What do you think about generating long-term wealth through appreciation?

    Now you know two of my favorite reasons for investing in real estate: cash flow and appreciation.

    Have you invested in real estate and benefited from appreciation?

    Did you force appreciation or hang tight and let the market do it’s thing?

    Let us know in the comments below!

  • Money Question: What Would I do with $10 Million?

    Money Question: What Would I do with $10 Million?

    In a recent post, I asked: If you woke up tomorrow with $10 million in your bank account, would you do anything differently?

    I ask a version of this question whenever I teach my personal finance course to law students.

    Asking what you would do with $10 million is just another way to ask what you would do with financial freedom.

    Attaching a specific dollar amount to the question helps make financial freedom seem real. It turns the aspirational concept of financial freedom into actual numbers.

    @thinkandtalkmoney

    In a recent post, I asked: If you woke up tomorrow with $10 million in your bank account, would you do anything differently? I ask a version of this question whenever I teach my personal finance course to law students. Attaching a specific dollar amount to the question helps make financial freedom seem real. Many thanks to one of our blog followers, Ian, for turning the question around and asking me what I would do with $10 million! #thinkandtalkmoney

    ♬ original sound – Thinkandtalkmoney

    Many thanks to one of our blog followers, Ian, for turning the question around and asking me what I would do with $10 million!

    It’s been some time since I put some real thought into this question. I’m happy to have gone through the thought process in crafting this post.

    If you haven’t already, I encourage you to do the same and think about exactly what you would do if you woke up with $10 million.

    Before I share my answer, I want to highlight some other reader responses to the question, which should shed some light on my decisions.

    Let’s get to it.

    🚨If you know anybody who would benefit from thinking and talking about money even just a little bit, please share the Think and Talk Money blog with them! I post 3 times every week. 🚨

    Disappearing on a beach.

    The most common response to what people would do with $10 million involved some version of:

    Invest the money and then disappear on a faraway beach.

    In a way, the “disappear on a beach” response illustrates what many of us are striving for with financial independence. By that, I mean the goal of having enough money to then not have to work if we don’t want to.

    palm tree near sea shore illustrating that life on a beach may get lonely after a while, which is why I would not disappear with $10 million.
    Photo by Maarten van den Heuvel on Unsplash

    Personally, I share the goal of becoming financially free, but I’m not looking to retire early and disappear. After all, I believe in FIPE not FIRE.

    I think jetting off to the beach would be nice at first but then get old pretty fast. That said, I can certainly appreciate the desire to take some time away from life’s daily stressors.

    Invest and then buy a shotgun.

    One reader, Sean, shared a pretty sensible plan:

    Put $9 million in the S&P 500, pay off debt with the rest and buy a nice shot gun.

    It’s hard to argue with this plan. Of course, it’s never a bad idea to pay off debt or invest in the S&P 500.

    I think it’s also important to treat yourself, within reason. I’m not in favor of earning financial freedom if it means being afraid to spend money on the things that make you happy.

    While I don’t know the first thing about shotguns, I’m guessing they represent a hobby of Sean’s. I’m certainly in favor of spending on hobbies, experiences, and activities that bring you joy.

    Well done, Sean.

    The struggle between “should” and “want.”

    Finally, Zach shared a sentiment that many of us struggle with when it comes to money decisions:

    I know what the answer should be but I’d really like to buy a house and a couple of the cool cars I’d always ogled over growing up.

    Zach’s comment stood out to me in the way he phrased it. He knows what he should do, which in his mind is different from what he wants to do.

    Zach’s one sentence comment sums up a money struggle that many of us have.

    We know what we should do, but we’re constantly fighting what we want to do.

    I would challenge Zach, and anyone else feeling this way, to take some time thinking about what you truly want out of life. I did this when I wrote down my Tiara Goals for Financial Freedom while on a beach in Florida.

    If you put some real thought into it, you might find that material possessions are actually not that important to you. Rather, buying your freedom is so much more valuable.

    I would want to know more about Zach’s desire to buy a couple of cool cars. Maybe, like our previous reader wanting a shotgun, having cool cars is a hobby for him that brings much joy.

    However, I have my doubts that’s what Zach meant. The way he phrased it (“cars I’d always ogled over growing up”) leads me to believe he wants these cars to show off.

    Here’s the problem with that type of spending.

    Buying a couple of cool cars would likely only give you a short-lived burst of happiness. Sure, it would be fun to drive them around at first. Maybe it’d also be fun to have your friends over and show off what you just bought.

    But, studies routinely show that the burst of happiness from material possessions like cars only lasts for so long.

    When that initial burst fades away, you’re stuck with the hassle of owning multiple cars that you probably wouldn’t even drive much. Your friends would stop caring before too long.

    Add in the cost of insurance, maintenance, and garage space, and these cool cars will be a major drag on your financial freedom.

    By the way, there’s nothing at all wrong with buying a house. You need to live somewhere. Just keep it reasonable.

    Otherwise, you’ll end up working long hours for a lot of years just to keep the house. That might not be a trade off you want to make.

    What I would do with $10 million.

    Without further ado, here’s exactly what I would do if I woke up with $10 million tomorrow.

    1. $50,000 to go on an African safari with my wife.

    My wife and I have three kids at home ages five and under. With a newborn, even date night can feel like an epic adventure. My wife does so much for all of us, that this is the easiest decision I’ve ever made.

    With the first $50,000, she and I are packing our bags for Africa and leaving the kids with Grandma. Since this would be our first big trip in six years, we’re balling out without worrying about the cost.

    I am a big advocate of using money as a tool to build memories. How could I do better than taking a dream vacation with my wife?

    2. Pay off my house.

    My goal is to be financially free. A big part of that is not having any debt. That’s why the next chunk of the $10 million is going to pay off my house.

    I could certainly make more money long-term by investing in the stock market or purchasing more rental properties. But, with $10 million at my disposal, I don’t need any more money. I know when enough is enough.

    I love my house and my community and would rather know that I can stay here with my family for the long run.

    3. Pay off my rental ski condo.

    In 2021, my wife and I bought a ski condo in Colorado. We currently rent it out for most of the year.

    If I had $10 million, I would pay off the mortgage on the ski condo, stop renting it out, and spend a lot more time out west with my family.

    Hiker on a log illustrating what I would do with $10 million, like hiking with my family.
    Photo by Jon Flobrant on Unsplash

    As I mentioned, one of my main goals in life is to create as many experiences and memories as possible with my family.

    Paying off my condo would allow all of us to spend more time together doing the things we love, like skiing, hiking, biking, and swimming.

    Best of all, we could do these things while sharing our condo with our extended family members.

    4. $250,000 in a high yield savings account.

    Everyone should have an emergency savings account. I would put $250,000 into a high yield savings account and turn to this money as my first line of defense in case of emergencies.

    After eliminating my mortgage debt on my primary home and my ski condo, $250,000 would be enough to fund my life for about 2 years. That’s a lot of runway and provides peace of mind.

    5. $300,000 total in my kids’ 529 college savings accounts.

    Besides eliminating debt, my other major financial goal right now is to save enough to pay for my three kids’ college. To cross this goal off my list once and for all, I would put a combined $300,000 into their 529 accounts.

    I landed on $300,000 by playing around with an online calculator, like this one. $300,000 should be enough to reach my goal for each kid.

    6. 70% of the rest in a total stock market index fund.

    I am an index fund investor, through and through. I have no interest in trying to beat the market or time the market.

    I’m perfectly happy with earning around 10% per year, which is the historical annual average return of the S&P 500.

    So, I would put 70% of the rest of my money in a total stock market index fund. I prefer Vanguard’s popular offering, VTSAX.

    If you’re wondering why I’m not putting all my money in “safer” asset categories, like cash or bonds, it’s because I still have a long investment horizon in front of me.

    I plan on investing for decades to come. I’m OK riding out the market swings that come with investing in stocks. I also want to keep up with inflation so my purchasing power remains strong in the future.

    7. 30% in a total bond market index fund.

    While I would mostly be invested in stocks, I would be highly motivated to preserve more of my wealth. Like I mentioned before, enough is enough.

    Investing in bonds is a good way to de-risk your portfolio, even if it means earning less each year.

    For that reason, I would allocate the remaining 30% of my money to a total bond market index fund. I would choose Vanguard’s VBTLX.

    I would not pay off my rental properties or quit my job.

    You may have noticed I did not mention paying off my rental properties or quitting my job.

    My rental properties are all on very low-rate mortgages and generate strong monthly cash flow. These properties are performing beautifully as is.

    I don’t see any good reason to mess with a good thing. I could always re-visit if circumstances changed.

    With $10 million, why am I not quitting my job and jetting off to a beach?

    The truth is I really like my life right now. I don’t see any good reason to make sudden, major life changes.

    I like the people I work with and the work that we do for our mesothelioma clients.

    On top of that, I like where I live and am not really craving any major purchases. I would probably get some new furniture for the house. Maybe I’d plant another tree or two in the backyard.

    Plus, because I’m still earning an income in this scenario, I can continue to use my income to fund my life. That’s why I didn’t account for daily spending in my plan for $10 million.

    In fact, I’d have more income available because the $10 million is more than enough for my long-term savings and investment goals.

    I could use the money I had been saving for these goals for more present day spending. I’m not sure I would, but I could spend more freely, if I wanted to.

    So, there you have it. That’s exactly what I would do with $10 million right now.

    What do you think of my plan?

    Would you do anything differently?

    Let us know in the comments below.

  • Invest in Real Estate Because Cash Flow is King

    Invest in Real Estate Because Cash Flow is King

    You may be wondering whether it’s better to invest in real estate or the stock market.

    It’s a valid question. We all have limited dollars (some more than others) and need to decide what to do with those dollars.

    The debate between investing in real estate or stocks is a good one. There’s no doubt that both asset classes can provide significant long-term growth.

    @thinkandtalkmoney

    Landlord Tip of the Week! ☑️🏡 #thinkandtalkmoney #landlord #landlordtips #realestateinvesting #realestateinvestor

    ♬ original sound – Thinkandtalkmoney

    There are also advantages and disadvantages to both types of investments. Advocates on either side of the debate can be very passionate about their preferred asset class.

    I personally invest in both asset classes. I have 10 rental apartments in Chicago and a rental ski condo in Colorado. In addition, I invest in the stock market primarily through index funds.

    Both asset classes play a key role in my journey to financial freedom. From my perspective, you don’t have to choose one asset class over the other. You can invest in real estate and own stocks.

    We’ve spent a lot of time in the blog already talking about the significant long-term upside of investing in the stock market. If you need a refresher, check out my post on investing early and often to benefit from the magic of compound interest.

    Today, I want to discuss one of the main reasons to invest in real estate. The reason comes down to a simple term:

    Cash flow.

    When investing in real estate, cash flow is the money left over each month after paying all your bills.

    There’s an old saying, “Cash is king.”

    For me, “Cash flow is king.”

    My goal is to use real estate to accelerate my journey to financial freedom. To that end, I invest in real estate primarily for the cash flow.

    Let’s dive in.

    Stocks and real estate will each provide incredible long-term benefit.

    Both stocks and real estate can provide significant long-term upside. Besides that upside, I invest in real estate for the immediate benefits of cash flow.

    In terms of your Budget After Thinking, your Later Money is for future expenses. Your Now Money and Life Money are considered immediate life expenses.

    Let’s talk about the Later Money category for just a moment. We can hopefully agree that both the stock market and real estate investments can generate incredible long-term wealth.

    The S&P 500 has historically provided an average annual return of 10%. While not guaranteed to continue in the future, 10% average annual returns represents a powerful wealth generator.

    With real estate, the long-term prospects can be harder to sum up with one simple number. There are a lot of variables at play, not least of which are the type of real estate and the geographic market.

    For example, I primarily invest in small multi-family properties in Chicago. According to Redfin, residential home prices in Chicago were up 9.1% compared to last year.

    Certain neighborhoods in Chicago have fared even better. In the neighborhood I invest in, prices are up 11.1% since last year.

    Those are nice short-term trends.

    On the other hand, in the past 25 years, home prices in Chicago have only doubled, which actually lags the national average. That’s not so nice.

    By the way, you can find data like this for most markets across the country so you can do your own homework on your market.

    So, what’s the takeaway?

    For me, it’s quite simple:

    If you hold real estate for long enough (think decades, not years), it will go up in value.

    Given enough time, like the stock market, real estate always goes up.

    How much your real estate will increase in value is hard to predict.

    My expected long-term returns in Chicago are different from somebody who invests in condos in San Francisco. Likewise, my Chicago rentals are different from my Colorado rental ski condo.

    I don’t expect my Chicago properties to increase in value at a rate of 10% over the long-term. I certainly hope the value of my properties beat the historical average in Chicago, but I’m not expecting that either.

    The point is, whatever happens long-term, I’m OK with it. The reason I invest in Chicago rental properties is not really about the long-term upside.

    It’s about the cash flow.

    For me, cash flow is king.

    Cash flow is king because it can cover present day expenses.

    To be truly financially free, you need to cover immediate life expenses at the same time you are saving for future life expenses.

    My definition of being financially free means not being dependent on the income from a primary job to cover your life expenses.

    My goal is to be truly financially free. That means I need money to pay for my life now, not just decades from now.

    African lion photography by Bisakha Datta symbolizing that cash flow is king when it comes to financial freedom.
    Photo by Bisakha Datta on Unsplash

    We just talked about how the stock market and real estate can both help with the future life expenses.

    For me, the primary benefit of investing in real estate is to help with those present day, immediate expenses.

    In terms of your Budget After Thinking, that means helping with your Now Money and Life Money.

    This is where cash flow comes in.

    I can use the cash flow from my rental properties to help cover my present day expenses. By having cash flow available in this way, I have accelerated my journey to financial freedom.

    In fact, I’ve been hard-pressed to find any other asset class that provides as many benefits in the here-and-now, while also providing benefits in the future.

    Let’s explore that point next.

    I prefer cash flow from real estate over stock dividends for my current expenses.

    Don’t get me wrong, you can certainly reach financial freedom by investing in the stock market. As we just talked about, the stock market provides significant long-term upside.

    Plus, you can certainly cover your current expenses with dividends from your stock investments.

    However, I think cash flow from real estate is a better option.

    Here’s why.

    In order to fund your current life with your stock investments, you either need to withdraw some of your earnings or even sell some of your stocks.

    When your stock portfolio is growing, you can leave your principle untouched and live off of the earnings. That’s pretty nice.

    But, what happens when the market drops? You still have bills to pay and a life to fund. To cover those expenses, you may need to sell some of your stock assets.

    Selling assets is not a great way to sustain long-term wealth.

    With real estate, you can live off of the cash flow without having to sell the asset.

    While your property may go through periods where it decreases in value, if you keep it long-term, the asset will increase in value. During that time frame, you can use the cash flow to fund your life.

    Let’s explore this concept a bit further with an example using the popular 4% Rule.

    What’s better for monthly expenses: cash flow from real estate or dividends from stocks?

    Let’s say you just received a windfall of $250,000. Pretend it’s a bonus from work or an inheritance from a distant relative.

    Your goal is to achieve financial freedom as soon as possible so you are not dependent on your W-2 job.

    You are considering two investment options.

    Option 1: You invest the $250,000 into a total stock market index fund, such as Vanguard’s popular offering (VTSAX).

    You’ve done your homework and know that based on the 4% Rule, you can safely withdraw 4% of your money in the first year and then 4% plus an adjustment for inflation in subsequent years. If you do so, your money should last 30 years.

    That means you can safely withdraw $10,000 in the first year year, and a bit more each year after that. For simplicity, let’s just look at the first year when you can safely withdraw $833.33 per month ($10,000 / 12 months = $833.33).

    Remember, your goal is to leave your primary job. With this investment, you can assume you’ll have $833.33 per month available to cover your monthly expenses. Not too bad.

    One important note: the 4% rule contemplates that your original investment should fund your lifestyle for 30 years. Importantly, there’s a chance your portfolio may be completely depleted after 30 years.

    There’s also a chance your portfolio may be worth more in 30 years than when you started withdrawing.

    Your results in large part depend on the percentage of stocks you own in your portfolio. If you are interested, you can read more about the 4% Rule and successful withdrawal rates here.

    One of keys to remember is that while the market does not always go up every year, you will still be making withdrawals every year.

    There may be a year where the market drops by 5% on top of the withdrawals you made that year. When that happens, your account balance drops. If you are not flexible in your withdrawal rate, this could lead to problems.

    True, when the market goes up, your account balance goes up. The 4% Rule attempts to factors in these up-and-down cycles over a 30 year period.

    However, when you are making constant withdrawals over a long enough period, there’s a chance that your account balance will eventually drop to zero.

    Keep this in mind as we consider our next option.

    Option 2: You use the $250,000 for a down payment on a rental property valued at $1 million.

    We will soon learn how to evaluate rental properties. Countless books have been written on the broad topic, and it’s beyond the scope of this post.

    Humor me for now since this is only a hypothetical scenario.

    Without getting into specifics, I am willing to bet that any decent real estate investor could generate more than $833.33 per month from a $1 million property.

    Personally, if I had $250,000 to invest in Chicago, I would not settle for anything less than $2,000 per month in cash flow. And, that would be the bare minimum for me to even tour a property.

    With an initial investment of $250,000, my focus would be on finding a rental property with at least $3,000 in monthly cash flow.

    For now, you’ll just have to trust that cash flow like that is possible with rental properties. I’ll soon show you how to do the analysis and manage your properties to target returns like this.

    Photo from Zach Angelo created for his church symbolizing that cash flow is king when it comes to financial freedom.
    Photo by Megan Watson on Unsplash

    To recap, with the same $250,000 investment, you should be able to earn more monthly cash flow in real estate than dividends from stocks.

    It gets even better.

    If you hold your property long-term, your monthly cash flow should increase over time. Over those 30 years, inflation will naturally cause your rental income to increase.

    At the same time, if you have a fixed rate mortgage for 30 years, that major expense stays constant. The difference between your increased rental income and constant mortgage payment results in more cash flow.

    So, if you are hoping to sustain financial freedom without a primary job, which investment gets you closer to covering your monthly expenses?

    Investing in real estate offers so much more than just cash flow.

    Don’t stop reading yet.

    On top of the monthly cash flow, real estate provides so much more.

    Here’s a sneak peak continuing our prior example:

    After 30 years, you will own an asset without any debt. In our example, even without any appreciation, you would own a $1 million property debt-free. And, that debt was paid off entirely by your tenants.

    Add in appreciation, another major reason to invest in real estate, and your property will likely be worth $2-$3 million debt-free after 30 years.

    Compare that to the example with stocks using the 4% Rule. After 30 years of depleting your investment account, your investments may be gone.

    To put a bow on this point:

    With stocks, you can earn $833 in monthly dividends and possibly have no money left after 30 years.

    With real estate, you should reasonably earn $2,000-$3,000 per month (improving over time), and after 30 years will own an asset worth $2 million-$3 million, debt free.

    When you look at it this way, the choice is really not that hard, is it?

    On your journey to financial freedom, are you convinced that cash flow is king?

    I’m not saying it’s bad to invest in stocks or you should only invest in real estate. I personally invest in stocks and real estate.

    I see a place for both asset classes in my future.

    If you haven’t previously considered investing in real estate, maybe you’ll now think about how that monthly cash flow can fit into your overall investment portfolio.

    If you’re striving for financial freedom, are you convinced that rental property cash flow can accelerate your journey?

    Let us know in the comments below.

  • Real Estate has Accelerated my Journey to Financial Freedom

    Real Estate has Accelerated my Journey to Financial Freedom

    I invest in real estate for one reason and one reason only:

    To accelerate my journey to financial freedom.

    Through monthly cash flow, debt pay-down, appreciation, and tax benefits, I’m convinced that owning rental properties is the fastest way to reach financial freedom.

    We’ll soon discuss each of these advantages in more detail. For now, here’s a quick overview:

    • Cash Flow: After paying all the bills each month, whatever is left is considered cash flow. You can use this cash flow however you want.
    • Appreciation: Real estate tends to increase in value over the long-term. If you hold real estate long enough, you should benefit from appreciation. This also means that your net worth grows.
    • Debt Pay-down: If you have a mortgage on a rental property, your tenants are the ones paying down that mortgage each month. That means your net worth grows because your debt is shrinking.
    • Tax Benefits: The tax code favors real estate investors. Whereas W-2 income is heavily taxed, many real estate investors pay little in taxes (and sometimes nothing in taxes). Some of the biggest reasons for this are depreciation and lower tax rates for capital gains.

    With these four major advantages in mind, you can hopefully start to see how investing in real estate will accelerate your journey to financial independence.

    Additionally, you may have noticed that investing in real estate provides both immediate and long-term financial benefits. 

    Let’s focus on that point for a moment.

    Investing in real estate offers immediate and long-term financial benefits.

    To be truly financially free, you need to cover immediate life expenses and prepare for future life expenses.

    In terms of your Budget After Thinking, your Now Money and Life Money are considered immediate life expenses. Your Later Money is for future expenses.

    Rental properties can help you in each budget category. The monthly cash flow and tax benefits will cover your Now Money and Life Money needs. Debt pay-down and appreciation offer significant upside for your Later Money.

    I’ve been hard-pressed to find any other asset class that provides as many benefits for both for the here-and-now and the future.

    There’s another major reason I believe in the power of investing in real estate.

    It has to do with one of my ultimate life goals: to create more time to spend with my family. This is one of my major life goals, in part, because of what I’ve learned in my career as an attorney.

    What I’ve learned about time and family as an attorney.

    I graduated law school at age 24 and spent the first couple of years of my career clerking for an appellate court judge.

    To this day, I tell my students that clerking for a judge is the best job for recent graduates. I recommend that all my students apply for judicial clerkships.

    When my clerkship ended, I joined my current law firm where I continue to represent people with mesothelioma, a rare and terminal cancer caused by asbestos.

    If it wasn’t for what I’ve learned from my mesothelioma clients, I would have never started investing in real estate.

    Let me explain what I mean.

    I’ve learned invaluable life lessons from my clients with mesothelioma.

    Most of my clients are in their 70s and 80s. That’s because mesothelioma is a disease that takes decades to manifest. A person can be exposed to asbestos in his 30s and not get sick until his 70s.

    A significant part of my job has been meeting with my clients in their homes after they have just found out they have incurable cancer. Before we ever get around to talking about the case, we inevitably end up talking about life.

    During these conversations, I do most of the listening. You can imagine what I’ve learned about life in these moments. It is not a stretch to say that many of my core beliefs have been shaped by these powerful experiences.

    When I listen to my clients talk about life, certain themes continue to surface.

    One major theme I hear from my clients is the importance of family. They’ve taught me the importance of creating experiences and memories with loved ones, usually involving family vacations or time spent with friends.

    Summer in Paphos representing creating more experiences with family.
    Photo by Natalya Zaritskaya on Unsplash

    Like my clients, I want to create as much time as possible with my family and friends. When I look back on my life, I want to look back on all the experiences and memories I’ve created.

    With rental properties, I can earn money without being physically present. And while investing in real estate is not completely passive, it provides tremendous upside without requiring all of my time.

    That means I can spend more time with my wife and three kids while still making money.

    Because of what I’ve learned from my clients, there’s nothing more important to me.

    I started investing in real estate in my mid-30s.

    By the time I reached my mid-30s, I had paid off my student loan debt. I had successfully saved up for an engagement ring and a wedding. Newly married, my focus shifted to saving up for a downpayment on a home.

    At the time I started saving up for a home, I had no idea that I could use my savings to invest in real estate.

    It wasn’t until I went to a Cubs game with a good friend of mine, The Professor, that I learned about real estate investing. This is when my journey to financial freedom really accelerated.

    See, The Professor had a beautiful condo with an incredible rooftop deck near Wrigley Field. During the game, he told me he was selling the condo and moving into a 4-flat with his fiancee in an up-and-coming part of town.

    Huh?

    Why on earth would you give up your amazing condo? And move to a random neighborhood I’d maybe been to one time in my life?

    I thought The Professor had lost his mind. Back then, I had no idea what a 4-flat even was. I couldn’t even point to his new neighborhood on a map of Chicago.

    The Professor set me straight.

    door key symbolizing how investing in real estate can accelerate your journey to financial freedom.
    Photo by Maria Ziegler on Unsplash

    He walked me through the numbers. He explained that he was going from paying $3,000 per month for his condo to receiving $700 per month on top of living for free in the 4-flat. That’s a $3,700 difference per month!

    I immediately thought about the experiences and memories that I could create with my wife if we had an extra $3,700 per month to spend.

    I already knew what my clients would say about the opportunity to create such memories.

    It almost sounded too good to be true.

    I did my homework and bought my first investment property less than a year later.

    During my talk with The Professor, he introduced me to BiggerPockets.

    If you haven’t heard of BiggerPockets, it is a treasure trove of online resources to help real estate investors of all levels.

    At BiggerPockets, you can listen to podcasts, read blog posts, and ask questions on the forums. You can also choose from a wide selection of incredible books on real estate investing.

    One of my favorite BiggerPockets books is Chad “Coach” Carson’s book, Small and Mighty Real Estate Investor: How to Reach Financial Freedom with Fewer Rental Properties.

    Coach Carson’s message is right there in the title: you can use real estate to efficiently reach financial freedom. He makes a compelling argument to use real estate to build a life, not the biggest bank account.

    Being introduced to BiggerPockets was a game changer for me. I believe in the motto, “Trust but verify.” With BiggerPockets, I could do my own research and decide for myself if real estate investing was for me.

    Over the next few weeks, I read everything I could about investing in real estate. When I wasn’t reading about real estate, I listened to podcasts.

    It didn’t take long before I was convinced that I wanted a 4-flat of my own.

    I am using real estate to accelerate my journey to financial freedom.

    To me, investing in real estate is all about fast-tracking my journey to financial freedom. It has not always been easy, but it’s definitely been worth it.

    I’m fortunate that my career has introduced me to so many wonderful people.

    I am convinced that I would not have been as motivated to act if it weren’t for my conversations with my mesothelioma clients. If nothing else, I know that talk with The Professor about real estate would not have resonated with me the same way.

    Fast forward to the present day, I now own 10 apartments in Chicago and a rental ski condo in Colorado.

    Coming up in the blog, I’ll share with you everything I’ve learned about investing in real estate along the way.

    As always, reach out if you have any questions or leave a comment below.

  • What if You Woke up Tomorrow with $10 Million?

    What if You Woke up Tomorrow with $10 Million?

    If you woke up tomorrow with $10 million in your bank account, would you do anything differently?

    @thinkandtalkmoney

    What would you do if you had $10 million in your bank account right now? #thinkandtalkmoney #financialfreedom #whatwouldyoudo

    ♬ original sound – Thinkandtalkmoney

    I ask a version of this question whenever I teach my personal finance course to law students. I’ve also asked this question to a lot of my friends and family members.

    Whether in class or with friends, this question is a great conversation starter. It’s not so much about the dollar amount as it is about the money mindset that goes along with that amount.

    That’s because asking what you would do with $10 million is just another way to ask what you would do with financial freedom.

    Attaching a specific dollar amount to the question helps make financial freedom seem real. That’s because it turns the aspirational concept of financial freedom into actual numbers.

    With those numbers in mind, you can more realistically think about what your life could look like if you were financially free.

    That’s why I love the question. I find it very interesting to talk to people about what they would do with financial freedom.

    Why I love talking about financial freedom.

    If you hear $10 million in the bank and think of spending it on mansions, boats, and cars… this is not the blog for you.

    I want to talk about using that $10 million to buy something way more valuable than material possessions: your freedom.

    When you are financially free, you can choose to do work that is meaningful to you without worrying about how much it pays. You can also choose to spend more time with people who are meaningful to you.

    I am striving for both of those things on my journey to financial freedom.

    By the way, $10 million is just an arbitrary number. Maybe your number is $3 million or $8 million or $15 million. For this conversation, use whatever number represents financial freedom to you.

    The amount may differ based on your age, spending habits, debt level, dependents, etc.

    The idea is to pick a dollar amount that is high enough that you wouldn’t have to work anymore unless you wanted to. In its simplest form, that’s what financial freedom means.

    I’ve found that when I have this conversation, $10 million is a good, round number to get people thinking about what they would do with financial freedom.

    So, today we’re going to ask ourselves if we would do anything differently if we woke up with $10 million in the bank.

    To help get the wheels turning, let’s start with some simple math to see what having $10 million in the bank really means.

    What does $10 million in the bank really mean?

    Let’s do some simple math using the 4% Rule to help frame the question.

    The 4% Rule suggests that you can safely withdraw 4% of your investments each year and 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. I view the 4% Rule as a useful tool to ballpark your magic retirement number.

    The 4% Rule is a great place for us to start thinking about what you could do with $10 million.

    Here’s what the formula looks like using $10 million as our current savings:

    Current Savings x 4% (.04) = Annual Retirement Spending

    $10,000,000 x .04 =$400,000.00

    This means that according to the 4% Rule, you could spend $400,000 annually and expect your money to last 30 years.

    This is a useful calculation that puts into perspective how much money $10 million really is. You can essentially view having $10 million in the bank as the same as having a job that pays you $400,000 per year.

    The major difference is you don’t have to get out of bed in the morning to receive this $400,000.

    Note for simplicity’s sake, we’ll set aside the tax implications of investment income v. W-2 income for this hypothetical.

    One other note: if you had $10 million in the bank, you don’t have to spend $400,000 per year. Rather, the 4% Rule suggests you could spend up to that amount and not run out of money for 30 years. If you spend less than 4% each year, your $10 million will last longer.

    How much can you spend each month with $10 million in the bank?

    To help you picture your life with $10 million in the bank, we can break down that $400,000 annual spending amount even more.

    I like to know how much I could safely spend on a monthly basis if I had $10 million in the bank. Knowing the amount I could spend monthly helps make the $10 million more digestible.

    That requires just a bit more very simple math:

    $400,000 annually / 12 months = $33,333.33

    So, if you have $10 million in the bank, you should be able to safely spend about $33,000 per month.

    The way to the cabin lady with arm out her window symbolizing what you can do with $10 million in the bank.
    Photo by averie woodard on Unsplash

    Now, you can view that number in the context of your Budget After Thinking. You might learn that you’re spending way less than $33,000 per month. Or, you may be spending way more.

    Either way, it puts that $10 million into smaller, more digestible numbers.

    To recap, we now know that $10 million in the bank means we can spend roughly $33,000 per month and not run out of money for 30 years. The important question then becomes:

    Would you make any changes to your current life if you started each month with $33,000 in the bank without having to work?

    Let’s explore what your answer may say about your current work situation.

    Would you still work your current job if you had $10 million in the bank?

    If you had $10 million in the bank, would you continue to work your current job?

    If your answer is “Yes,” that’s a great sign that you enjoy your work and the people you work with. You also most likely have motivations for working that go beyond earning money. That’s a really nice position to be in.

    By the way, I know a good amount of people in this boat. Even with $10 million, they wouldn’t change a thing about their work situation.

    If your answer is “No,” it’s worth thinking about why you wouldn’t keep working your job. Is it the people? The hours? The lack of stimulation? Overall stress?

    $10 million in the bank should be enough to leave your job for new pursuits. You can start to ask yourself what you would do for work if you didn’t have to work for money.

    I also know a lot of people in this boat. If they had $10 million, they would be out the door tomorrow.

    Why am I talking about new pursuits instead of shutting it down completely?

    With $10 million in the bank, your initial thought might be to just shut it down completely. For people of a certain age or people with health considerations, that certainly could be the right choice.

    Setting those reasons aside, I do not believe in retiring early. I’m convinced that humans are meant to be productive. We are social creatures who at our core want to be contributing.

    I think this especially holds true for high achievers who have put in the work and made sacrifices to become financially free in the first place.

    That’s why I don’t believe financial independence has to mean retiring. It’s also why I don’t like the popular acronym, FIRE: Financial Independence, Retire Early.

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

    I don’t like what the word “retire” implies.

    If you look it up, you’ll see that the word “retire“means to withdraw, to retreat, to recede.

    None of those things sound appealing to me at all. 

    Each word implies moving backwards. I’m not working so hard to achieve financial freedom so I can move backwards in life.

    Instead, I like to view my financial freedom journey as FIPE:

    Financial Independence, Pivot Early.

    I believe in FIPE not FIRE.

    When you have financial independence, you have options. You can make decisions based on your core values instead of making decisions based on money. You can pivot, if you want.

    One of the ways you can pivot is by taking more control of what you do with your working hours. It’s not about quitting work entirely and wasting away on a beach. As nice as that might sound right now, it will get old fast.

    That’s why I believe in FIPE not FIRE.

    I encourage you to think about how you might use $10 million to pivot instead of to retire. Could you use that money to buy yourself the freedom to pursue more meaningful work?

    So, what would you do with $10 million in the bank?

    The point in asking about $10 million is to help you think about your current choices and whether it’s time to make some adjustments.

    Having this conversation with your friends and family will teach you a lot about your current situation. Remember, talking about money is not taboo.

    In these conversations, pay attention to what you learn about yourself and how you presently spend your time.

    Even though $10 million may seem like a distant dream, you don’t need to have that much money to start your own financial freedom journey.

    You can start making choices today to put yourself in a better position to pivot, if you so choose.

    Maybe you wouldn’t change a single thing about your career choices. Or, maybe you would be out your employer’s door tomorrow.

    In the end, thinking about what you could do with $10 million in the bank will help you lead a more intentional life.

    So, let us know in the comments below.

    What would you do with $10 million in the bank?

  • How to Prioritize Investment Account Types While in Debt

    How to Prioritize Investment Account Types While in Debt

    Recently, we’ve been talking about some tricky money questions related to investing.

    We first looked at whether it makes sense to invest while you’re in debt.

    We then looked at whether to prioritize investing for retirement or for your kid’s college.

    These are questions that commonly come up when I’m teaching law students and young lawyers. Of course, these questions are best answered when we consider both the emotions and the math of money.

    Today, we’ll look at a third question that comes up regularly:

    How should you prioritize certain investment account types, especially if you’re still paying off debt?

    @thinkandtalkmoney

    Airport walks ✈️💭 401k? Roth IRA? Savings? Debt? Don’t know how to prioritize where to put your money first? I break it down here: https://thinkandtalkmoney.com/how-to-prioritize-investment-account-types-while-in-debt/ #thinkandtalkmoney #401k #rothira #savings #debt #financialfreedom

    ♬ original sound – Thinkandtalkmoney

    This is another great question.

    If you’re wondering what I mean by different investment account types, you can read about my four favorite account types here.

    Below are my thoughts on how I would choose between different investment account types while paying off debt.

    Let me know if you agree or would prioritize a different order in the comments below.

    1. Invest just enough to qualify for your employer match.

    Your first goal should be to invest enough in your 401(k) plan to qualify for the employer match.

    Many employers today offer a match to incentive employees to contribute to their 401(k) plans. To qualify for the match, you must be participating in your company’s plan and make contributions yourself.

    The match is usually a percentage of your overall salary, usually between 3% and 6%. 

    For example, let’s say your salary is $100,000 and your employer offers to match your contributions up to 5% of your salary.

    That means if you contribute $5,000 (5% of your salary), your employer will contribute an additional $5,000 (5% match) to your account.

    In other words, your $5,000 automatically turns into $10,000.

    Think about that for a moment.

    That’s a guaranteed 100% return on your contribution. You put in $5,000 and you automatically get another $5,000. You won’t find a guaranteed return like that anywhere else.

    That’s why if your company offers a match, it’s a no-brainer to take advantage of that match.

    For this reason, an employer match is often described as “free money.”

    I don’t like the term “free money” because it implies that you have not earned that money as an employee for your company. I prefer to refer to the company match as a bonus you’ve rightfully earned. 

    The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.

    Whether you think of it as free money or as a bonus you’ve earned, make sure you contribute enough to your 401(k) plan to qualify for the employer match.

    2. Pay off all credit card debt.

    After you hit the employer match, and before you think about further investments, you should pay off all credit card debt.

    Note that credit card debt is in a category of its own because of the extremely high interest rates that accompany credit cards.

    Currently, the average credit card interest rate is 20.12%.

    The S&P 500 has historically averaged a 10% annual return.

    That gap is so large that it’s a good idea to pay off your credit card debt before turning to further investments.

    Think about it like this: with credit card debt, you are guaranteed to pay a penalty of around 20% until you pay off that debt. When investing, you can reasonably hope to earn around 10% interest.

    Because the penalty you’re paying is twice the rate you’re hoping to earn, the smart move is to eliminate that penalty.

    For help on paying off your credit card debt, check out my top 10 tips here.

    Why not pay off your credit card debt entirely before investing in your 401(k)?

    You may be wondering why I recommend qualifying for your employer match before paying off credit card.

    Even with such high credit card interest rates, there’s a good reason to prioritize qualifying for your employer match. We touched on that reason above.

    Let’s revisit our example. With an employer match, if you contribute $5,000, your employer will also contribute $5,000.

    As we said, that’s like earning a 100% guaranteed return on your money. A 100% guaranteed return is too good to pass up.

    No other reasonable investment option offers a 100% guaranteed rate of return. You can’t even reasonably hope to match the 20% penalty that credit card companies charge.

    That’s why eliminating your credit card debt should be your next priority after receiving your employer match.

    3. Allocate 75% of available funds to other loans and 25% to investments.

    Once you have paid off your credit card debt, I recommend putting 75% of your available funds to loans and 25% to other investments.

    When I say loans, I am referring to student loans, personal loans, lines of credit, and HELOCs. Note, I am not referring to primary mortgage debt.

    It’s not uncommon for law students to have hundreds of thousands of dollars in debt. The same is true for students in medical school and business school.

    It’s not just people with student loan debt who face this question. As one example, perhaps you’ve used a HELOC to buy investment property, like I have.

    There’s a reason credit card debt is in a separate category from other loans, like student loans and HELOCs.

    Unlike credit card debt, student loan debt and HELOC debt typically come with lower interest rates.

    The current lowest federal student loan interest rate is 6.53%.

    The current average HELOC interest rate is 8.27%.

    Your loans may have even lower interest rates. Regardless, the odds are that your interest rate is below the historical 10% average annual return of the S&P 500.

    While it’s never a bad idea to eliminate debt, there are some good reasons why you should invest even though you’re in debt.

    We explored these reasons and why I recommend a 75/25 ratio in my recent post on investing while in debt:

    A Tricky Money Question: Should You Invest While in Debt?

    If you’re on board with investing while paying off debt, the question becomes: where should you invest that money?

    That brings us to my next suggestion.

    4. Max out your 401(k) plan.

    Once you reach this step, you should have no credit card debt. You should also be applying either the 75/25 ratio to invest while you’re in debt, or have no other debt to pay off.

    At this point, I suggest maxing out your 401(k) with your remaining available funds.

    The reason I suggest maxing out your 401(k) is because these contributions are made with pre-tax dollars. In other words, you get a tax break today by investing in your 401(k).

    To put it another way, you will save money on taxes every year you contribute to your 401(k) plan.

    Don’t sleep on the impact of taxes on our money decisions. Over the long term, taxes can be hard to predict, but they should not be ignored.

    changed priorities ahead illustrating the options you have as an investor with different account types.
    Photo by Ch_pski on Unsplash

    Nobody really knows what taxes are going to be like in the future. Yes, it’s a safe assumption that taxes will keep going up.

    But, taxes have always been complicated. I’m guessing they will always be complicated. Even if taxes generally go up, there’s no telling the exact impact taxes will have on your personal situation.

    That’s why I prefer to take the guaranteed tax savings now. I’m ok with the possibility of paying more in taxes decades from now. That’s especially true because I have plenty of good uses for those tax savings right now.

    That’s why I recommend maxing out your 401(k) before moving on to my final suggestion.

    5. Max out your HSA, Roth IRA and 529 plan.

    Once you reach this step, you’re in great shape. Reaching this point means you have maxed out your 401(k) plan, which means you’re receiving an employer match.

    It means you have no credit card debt. On top of that, you are paying down your other loans with a 75/25 ratio or have eliminated those loans entirely.

    Now, you have options. You’ve earned the right to choose the best investment account type for your situation.

    Besides a 401(k), my other favorite account types are a Roth IRA, a Health Savings Account (HSA), and a 529 account.

    You can read all about my favorite investment account types in this recent post:

    My 4 Favorite Investment Accounts for Long-term Wealth

    Depending on your income, a Roth IRA may be the best account type for additional retirement savings.

    If you’re healthy and can cover certain medical expenses, maybe you would benefit from an HSA.

    Have kids and worried about paying for college? Maybe a 529 plan is right for you.

    The point is you’ve earned the right to pick the best investment accounts for your present situation.

    You really can’t go wrong with any of these choices.

    What do you think of this plan to prioritize certain investment accounts while in debt?

    What do you think about this plan to prioritize certain investment account types, especially if you’re still paying off debt?

    Let us know in the comments below.

    If you’ve already made it to step 5 and are looking for help with what to do next, the truth is that you have too many options to cover in this post.

    To help you start thinking about your choices, you could:

    • Invest in a traditional brokerage account;
    • Invest in real estate; or
    • Pay down your primary mortgage.

    If you’ve already made it to step 5, reach out and I’d be happy to help you think and talk about your options.

    The best way to reach me is to sign up for my weekly email and reply to any email.

  • How to Think About Investing for Retirement and College

    How to Think About Investing for Retirement and College

    We recently talked about the tricky question of whether you should invest while you’re in debt.

    It’s a choice many people struggle with because we know debt can be bad and investing can be good.

    The desire to tackle both goals raises the question: should we focus on eliminating the bad thing or doing more of the good thing?

    In that post, we explored the four main reasons why I think it’s a good idea to invest while in debt. You can read more here.

    Today, we’ll talk about another challenging question that many of us face:

    Should we prioritize investing for retirement or investing for our children’s college?

    Like the question of whether to invest while in debt, this question presents a difficult choice because two things are true at once:

    Investing for retirement is a good thing.

    Helping our kids is a good thing.

    So, what should we do?

    This is a question I think about a lot now that I have three young kids.

    There are powerful emotional reasons on both sides of the question. And while money decisions are certainly emotional, using simple math can help you choose the right balance between retirement and college.

    Let’s start by looking at some of the emotional reasons and then explore how simple math can help us with this difficult choice.

    As a parent, I want to help my kids as much as I can.

    On the one hand, as a parent, I want to help my kids as much as I can. College is expensive and is only getting more expensive.

    I have personally felt the heavy burden of debt. It’s not a good feeling. If I can help my children avoid that feeling by paying for college, I will.

    I want to be free to retire on my terms.

    On the other hand, I want to be free to retire on my terms. To do so, I know that I need to start investing early and often. Just like college is expensive, retirement can also be very expensive.

    I don’t want to be in a position where I’m forced to work longer than I otherwise would because I don’t have enough saved up.

    If I skip out on investing for retirement to pay for college, I may end up in that situation.

    With powerful emotions on both sides of the question, is it possible to come up with a plan that helps accomplish both goals?

    Yes, I think we can. In this instance, it helps to remember that money decisions are both emotional and mathematical.

    Let’s revisit some of the math we’ve previously looked at to help us get closer to a decision.

    What does the math say about paying for college?

    We took a deep dive into saving for college in my post on using 529 plans for sky high college costs.

    While nobody can say for certain how much college will cost or how your investments will perform, you can make reasonable estimates and use an online calculator to help form your strategy.

    I like the calculator available on Illinois Bright Start 529 website. What’s nice about this website is you can look up the future estimated cost of attending specific schools around the country.

    I also like using calculator.net. They have a College Cost Calculator where you can see how much college costs on average today and how much it is estimated to cost when your child starts college.

    Whatever online calculator you use, you’ll have to make some assumptions when you start plugging in numbers, like an investment return rate.

    The S&P 500 has historically provided a 10% average annual return. So, 10% seems like a reasonable return rate to me for your estimations.

    Besides the estimated return rate, you’ll also need to account for the rising costs of college. Most of the online calculators recommend you assume the cost of college will increase by 5% each year. That also sounds reasonable to me.

    Graduation with woman with purple gown on because her parents saved for retirement and college.
    Photo by MD Duran on Unsplash

    With these assumptions in mind, let’s look at an example using a current kindergarten student.

    Since I live in the Chicago-area, we’ll assume in this example that the kindergarten student is going to the largest in-state college, the University of Illinois Urbana-Champaign (U of I).

    Illinois’ Bright Start 529 calculator estimates that the cost of a current kindergarten student attending U of I will be $264,735.

    Assuming you don’t have any current savings and you estimate a 10% annual rate of return, the Bright Start 529 calculator indicates you should save $10,796 per year.

    That comes out to $900 per month.

    By doing the math, you now have a reasonable estimate as to how much you should be saving for college.

    You do not have to rely exclusively on long-term savings to pay for college.

    If $900 per month seems like a lot of money, keep in mind that you don’t have to depend exclusively on these savings to pay for college.

    There are two key reasons for that:

    1. Your child can take out student loans.

    While it may not be your plan right now, don’t forget that your child always has the option of using student loans to help pay for college. Your child may also earn scholarships or qualify for other financial assistance.

    On top of that, there are hundreds of good colleges at varying price points around the globe. It is not the end of the world if your child ends up going to a lower-ranked but less expensive school.

    The bottom line is that there are options when it comes to paying for college. It is not exclusively up to your savings to ensure your child gets a good college education.

    In other words, don’t convince yourself that your student will be prohibited from attending college if you don’t save enough right now.

    2. You will likely still be earning income when your child starts school.

    Besides the availability of other options to pay for college, also keep in mind that you will likely still be working when your child starts school. There is no reason that you can’t use some of that income to help pay for school.

    If you continue to make intentional, solid money decisions, you should have extra funds available in your budget when your kid starts college.

    One way make sure that happens is to keep your expenses constant as your career progresses and you make more money. As an example, let’s say you bought a home while your kids were young. Of course, this is a common path for a lot of professionals who are starting a family.

    If you stay in that home long-term, your housing costs should be relatively fixed. As you earn more money, instead of upgrading your home, you can use that excess money to help pay for college.

    Once again, the point is that there are options to help your children pay for college even when your investments fall short.

    Now, let’s look at the math to figure out how much we should be saving for retirement.

    Just like we can use an online calculator to estimate the cost of college, we can also use a calculator to estimate how much we need to save for retirement.

    We took a detailed look at how to do this in my post on figuring out your magic retirement number.

    The key is to start with the 4% Rule,

    The 4% Rule suggests that you can safely withdraw 4% of your investments each year and 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.

    For simplicity, let’s say you have $1 million in your portfolio. According to the 4% Rule, you can safely withdraw $40,000 per year (4% of your portfolio) and not run out of money for 30 years.

    Current Savings x 4% (.04) = Annual Retirement Spending

    $1,000,000 x .04 =$40,000.00

    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.

    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

    $120,000 / .04 =$3,000,000.00.

    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.

    Now that you know you will need $3 million in retirement, you can figure out how much you need to be investing today to hit that number.

    I like the calculator available on investor.gov for this part.

    With this calculator, you can plug in your investment goal, initial investment, years until retirement, and interest rate to figure out how much you need to save each month.

    Let’s continue our example assuming your magic retirement number is $3 million.

    We will also assume that you currently have $100,000 saved for retirement and you plan to retire in 30 years. We’ll also use the same 10% annual rate of return we used before.

    Based on these assumptions, you would need to save $635.82 each month to hit your magic retirement number of $3 million.

    With this information, you can now plan accordingly to make sure you are saving enough for retirement each month before you start worrying about college.

    woman on hammock near river relaxing because she invested for her future retirement while saving for college.
    Photo by Zach Betten on Unsplash

    Aim to hit your monthly retirement target before saving for college.

    By using these simple online calculators, you can estimate exactly how much you need to save for college and to save for retirement.

    I recommend that you aim to hit your monthly retirement target first before funding your college savings accounts.

    As we mentioned above, you and your child will have other options to help pay for college, like loans, scholarships, and concurrent income.

    By contrast, these options are not readily available to fund your retirement. You’re more-or-less on your own to sustain yourself.

    Think about it: by definition, retirement means ceasing to work. That means no income coming in besides your retirement savings. There are not any loans (at least reasonable ones) or scholarships to bail you out in retirement.

    Sure, you could try to work part-time during retirement. But, that means you’re really only partially retired. Plus, it would be nice to have the choice to work in retirement because you want to work instead of being forced to do so.

    It’s for these reasons why you should prioritize saving for retirement over saving for college.

    In an ideal world, you can do both. If you control your expenses as your income grows, you give yourself the best chance to do both.

    How are you balancing investing for retirement with investing for college?

    While money decisions are certainly emotional, using simple math can help you choose the right balance between retirement and college.

    My recommendation is to prioritize retirement over college because of the additional options available to help pay for college. You’re essentially on your own when it comes to retirement.

    Once you’ve calculated your magic retirement number, you can then calculate exactly how much to save each month.

    When you can comfortably hit that number, you can then figure out how much to be saving for college.

    • Are you currently saving for retirement and for college?
    • How do you balance doing both?
    • Have you thought about other ways to help pay for college besides the options we discussed?

    Let us know in the comments below.

  • Money on My Mind: Bears, Net Worth and Exercise

    Money on My Mind: Bears, Net Worth and Exercise

    On my journey to financial freedom, I’m consistently striving to learn as much as I can from others who have done it before me.

    This week, I read a few great blog posts from some of my favorite authors and bloggers.

    Let’s take a look and see what we can learn together.

    What to do in a bear market.

    JL Collins recently posted about the big mistake that people make during bear markets. A bear market is when the stock market drops by 20%.

    Collins is one of my favorite authors on investing. He just released the new edition to his best-selling book, The Simple Path to Wealth.

    I highly recommend you pick up a copy if you are interested in learning the easy way to invest and grow your net worth.

    You can read my full review of The Simple Path to Wealth in my post here.

    Back to the question at hand:

    As an investor, what should you do during a bear market?

    Nothing!

    Easier said than done, right?

    Human instinct is to act. Our natural instinct tells us to do something when confronted with danger. We’ve all heard the saying, “fight or flight.” It’s our body’s way of protecting us from potential harm.

    For example, if you encounter a bear in the woods, despite what survival experts may tell you, I’m betting you’re running for your life in the opposite direction.

    That’s exactly what my wife and I did when we saw a black bear in Colorado a couple summers ago.

    Even though we were at least 100 yards away when we saw the bear, and the bear was walking away from us, we ran in the opposite direction as fast as we could.

    Survival experts, we are not.

    Doing nothing in a bear market is easier said than done, like not running away from a black bear when you see one on the trail up ahead.

    If you zoom in (and squint), you can see the ferocious beast in this picture.

    When it comes to investing, the saying should be modified to include a third option: “fight or flight or do nothing.”

    And as JL points out, doing nothing is usually the best decision.

    When the market drops, you have the chance to buy stocks at a discount. Whenever the market bounces back, you will benefit from all those discounted stocks you purchased.

    Of course, nobody knows when the market will bounce back. For that matter, nobody knows when it’s going to drop, either. However, history has shown us that the market has always recovered.

    What if the market doesn’t recover?

    Then, we all have bigger problems to worry about than our money.

    It may take a long time for the market to recover. That’s OK. When you invest early and often, time is on your side.

    By combining time and the courage to do nothing, you will benefit immensely in the long run.

    The Rise of Middle Class Multi-Millionaires

    Another one of my favorite authors and bloggers, Financial Samurai, recently posted about the rise of middle class, multi-millionaires.

    If you haven’t picked up a copy of his new book, Millionaire Milestones, I highly recommend it. I recently ranked it as one of my favorite money mindset books.

    You can read my full review of Millionaire Milestones here.

    In his post on middle class multi-millionaires, Financial Samurai raises a great point:

    How come people are so enthralled by high incomes instead of high net worths?

    Like me, have you wondered why people tend to be more interested in someone’s salary rather than his net worth?

    I have one theory for why society continues to value income more than net worth: income can be more easily measured and more easily used for marketing purposes.

    To put it another way: income is sexier than net worth.

    One example I thought of: remember when you applied to college, grad school, law school, etc.?

    Did you notice how schools commonly advertise the average or median income of their graduates. Schools love to show off that if you go to their school, you’ll make a certain amount of money upon graduating. 

    However, you’ll never see data on the net worth of its graduates.

    Why is that?

    Because an impressive net worths can take decades of discipline to manifest. That type of slow progress doesn’t make for sexy marketing for schools.

    Plus, a top flight education may help you earn a high income but doesn’t guarantee a high net worth. Many high earners are also high spenders. You’d be surprised how many people are good at making money but not keeping it.

    It’s up to each of us to turn that income into a high net worth. Again, that’s harder for schools to market.

    If you are a personal finance enthusiast, you know to value net worth more than income. In fact, the most impressive feat of all is when you have a high net worth on just a standard income.

    For my kids, I’d be way more impressed to see what schools crank out students with high net worths 20-30 years after graduation instead of the median income upon graduation.

    To learn how and why to track your net worth, you can read my post here.

    Does early retirement negatively impact your life expectancy?

    I read a fascinating post on Early Retirement Now that looked at the potential consequences of someone’s life expectancy based on when that person retires.

    There has been a lot of academic research done on the topic. Somewhat surprisingly, there are studies that indicate retiring early may negatively impact your life expectancy.

    Check out the post on Early Retirement Now for a closer look at some of these studies.

    I’m not too worried about the conclusions about life expectancy based on when someone retires. At best, there are conflicting studies on that question.

    Rather, what I found most interesting about the post was that I’ve rarely thought about the potential health consequences about retiring early.

    I regularly think about the mental side of retiring early. Specifically, how does someone keep his mind sharp in early retirement?

    This is one of the main reasons I believe in FIPE not FIRE.

    However, I’ve never really thought about the physical effects of retiring early.

    Does retiring early negatively impact your physical health?

    I may have mistakenly assumed that someone’s physical health would automatically peak in early retirement. I’ve based that assumption on the idea that you’ll have so much time to exercise and eat right when you don’t have to worry about a job.

    In other words, if you’re not spending 50+ hours per week sitting at a desk, there would be no excuse to skip out on exercising regularly and preparing healthy meals at home.

    This post has me thinking about other factors I’ve failed to consider.

    For one, your body may trend towards lethargy if you’re not forced to wake up, get dressed and work 50+ hours per week. Plus, as much as people may not like commuting, at least it gets you out of the house and moving around.

    My takeaway is that if you’re considering retiring early, be sure to plan ahead for physical activity as much as mental activity.

    Your body may not want to exercise every day. You may need a motivational boost from group exercise classes or clubs. Maybe you’ll need a personal trainer or coach.

    If you don’t currently have any hobbies tied to physical activity, I would suggest exploring different options before you leave full-time employment. It may take some time to find your groove with an activity or two that interests you.

    Let us know what you think about these posts.

    What do you think about these posts from popular personal finance writers?

    • Are you brave enough to do nothing in the face of a bear?
    • Have you been tricked into thinking a high income is more impressive than a high net worth?
    • What are your thoughts about the physical side of retiring early?

    Let us know in the comments below.

  • How to Think About Investing While in Debt

    How to Think About Investing While in Debt

    One of the most difficult money decisions people have to make is whether to invest while in debt. That’s because it can be challenging to plan for the future while worrying about past debts.

    It’s also a tough decision because we know two things to be true at once:

    Debt can be bad.

    Investing can be good.

    So, should we focus on eliminating the bad thing or doing more of the good thing?

    You can see why it’s a tricky question.

    The way I see it?

    You don’t have to choose only one door to walk through.

    You can invest while in debt.

    I regularly get questions like this from law students who take my personal finance class. People just starting out in their careers are rightfully thinking about whether they should invest while paying off student loan debt.

    It’s not uncommon for law students to have hundreds of thousands of dollars in debt. The same is true for students in medical school and business school. The question about investing or paying off debt makes perfect sense.

    It’s not just people with student loan debt who face this question. Perhaps you’ve used a HELOC to buy investment property like I have. Maybe you have mortgage debt, medical debt, or consumer debt.

    The choice to pay down debt or invest for the future is tricky.

    Whatever the case may be, the choice to pay down debt faster or invest for the future is tricky.

    For people feeling the heavy burden of debt, the idea of investing for some future goal can seem a little bit comical. I completely understand.

    If you’re facing monthly debt payments for the next 10 years, you may not be ready to think about retirement 50 years from now.

    Trust me, I get it.

    I know firsthand how heavy debt can feel.

    In my 20s, I had both student loan debt and credit card debt. It was not fun to carry that debt burden. I’ll never forget the incredible feeling of accomplishment when I paid off those debts. I felt so much lighter. 

    I now have HELOC debt that I’m focused on paying off. That HELOC debt stems from buying five properties in seven years. My real estate portfolio is now exactly where I want it to be, so I’ve shifted from acquisition mode to debt-reduction mode.

    Just about every day, I think about how good it’s going to feel to have that HELOC debt paid off.

    The point is: you don’t have to convince me why you may want to focus on paying off debt. I understand completely.

    However, I think it’s worth considering the advantages of investing at the same time you’re paying off debt. You don’t have to go all-in on paying off debt or all-in on investing. You can strike a balance.

    In today’s post, I’ll share my perspective to help you think about the right balance between debt reduction and investing.

    Four main reasons to invest while in debt.

    There are four main reasons to consider when thinking about whether you should invest even though you’re in debt. If you’re not investing at all because you’re focused on debt, these four reasons should give you something to think about.

    Muir Woods trails illustrating the tricky choice between investing and paying off debt.
    Photo by Caleb Jones on Unsplash

    1. Invest while in debt because of the emotions of money. 

    It feels good to see your investment accounts grow. This is especially true when you are accustomed to looking at huge debt balances on your laptop or phone screen.

    Yes, it feels good to see those debt balances shrink. It also feels really good to see your investment accounts grow.

    As a professional, you work hard for your money. You spend a lot of hours away from home so you can work and make a living. You deserve to experience the fruits of your labor.

    When your career is stressing you out, it can be very uplifting to observe a growing investment account balance month-to-month.

    2. Invest while in debt to develop the habit.

    It’s important to get in the habit of investing as early as possible in your careers. Once you start investing, even if it’s only $25 per month, you are creating a habit. This is the type of habit that will pay off immensely in the long run.

    Humans have a tendency to resist change. That’s why it’s difficult to break bad habits. This tendency also works in our favor when we have established good habits, like investing. We tend to just keep doing what we’ve always done.

    When you’ve established the good habit of investing, it’s easy to increase your contributions as you earn more money. The same is true when you’ve eliminated all your debt. You can easily use the money you had been putting towards debt for your already-established investments.

    That’s because your accounts will already be set up. All you need to do is increase your monthly investment contributions.

    This makes it easier to solidify and benefit from the good habit you’ve cultivated.

    3. Invest while in debt because of compound interest.

    Compound interest is the most powerful force in all of personal finance. The earlier you start investing, the more benefit you’ll get from compound interest.

    You can check out more about the power of compound interest in my post on investing early and often.

    Even investing a small amount of money while paying off debt will lead to massive gains over the long term because of compound interest.

    4. Invest while in debt because of the math.

    Even though money decisions are closely connected to our emotions, the math of investing can be hard to ignore. If you prefer to make money decisions primarily based on the math, here’s what you can do.

    We’ve talked before about how the S&P 500 has historically earned an average annual return of 10%. Of course, there’s no guarantee that you will earn 10% if you invest. You may earn less or you may earn more. Still, based on the historical data, it’s a reasonable estimate.

    You can then compare that 10% return to the amount you’re paying in debt interest.

    Close up of man hand using calculator to figure out whether to invest while in debt.
    Photo by Towfiqu barbhuiya on Unsplash

    For example, let’s say you have student loan debt. In this example, let’s also assume you’ve created an extra $200 in your monthly budget to allocate towards either debt or retirement.

    You’ll next want to look up your current student loan interest rates. For illustration purposes, the current interest rate for undergraduate federal loans is 6.53%. The current interest rate for graduate and professional students is 8.08%.

    Then, you can use an online calculator to help make your decision about whether to invest the $200 or put that money to debt.

    If you put the money to debt, you’ll obviously pay off that debt faster. You can read more about how to easily do these calculations in my post on Debt Snowball vs. Avalanche.

    Likewise, you can use an investment calculator to see how much that $200 will grow in an investment account over the long run. You can see how to do these calculations in my post on risk as the cost to invest.

    Armed with the math, you can then make a decision that makes the most sense to you.

    You may value getting out of debt faster. Or, you may be motivated by the larger balance in your retirement account.

    It may come down to how high the interest rate is on your student loans. The higher your interest rate is, the more sense it makes to prioritize paying off that loan.

    The point is that there are mathematical reasons to start investing even while paying off debt.

    One final note about the math: your student loan interest rate is effectively locked in (unless you have a variable rate). On the other hand, your investment return rate is only a projection. That makes a difference.

    It means that when you are in debt, you are guaranteed to be charged interest every month. In contrast, there are no guarantees you will make money when you invest. As you make your decisions, don’t ignore this key difference.

    I prefer to allocate 75% to debt and 25% to investments.

    When you consider these four main reasons, you may be convinced that it makes sense to invest even while paying off debt. 

    So, the obvious next question becomes: how much money should you put towards debt and how much should you invest?

    The ratio that works for me is 75% towards debt and 25% towards investment goals. In other words, if I had $1,000 to allocate in my budget for debt and investments, I would use $750 for debt and $250 for investments.

    I used this ratio when I had student loan debt and continue to use it to eliminate my HELOC debt.

    You can read more about my primary goal of paying off HELOC debt in 2025 in my post on money and cheeseburgers:

    Great Talk: Money and Cheeseburgers

    This 75-25 ratio gives me the dual benefit of paying off my debt faster while also seeing my investment accounts grow over time. Once my debts are paid off, I will have already established the good habit of investing. In the meantime, I’m currently benefitting from compound interest and the math of investment returns.

    The reason I lean more towards debt is because I don’t like the feeling of being weighed down by debt. It’s hard to feel completely free when you are carrying the burden of debt. That’s why I am currently prioritizing paying off HELOC debt.

    That said, I’m not willing to entirely delay investing for the future. The 75-25 ratio is a good balance for me and helps me accomplish multiple goals.

    75-25 has worked well for me. Having reached my 40s, I’m very happy that I did not neglect my investments entirely while dealing with debt.

    Don’t agonize about finding the perfect ratio between debt and investments.

    Whatever balance works for you, keep one important tip in mind:

    Don’t agonize about finding the perfect balance between debt reduction and investing for the future.

    Take a step back and think about it for a moment:

    Paying off debt is great.

    Investing for the future is also great.

    If you’re doing both of these things in some fashion, you’re already making great money choices!

    If you’re able to pay off debt and invest at the same time, you most likely have already created a successful Budget After Thinking. You have proven that you can stay disciplined enough to allocate funds to your Later Money goals each month.

    You have already done the hardest part.

    I consider this whole conversation of putting money towards debt or investments a win-win decision. There’s no reason to stress yourself out in search of the perfect balance. You’re already winning.

    Find a balance between debt and investments that works for you and stick to it. You really can’t go wrong. Either way, you are making progress on your money goals.  

    Some day in the future your debt will be paid off. 

    The bottom line is, one way or the other, you are going to pay off your debt. That’s assuming you are a reasonably responsible person on a typical career trajectory.

    If you have student loans, it might feel like you will never get out of debt. I assure you that you will.

    To put it in perspective, if you are on a standard repayment plan, you’ll be debt-free in 10 years. For most students, that equates to being debt-free sometime in your 30s.

    My guess is that by the time you retire, you won’t even remember how much debt you had or exactly when you paid it off. The only reason I remember when I paid off my debt is because I’ve been keeping a money journal since 2011.

    On the other hand, towards the end of your career, you will very much be aware of how much money you have saved for retirement. You will be counting on that money to allow you to step away from full-time employment.

    If you’ve figured out your magic retirement number, you’ll know how long you can sustain yourself on your retirement savings. 

    As hard as it is to do when you’re in debt, try and picture that older version of yourself who is nearing retirement. That older version of yourself will be very grateful that you had the discipline to start investing even while paying off debt.

    That’s why I allocate 75% of my available funds to debt and 25% to investments. When my debt is gone, I’ll put the full 100% to investments.

    • So, what do you think?
    • Are you currently investing while paying off debt?
    • What other factors went into your decision besides the four main reasons discussed above?

    Let us know in the comments below.

  • What is the Best Money Mindset Book?

    What is the Best Money Mindset Book?

    On my journey to financial independence, I’ve read close to 100 personal finance books. My favorite books motivate me to think about the relationship between life and money. I think of this type of book as a “money mindset book.”

    @thinkandtalkmoney

    What is your favorite money mindset book? If you need a summer read, I rank my top eight here: https://thinkandtalkmoney.com/best-money-mindset-book-my-8-favorite-picks/ #thinkandtalkmoney#moneymindset #summerreads #personalfinance

    ♬ original sound – Thinkandtalkmoney

    In today’s post, I’ll show you my nine favorite money mindset books. These books share a common theme: they will inspire you to use money to build a life that you’re proud of.

    One of the ways these books do that is by exploring the emotional side of money. In other words, they don’t just talk about the numbers and math of personal finance.

    That not only makes the books more interesting to read, it also makes them so much more practical in the real world.

    See, I am striving to build the best life possible for my family. To do that, I need to learn more than just the numbers.

    That means I need to be good at not only making money, but also using that money to build a life on my terms. That requires finding a balance, which can be tricky.

    To help strike that balance, I’ve studied how others have done it. Then, I can take what I learn and implement those lessons into my own life.

    As a personal finance teacher, I can also share these lessons with my students.

    And, that brings us to my favorite money mindset books.

    Each one of these books has helped me develop my core life philosophies. Importantly, these books have helped me acquire and use money in alignment with those core beliefs.

    Of course, when I review my Tiara Goals for Financial Freedom, I can feel the influence of each of these books on my most important values.

    I recommend that you check out each of these money mindset books. You will learn not just how to acquire money, but also how to use that money to live your best life.

    Let’s take a look at my favorites, in no particular order.

    1. Rich Dad Poor Dad by Robert Kiyosaki

    There’s a reason Rich Dad Poor Dad is the best selling personal finance book of all time. Its message is so powerful and simple that I’ve been recommending this money mindset book for years.

    If you read Rich Dad Poor Dad, your entire money mindset will be changed. Kiyosaki brilliantly shares the stories he learned about money while growing up in Hawaii.

    His Rich Dad was really his best friend’s dad, who was a very successful real estate investor and business owner. His Poor Dad was his actual dad, a highly educated and hardworking man who followed a traditional career path.

    Using these two role models in his life, he makes a very compelling case that most of us go about life and money all wrong.

    This is the money mindset book you want to start with.

    Read Rich Dad Poor Dad. It’s the money mindset book that will light a fire under you like no other book I’ve read.

    2. The Psychology of Money by Morgan Housel

    In The Psychology of Money, Housel writes about how people make decisions with their money in the real world. Housel agrees with one of our main themes at Think and Talk Money:

    Money is emotional.

    We can all be shown data and spreadsheets and understand what we should do. But, that’s usually not enough to change our behavior.

    Housel is here to help with that. In The Psychology of Money, he takes core personal finance lessons and translates those lessons into regular life concepts.

    Additionally, Housel teaches us the different ways people think about money. Then, he offers his perspective on how we can make better sense of money through our own life experiences.

    Read The Psychology of Money. This money mindset book will help you understand the relationship between money and happiness.

    3. Think and Grow Rich by Napoleon Hill

    Think and Grow Rich is another classic money mindset book that will shift your entire viewpoint on earning a living.

    I first read this money mindset book in college when I learned my friend’s dad offered him $50 if he read this book.

    $50 to read a book?

    I needed to see what this book was all about.

    At the time, I didn’t appreciate how much this money mindset book would change my life.

    Originally published in 1937 and later updated, Think and Grow Rich, will convince you that you can be successful.

    Initially, Hill studied innovators like Henry Ford and Thomas Edison. In the updated version, you’ll learn about modern figures like Bill Gates and Mary Kay Ash.

    Books on a brown wooden shelf, which includes a money mindset book to help learn about the balance between life and money.
    Photo by Susan Q Yin on Unsplash

    Hill’s book is so good because of what he reveals about these legendary figures.

    The secret?

    There was nothing mystical about any of them. Before they became legends, they were just like you and me.

    You can be successful in any walk of life if you just stop sleepwalking through life like everyone else and do something.

    Read Think and Grow Rich. This money mindset book will motivate you to do that thing you’ve been saying you would do, but haven’t yet.

    4. The Richest Man in Babylon by George S. Clason

    The Richest Man in Babylon is a third classic money mindset book originally published nearly 100 years ago.

    This book is a quick read. It’s ideal for anyone still not convinced that they have to pay attention to their personal finances.

    Clason wrote a simple collection of fables set in the ancient city of Babylon. Each fable illustrates the importance of a key money habit, like saving and investing.

    Through his stories, you’ll see how you can get ahead in life by practicing strong financial habits.

    It’s not enough to just be good at making money. You need to be good at keeping that money, too.

    Read The Richest Man in Babylon. This money mindset book will introduce you to the building blocks of a healthy financial life.

    5. Your Money or Your Life by Vicki Robin and Joe Dominguez

    Your Money or Your Life is the complete package when it comes to money mindset books.

    Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the Financial Independence Retire Early (FIRE) movement.

    While I prefer the term Financial Independence Pivot Early (FIPE), I share their viewpoints on the relationship between money, work, and time.

    Spoiler alert: when it comes to life and money, most of us are doing it all wrong. We chase money at the cost of our precious time.

    First, you’ll learn to think of money as nothing more than a tool to build your ideal life. Next, you’ll learn how to specifically use that tool to achieve financial independence.

    Read Your Money or Your Life. This money mindset book will motivate you to start valuing your time for what it’s really worth.

    6. The Millionaire Next Door by Thomas Stanley and William Danko

    It can be difficult to ignore the temptation to keep up with our neighbors. Whether we like it or not, we are concerned with our social status. Part of our self-worth gets tied to comparing ourselves to others.

    One of my favorite money mindset books, The Millionaire Next Door, discusses this concept in detail.

    To start, you need to adjust your perception of how real life millionaires behave.

    You may be surprised to learn how most millionaires have made their fortunes. Also, you may be surprised to learn about their modest lifestyles.

    Read The Millionaire Next Door. This money mindset book will help you if you’re struggling with comparing yourself to others.

    7. Die with Zero by Bill Perkins

    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.

    8. Millionaire Milestones by Sam Dogen

    In Millionaire Milestones, Dogen covers his journey from finance bro in New York in his 20s to present day life as a writer, investor, and husband and father.

    What separates Millionaire Milestones from other personal finance books is that Dogen’s still on his journey.

    Girl reading a money mindset book to learn about the balance between life and money.
    Photo by Joel Muniz on Unsplash

    He’s not a newbie, and he’s not preaching from the rocking chair on his patio.

    Dogen’s presently raising kids. He’s focused on his website and his investments. Like you and me, he can relate to the present day challenges of personal finance because he’s still on his journey.

    You can read my full review of Millionaire Milestones in my separate post here.

    Read Millionaire Milestones. This money mindset book is the Goldilocks of personal finance books.

    9. The Simple Path to Wealth by JL Collins

    The Simple Path to Wealth by JL Collins is the best money mindset book on investing I’ve ever read.

    It is a must-read for anyone trying to figure out why and how to invest in the stock market.

    If you’re a new investor and don’t understand how to invest in the stock market, Collins will set you on your way.

    If you’re a seasoned investor unsure what to do in times of economic uncertainty, Collins is here to help. 

    Maybe you just need a bit of motivation or a reminder of how simple it is to build long-term wealth. There’s no one better than Collins to provide that pep talk.

    Collins is sometimes described as “the Godfather of Financial Independence” in the personal finance community. He has a popular blog where you can read more about his story.

    The short version is that he wrote a series of letters to his then teenage daughter about money, investing, and life. He wanted to impart the wisdom he had accumulated during his lifetime and help her avoid the mistakes he had made.

    Those letters eventually led to his blog, which then led to his bestselling book, The Simple Path to Wealth, first released in 2015.

    Since then, Collins has been a thought-leaders in the financial independence community. He has inspired thousands, if not millions, of people around the world to accumulate massive wealth by following a few simple rules. 

    What makes Collins so transformative is his ability to make seemingly complex topics (like investing) into easily digestible and actionable information.

    If you have any intention of becoming financially independent and haven’t read The Simple Path to Wealth, now is the time to do so.

    I’ve read his book cover-to-cover twice and constantly refer back to his lessons.

    Each time I read his book, I’m reminded how simple it is to reach financial independence if I can just follow a few simple tips.

    You can read my full review of The Simple Path to Wealth in my post here.

    Read The Simple Path to Wealth. It is quite simply the best money mindset book on investing I’ve ever read.

    What is your favorite money mindset book?

    So, these are the money mindset books that I recommend most often.

    Wherever you are on your personal finance journey, there is something for everyone in one of these books.

    If you have read some of these money mindset books in the past, I suggest you read them again. As our lives and priorities change, so does our relationship with money.

    You’ll get something new and different from reading these books again. Personally, I didn’t fully appreciate these money mindset books until I was years into my career and knew what it felt like to work for money.

    • Have you read these money mindset books?
    • What money mindset books am I missing?

    Let us know in the comments below.

  • Why Target Date Funds: The Easy Way to Invest

    Why Target Date Funds: The Easy Way to Invest

    Don’t be fooled. The easiest option can also be the best option.

    You already know I’m a big fan of making things easy, especially investing.

    And, there is no better example of making things easy than investing in target date funds.

    Maybe we’ve been brainwashed into thinking that the harder something is, the better it is. Of course, there’s that often-repeated phrase, “If it were easy, everybody would do it.”

    We’ve been programmed into thinking that “hard work” automatically means “better results.”

    I certainly agree that hard work pays off when it comes to things like career and exercise.

    As another example, baking cinnamon rolls comes to mind. With cinnamon rolls, the harder way is probably also the better way.

    My daughter and I bake pre-made cinnamon rolls every week. We have fun with it and it’s quick and easy.

    She loves how they taste, so that’s all that really matters. But, they don’t come close to tasting as good as homemade cinnamon rolls, which are certainly harder to make.

    So in the context of cinnamon rolls, I think “harder” does mean “better.”

    On the other hand, I don’t agree that investing has to be hard. I don’t believe that just because something is easy, it must not be that good.

    And, that brings us to target date funds.

    There’s nothing easier than investing in target date funds.

    My wife and I have been investing in target date funds for years. Target date funds have been both easy and effective for us.

    That’s important because we’re also at the stage in our lives where we are trying to make things easier, not harder.

    The idea behind target date funds is that your portfolio automatically rebalances as you move closer to your predetermined life event, like retirement or your kid’s college start date.

    That means over time, your target date fund will gradually become more conservative to protect all the money you had saved and earned over the years. It typically does so by reducing exposure to stocks and increasing exposure to safer assets, like bonds.

    You do not have to do a thing. 

    It simply cannot get any easier than this.

    Today, we’ll take a closer look at how target date funds work. The goal is to help you make an informed decision on whether they are the best option for your situation.

    Before we jump in, if you need a refresher on some key investment terminology, check out my post on the language of investing:

    Learn the Language to Make Investing Easier

    What are target date funds?

    Target date funds are a form of mutual fund. When you invest in target date funds, you are essentially getting a complete portfolio in a single fund.

    Target date funds are typically comprised of broad stock index funds and bond index funds.

    That is one of the keys to remember about target date funds. They automatically provide investors with strong diversification and optimal asset allocation based on their chosen time horizon.

    Target date funds are ideal for long-term investment goals. They are designed to help you manage risk as you move closer to your pre-determined goal.

    Typically, target date funds invest more heavily in stocks in the early years in an effort to earn greater returns. As you move closer to your pre-determined goal, the fund will automatically shift to buying safer assets, like bonds.

    What types of investments are typically in target date funds?

    Most target date funds are made up of index funds. That means that when you buy a target date fund, you are getting exposure to a wide variety of stocks and bonds through index funds.

    An index fund is a type of mutual fund that seeks to track the returns of a market index, like the S&P 500 Index.

    As explained by Vanguard:

    An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or “index,” like the popular S&P 500 Index—as closely as possible. That’s why you may hear people refer to indexing as a “passive” investment strategy.

    Instead of hand-selecting which stocks or bonds the fund will hold, the fund’s manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.

    It’s very hard, even for professionals, to beat the returns of the S&P 500. Historically, the S&P 500 has averaged an annual return of 10%.

    Hit your Target by investing in target date funds, whether that target is saving for retirement or something else, like your child's college.
    Photo by Artur Matosyan on Unsplash

    I Invest in target date funds because they give me a great chance to match those historical average returns without any effort on my part.

    What are the advantages of investing in target date funds?

    Target date funds share the same benefits as investing in index funds. That’s because, as we just discussed, most target date funds are comprised of index funds.

    In addition to the benefits of index funds, target date funds offer one additional major benefit we’ll discuss below.

    By the way, you already know 7 things I love about index funds:

    1. Anybody can do it
    2. No wasted mental energy
    3. Low fees
    4. Automatic diversification
    5. The closest thing to predictability
    6. I don’t have stock FOMO
    7. Good enough for Buffett, good enough for me

    For a more in depth look, check out my post here:

    7 Things I Love About Index Funds

    Target date funds automatically rebalance

    In addition to sharing the 7 benefits of index funds, target date funds offer one additional, major benefit:

    automatic rebalancing

    Importantly, target date funds automatically rebalance to continuously maintain your optimal mix of stocks and bonds.

    That means as time goes on, you don’t have to worry about rebalancing on your own. That’s one less stressor on your plate.

    What do I mean by rebalancing?

    Let’s say an investor’s optimal asset allocation is 50% stocks and 50% bonds. After a year of impressive stock market growth, this investor’s portfolio now consists of 60% stocks and 40% bonds. That’s because his stocks increased in value at a greater rate than his bonds.

    As a result, he’s now weighted more heavily in stocks than his optimal asset allocation. To rebalance his portfolio, he could take a variety of steps. He could sell some stocks or purchase more bonds to get back to where he wants to be.

    With target date funds, he would not have to worry about this situation. That’s because target date funds automatically rebalance for you.

    That’s a big load off an investor’s plate. It’s the main reason why I like investing in target date funds.

    Target date fund or build your own?

    After you open an investment account, you can select a combination of index funds on your own or choose a target date fund.

    There’s nothing wrong with buying index funds on your own instead of through a target date fund.

    You will actually save money on fees if you go that route, but not very much.

    For example, the popular Vanguard Total Stock Market Index Fund (VTSAX) charges a fee of .04%.

    Vanguard’s Target Retirement 2065 Fund presently charges a fee of .08%.

    Just remember to rebalance your portfolio from time-to-time to stay within your preferred asset allocation.

    If you don’t want that added responsibility, you can invest in a target date fund that automatically chooses the index funds for you.

    Then, the target date fund will automatically rebalance your portfolio over time to maintain an optimal balance of stocks and bonds.

    As you saw above, you will pay slightly more in fees for the added convenience. To me, that extra .04% in fees is absolutely worth it.

    In the end, both options are good ones.

    Investing with target date funds is the easiest choice.

    How can you invest in a target date fund?

    Most employer-sponsored retirement plans, like 401(k) plans, now offer target date funds. In fact, target date funds are usually the default investment option for new plan participants.

    You can also invest in a target date fund outside of your employer-sponsored plan. Most major investment companies offer target date funds in a variety of account types.

    In addition to retirement accounts and traditional brokerage accounts, 529 college savings plan providers usually offer target date funds based on when your child will start college.

    If you’re curious about my favorite investment account types, you can read more here:

    My 4 Favorite Investment Accounts

    Regardless of the account type, the process for selecting the right target date fund is the same.

    Generally, you’ll see various target date fund options based on your personal time horizon.

    For example, if you are currently 25-years-old and plan to retire in 40 years, you would select the target date fund corresponding to 2065. This fund will automatically rebalance as your career progresses towards that retirement date.

    Typically, there are target date funds offered in 5-year intervals. Choose the one closest to your preferred retirement year, even if there isn’t one that matches your exact year.

    The same concept applies to a 529 college savings plan. If you have a newborn, like I do, you would select the plan that corresponds with your child starting college around 2043.

    After you make this one decision, there’s nothing more to do it.

    Your focus should be on adding as much money to that account as possible without worrying about things like rebalancing.

    I personally invest in target date funds.

    My wife and I invest in multiple target date funds. We have various target date funds for our retirement savings and for our kids’ college education.

    At this stage in our lives, we’ve placed a premium on doing things the easy way.

    We have full-time jobs as attorneys, manage our own rental properties, and have three kids at home. The last thing we need is to add more complication to our lives.

    Our personal accounts are with Vanguard, which has long been known as an investor-friendly company that prioritizes low fees.

    Why target date funds?

    Just because something is easy doesn’t make it wrong.

    Investing in target date funds is as easy as it gets. By taking the easy option, you can have exposure to a broad range of index funds that automatically rebalances over time.

    Are you doing things the easy way?

    If you’re a busy professional like I am, don’t sleep on target date funds.

    You’ll always have people that look down upon target date funds as too basic. Ignore them. Let them stress about picking the next hot stock, rebalancing, and timing the market.

    • So, are you doing things the easy way? Are you a target date fund investor?
    • Do you agree that target date funds are an easy and effective way to invest for the long term?
    • Has anyone ever looked down on you for investing in target date funds?

    Let us know in the comments below.

  • 7 Things I Love About Index Funds

    7 Things I Love About Index Funds

    For my money, there’s no beating index funds.

    More important, than my money, for my sanity, there’s no beating index funds.

    In today’s post, I want to highlight 7 things I love about index funds.

    My 7 reasons range from the low costs and automatic diversification to the minimal mental effort required for long-term wealth.

    If you’ve been a consistent reader of the blog, you know that money is as much emotional as it is rational. I don’t want to be worried about my money any more than you do.

    That’s why the reasons I love index funds take into account both the numbers and the emotions of investing.

    Let’s dive in.

    7 Things I Love About Index Funds

    1. Anybody can do it
    2. No wasted mental energy
    3. Low fees
    4. Automatic diversification
    5. The closest thing to predictability
    6. I don’t have stock FOMO
    7. Good enough for Buffett, good enough for me

    1. Anybody can do it

    I’ve said it before, and I’ll say it again:

    Investing is actually the easy part.

    And, when I say investing is actually the easy part, I’m talking mostly about investing in index funds.

    You don’t need an MBA or a financial background. You don’t need to read the Wall Street Journal.

    All you need to do is consistently fuel your investment account and to let compound interest work its magic.

    Oh wait, one more thing:

    You also need to read Think and Talk Money. I post three times every week.

    Oh, and tell your friends about Think and Talk Money!

    2. No wasted mental energy

    It goes without saying that most professionals are busy people. On top of working our day jobs, we’re also doing our best to stay healthy, be good family members, and have some semblance of a social life.

    Some of us even have side hustles that occupy our time and mental energy.

    Hot stone bath in the mountains because this man read Think and Talk Money and invests in index funds.
    Photo by Robson Hatsukami Morgan on Unsplash

    The last thing we need is another stressor in our lives, like actively trading stocks.

    I invest in index funds to take this stressor out of my life.

    Yes, I could pay someone a lot of money to manage my money for me.

    Or, I could invest in index funds and rest comfortably knowing that I’m going to be in great financial shape down the road.

    Why am I confident I’m going to be in great financial shape?

    For three main reasons, discussed next.

    3. Low fees

    Because index fund are passively managed, the fees are significantly lower than actively managed mutual funds.

    My favorite index fund is Vanguard’s popular fund called the Vanguard Total Stock Market Index Fund (VTSAX). This fund currently charges .04%, which is just about the lowest fee you will ever see.

    Compare that to the 1% fee commonly charged by investment advisors. Also, don’t forget it’s very difficult for even the professionals to beat the returns consistently generated by the S&P 500.

    If you don’t think that difference in fees matters, check out my post on what a 1% fee really costs you:

    How Much Money a 1% Advisor Fee Really Costs

    While I can’t control what returns I may earn, I can control the fees I pay.

    I’d rather pay .04% than 1%.

    That’s especially true when there’s no guarantee that an advisor can perform better than the returns I earn through index funds.

    4. Automatic diversification

    By investing in an index fund, like an S&P 500 index fund or a total stock market index fund, my stock portfolio is by definition diversified.

    For example, when I invest in an S&P 500 index fund, I essentially own a piece of 500 large companies.

    Some companies may go up in value, others may go down. I’ll never know which ones are going to make money or lose money. By investing in an S&P 500 index fund, it doesn’t matter. I’m covered either way.

    That’s the point of diversification: smooth out the ride so I’m less susceptible to the fortunes of one particular company.

    Man with fresh organic coconut relaxing because he invests in index funds as learned on Think and Talk Money.
    Photo by Artem Beliaikin on Unsplash

    As another example, I also invest in Vanguard’s total stock market index fund (VTSAX). This fund offers exposure to nearly the entire U.S. stock market, which consists of 3,598 companies.

    Now, that’s really good diversification.

    5. The closest thing to predictability

    The S&P 500 has historically earned an average annual return of 10%.

    By investing in an index fund that tracks the S&P 500, like I do in my 401(k), I have a pretty good chance of earning consistent returns in the long run.

    Sure, there may be ups and downs.

    But, check this out:

    Since 1996, the S&P 500 has ended the year in positive territory 23 times and negative territory only 7 times.

    In other words, the S&P 500 has generated positive returns three times more frequently than it generates negative returns.

    And even with those 7 negative years, with the exception of 2000-2002, the S&P 500 returned to positive territory the following year.

    What this all means is that while the S&P 500 will drop occasionally, the down periods are historically short-lived.

    Because of this historical consistency, index funds give me the best shot at predictability.

    Note that predictable returns does not mean guaranteed returns. There are no guarantees in the stock market. That’s why my preference is predictability.

    I’m very happy with consistent returns and a smoother ride.

    6. I don’t have stock FOMO

    Depending on the index fund you choose, you may own pieces of a handful of companies or as many as 3,598 companies.

    I invest in S&P 500 index funds and total stock market funds. That means I own pieces of lots of companies.

    It also means I never have stock FOMO.

    You know what stock FOMO is, right?

    Stock FOMO is when you find yourself in a conversation talking about something fun like your favorite new show. Then out of nowhere, someone volunteers the hot stock he bought that’s up 20%.

    If you have stock FOMO, you feel like you’re missing out by not owning that stock. You think to yourself, “Oh man, that guy’s going to be so rich and I missed the boat!”

    You might even run back to your desk so you can buy that hot stock, not realizing that you’ve probably already missed the train.

    Stock FOMO can cause a lot of stress. I don’t want that stress.

    So, I invest in index funds.

    When a stock jumps 20%, I feel good because I already own every company in the U.S. stock market.

    No stock FOMO here.

    7. Good enough for Buffett, good enough for me

    In 2013, Buffett famously instructed that after he dies, his wife’s cash should be split 10% in short-term government bonds and “90% in a very low-cost S&P 500 index fund.”

    Good enough for Buffett, good enough for me.

    It’s not just Buffett, though. One of my favorite authors on investing, J.L. Collins, wrote about the advantages of investing in a total stock market index fund in his seminal book, The Simple Path to Wealth. 

    In fact, Collins makes a compelling argument that the Vanguard Total Stock Market Index Fund (VTSAX) we discussed above may be the only stock fund that you’ll ever need.

    Buffett and Collins are smart guys. Taking advice from smart guys seems like a good idea to me.

    I highly encourage you read The Simple Path to Wealth.

    You can read my full review of The Simple Path to Wealth in my post here.

    What do you think of the 7 things I love about index funds?

    To recap, I love index funds for these 7 reasons:

    1. Anybody can do it
    2. No wasted mental energy
    3. Low fees
    4. Automatic diversification
    5. The closest thing to predictability
    6. I don’t have stock FOMO
    7. Good enough for Buffett, good enough for me

    My reasoning combines the emotional side and the rational side of investing.

    Like you, I want to earn a nice investment return. At the same time, I don’t want to be worried about my investments 24-7.

    Index funds give me the best of both worlds.

    What am I missing?

    Help me grow my list of 7 into a list of 10 by leaving a comment below on why you invest in index funds.

  • My 4 Favorite Investment Accounts for Long-term Wealth

    My 4 Favorite Investment Accounts for Long-term Wealth

    We recently talked about that to start investing, there are really only two main steps: 

    • Step 1: Open an account.
    • Step 2: Pick the investments for inside that account.

    Today, we’ll discuss my four favorite investment accounts. These accounts are all tax-advantaged and match my evolving priorities, like saving for retirement and paying for college.

    To help explain why you may want different investment accounts, I’ll show you how I went from a single account in my 20s to 14 investment accounts today.

    Even if you’re just starting out in your career or new to investing, it’s likely that you’ll eventually have multiple types of investment accounts.

    You’ll almost certainly have different goals and priorities as life moves on.

    Before you do anything else, you’ll need to decide what type of investment account matches your investment goals. As we’ll see, investing is about more than just saving for retirement.

    By understanding the type of accounts to use that match your evolving priorities, you’ll have a better chance of reaching your goals.

    Let’s begin by looking at how my investment accounts have changed from the time I started investing in my 20s to the present day.

    My investment accounts in my 20s.

    When I started working in my 20s, I had one investment account:

    1. My 401(k).

    In my 20s, I was just starting my career and was proud to be investing in a 401(k). Back then, tracking my net worth was pretty easy.

    Part of the reason I only had one investment account was because I didn’t really know there were other types of accounts.

    It wasn’t until I prioritized learning about personal finance that I realized what else was out there.

    Quick side note: during law school, I did have a traditional brokerage account with a financial advisor. But, I closed that account when I learned we had set $93,000 on fire.

    There were two other main reasons I only had one investment account back then.

    First, I had student loan debt to pay off. I didn’t exactly have the means to invest in other accounts.

    If you’re in a similar boat and have student loan debt, be sure to check out my post:

    10 Student Loan Tips for Lawyers and Professionals

    Second, in addition to student loan debt, I also had credit card debt.

    It was only after a year of working and seeing my credit card debt grow each month that I decided to do something about it. In a lot of ways, my experience with credit card debt is what led me to start Think and Talk Money.

    If you’re likewise dealing with credit card debt, check out my post:

    10 Credit Card Tips for Lawyers and Professionals

    As time went on, a few things happened that led me to opening more investment accounts.

    First, I educated myself and learned that there were other investment accounts I could take advantage of.

    Then, as my career progressed, I started making more money. Because I had paid off my student loan debt and credit card debt, I had money leftover to invest.

    Finally, I got married and had kids. That meant my investment goals evolved.

    To match my evolving goals, it was beneficial to open different types of investment accounts.

    My investment accounts at age 40.

    Fast forward about 15 years, and my family’s balance sheet looks a little bit different than it did in my 20s.

    Between my wife, our three kids, and me, we now have 14 investment accounts:

    1. My 401(k)
    2. Wife’s 457(b)
    3. Wife’s Roth IRA
    4. My Roth IRA
    5. Wife’s Traditional IRA
    6. Wife’s Pension
    7. Daughter’s UTMA
    8. Son’s UTMA
    9. Baby’s UTMA
    10. Daughter’s 529
    11. Son’s 529
    12. Baby’s 529
    13. HSA
    14. Traditional Brokerage Account
    Just like life gets more complicated, your investment account lineup also gets more complicated as you make more money and have a family, which is why these are my 4 favorite investment accounts..
    Photo by MIGUEL GASCOJ on Unsplash

    The point in sharing my various account types with you is to give you an idea of how your investment priorities will change over time.

    The most savvy investors know how to match their investment accounts to those changing priorities.

    With this context in mind, let’s now take a closer look at my four favorite investment account types that help me maximize tax benefits.

    With these tax-advantaged accounts, I have a better chance of reaching financial freedom.

    Favorite Account No. 1: 401(k)

    A 401(k) is likely the first investment account most people will have.

    401(k) plans are employer-sponsored retirement plans. Employees can elect to participate in their company’s 401(k) plan and choose from a variety of investment options, usually mutual funds and index funds.

    There are four major reasons to invest in a 401(k) plan.

    1. You can invest with pre-tax dollars.

    That means more of your money gets invested rather than going towards your taxes. When you have more money invested, you can earn more in returns.

    2. Your contributions are automatic.

    Once enrolled, your employer will automatically deduct money from your paycheck and invest it directly into your investment selections.

    Because the money never hits your checking account, you won’t be tempted to spend it on things you don’t really care about. You’ll be used to living without this money because it never hits your account.

    You also don’t have to worry about consistently making transfers into your account because it will happen automatically.

    3. Your earnings grow tax-free.

    In addition to not being taxed on your contributions, you also won’t be taxed on your earnings. That’s a double tax advantage that acts to magnify the power of compound interest. You will be taxed when you make withdrawals.

    4. Your employer may offer a match.

    Many employers today offer a match to incentive employees to contribute to their 401(k) plans. To qualify for the match, you must be participating in your company’s plan and make contributions yourself. The match is usually a percentage of your overall salary, usually between 3-6%.

    For example, if you contribute 5% of your salary, your company may match you with an additional 5% contribution.

    If your company offers a match, it’s a no-brainer to take advantage of that match. It’s often described as “free money.”

    I don’t like the term “free money” because it implies that you have not earned that money as an employee for your company. I prefer to refer to the company match as a bonus you’ve rightfully earned.

    The key is to accept that earned bonus by ensuring you are meeting the minimum requirements to qualify.

    401(k) Contribution Limits and Penalties

    Keep in mind there are annual limits to how much you can contribute to your 401(k) plan. The IRS regularly increases the contribution limits. In 2025, you may contribute up to $23,500.

    If you are between the ages of 50 and 59, or 64 or older, you may contribute an extra $7,500 per year. If you are between the ages of 60 and 63, you may be eligible to contribute up to $11,250.

    Also, remember that 401(k) plans are intended for retirement savings. To discourage early withdrawals, a 10% penalty on top of regular income taxes apply to people under the age of 59 ½.

    Because of these contribution limits, early withdrawal penalties, or other strategic reasons, you may benefit from another type of investment account.

    Let’s look at our next popular type of investment account called a Roth IRA.

    Favorite Account No. 2: Roth IRA.

    A Roth IRA is another type of retirement investment account that also provides double tax benefits.

    Unlike a 401(k), you make after-tax contributions to your Roth IRA. Your earnings then grow-tax free, and your withdrawals are tax-free.

    Another major advantage is that you can withdraw your contributions tax-free and penalty-free at any time.

    There are penalties if you make withdrawals from your earnings before the age of 59 1/2.

    Roth IRA Contribution and Income Limits.

    Because of the amazing tax advantages associated with Roth IRAs, there are income limits that apply. In 2025, individuals must have a Modified Adjusted Gross Income (MAGI) of less than $150,000, and joint filers less than $236,000.

    On top of the income limits, there are annual contribution limits, as well. In 2025, the contribution limits are $7,000 if you’re under age 50, and $8,000 if you’re over age 50.

    Why think about opening a Roth IRA?

    For many investors, it’s not a bad idea to consider opening a Roth IRA in addition to your 401(k).

    For starters, we mentioned the contribution limits to each account. You may need more money in retirement than just what your 401(k) plan will provide.

    For another reason, 401(k) plans and Roth IRAs are treated differently from a tax perspective. It may be wise to have some tax-free income in retirement from a Roth IRA to go along with your taxable income from a 401(k).

    You can open a Roth IRA with any number of investment companies, like Vanguard, Fidelity, and Charles Schwab.

    Favorite Account No. 3: Health Savings Account (HSA)

    A Health Savings Account (HSA) is another tax-advantaged account that you can use to pay for eligible medical expenses.

    HSAs are linked to employer-sponsored health insurance plans. Oftentimes, employers will make an annual contribution to help fund your HSA.

    Physical examination by a Children's Doctor. Teddy's medical check up, illustrating that years from now you can use your HSA to reimburse yourself for prior medical expenses after benefiting from triple tax benefits.
    Photo by Derek Finch on Unsplash

    One of the trade-offs to having an HSA is that you’ll need to enroll in a high deductible insurance plan. You are still covered by insurance, but you’ll pay more out-of-pocket each year for medical treatment.

    But, if you’re relatively healthy and/or have the means to pay for your present day medical care, you stand to benefit immensely down the road.

    That’s because you can choose to invest your HSA contributions just like you might invest in a 401(k) plan. 

    If you do so, your contributions, earnings, and withdrawals are all tax-free if you follow some basic rules.

    Because of these triple tax benefits, HSAs are my absolute favorite investment account.

    Remember, 401(k) plans and Roth IRAs only offer double tax benefits. HSAs are even better because they offer triple tax benefits.

    What are the key rules to follow with HSAs?

    To get the triple tax benefits, you need to follow some basic rules.

    One of the key rules is that you must use your withdrawals for eligible medical expenses. The good news is that “eligible medical expenses” is a very broadly defined term.

    You can take a look here for a comprehensive list of eligible medical expenses. Some examples include prescriptions, contact lenses, and flu shots.

    Another key rule to know is that there are no time limits for when you have to use your HSA funds. As long as you keep your receipts, you can reimburse yourself for eligible medical expenses years, or even decades, later.

    If you put these two rules together, you’ll see why HSAs are so beneficial.

    As long as you have the means to pay out-of-pocket for your current medical expenses, you can allow your pre-tax HSA investments to grow tax free for years.

    That means you can take advantage of the magic of compound interest for decades, tax-free.

    Then, years later, you can withdraw those funds to reimburse yourself for eligible medical expenses you paid for years prior.

    HSA contribution limits.

    Like 401(k) plans and Roth IRAs, there are annual contribution limits for HSAs.

    In 2025, the contribution limit for an individual with self-coverage is $4,300 and $8,550 for family coverage.

    Favorite Account No. 4: 529 College Savings Plan

    529 college savings plans are state-sponsored, tax-advantaged investment accounts.

    While there are certainly other ways to save for college, 529 plans are hard to beat because they typically offer triple tax benefits.

    To read more, check out my in-depth post on 529 Plans for Sky High College Costs:

    529 Plans for Sky High College Costs

    What do you think of my 4 favorite investment accounts?

    There are certainly others, but these are my 4 favorite investment account types. Each comes with tax advantages that will help me reach financial freedom sooner.

    As your life and priorities change, you may also benefit from opening multiple investment account types.

    So, what do you think of my four favorite investment accounts?

    Did I miss any?

    Let us know in the comments below.

  • What is Your Magic Retirement Number?

    What is Your Magic Retirement Number?

    Have you thought about your number recently?

    According to a recent study by Northwestern Mutual, Americans expect they will need $1.26 million to retire comfortably.

    When you first hear that retirement number of $1.26M, does that sound impossibly high? Does it sound way too low?

    Or, maybe your reaction was like what my five-year-old says when questioned about who made the mess:

    “No clue.”

    I think it’s safe to say that, at some point, most professionals accept that they need to save for retirement. Hopefully, you are in that group and have been investing early and often.

    However, I suspect most people have never thought about how much they’ll actually need to retire comfortably. That’s understandable since retirement can seem like such a far-off goal.

    Still, it’s a good idea to start thinking about how much you’ll need to retire comfortably. We’ll refer to that amount as your magic retirement number.

    That way, you can start taking the necessary steps today to reach that magic retirement number.

    Today, we’ll learn how to calculate your magic retirement number.

    So, how do I figure out my magic retirement number?

    To answer that question, let’s turn to the “4% Rule.”

    The 4% Rule is one of the most popular ways in the personal finance community to ballpark how much money you’ll need in retirement.

    Of course, your personal answer depends on a variety of factors, like when you want to retire and how much you expect to spend in retirement.

    You can imagine how someone hoping to achieve FIPE (Financial Independence Pivot Early) may require a different amount than some retiring in his 70s.

    Your answer may also change after reading a book like Die with Zero, where author Bill Perkins brilliantly argues that most of us are actually saving too much for retirement.

    In any event, the 4% Rule can give you a good idea of where you currently are. Then, you can decide what changes you may want to make to ensure you hit your magic number.

    Let’s dive in.

    What is the 4% Rule?

    The 4% Rule suggests that you can safely withdraw 4% of your investments each year, adjusted for inflation, and 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.

    For simplicity, let’s say you have $1 million in your portfolio. According to the 4% Rule, you can safely withdraw $40,000 per year (4% of your portfolio) and not run out of money for 30 years.

    Using the magic retirement number of $1.26 million, you could safely withdraw $50,400 and not run out of money for 30 years.

    These simple examples show how you can take your current retirement savings and project how much you can safely spend so your money lasts 30 years.

    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.

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

    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.

    Regardless, the 4% Rule is a great way to start thinking about how much you’ll need in retirement.

    So, let’s practice using the 4% Rule.

    Our goal is to help you project a magic retirement number based on your current spending habits.

    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.

    Current Savings x 4% (.04) = Annual Retirement Spending

    $1,000,000 x .04 =$40,000.00

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

    The 4% Rule works two ways, meaning you can calculate how much you can spend in retirement based off of your current savings or you can reverse it and calculate how much you need to maintain your current spending levels.
    Photo by Hugo Delauney on Unsplash

    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.

    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

    One note related to your Budget After Thinking: for this exercise, ignore your Later Money (with one caveat). Only use your Now Money and Life Money totals.

    The reason is that since you’re retiring, you likely won’t be focused on saving for future goals anymore. Presumably, you’ve already reached your goals. If you include your Later Money in your monthly spending, you’re magic retirement number will be artificially inflated.

    The caveat is for those people pursuing FIPE. In that case, you should include your Later Money in your calculations. That way, you have a buffer in place to cover you over a longer retirement period.

    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

    $120,000 / .04 =$3,000,000.00.

    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.

    If that number seems impossibly high to you, you now know to make some adjustments to your current spending.

    Let’s look at how your magic number changes with some tweaks to your spending habits.

    Assume you’re open to cutting some expenses in retirement to reduce your magic number. That might mean spending less money on transportation, meals out, your wardrobe, and whatever else.

    Let’s assume that by making those cuts, you shaved $1,000 off your Now Money expenses.

    As a result, you only need $9,000 to cover your retirement lifestyle each month. That’s $108,000 per year.

    Using the 4% Rule, your magic retirement number has now shrunk to $2.7 million.

    $108,000 / .04 =$2,700,000.00.

    That means that by reducing your spending by $1,000 per month, you have reduced your magic retirement number by $300,000.

    It also means you have just sped up your timeline to retirement by reducing your lifestyle expenses.

    A surprising note about people’s magic retirement number in 2025.

    At the beginning of this post, we learned that according to a recent study by Northwestern Mutual, Americans expect they will need $1.26 million to retire comfortably.

    What’s most interesting to me is that this year’s magic retirement number dropped from $1.46 million reported in the same study just last year.

    Think about that for a minute.

    Because of inflation (and now tariffs), things are only getting more expensive year over year. If anything, you would think that people would say they need more money to retire comfortably in today’s enviornment.

    Except, the study found the opposite happened. Instead of wanting more money to pay for all these more expensive things, people think they can retire comfortably on nearly 14% less money.

    How does that make any sense?

    For starters, I doubt many of these respondents used the 4% Rule to project their magic retirement number based on their current spending habits.

    If they had, they would have seen that their spending has likely gone up this year, unless they’ve made big cutbacks. Then, they would have seen that their magic retirement number also went up to account for those higher expenses.

    Besides ignoring the 4% Rule, my other takeaway relates to one of our major themes at Think and Talk Money:

    Money is emotional.

    If our money thoughts were strictly rational, there would be no way that someone could say he needs less money to survive when everything is more expensive.

    The reality is that our decisions don’t always make rational sense.

    And, that’s OK.

    Recognizing that our money decisions are not always rational, what can we do about it?

    We can think and talk about money.

    Talking to our people about our money decisions, like we would anything else, is the best way to find a balance between our emotional side and our rational side.

    So, what is your magic retirement number?

    Now you know how to use the 4% Rule to calculate your magic retirement number.

    Be sure to use the 4% Rule as a tool to help you think about making adjustments to your current spending or savings habits.

    Knowing how to use the 4% Rule, does a magic number of $1.26 million seem too high, too low, or maybe just right?

    Let us know in the comments.

  • 2 Easy Steps to Start Investing for Long-Term Wealth

    2 Easy Steps to Start Investing for Long-Term Wealth

    By now, I hope I’ve begun to convince you that investing is actually the easy part. The more challenging part is consistently coming up with money for your investments.

    If you’ve been worried about the risks associated with investing, we covered that, too. At the end of the day, reasonable risk is the cost to invest.

    Because of inflation, the reality is that it’s more risky to not invest than it is to invest. Take a look at what happened to our pretend friend Terry who chose to play it safe.

    At a bare minimum, investing is a way to play offense and defense. Investing to do fun things later on is playing offense. Investing to counteract inflation is playing defense.

    We’ve also previously covered three great ways to minimize investment risk:

    1. Invest early and often. Take advantage of the power of compound interest by starting early and being consistent. Over time, compound interest will lead to wealth.
    2. Minimize fees. One of the few things we can control when we invest is what we choose to pay in fees. Keep fees to a minimum to maximize your long term gains. Even a fee of only 1% can do significant damage to your future prosperity.
    3. Learn the language. Investing can seem intimidating when you hear phrases like “asset allocation” and “diversification.” Once you learn the language, you’ll realize that practicing asset allocation and diversification is actually not that hard.

    With this backdrop in mind, there should be no more excuses for why you can’t start investing.

    So today, we’re going to talk about the two main steps to get started investing.

    How to start investing in 2 steps.

    If you’ve never invested before, are you nervous about how complicated the process is going to be?

    Don’t be.

    To start investing, there are really only two main steps involved.

    • Step 1: Open an account.
    • Step 2: Pick the investments for inside that account.

    There really isn’t much more to it.

    But, don’t forget to complete both steps.

    Step 1: Open an account.

    The first step to investing is simply to open an account.

    There are endless investment companies available where you can easily open an account online. Some of the more popular companies are Vanguard, Fidelity, and Charles Schwab.

    I personally use Vanguard.

    Once you’ve chosen an investment company, you’ll next select the type of investment account to open.

    There are two main types of investment accounts and some other popular accounts I’ll highlight below.

    Before you do anything else, you’ll need to decide what type of account matches your investment goals. Once you know the type of account that best suits you, you will need to open that account before moving on to step 2.

    It really is that easy to start investing.

    BIG EASY, reflective of how easy it is to actually start investing.
    Photo by Jay Clark on Unsplash

    You don’t need a financial advisor or a broker to open an account. Like most things these days, as I mentioned above, you can easily open an account on-line by yourself.

    In fact, most of us begin investing in employer-sponsored retirement accounts, like 401(k) plans. When you start a new job, your HR department will provide you detailed instructions on how to enroll.

    So, what are the main types of investment accounts to choose from?

    Tax-advantaged retirement accounts.

    The most common tax-advantaged retirement accounts include 401(k) plans, Roth IRAs, and traditional IRAs. “IRA” stands for Individual Retirement Account.

    We’ll soon take a deep dive into the advantages and disadvantages of each type of account.

    As a whole, the primary difference between tax-advantaged retirement accounts and traditional brokerage accounts relates to taxes.

    The government wants us to save for retirement. To encourage us to do so, retirement accounts come with major tax advantages. That’s why most investors begin investing in these types of retirement accounts.

    Traditional brokerage accounts do not have the same tax advantages.

    In addition, tax-advantaged retirement accounts, like a 401(k) plan, are commonly offered by employers. That makes it easy for employees to invest.

    You may be wondering: with these great tax advantages, why would someone open a traditional brokerage account?

    Let’s take a look.

    Traditional brokerage (non-retirement) accounts.

    There are two main reasons to open a traditional brokerage account.

    First, tax-advantaged retirement accounts have caps in place for how much someone can invest per year.

    While the government is happy to encourage investing for retirement, its generosity only goes so far. Uncle Sam still depends on tax revenue and can’t afford to give us an unlimited free pass.

    Once you reach those caps, and still have money that you want to invest, you’ll need to open a traditional brokerage account.

    Most investors try to max out their retirement accounts to receive the full tax advantages before moving on to investing in traditional brokerage accounts.

    The second reason is that tax-advantaged retirement accounts are intended for long-term retirement planning.

    If you withdraw from your account before reaching a certain age, typically 59 1/2, you’ll be subject to penalties and taxes.

    Of course, Think and Talk Money readers know that there are other reasons to save and invest besides retirement.

    You may be investing to buy a home in 10 years. Maybe you have reached financial independence and rely on your investment income to fund your life.

    Whatever the case, traditional brokerage accounts provide flexibility for people to withdraw their money when they want to.

    Other types of investment accounts.

    Besides tax-advantaged retirement accounts and traditional brokerage accounts, there are two other popular investment accounts to highlight.

    529 Savings Plans for College: 529 college savings plans are state-sponsored, tax-advantaged investment accounts. While there are certainly other ways to save for college, 529 plans are hard to beat because they typically offer triple tax benefits.

    To read more, check out my in-depth post on 529 Plans for Sky High College Costs.

    Health Savings Accounts (HSA): An HSA is a tax-advantaged account that you can use to pay for eligible medical expenses.

    These accounts are typically linked to employer-sponsored health insurance plans. You can choose to invest your HSA contributions, similar to how you might invest in a 401(k) plan.

    Like with 529 plans, the reason to invest in an HSA is to receive triple tax benefits that are hard to beat. Your contributions, earnings, and withdrawals are all tax-free if you follow some basic rules.

    We’ll explore this further in a future post.

    You are not limited to just one type of account.

    To recap, the first step to investing is simply to open an account.

    There are two main types of investment accounts to consider: tax-advantaged retirement accounts and traditional brokerage accounts.

    There are also other investment accounts intended to help with specific goals, like saving for college or medical expenses.

    For almost all investors, it makes sense to first open a tax-advantaged retirement account before considering the other types of accounts. For many of us, that means participating in our employer-sponsored 401(k) plan.

    Keep in mind, you are not limited to just one investment account. Many investors have various accounts for different goals. My wife and I have multiple retirement accounts, 529 plans for each of our kids, an HSA, and others.

    Once you’ve opened an account, you’re ready to move onto step 2. The next step is choose what investments you want inside that account.

    Step 2: Pick the investments for inside that account.

    Now that you have an account opened up, the next step is to pick what investments you want inside that account. By that, I mean selecting what mutual funds, index funds, individual stocks, or bonds you want to buy.

    Each major investment company offers a variety of investments to choose from, including target retirement date funds that are as easy as it gets.

    Picture the account you just opened as a bucket. Now, you need to fill that bucket with something.

    What you fill that bucket with are your investments.

    This second step is crucial. It’s also easily overlooked.

    More often than you might think, when people new to investing complete step 1 by opening an account, they mistakenly believe that their job is done. That’s not the case.

    When you first open an account (other than employer-sponsored plans), you will need to fund that account with a minimum required deposit.

    The key to remember is that once you make that transfer, your money will sit in your new investment account, not earning much or any interest, until you choose how to invest it.

    Until you complete this second step, your money sits in your account and you don’t reap the benefits of investing.

    As a side note, you’ll likely need to complete this second step every time you make a transfer into your investment account. You can link your checking account to your new investment account to make transfers easier.

    One other side note, I mentioned that employer-sponsored plans, like 401(k) plans, operate a little differently. That’s because when you first enroll in your 401(k) plan, you will make your investment selections right then and there.

    Because your contributions are automatically deducted from your paycheck, they will automatically be invested in your preselected investment choices.

    Don’t laugh about people forgetting to choose their investments.

    When I first taught my financial wellness course to law students, I thoughtlessly made a joke about people who forget to complete this second step. At the time, it seemed obvious to me that once an account was opened, the next step was to select the investments.

    Boy, was I wrong.

    In that first class, a student raised her hand and said she had made that mistake before. Her money sat in her investment account, without earning any interest, for more than a year before she realized her mistake.

    She was not laughing at my joke.

    Nor was she the only person in my class who had made that mistake. It turned out nobody was really laughing.

    Since that first class, I’ve realized that it’s actually a common mistake.

    That’s why I now emphasize there are two steps to start investing. The first step is to open an account. The second step is to pick investments for that account.

    listen up yall illustrating professor Adair teaching personal finance to law students.
    Photo by Kenny Eliason on Unsplash

    And, guess what?

    I recently made the exact same mistake.

    My HSA had been with one provider for years before that provider changed. My money was automatically transferred over to the new provider.

    However, somehow I missed the announcement that my money would not be invested until I chose the investments for that new account.

    It took me about six months of earning no interest to realize what was going on.

    That’s what I get for making a joke about step 2!

    How do I pick the right investments to fill my account?

    We recently discussed the importance of learning the language of investing. In that post, we talked about stocks, bonds, mutual funds, and index funds. When you’re selecting investments, you’re choosing between these types of options.

    We also talked about the importance of asset allocation and diversification. These terms make investing seem more complicated than it really is.

    Ultimately, you’ll need to do your homework or pay an advisor to do it for you. Before you make your decision, be sure to check out my previous posts on investing so you have a good understanding of your options.

    Personally, I invest in index funds to keep my costs down and to ensure a certain level of diversification. If I don’t have the option to invest in a total stock market index fund, I invest in an S&P 500 index fund.

    I also invest in target date retirement funds since these funds automatically rebalance for me as time goes on. It doesn’t get any easier than this.

    Now you know how easy it is to start investing.

    If you were ever hesitant to start investing in the past, now you should be feeling more confident in how to get the process started.

    There are really only two steps:

    1. Open an account.
    2. Pick investments for that account.

    It doesn’t have to be any more complicated than that.

    As always, leave a comment below if I can answer any questions as you get started.

  • Learn the Complicated Language to Make Investing Easy

    Learn the Complicated Language to Make Investing Easy

    Investing has always seemed more complicated than it really is.

    This is partially because of the complicated language used to describe relatively straightforward concepts.

    Exhibit A: “asset allocation.”

    Exhibit B: “diversification.”

    Asset allocation and diversification are not terms that come up in regular day-to-day conversation. That’s a good thing, btw.

    Because of that, these terms don’t make immediate sense to somebody new to investing. That’s why I want to spend some time learning some basic investment language.

    Then, you’ll appreciate how asset allocation and diversification are some of the best ways to minimize risk when investing.

    We’ve already talked about a couple of the other main ways to minimize risk. One is to buy and hold for the long term, which I think of as investing early and often.

    We’ve also looked at the importance of minimizing fees.

    When you combine all three strategies, you’ll be setting yourself up for a very prosperous future.

    So today, let’s talk about the importance of asset allocation and diversification.

    To make better sense of what we mean by asset allocation and diversification, let’s first define some key terms.

    What is a security?

    The term security broadly includes any investment instrument, such as a stocks or bonds.

    When you invest money in a company, you have a protected or “secured” claim on profits from that company.

    What are stocks?

    Stocks are a type of security that gives stockholders a share of ownership in a company. If you buy stock in a company, you own a small piece of that company.

    Why would a company sell you an ownership piece?

    Companies issue stock to get money for a variety of reasons, like developing new products or paying off debt. The basic idea is that by offering stocks, companies can thrive and make more money.

    Stocks also are called “equities.”

    Stocks have typically offered investors strong potential for growth over the long term. However, there’s no guarantee that you will earn a strong return. You can lose money when you invest in stocks.

    What are bonds?

    Bonds are like IOUs where you are lending money to an entity, like a company, government, or municipality.

    These entities issue bonds to raise money from investors. In exchange, the issuer agrees to pay the investor interest during the life of the bond. The issuer also agrees to repay the principal (the original investment) after a set period of time.

    Bonds are generally considered safer than stocks. Because bonds are a safer investment, you can expect a lower return on your investment.

    What are mutual funds?

    A mutual fund is a company that pools money from many investors and invests in securities, like stocks and bonds.

    As an investor, you can buy shares in mutual funds. Each share represents your part ownership in the fund and the profits it generates.

    Meet me on Wall St sign which makes it seem like investing is more complicated than it is.
    Photo by Patrick Weissenberger on Unsplash

    Mutual funds typically invest in a variety of companies and industries. This helps minimize your risk as an investor. A mutual fund may have a combination of stocks and bonds, which also acts to minimize risk.

    Mutual funds are usually professionally managed. That means managers do the work for you. But, that service comes with a price or “fee.”

    The fee can be a significant drain on your investment earnings. We looked at the impact of even a 1% fee on your long term earnings here.

    Mutual funds were very popular in the latter half of the 20th century, especially the 1980s and 1990s.

    Nowadays, a subtype of mutual funds, known as “index funds,” has become a popular and advantageous option for most regular investors.

    What are index funds?

    An index fund is a type of mutual fund that seeks to track the returns of a market index, like the S&P 500 Index.

    As explained by Vanguard:

    An index mutual fund or ETF (exchange-traded fund) tracks the performance of a specific market benchmark—or “index,” like the popular S&P 500 Index—as closely as possible. That’s why you may hear people refer to indexing as a “passive” investment strategy.

    Instead of hand-selecting which stocks or bonds the fund will hold, the fund’s manager buys all (or a representative sample) of the stocks or bonds in the index it tracks.

    When we talk about investing in the S&P 500 Index, we mean investing in an index fund that tracks the returns of the S&P 500.

    Index funds are typically passively managed, rather than actively managed. Index funds are focused on long term returns. Unlike an actively managed fund, index funds do not buy and sell securities frequently.

    smiling woman standing while holding orange folder who learned basic investment terminology so she understands what asset allocation is.
    Photo by Icons8 Team on Unsplash

    Because index fund are passively managed, their fees are significantly lower than actively managed mutual funds.

    With these terms in mind, we can now talk about asset allocation and diversification.

    What is asset allocation?

    Asset allocation refers to dividing your investments among different options like stocks, bonds, and cash.

    The optimal asset allocation varies from investor to investor.

    Your optimal asset allocation will vary depending on where you are in your investment timeline. That’s because one of the biggest factors in asset allocation is an investor’s time horizon.

    The longer the time horizon an investor has, the more risk that investor can afford to take on. That typically means investing more money in stocks.

    Stocks usually offer a higher potential rate of return, but come with greater risk.

    As an investor’s time horizon shrinks, it’s wise to invest less money in stocks and more in bonds. This safer approach acts to protect years of investment earnings from drastic losses later in life.

    For these reasons, it’s important for investors to rebalance their portfolio as time goes on.

    What do we mean by “rebalance”?

    Let’s look at an example. Let’s say an investor’s optimal asset allocation is 50% stocks and 50% bonds. After a year of impressive stock market growth, this investor’s portfolio now consists of 60% stocks and 40% bonds.

    As a result, he’s now weighted more heavily in stocks than his optimal asset allocation. To rebalance his portfolio, he could take a variety of steps. He could sell some stocks or purchase more bonds to get back to where he wants to be.

    What is diversification?

    Diversification refers to the act of spreading money around in different investments to decrease risk.

    Think of diversification in two parts:

    • First, it’s important to diversify among asset classes, like owning a combination of stocks and bonds.
    • Next, it’s important to diversify within each asset class, like owning a variety of stocks instead of just one type of stock.

    As for diversifying among asset classes, stocks and bonds generally have an inverse relationship. When one asset class does well, the other performs poorly.

    By holding a combination of stocks and bonds in your portfolio, you can minimize the consequences of big drops in the market.

    As for diversifying within asset classes, it’s generally recommended that investors own a variety of each type of asset.

    For example, it is typically wise to own stocks of various companies and across different industries. That way, your investment returns are not determined by one small subset of the overall economy.

    The S&P 500 and the Dow are the two most common stock indices.

    When people talk about “the markets”, they’re typically talking about the S&P 500 or the Dow.

    The S&P 500 is a broad stock market index that tracks the performance of about 500 large publicly traded companies in the United States.

    Because it tracks companies from a wide variety of sectors, the S&P 500 is typically a good barometer for the entire U.S. (and world) economy.

    This is all to say that if you choose to invest in an S&P 500 index fund, you essentially own a piece of 500 large companies.

    That’s pretty good diversification.

    The other most common index you’ll hear about is the Dow Jones Industrial Average (“Dow”). The Dow tracks 30 U.S. blue chip companies. You can invest in an index fund that tracks the Dow and essentially own 30 of America’s biggest and best companies.

    In addition to these two major indices, investors have a variety of options to invest in index funds that track certain sectors of the economy.

    You can also invest in an index fund that tracks the entire U.S. stock market. For example, Vanguard offers a popular fund called the Vanguard Total Stock Market Index Fund.

    This fund provides exposure to nearly the entire U.S. stock market, which consists of 3,598 companies.

    Now, that’s really good diversification.

    Read The Simple Path to Wealth by J.L. Collins

    One of my favorite authors on investing, J.L. Collins, wrote about the advantages of investing in a total stock market index fund in his seminal book, The Simple Path to Wealth.

    In fact, Collins makes a compelling argument that the Vanguard Total Stock Market Index Fund may be the only stock fund that you’ll ever need.

    I highly encourage you read The Simple Path to Wealth.

    You can read my full review of The Simple Path to Wealth in my post here.

    If all this sounds complicated, don’t worry.

    I’ve told you before that investing is actually the easy part.

    Now, I can explain why.

    Index funds have become the go-to investment choice for most everyday investors. That’s because index funds are naturally diversified, meaning when you invest in an index fund, you own stock in every company that makes up that index.

    Index funds are also passively managed, which means they have very low fees.

    When you combine a diversified selection of stocks with low fees, you’re setting yourself up for success.

    But hey, don’t take it from me.

    Take it from the single greatest investor of our lifetimes, if not ever: Warren Buffett.

    In 2013, Buffett famously instructed that after he dies, his wife’s money should be split 10% in short-term government bonds and “90% in a very low-cost S&P 500 index fund.”

    Good enough for Buffett, good enough for me.

    Don’t ignore target date retirement funds.

    If this still seems too complicated, that’s OK.

    There’s an even easier option available to all of us, at a very low cost, called target date retirement funds.

    The idea behind a target date retirement fund is that your portfolio automatically rebalances as you move closer to retirement.

    Over time, your portfolio will gradually reduce its exposure to stocks and increase its exposure to safer assets, like bonds.

    You do not have to do a thing.

    It simply cannot get any easier than this.

    Most employer-sponsored retirement plans offer target date retirement funds as a low cost, low stress option. Target date retirement funds are a great option for just about all of us.

    Do you agree with me that investing is actually not that hard?

    Even though investing may seem complicated, understanding these terms should take some of that complexity away.

    When you have a basic understanding of the key language, you’ll feel more confident in choosing an investment strategy that works for you.

    That holds true no matter what direction you take. You’ll be prepared if you choose to talk to an advisor.

    You’ll also have a head start if you choose to invest on your own.

    So, what do you think?

    Is investing really that hard?

    Or, is investing actually the easy part?

  • Money on My Mind: Read Millionaire Milestones

    Money on My Mind: Read Millionaire Milestones

    On my journey to financial independence, I’ve read close to 100 personal finance books.

    This week, Sam Dogen of Financial Samurai fame, released Millionaire Milestones: Simple Steps to Seven Figures.

    I pre-ordered my copy of Millionaire Milestones and read it cover-to-cover in three days. You may have noticed my posts this week have been slightly delayed. Now, you know why.

    You can find a breakdown of my favorite money mindset books here. I recently added Millionaire Milestones to my list. It was that good.

    If you’re serious about becoming financially independent, I highly recommend you read Millionaire Milestones.

    Who is Sam Dogen aka The Financial Samurai?

    Dogen has been a leader in the personal finance space since he launched Financial Samurai in 2009. Since then, he’s shared his experience and knowledge for free with three posts per week. I do my best to read every post.

    Millionaire Milestones is his third book. Dogen’s also written the Wall Street Journal Bestseller Buy This, Not That and the bestselling e-book How to Engineer Your Layoff.

    What separates Millionaire Milestones from other books?

    As many of you know, I’ve been on my journey to financial independence since 2010 when I was drowning in credit card debt. Since then, I’ve read every personal finance book I can get my hands on.

    Allow me to over-generalize and separate the books I’ve read into two broad categories.

    The first category of books are written by authors who are at a very early stage in their personal finance journeys. These authors tend to be in their 20s and early 30s. They are intelligent people, good writers, and have a lot of valuable advice to share. I certainly gained a lot of insight from these books.

    The second category of books are written by authors who had not only achieved, but also sustained, financial independence. Contrary to the first category, these authors are typically in their 60s and 70s. They have decades and decades of experiences and knowledge to draw upon. They are absolute legends in the financial wellness space.

    person holding book sitting on brown surface illustrating the need to read Millionaire Milestones by Sam Dogen
    Photo by Blaz Photo on Unsplash

    With those overly broad categories in mind, do you see where I’m going with this?

    Category 1: Too young.

    Category 2: Too old.

    Enter Dogen AKA The Financial Samurai.

    AKA… Goldilocks?

    Millionaire Milestones is the Goldilocks of Personal Finance books.

    Yup, Dogen is part samurai and part golden-haired girl.

    Let me explain.

    Dogen is in his mid-40s. He’s not too young. He’s not too old. His book hits just right.

    In Millionaire Milestones, Dogen covers his journey from finance bro in New York in his 20s to present day life as a writer, investor, and husband and father.

    What separates Millionaire Milestones from other personal finance books is that Dogen’s still on his journey. Don’t get me wrong, he’s been financially independent for more than a decade. He certainly has accumulated decades of knowledge since his time working on Wall Street.

    But, Dogen’s still in the thick of things. He’s not preaching from the rocking chair on his patio overlooking his immaculate yard.

    Dogen’s presently raising kids. He’s focused on his website and his investments. Like you and me, he can relate to the present day challenges of personal finance because he’s still on his journey.

    To recap, Dogen’s not wet behind the ears. You don’t have to question his credentials.

    At the same time, he’s not so far removed from his peak earning years that his advice is outdated.

    That’s why I think Millionaire Milestones is the Goldilocks of personal finance books.

    In Millionaire Milestones, Dogen doesn’t pull any punches.

    Now, Dogen might be part Goldilocks.

    But, make no mistake. He’s still all samurai.

    If you read Millionaire Milestones, Dogen will tell it to you straight. He’s not going to sugarcoat anything for you. The journey to financial independence is hard. Most people don’t have it in them to make the sacrifices that Dogen recommends.

    The fact that Dogen doesn’t run away from that reality is what separates his book from others I’ve read.

    If you want the truth about what it takes to become a millionaire, Dogen will give it to you.

    Throughout his multiple decades studying and teaching personal finance, Dogen has seen many ups and downs. He’s not shy about sharing his mistakes in hopes that we can learn from those mistakes.

    He opens up about his relationship with his wife and his young kids. This is key because it helps understand why money even matters to him in the first place.

    Dogen has felt the pain.

    Importantly, Dogen has felt the pain. I’ve previously expressed my opinion that personal finance education is best suited for people that have already begun their careers or are just about to start.

    This is why I teach personal finance to law students and launched Think and Talk Money for lawyers and professionals.

    I know that personal finance education didn’t matter to me until I felt the pain. By feeling the pain, I’m talking about that struggle that comes with balancing rent, debt, and a social life for the first time with your own money.

    I don’t know Dogen, and I wouldn’t presume to put words in his mouth. But, my impression after reading Millionaire Milestones is that he would agree that personal finance education is best suited for people that have felt the pain.

    Dogen is not shy about sharing how he’s felt the pain at various stages of his life.

    In fact, he will tell you that if you want to be truly independent, you’re going to have to feel the pain, too. And, it won’t come easy.

    But, he’ll also convince you that it’s well worth it.

    Read Millionaire Milestones to the very end to see why it’s all worth it.

    Reaching financial independence is hard. If you make excuses, Dogen will be the first to tell you that you aren’t going to get there.

    But, if you take responsibility for educating yourself about money, Dogen will also be the first to tell you that it’s all worth it.

    Read Millionaire Milestones to the very end. If you think you might not be cut out for the journey, seeing what it looks like at the finish line may persuade you otherwise.

    Dogen does an excellent job of not only showing you how to amass wealth, but also what you can do with that wealth you’ve worked so hard for.

    That was my favorite part of the book.

    At this point in my personal finance journey, I know the steps I need to take to become financially independent.

    What I’m still sorting out is what to do with myself once I’m there.

    Reading Dogen’s perspective on what is possible once you’ve amassed enough wealth was fascinating.

    I found his conversation about how much to spend each year once you’ve left full-time employment especially valuable. As he puts it, there’s a sweet spot between spending too much and spending too little. He gives you the tools to find that sweet spot.

    Dogen also talks about spending money in ways that boost your happiness. That could mean something as small as leaving a generous tip or as large as a once-in-a-lifetime trip for your friends.

    Most of all, his conversation about helping others through the knowledge he’s acquired really resonated with me.

    I started teaching personal finance and launched Think and Talk Money because of all the knowledge I have acquired from people like Dogen. My life has been greatly enhanced through this education.

    I’ll be nothing short of thrilled if I can carry the torch and share my personal finance journey in order to help others like Dogen has helped me.

    I highly recommend you read Millionaire Milestones.

    Wherever you are on your journey to financial independence, I highly recommend you read Millionaire Milestones.

    Dogen has not only done it all, he’s still doing it.

    Dogen won’t pull any punches. The journey to financial independence is not an easy one.

    But, as he makes clear, it’s well worth the sacrifice in the end.

  • Great Talk: Money, Baby Blue, and Friends

    Great Talk: Money, Baby Blue, and Friends

    What’s the best money you’ve spent recently?

    I thought of this question the other day as I sat in the yard. It’s such a simple but important question.

    You should be able to easily feel money well spent. If nothing comes to mind, that might be an indication that the money you are spending has not been well spent.

    The best money I’ve spent recently was on a beautiful Colorado Baby Blue Spruce for my backyard.

    Man, saying that out loud makes me feel old.

    This one purchase gave me an extended, triple happiness boost.

    Buying this tree for my backyard gave me a triple happiness boost.

    First, I enjoyed the process of learning about and choosing the right tree.

    I liked talking trees with the experts at the nursery and my family members. My kids and I would walk around the neighborhood and take pictures of any trees that we liked. It was infectious how excited they were to hunt for beautiful trees.

    Even though my daughter’s first choice was this Easter egg tree, she eventually relented and agreed the Baby Blue was the way to go .

    My daughter's favorite easter egg tree she wanted for the backyard.

    My second happiness boost came from buying and then planting the tree.

    The day I bought the tree, I walked around the nursery in the rain with my father-in-law and picked the actual tree we wanted. I’ve never picked out a tree before, but it was fun. I learned from the experts and enjoyed pretending I knew what I was doing.

    The next day, the landscaping crew came over to plant the tree. It was fun to strategize exactly where to put it and then watch the experts execute the plan.

    My third happiness boost came the next day with the tree in the ground and my kids running around the back yard.

    My son played with his toys at the base of the tree. He and his sister played hide-and-seek and took advantage of the new hiding spot.

    The whole time I watched them, I sat with a smile on my face. I expect that feeling will continue every time I look at Baby Blue in my yard.

    So, yeah, Baby Blue was money well spent.

    And yeah, I know. I’m old.

    Baby Blue brought me joy before, during, and after the purchase.

    Baby Blue is an example of the trifecta of happiness. It brought me joy before, during and after.

    The same happiness effect has been well-documented when it comes to traveling. People get a happiness boost in planning the trip, then taking the trip, and finally remembering all the fun things they did on the trip.

    That’s why so many people “love to travel.” It brings them happiness before, during, and after.

    Baby Blue taught me that I can spend money to get that same triple happiness boost even when not traveling.

    I recently met up with an old friend for a great talk about money.

    I experienced the same trifecta recently when I met up with an old friend for a great talk about money.

    Funny enough, we reconnected after he learned from a mutual friend that I had launched Think and Talk Money. I had no idea that he’s as fascinated about personal finance as I am.

    I had been looking forward to our “date” since we planned it a couple weeks ago.

    The conversation was great. We talked about money, careers, kids, and shared friends. We hadn’t seen each other for years, but you would never know it. That’s the sign of a good friendship.

    When the check came, I was delighted to spend my money. That conversation brought me a lot of happiness.

    Since we met up, I’ve been revisiting in my mind so many of the topics we covered. I’m already looking forward to the next time we get together.

    That’s money well spent.

    Personal finance is not just about the numbers.

    In the personal finance world, we spend a lot of time talking about numbers. That’s not a bad thing. Numbers help us turn our ultimate life goals into quantifiable action steps.

    However, saying you want to “buy a house” is nice, but it’s not that helpful for planning purposes.

    Saying you want to “save $100,000 for a down payment on a house in the next 3 years” is an improvement.

    Running the numbers and committing to saving $2,800/month to achieve that goal is even better.

    So, while numbers are certainly important in personal finance, it’s equally important to continuously recognize the emotions behind those numbers.

    Those emotions turn into our motivation to stay on track and hit our numbers.

    Personal finance is tied to our emotions.

    I spent money on Baby Blue. In exchange, I received a triple happiness boost. The same is true about catching up with an old friend. These experiences reminded me of why I care about money.

    Money is nothing but a tool. I care about money because I want to wield that tool to bring me and my family happiness.

    Happiness is hard to define. Spending money in exchange for happiness can be hard to accomplish. What has helped me in that regard is thinking about how I can use money to get what I want.

    Sunshine bath illustrating the triple happiness boost spending money the right way can give you.
    Photo by Zac Durant on Unsplash

    Sometimes, that means taking a deep look at my Money Why. Or, it could mean sitting on a beach with a notepad (and maybe a beer or two) and writing down my Tiara Goals for Financial Freedom.

    But, thinking about money is not just about long term goals.

    It also means how we spend our money in the present.

    Humans are emotional creatures. We can rationally look at examples and charts and won’t dispute the long term magic of compound interest.

    At the same time, we have emotions and feelings that need to be tended to now.

    It’s not realistic to expect people to put off all happiness until some unknown time in the future.

    It is realistic to make reasonable sacrifices now to ensure a better future.

    That’s the essence of investing. We invest money that we could spend today and hope it turns into more money later on.

    What might be a reasonable sacrifice for one person may be totally unreasonable for someone else. That’s perfectly fine. Still, it’s one thing to make sacrifices. It’s another thing to deprive ourselves entirely.

    I don’t think it’s reasonable to expect people to entirely deprive themselves of the things that make them happy. The key is understanding what those things are, and then spending our money in the pursuit of those things.

    This is one of the things my friend and I talked about the other day. It’s not that hard to understand the numbers on the spreadsheet. It’s much more difficult to stay motivated to keep making good money choices.

    This intersection of money and life is what makes personal finance so fascinating.

    Personal finance is fascinating, not because of the numbers, but because of the emotional impact of money.

    It’s why I encourage people to talk about money with their loved ones. Talking money is not about talking numbers and spreadsheets. It’s about motivating each other to intentionally use money in a way that aligns with our values. And, to do so both in the present and in the future.

    When we create a Budget After Thinking, this is exactly what we’re doing. Not only are we generating fuel for our Later Money bucket, we are giving ourselves permission to spend our Life Money on things we truly care about.

    So, what’s the best money you’ve spent recently?

    I bought a tree.

    I had a beer with a friend.

    Sure, I could have saved that money and invested it. But, I’m glad I didn’t.

    Both experiences continue to bring me joy.

    That’s money well spent.

  • How Much Money a 1% Advisor Fee Really Costs

    How Much Money a 1% Advisor Fee Really Costs

    I recently attended a “financial empowerment” workshop hosted by a financial advisor.

    The financial adviser was smart and very passionate about helping people plan for retirement. She shared a lot of valuable information, such as investing early and often.

    She also shared good examples on how compound interest works and how inflation eats away at our purchasing power.

    I liked just about everything she was sharing with the audience. It was solid advice, and her presentation included many informative charts and examples.

    I was not even bothered that she was frequently pitching her services in hopes that audience members would hire her to manage their money. It was her presentation and she earned the right to promote herself.

    The thing is, and I was not surprised by this in the least, the topic of fees hardly came up at all.

    In fact, the first mention of fees did not come up until the very last slide. In total, fees were addressed for maybe 30 seconds in an hour-long presentation.

    I don’t necessarily blame the advisor for not discussing fees until the very end. She’s trying to make a living and doesn’t want to scare people off before hearing what she had to say.

    I think most people in her situation would have structured the presentation the same way.

    That said, in my opinion, fees should be one of the first things discussed when it comes to investing. It should not be a throw-in at the end of a presentation.

    The amount we pay in fees is one of the main things we as in investors can control.

    There is not much we can control as stock investors. Markets are unpredictable. One of the only things we can control is the amount we pay in fees.

    There are two primary types of fees: transaction fees and ongoing fees.

    • Transaction fees are charged each time you make a transaction, like buying a stock.
    • Ongoing fees are charged regularly, like account maintenance fees.

    Whenever you are choosing how to invest your money, pay close attention to the fees associated with that investment option.

    You cannot avoid fees completely, but you can minimize the amount you pay depending on the investments you choose.

    Below, we will take a look at how even a seemingly small fee of 1% can have a huge negative impact on your account balance over time.

    As a general rule, passively managed investments like index funds, charge lower fees. Actively managed investments charge higher fees.

    If you choose to work with an investment advisor, be sure to understand all of the fees charged for those services. Pay particular attention to the ongoing fees, which can have a big impact on your investment portfolio.

    I am not on a crusade against financial advisors.

    Before all the financial advisors out there bite my head off, let it be known that I am not on a crusade against you.

    Believe it or not, I’m not here to tell anybody whether he should work with a financial advisor or not. That’s not for me to decide.

    I believe that advisors can offer significant benefits to a lot of people, including benefits that are difficult to quantify. For example, an advisor may help someone stay calm during market dips so that person stays invested for the long term.

    I view my role in the personal finance food chain as that of an educator. I am not a financial advisor, and I won’t be giving personal investment advice.

    My purpose in writing this post is to help you decide whether the cost of hiring an advisor is worth it to you.

    Dapper Professional wearing a blue plaid suit, a custom shirt and a silk knit red tie, illustrating a financial advisor ready to charge you "only 1%" in fees.
    Photo by Benjamin R. on Unsplash

    I do the same thing when I teach personal finance to law students. I try my best to present options and information so they can make the best decisions.

    When it comes to investment fees, it’s hard to know exactly what we’re paying. What does a 1% fee even mean?

    By looking at the examples below, you should get a better idea of what a 1% fee looks like over the long term. Then, you can be better equipped to make a thoughtful decision on whether to work with an advisor.

    In the end, I’ve done my job if I’ve helped you acquire enough personal finance knowledge to make educated choices with your money.

    So today, we’re going to talk about fees.

    Remember, none of us can control the market, and that includes financial advisors. The best any of us can do is project what may happen in the future based on what has happened in the past.

    Since we can’t control the market, let’s focus on what we can control, like fees.

    To help us understand how fees can be a drain on our investment returns, let’s revisit our friend Sally.

    Sally earns 10% a year and pays no advisor fees.

    Remember our friend, Sally?

    While in her 20s, Sally funded her retirement account with an initial contribution of $2,500. She then made contributions of $250 every month for 40 years.

    She was comfortable with reasonable risk and invested in the S&P 500, which has historically earned an average annual rate of return of 10%.

    After 40 years, Sally had contributed a total of $122,500.00. Her retirement account grew to  $1,440,925.81.

    After 40 years, a $2,500 initial contribution and $250 subsequent monthly contributions earning 10% average annual interest will be worth $1,440,925.81

    Sally set herself up to have a lot of choices come retirement.

    Now, let’s make one slight adjustment to our hypothetical to account for a fee of “only 1%.”

    Sally earns 10% a year and pays a 1% advisor fee.

    Let’s assume that Sally decided to work with a financial advisor that charges a 1% fee. That means every year, Sally pays her advisor 1% of her account balance.

    We’ll assume that her advisor also averaged a 10% annual rate of return for Sally. However, because Sally pays her advisor a 1% fee, Sally’s actual earnings rate drops from 10% to 9%.

    Let’s see how that 1% fee changes Sally’s performance over 40 years.

    After 40 years of earning 9% after paying a 1% fee to her advisor, Sally will have $1,092,170.89.

    The 1% fee resulted in Sally’s account dropping by $348,754.92.

    That’s 24% less money than she had in our example when she earned 10%.

    The impact of even a 1% fee is monumental.

    Through this example, you should be able to see that even a seemingly small fee can have major consequences on your long term gains.

    When people start investing, the 1% fee does not seem like a bad deal. In my experience, whenever a financial advisor has explained fees to me, he uses words like “just 1%” or “only 1%”.

    I think that language is misleading and deceiving. Sally would probably agree that words like “only 1%” do not accurately express a cost of $350,000.

    If you look at the very beginning of Sally’s investment profile, it’s true that the 1% fee seems to have little impact.

    In Sally’s case, the difference in her account in the two scenarios after 1 year is only $25.

    • Sally’s account after 1 year at 10% interest: $5,750.
    • Sally’s account after 1 year at 9% interest:$5,725.

    That’s a pretty marginal difference. However, it takes time for the impact of fees to materialize.

    The reason is because it takes time for the magic of compound interest to set in. That’s why we need to invest early and often.

    Let’s look at the difference in Sally’s account over time:


    10% Return
    9% Return
    After 1 year$5,750$5,725
    After 10 years$54,296.63$51,497.20
    After 20 years$188,643.75$167,491.39
    After 30 years$537,105.57$442,091.81
    After 40 years$1,440,925.81$1,092,170.89

    Looking at these numbers, it becomes clear how much a 1% fee can impact your overall investments.

    One other consideration: the fee also typically gets taken straight out of your account. That can make it feel like the fee is relatively small or doesn’t exist at all.

    It would feel much different if each month you had to go through the process of writing a check to your advisor. Maybe feeling that pain would impact your decision to pay the fee.

    Decide for yourself if the real cost of an advisor is worth it to you.

    You can play with these numbers to match your personal situation. Maybe you have an advisor charing less. Maybe yours charges more.

    If you want to tweak the annual rate of return you expect to earn by working with an advisor, please do.

    Or, maybe you just want to ask your advisor or potential advisor about fees and how they may impact your portfolio over the long term.

    Hopefully, looking at these numbers gives you something to think and talk about.

    I personally do not work with a financial advisor.

    Let’s circle back to the financial empowerment workshop I attended the other day.

    At its conclusion, the advisor’s husband came by to collect the sign-up sheet. I happened to be the last person to receive the clipboard.

    Seeing that I had not signed up for a free consultation, he looked at me and said, “Oh, you forgot to sign up!”

    I chuckled.

    Uhh, no I didn’t “forget”.

    I respectfully declined to be added to the list. I’ve chosen not to work with an advisor.

    I shared my story about how I set $93,000 on fire when my former advisor pulled me out of the markets in 2008.

    In that post, I also shared that it wasn’t her fault. It was my fault for not being educated.

    Since then, I’ve been convinced by endless reports, such as this from Yahoo! Finance, that I’m better off without an advisor when considering the cost:

    Making matters worse is that the professionals, who the average investor might turn to for guidance, have poor track records. In the past decade, an alarming 85% of U.S.-based active fund managers underperformed the broader S&P 500. Those who invest in these funds are essentially paying for unsatisfactory results.

    How much does 1% matter to you?

    I recently calculated how much I would have paid an advisor by this point in my life. I determined that If I had been working with an advisor, I would have paid more than $100,000 in fees so far.

    When I think about all the things I could do with more than $100,000, I’m very happy that I chose to educate myself and keep that money instead of paying it to an advisor.

    Maybe I would have earned more if I worked with an advisor. Maybe that $100,000 would have been a worthwhile price to pay. Then again, maybe not.

    If you choose to work with an advisor, I won’t blame you. Hopefully your advisor consistently beats the returns of the S&P 500 or provides value to you in other ways.

    Whatever the case may be, you now should have a better understanding of what you’re paying when you hear the phrase “only 1%.”

    • Do you work with an advisor?
    • What fee does your advisor charge?
    • What are the top benefits you receive in exchange for the cost?

    Let us know in the comments below.