I try to bring my lunch most days. It’s partly trying to eat healthier. The other part is that I have a hard time justifying the cost and have decided that lunch is really not something I care about.
Even so, there are days when I run out of time in the morning to get a lunch packed before I’m out the door. On those days, I’m usually looking for something relatively quick and healthy.
I’ve noticed that no matter where I go near my office, it seems like the cost of a fast-casual lunch is between $15-$20. That’s true whether it’s a sandwich or a salad or a burrito.
$20 for a lunch that is not even the least bit exciting! That’s hard for me to swallow (sorry, couldn’t help myself…)
Am I yelling at the clouds alone here?
Why does it matter that everything is getting more expensive?
There’s no single explanation for why things are getting more expensive. For example, restaurants are facing higher costs for ingredients, labor, and even online reservation sites.
Setting aside isolated explanations, the reality is that all things tend to get more expensive over time.
The word for that reality is “inflation.”
Specifically, inflation is defined as “ongoing increases in the overall level of prices.”
If you were accustomed to paying $10 for lunch, and now that same lunch costs $20, that’s what inflation looks like.
Terry took no risk and kept his money in a savings account. Terry did not play offense.
Sally took on reasonable risk and invested in the S&P 500. Sally played offense.
What happened after 40 years in our hypothetical scenario?
Terry, at a 3% interest rate from his savings account, had a total of $234,358.87.
Sally, at 10% annual returns from the S&P 500, had a total of $1,440,925.81.
As a result, Sally will have $1,200,000 more than Terry to do fun things with in retirement.
Sally clearly played offense. Terry clearly did not.
Investing to counteract inflation is playing defense.
You may be thinking that at least Terry’s “safe” approach meant that he played good defense.
Nope.
Terry’s approach was bad defense just like it was bad offense.
All because of inflation.
Investing to counteract inflation is playing defense. It’s protecting your hard-earned purchasing power.
Over the long term, it’s critical to invest your money and earn a return that exceeds the rate of inflation.
Otherwise, you risk not being able to afford the same items you’re accustomed to buying today because those items will be more expensive.
In our earlier examples of eggs and workday lunches, we’ve seen how things feel like they’re getting more expensive over time.
It’s not just eggs and lunches that get more expensive. Everything does.
Let’s plug some numbers into US Inflation Calculator to illustrate how things really are getting more expensive.
Let’s say you bought something in 2000 for $100. Based on the actual inflation rates between 2000 and 2025, that same $100 item would could $185.71 today.
That’s an increase of 85.7%!
So, by keeping his money in a savings account earning 3% interest, Terry may have thought he was doing the right thing because his balance was getting bigger.
The problem is that while his bank balance was increasing, so was the cost of everything he might want to buy. So, he had more money, but he could buy less things with that money.
That’s what inflation does.
The only way to get ahead of inflation is by investing and earning a higher rate of return.
So to return to our question: was Terry really playing good defense by keeping his money in savings?
No, because his actual purchasing power diminished even though his balance grew.
Investing is about playing offense and playing defense.
By now, you should hopefully be motivated to invest as a way to play offense and play defense.
It’s fun to think about what you can do with your money when it grows with very little effort on your part.
It’s just as important to think about investing as a way to protect your ability to buy the very same things in the future that you buy today.
Instead of being the man who yells at the clouds, you can be the one buying as many eggs and lunches as you want.
That’s cool. It’s never a bad idea to pay a little extra attention to your finances.
Of course, Think and Talk Money readers don’t wait until April to be reminded of all the things we should be doing with our money.
With more than 50 posts already at our disposal, Think and Talk Money readers pay attention to our money year round.
We know how important money is to reaching our ultimate goals in life. That’s why we like to think and talk money just a little bit every week.
Think and Talk Money readers know that personal finance starts with getting our money mindset in the right place. That’s why we create our personal version of Tiara Goals for Financial Freedom.
Is it just me, or are you also noticing more and more businesses charging fees to use credit cards?
I wrote about my disdain for credit card fees recently.
In just the past couple of weeks, I’ve chosen to pay with cash instead of credit card on multiple occasions:
At the butcher shop, which charges a 3% fee, and is kind of smug about it.
At the local ice cream shop, which charges a 4% fee and misleadingly labels it a 4% discount for customers paying in cash.
For the garage door repair guy, who creatively indicates the fee in terms of cash instead of a percentage. In this instance, $11 instead of 3% of the total bill.
At the tree nursery, which also charges a 3% fee for credit cards. This one hurt the most. Trees are expensive! I really would have liked those points.
By paying cash, I avoided hundreds of dollars in fees. Don’t get me wrong, I love credit cards points as much as anyone. But, I just can’t stomach paying these fees to earn the points.
I even ran the numbers recently and determined that the points don’t make up for the added penalty of using a card.
I know many business owners disagree, but in my opinion, these fees are bad for business.
Fees act as a deterrent for me to spend money. I imagine they are a deterrent for others, as well. If I do shop at one of these establishments, I end up being more selective and spending less money than I otherwise would have.
At the butcher shop, I didn’t buy the side items to go with my skirt steaks.
At the ice cream shop, I bought ice cream for my kids but not for myself. Luckily (or unluckily?), my son gave me his leftover, melty Superman ice cream with rainbow sprinkles.
I had no choice with the garage door guy- the garage was broken and needed fixing. You win, garage door guy!
At the tree nursery, I bought half as many trees and plants as I intended.
The way I see it, both the customer and the business lose out because of these fees.
For example, at the nursery, I didn’t get all the plants I wanted. That made me kind of sad.
At the same time, the nursery lost out on more than $1,000 in plant sales. I don’t know how that made the business feel. Obviously, it’s not that sad since it continues to charge the fee.
Taking a broader viewpoint, maybe these credit card fees are actually good for us consumers.
In our consumer-driven society, we all spend too much money when we go out to eat or go shopping. Studies have consistently proven that we spend less money when forced to use cash.
In that sense, a deterrent to spending, which is exactly what these fees are, is probably a good thing for us consumers.
I can’t imagine it’s good for business, though.
What do you think?
It’s OK that tracking your net worth is less fun during a market dip.
I track my net worth once per month using a simple spreadsheet. Today was the first day I updated the spreadsheet since “Liberation Day” and markets dipped.
Like so many others, my net worth took a hit this past month.
That’s not fun.
But, I’m not losing my mind over it.
I’m not saying it feels good. I would much rather see my net worth steadily improving.
I’m just saying I’m not freaking out about it. Time is on my side.
I expect dips like this will occur multiple times throughout my investing timeline.
One thing I’ve found is that it helps to talk about money when things aren’t going well. You realize that you’re not alone. Your friends and family are probably having the same feelings that you’re having.
You don’t have to share how much money you have or how much you lost. You can still benefit emotionally by acknowledging to your loved ones that you’re thinking about the markets a little bit more these days.
People are going bananas for The Bananas.
A reader sent in a great story about a couple who went $1.8 million into debt to start The Savannah Bananas.
If you haven’t heard of The Bananas, they might just be the best story in sports right now.
The Savannah Bananas are the best story in sports.
Owner Jesse Cole and his wife Emily went $1.8 million in debt to start the team, but they now have a broadcast deal with ESPN and will sell two million tickets this year.
Despite countless opportunities to cash in by taking on investors, the owners still own 100% of the team. They continue to do things their way, even if that means foregoing massive profits.
I love stories like this. These owners bet on themselves and found success. Instead of cashing in at the first chance, they’re staying true to themselves.
At the end of the day, they’re making money and seem to enjoy what they’re doing.
Two young coworkers, Terry and Sally, start the same job at the same time making the same amount of money.
While still many years away, Terry and Sally both know that they should invest early and often for retirement.
They each decide to fund a retirement account with an initial contribution of $2,500. They are also dedicated to making contributions of $250 every month until they retire.
Both plan to retire in 40 years while they’re in their 60s.
There’s one major difference between Terry and Sally.
Terry doesn’t like risk. He wants to be able to sleep at night knowing that his hard-earned money is safe and sound in the bank. He can’t stand the idea of potentially losing money from one month to the next.
When Terry wakes up in the morning, he likes to check his bank accounts while he drinks his coffee. He gets a jolt out of opening up his mobile banking app and seeing exactly how much money he has.
In fact, at any given moment, Terry can tell you within a few hundred dollars what his net worth is.
Because Terry doesn’t want to take any chances, he decides to stash all of his retirement savings in a savings account that earns an average annual return of 3%.
Sally is more comfortable with reasonable risk. Upon starting her career, Sally was aware that she had never learned basic personal finance skills. She was determined to put in a little bit of effort early on to set herself up for a prosperous future.
Through the process of educating herself about personal finance, Sally started thinking about what she really wanted out of life. Since she was young and had just started her career, it wasn’t easy to come up with a good answer.
Still, Sally knew that whatever she wanted to do in life, investing was an important part of her financial journey. If she wanted to create more time for herself down the road, she would need passive income from investments to sustain her.
So, after doing her homework, Sally decided to invest her money in a low cost S&P 500 index fund.
While she appreciated that there are no guarantees when it comes to investing, Sally knew that the S&P 500 has historically earned an average annual return of 10%.
Unlike Terry, Sally only checked her accounts once per month when she tracked her net worth and savings rate. Sally slept fine at night because she knew time was on her side.
Let’s see how Terry and Sally turned out 40 years later.
Using a simple online calculator like the one at investor.gov, let’s see how much money Terry and Sally will have in their retirement accounts after 40 years.
After 40 years, Terry will have contributed a total of $122,500.00 to his retirement savings account.
At a 3% interest rate, Terry will have a total of $234,358.87 after 40 years.
In other words, Terry has just about doubled the value of his total contributions in his account.
Not bad, Terry.
Now, let’s check out Sally’s account.
Sally’s retirement savings total $1,440,925.81.
Sally likewise contributed $122,500.00. After 40 years, at a 10% interest rate, Sally’s retirement account will have a total of $1,440,925.81.
Wow, Sally!
Sally’s retirement account is worth 10 times more than what she personally contributed. Terry failed to even double his account.
Recall in our little hypothetical, Sally did the exact same things as Terry, with one key difference. Sally was more comfortable taking on reasonable risk.
Because Sally was comfortable taking on some risk, her retirement savings were worth more than six times as much as Terry’s savings. She has over a million dollars more than what Terry has!
Look at compound interest in action.
One last thing: take a look at the pictures of Terry and Sally’s investments over time. Notice the gaps between each of their red and blue lines.
While they each benefited from compound interest, Sally benefited exponentially more.
Look at how Terry’s red line stayed much closer to his blue line. Because he wasn’t earning as much overall interest, he didn’t have as much money to multiply from compound interest.
Sally’s red line mirrored her blue line closely for the first 12-15 years. Then, the gap widened before the red line skyrocketed over the final decade or so.
The point of this hypothetical is to introduce the concept of risk when it comes to investing.
We’ve all heard the saying, “You don’t get something for nothing.”
That motto applies to investing as much as anything else. There is always risk involved in investing.
The question is how do you react to that risk.
Some people are so fearful of that risk that they don’t invest at all, like our friend, Terry.
Other people are so desperate to get rich quickly that they take wild risks.
The people that tend to reach and sustain financial independence are the ones who educate themselves and become comfortable with taking on reasonable risk. This is what Sally did.
In future posts, we’ll dive into the various ways you can reduce investment risk.
At this point, knowing why you’re investing and taking on risk is a powerful first step. I was recently reminded of my Money Why when my baby girl was born.
Think of risk as the cost to invest.
If you want to reach true financial independence or any other financial goal, it’s going to cost you something.
Think of risk as the cost to invest.
Sure, there may be some people out there who are able to reach financial independence on a massive salary.
For the rest of us, we’re going to have to get comfortable with investing.
There’s a reason we spend so much time talking about our ultimate life goals. It’s important to embrace the reasons why you’re investing and why you’re opening yourself up to risk.
It never hurts to remind yourself what you are hoping to achieve in the future.
When you know what that thing is, it’s much easier to pay the cost of risk.
When you look at Sally and Terry’s future outlook, who would you rather be?
It’s not really a hard question, right?
It’s not that Sally has a bigger bank account. What matters is that she has created options for herself.
Sally should be in position to do whatever she wants.
Terry probably can’t.
Are you naturally more inclined to act like Terry or Sally?
If you’re more like Terry, have you thought about what outcome in life would be worth taking on some reasonable risk?
There’s an infamous slogan in Chicago politics, “Vote early and often.” My professional advice: don’t do that. Instead, I prefer: “Invest early and often.”
We’ll call it the new Chicago way.
When you invest early and often, you can take advantage of the power of compound interest.
There’s very little we can control when it comes to investing. One of the main things we can control is how early we prioritize investing.
In today’s post, we’ll learn what compound interest is and why it’s so powerful in generating long-term wealth.
Invest early and often to benefit from the magic of compound interest.
Fortunately, the idea of compound interest makes a lot more sense with a simple example.
Let’s say you make an initial investment contribution of $1,000. Let’s assume that you earn 10% interest each year on that investment. We will also assume that you re-invest your investment gains.
After the first year, your initial contribution of $1,000 earns $100 in interest (10% of $1,000). That means after one year, you have $1,100 in your investment account.
Because we are re-investing our gains, that means that at the start of year two, yo have $1,100 to invest: $1,000 from your initial contribution plus the $100 earned in interest.
If you earn the same 10% interest on that $1,100 investment, you will have $1,210 at the end of year two.
Notice that in year two, you earned $110 in interest, whereas in year one you earned $100 in interest. That’s because in year 2, you earned interest on the interest your previously earned.
This is the key point about compound interest: you earned more money in year two, even though the interest rate remained the same and you did not contribute any additional money.
That’s how compound interest works. Compound interest is earning interest on interest you’ve previously earned.
So, why is compound interest so powerful?
Earning an additional $10 in interest year two may not seem like a lot.
Over the long run, those additional earnings add up.
Let’s look at an illustration from investor.gov of what happens to that initial $1,000 contribution over a 30-year period:
In 30 years, you will have a total of $17,449.40. That’s a pretty good result from total contributions of only $1,000.
However, for this example, that total is not the important part. The important part is to visualize how compound interest worked its magic to get that result.
Look closely as the two lines on the graph. The blue line that doesn’t change represents your initial $1,000 contribution.
The red line represents the amount of money you have over time.
Notice how in the first 10 years or so, the red line and blue line mirror each other pretty closely. Around year 12, you start to see some separation between the two lines.
While the blue line stays flat, the red line begins to arc upwards. That’s because all that interest you earned during the previous decade has been earning interest. Your investment begins to accelerate upwards without any additional contributions from you.
By the end of year 30, look at how steep the red line is jetting upwards.
We can look at the specific amount of money you’d earn each year in this hypothetical to really drive this point home.
As we mentioned earlier, you earned $100 in interest during year 1. Then, you earned $110 in interest during year 2. That’s a good, but modest, increase.
During year 12, you earned $285.31 in interest. That’s significantly more than you earned in the early years, all without any additional contributions on your part.
During year 30, you earned $1,586.31 in interest!
The more time that you stay invested, the more money you’ll earn as compound interest works its magic.
That’s the power of compound interest.
Invest early and often to be a millionaire with very little effort on your part.
Compound interest is so powerful that it can make you a millionaire with very little effort on your part. All it takes is time and consistency.
In other words, invest early and often.
Let’s look at another example to see how you can easily become a millionaire if you invest early and often.
Let’s say you begin your career after going to law school or grad school at age 25. During your first year working, you saved up $3,000 and decided to invest in a low cost index fund.
You also make a plan to contribute an additional $300 per month to your investment account for the next 40 years, setting yourself up to retire at age 65.
We’ll also assume you earn the same 10% interest from our prior example, and you don’t make any withdrawals from your account.
By the time you reach retirement age, you’ll have $1,729,110.97 in your retirement account!
That’s after contributing only $3,000 initially and $300 per month after that.
Put another way, your total contributions of only $147,000 turns into $1,729.110.97 by the end of your career.
Let’s look at the graph corresponding with these figures to once again visualize compound interest at work.
You’ll notice this graph looks almost identical to our prior example, even with the additional contributions that you make over time.
You can once again see that the blue and red lines mirror each other closely for the first 10-15 years.
Then, the blue line stays relatively flat while the red line gradually arcs up before skyrocketing towards the end.
Your personal investment picture should look similar in the long run.
Now, there’s no way to predict exactly when you’ll start to notice the magic of compound interest. There are too many variables at play.
The point is that given enough time, your personal investment trajectory should look similar because of compound interest.
You can play with the numbers in an investment calculator like the one available at investor.gov to match your personal situation.
If you’ve created a Budget After Thinking, you may be able to invest much more than $300 per month.
No matter what initial contribution you make and what interest rate you assume, you should notice a similar investment picture over the long run.
When I say investing is the easy part, this is what I mean.
I just showed you how an early contribution of $3,000 and regular contributions of $300 can turn into more than $1.7 million.
You don’t have to understand the math behind compound interest.
You just have to trust that it works.
Then, invest early and often.
Given enough time, assuming normal, historical market conditions, your investments will gradually increase before shooting up in the later years.
Read that sentence again. “Given enough time” is the key phrase.
The magic behind compound interest is time.
The earlier you can start investing, the better off you will be.
Since we can’t control investment returns, I prefer to focus on what we can control when it comes to investing.
We can control when we start investing and how long we invest for.
By making regular contributions over a long period of time, compound interest ensures that your wealth will grow.
Invest early and often.
$3,000,000 today or a penny that doubles each day for the next 30 days?
Let’s look at one more fun example to demonstrate the power of compound interest.
At the start of each personal finance class I teach, I ask my students this question:
“Would you rather have $3,000,000 today or one penny that doubles each day for the next 30 days?”
Maybe the fact that I’m asking the question in the first place gives away the answer. Still, some students refuse to believe that the penny could grow to more than $3,000,000 in 30 days.
The real lesson in asking this question is not that the penny ends up being worth more. The lesson is that it’s not until the very end of the time period that the penny takes the lead.
If you chose the penny, for the first 20 days, you’d be feeling pretty foolish. Even after 29 days, the penny still hasn’t outpaced the guaranteed $3,000,000.
Then, by day 30, you realize the full power of compound interest. The penny ends up being worth $5,368,709.12!
Just like we saw with our prior examples, it takes time for the magic of compound interest to do its thing.
When it comes to investing, time is the most important factor that we can control. The more time you spend in the markets, the better chance you have of significantly increasing your wealth.
People smarter than you and me preach the power of compound interest.
Warren Buffett, the world’s greatest investor, fully appreciates the power of compound interest. He’s famous for saying that his favorite holding period for an asset is “forever”.
Buffet’s not literally saying that there’s never a time or reason to sell an asset, like a a stock. He’s simply making the point that compound interest benefits people who stay invested over the long term.
If the world’s greatest investor isn’t impressive enough for you, how about the world’s greatest thinker?
Albert Einstein is often credited with this famous quote about compound interest:
Compound interest is the eighth wonder of the world. He who understands it, earns it. He who doesn’t, pays it.
You don’t have to be as smart as Buffet or Einstein to benefit from compound interest.
You just have to invest early and often.
The Chicago Way: Invest early and often.
Let’s recap:
Voting early and often = bad idea.
Investing early and often = good idea.
Whether you are new to investing or have been investing for some time, never underestimate the power of compound interest.
It will take time before you see results. But, the only way you’re going to get those results is by staying patient and staying invested.
When you’re tempted to pull out of the market, remind yourself that investing is a long-term game.
Picture the graphs that show how your money can skyrocket with enough time. Remember the question about the penny doubling for 30 days. Don’t ignore the words of Buffett and Einstein.
Investing is a major part of leading a healthy financial life.
It also should be the easiest part.
Despite all the attention, news, and marketing, investing doesn’t have to be complicated.
Investing simply means committing money now to earn a financial return later. This is why I refer to money I invest as Later Money.
To be honest, the most difficult part of investing is continuously generating money to invest in the first place.
The actual investing part is pretty easy.
That’s because when you invest the right way, your money should earn more money without much additional effort from you.
This is the best part about investing. Your money can (and should) grow over time without your active participation. This is why investment gains are often referred to as “passive income.”
If you are on a journey towards financial independence, you know how important passive income is. The best way to get your time back is to earn money passively through investments while you’re off doing something else.
We’ll soon learn why investing does not have to be complicated. If you can drown out the noise, all you’ll really need to do is regularly fund your investment accounts and watch your net worth slowly grow.
This is when personal finance starts to get really fun.
Investing is when personal finance starts getting really fun.
When you’ve invested the right way, your wealth will slowly multiply. You won’t notice it at first. Trust me, give it time.
You’ll soon see that all the effort you put into educating yourself about money was more than worth it.
No, you won’t be immune from market swings like the one we’re in right now.
But, you’ll be educated enough to not panic. You’ll know that time is on your side.
Have you noticed that we’re now 50 posts in and have hardly talked about investing?
There’s a reason we’ve hardly talked about investing in the first 50 posts of Think and Talk Money.
In order to get the benefits of investing, you need to have the right money mindset. That means knowing why you’re investing in the first place. Without the right motivation, you will struggle to consistently fund your accounts.
After all, when you invest, you are sacrificing money you could spend right now for the opportunity to spend even more later on. Without the right motivation, too many people put off, or give up on, investing altogether.
When they do that, they have a little more money to spend today. But, years from now, they will wonder why they’re still working so hard and don’t see an end it sight.
Your goal may be to pay for your kids’ college. One way to do that is to take advantage of 529 college savings plans.
You may not know exactly what you want down the road. That’s OK, too. Whatever it is, investing now will make it easier to pursue whatever that thing ends up being.
Once your mindset is in the right place, you’ll be more determined to craft a budget that consistently creates money to invest.
Think about it: would you rather be someone who invests $1,000 one time or someone who invests $1,000 every month?
If you practice solid personal finance fundamentals, you can be the person consistently investing to accomplish your ultimate life goals.
Too many people think personal finance is only about investing.
Too many people skip over the part where we learn strong personal finance habits. These people think that personal finance is only about investing.
Let’s play a game. Walk down the hall at your office and ask the first person you see what they know about personal finance.
I’m guessing you’re going to get a response like:
“Personal finance? Oh, yes. I need to learn that. I don’t know anything about the stock market.”
If I’m right, leave a comment below. This should be fun.
By the way, people that assume personal finance is only about investing are not bad people. They just haven’t been properly educated. Just like me when I set $93,000 on fire.
By now, you know that personal finance is about so much more than investing. You know that you need to develop strong habits so you constantly have money to invest in the first place.
And, you’ll soon learn that investing is really the easy part.
When you learn basic investing principles, like minimizing fees and playing the long game, your money can slowly grow over time.
As that happens, you move closer and closer to financial independence without much effort at all.
It’s actually pretty easy.
We’ll cover these basic principles in upcoming posts.
One thing we won’t discuss at Think and Talk Money is the latest hot stock tip.
If you want to study P/E ratios and company balance sheets in a quest for the best individual stocks, I won’t stop you.
I just won’t be joining you.
That’s because it’s very hard to pick winning stocks. Even the “experts” have a very hard time doing it consistently.
You don’t believe me, do you?
What if I told you that the vast majority of investment pros underperform the S&P 500?
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.
If the “pros” can’t beat typical market returns that are available on the cheap for all of us… why even play that game?
Why overcomplicate things?
Sure, maybe you’ll get lucky and your investment pro is one of the few who can beat the market. Odds are that if your pro beat the market one year, he probably won’t the next year.
If that’s your game, I wish you nothing but good fortune.
Personally, I’d rather do things the easy way. I’d rather focus on what I can control, like how much money I’m contributing to my investment accounts each month.
And, that brings us to an interesting point.
Even if you are working with a professional, you are not excused from participating in your investment journey. You still need to understand the basics.
Plus, while you may not be watching your portfolio closely, your job is always to make sure there is consistent money to be invested.
My guess (or is it hope?) is that your advisor has told you as much.
Investing is a major component of financial independence.
Whether you are striving for financial independence, or hoping to maintain it, investing is a major component.
To be a successful investor, you first need to practice strong financial habits.
Don’t worry. If your mind is in the right place, the investing part is actually pretty easy.
Back in 2008, I was a third-year law student. My entire life savings at that point was about $10,000. A lot of this money came from savings bonds gifted to me by my grandma for my birthday since the year I was born.
I mentioned the year was 2008, otherwise known as the beginning of The Great Recession. As detailed in Forbes Advisor:
The Great Recession of 2008 to 2009 was the worst economic downturn in the U.S. since the Great Depression. Domestic product declined 4.3%, the unemployment rate doubled to more than 10%, home prices fell roughly 30% and at its worst point, the S&P 500 was down 57% from its highs.
Suffice it to say, 2008 was not a great time to be graduating or looking for jobs.
Those of my friends fortunate enough to have secured a job offer soon learned that their offers were being rescinded. Such were the times.
But, I digress.
Back to how I set $93,000 on fire.
As I mentioned, my life savings at the time totaled about $10,000. I had previously decided to use a financial advisor to invest my money for me.
I had been working with this financial advisor for a few years prior to The Great Recession.
All these years later, I couldn’t tell you what she had me invested in prior to the markets imploding. I’m assuming that she took into account my age and risk tolerance and designed a suitable portfolio for me.
What I can tell you is that my portfolio suffered the same fate as just about everyone else towards the end of 2008. My $10,000 balance was shrinking.
At that point, my advisor took me out of the markets and stashed the remainder of my money in a savings account earning close to 0% interest.
I didn’t notice this maneuver right away. In fact, it wasn’t until 2010 that I noticed that my money was sitting in a savings account.
When I finally caught on that my account balance had not changed for a couple years, I called my advisor. She explained that she had pulled me out of my investments when things weren’t looking too good.
She didn’t have a good explanation for why I was still in the savings account in 2010. To be honest, it seemed like maybe she forgot about me.
By that point, the markets were improving. I had already missed all of the upswing from 2009. Since I had felt neglected, I withdrew my money and closed my account.
I wish I could tell you that I started investing on my own at that point.
Nope, that’s not how you set $93,000 on fire.
Instead of investing, I let the money sit in my checking account until it just kind of disappeared. I had no plan for the money. All these years later, I have no clue what I spent it on. I just know that it disappeared.
But Matt, you said you only invested $10,000. How did you end up setting $93,000 on fire?
I’m glad you asked.
If I had known then what I know now, I would have invested that $10,000 in a low-cost S&P 500 index fund.
I also would not have taken my money out of that S&P 500 index fund when the markets dropped.
Time was on my side. The smart thing would have been to do nothing at all.
Between the start of 2009 and the end of 2024, the S&P 500 earned an average annual return of 14.98%.
That means my $10,000 invested in a low-cost S&P 500 index fund at the start of 2009 would have been worth $93,265.90 by the end of 2024.
That, my friends, is how I set $93,000 on fire.
And, I have nobody to blame but myself.
Let me make one point perfectly clear:
It’s nobody’s fault but my own that I missed out on those earnings.
It was my fault for not taking a more interested, and educated, approach to my personal finances.
In a way, I’m glad I learned that lesson with only $10,000 at stake instead of later in life when I had more to lose.
It’s not my financial adviser’s fault. She did what she thought was best. For some people, her strategy was probably successful.
My problem was I blindly trusted my adviser without educating myself first. I didn’t know the right questions to ask. I didn’t understand the plan.Worst of all, I didn’t pay attention when my account statements arrived in the mail each month.
In my mind, once I transferred my money over to my advisor, I was excused from taking any responsibility for my future.
That was a mistake I’ll never make it again. When things didn’t go well, I had no one to blame but myself.
We all need to understand the basics of investing.
Whether you choose to work with an advisor or not, it’s up to each of us take accountability for our own future.
We need to educate ourselves enough to be part of the planning process. We need to know why we’re taking certain steps and be savvy enough to ask the right questions.
You may be more comfortable working with a financial advisor. That’s perfectly fine. You still need to understand the basics of investing.
My problem in 2008 and 2009 was that I hadn’t educated myself. I like to share this little story to illustrate how important it is to pay attention to our finances.
These days, I manage my own investments. I’ve determined that paying fees for someone else to manage my money is not worth it to me.
By the way, we’re going to spend a lot of time talking about fees so you can decide for yourself if you want to pay them.
Whether you manage your own investments or you use an adviser, it’s critical to understand the basics about investing in the stock market. The good news is the basic principles of investing are relatively straightforward.
Always remember: there are some things we can control and a lot of things we can’t control.
We’re going to focus on what we can control.
That means focusing on how much fuel you’re generating each month to invest in the first place.
Then, it means minimizing fees and maximizing your time in the market.
If you can successfully implement just those ideas, you will wake up years from now with major gains to your net worth due to the power of compound interest.
There are other strategies we’ll cover, as well. You’ve likely heard fancy terms like “diversification” and “asset allocation.” We’ll talk about what those phrases mean with the goal of convincing you that investing does not have to be complicated.
That’s right. Investing does not have to be complicated.
You don’t have to read the Wall Street Journal. You don’t have to study financial statements. Even people who do that for a living struggle to predict what’s going to happen next.
So, let’s not waste our time. We’ve got better things to do on our way to financial independence than studying corporate balance sheets.
With even just a little bit of knowledge, you can feel comfortable and confident investing in the stock market. Then, all you’ll need to stay on track is the occasional reminder to think and talk about money with your loved ones.
I’m further away from financial independence today than I was five years ago.
You know what’s funny?
I couldn’t be happier about where I am today.
Let me explain.
In 2020, my wife and I had very minimal expenses.
At the start of 2020, my wife and I were both working as lawyers in Chicago. We lived in an apartment in a 4-flat that we had purchased in 2018. We had no kids at the start of the year, but were about to welcome our first.
This was a good apartment in a popular part of town. It had 3 bedrooms and 2.5 bathrooms. That was plenty of space for my wife and I, and eventually the two babies we brought home there.
We purchased this 4-flat from a real estate investor who had done a decent job on the renovation. It had in-unit washer/dryer, modern finishes, and plenty of storage.
We had a small outdoor patio with enough room for a grill and little table. We also had a garage parking space but ended up parking our 20-year-old car on the street most days.
When we purchased the building, it was the most expensive 4-flat that had ever been sold in that part of town. It was a bit of a risk to set the high-water mark in the area.
Even though the building was expensive for the area, this was not a fancy apartment. This part of town was still up-and-coming. Some people probably thought it was not a nice part of town.
I doubt many people came over and thought, “Wow, look at this amazing apartment!”
The more likely reaction was probably something like, “What the heck are they doing?”
To be fair, I asked myself that question plenty of times.
So, what were we doing?
We were paying ourselves to live there.
Say that again?
My wife and I paid ourselves to live in that apartment.
We lived for free. And made a profit at the same time.
See, the rental income from the other three units covered the entire mortgage plus all expenses for the property.
But, that’s not all. On top of covering all the expenses, the rental units generated a profit of $1,000 per month on average.
So, not only did we spend zero dollars each month on housing, we profited $1,000 per month.
Looking back, getting paid to live in a decent apartment was maybe the best decision we ever made.
What happens to your finances when you live for free?
Let’s take a look at how living for free can be a major advantage on your way to financial freedom.
The common wisdom is for people to spend no more than 30% of their gross income on housing. Regardless of how much you make, that usually means thousands of dollars.
Because our tenants were paying our living expenses for us, we did not have that expense for the five years we lived in that apartment.
In other words, we didn’t have to worry about budgeting for housing.
We also drove a nearly 20-year-old car and could walk to the “L” (Chicago’s subway). We lived in a neighborhood with plenty of nearby restaurants and shops. That meant our transportation costs were next to nothing.
Because we weren’t paying for housing and had very minimal transportation costs, we could supercharge our savings.
How much were we able to save?
Let’s take a look.
Between 2018 and 2023, my wife and I acquired three buildings and ten apartments in that same neighborhood. We’re very familiar with market rents in the area.
We rent our apartments for anywhere from $2,300 to $3,600 per month. Our usual tenants are professionals like engineers, lawyers, doctors, consultants, and pilots.
The unit we were living in from 2018 to 2022 was one of our larger units. At the time, it would have rented for $3,500 per month on average. That equals $42,000 per year to rent that apartment.
Keep in mind, if someone was paying rent to live there, that would be $42,000 of after-tax money.
Since we owned the building, we lived there for free. We could save that $42,000 we would have otherwise paid in rent. Instead of spending that savings on things we didn’t need, we were able to save that money for our next real estate investment.
Plus, we earned $1,000 on average per month while we lived there. That’s an additional $12,000 per year in profit.
We lived in that unit for almost five years.
Add it all up and we saved $270,000 by living in that apartment for five years.
$42,000 saved rent x 5 years =$210,000.
$12,000 profits x 5 years = $60,000.
Total savings = $270,000
We used that $270,000 for a downpayment on a rental condo in Colorado ski country.
It took five years of living in a decent, but not-awesome, apartment to have a ski condo that will hopefully be in our family for decades.
Choosing to live in our 4-flat to save $270,000 over five years was one of the best financial decisions we’ve ever made.
I highly recommend you consider house hacking if you’d like to start investing in real estate.
Many of you are familiar with the strategy of living in a building (or home) you own while tenants (or roommates) pay for it. Brandon Turner, of BiggerPockets fame, popularized the concept he dubbed “House Hacking”.
You can read all about house hacking on BiggerPockets here.
Without a doubt, there is no better strategy for entry level real estate investors than house hacking. I gave you a glimpse of the financial upside earlier in this post.
Besides the financial upside, it’s like landlording with training wheels. Since you live on site, you can more easily learn how to manage a rental property, including responding to tenants and handling routine maintenance.
The naysayers will say something like, “I don’t want to live with my tenants. They’re going to stress me out. I don’t want to be bothered at 2 a.m.”
Ignore them.
My wife and I lived with our tenants for five years at this property and two more years at a subsequent property. We did this while working full-time jobs as lawyers and raising two kids.
Because we didn’t listen to the naysayers, we now have four income-generating properties and our “forever home” just outside Chicago.
Even though we’re no longer living for free, the income from our rental properties is enough to cover the expenses of our home.
So, why am I further away from financial independence today?
I’m further away from financial independence today because my expenses have gone up since 2020. I’ve already alluded to those increased expenses throughout the post.
In 2020, we had our first child. Now, we have three children.
Also, after seven years of house hacking, we decided it was time to purchase a long-term home for our growing family just outside the city in a terrific area.
We also finally traded in our 21-year-old car for our first new car ever.
How’s this for easy math:
Three Children + Nice House + New Car = Further Away from Financial Independence
While that combination means I’m further away from reaching financial independence, I now have everything that I could possibly ever want.
That’s why I couldn’t be happier with where I’m at today.
My end game is finally in sight. Five years ago, I didn’t know where I’d be living or what car I’d be driving or what my family situation might be.
Now, the picture is clear.
I can calculate with reasonable certainty how much money I need to be truly financially independent. I can use that number as a target and make every financial decision with that target in mind.
That’s why in 2025, I’m focused on paying down HELOC debt. Each time I make a debt payment, I move closer to financial independence.
I have no intentions of retiring any time soon. Retiring early is not, and has never been, my goal.
My goal is to become financially independent to create as many options as possible to protect myself and my family. I want to be financially independent so I can pivot no matter what life throws at me.
If my goal was to retire early, I may have skipped the single family home in a great neighborhood. I could have continued house hacking, minimized my expenses, and lived off of the rest of the rental income.
But, I want more for me and my family. I don’t want to just survive.
Have you delayed financial independence to craft the life you really want?
My life has certainly changed in the past five years, but all that change has been for the better.
That meant house hacking at first to keep expenses as low as possible. Now it means enjoying the wealth I created by making those earlier sacrifices.
In order to have the life I want, I needed to temporarily move further away from financial independence.
Still, I’m confident that I’ve taken the right steps to not just reach financial independence, but to reach it while living the life I want.
The tradeoff is that it will take me longer to be truly financially independent. I’m perfectly happy with that.
Financial independence has never been more clearly in sight. It’s just delayed a little bit.
Is your goal to reach FIPE and pivot as quickly as possible?
Or, are you OK with delaying FIPE temporarily for the life you truly want?
We focus a lot on financial independence here at Think and Talk Money. That’s because achieving financial independence is the ultimate goal for most of us.
To me, financial independence does not mean retiring.
That’s why I don’t like the popular acronym, FIRE: Financial Independence, Retire Early.
Instead, I I like to view my financial freedom journey as FIPE: Financial Independence, Pivot Early.
Let me explain why I believe in FIPE not FIRE.
FIPE = Financial Independence, Pivot Early
Whatever it is that you truly want to do in life, financial independence makes it possible.
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 necessary.
Financial independence is for people who want to be empowered to take more control of what they do with their working hours.
It’s not about quitting work. It’s about the freedom to pivot to other work, if you want. I’m convinced that humans are meant to be productive. We are social creatures who at our core want to be contributing.
That doesn’t mean we have to be or want to be employees. But, it does mean that we want to do something meaningful with our working hours every week.
That’s why I believe in the power of pivoting, not retiring.
Why I don’t like the name FIRE.
Part of the misconception about financial independence may stem from the name of the popular personal finance concept known as FIRE: Financial Independence, Retire Early.
It’s not uncommon for people to hear financial independence and immediately think that’s only for people who want to quit their jobs and retire. That’s how widespread FIRE has become in the personal finance space.
I agree with so many of the principles of FIRE. I just don’t agree with the name.
Financial independence is about much more than retiring early.
FIRE emphasizes saving more and spending less until you reach the point where your passive investments generate enough income to allow you to quit your job.
I love this part of FIRE: the idea of creating enough income streams so that you have the freedom to do what you want with your time. I share the primary goal of saving more money and spending less to achieve more life freedom.
I call this Parachute Money. I like to view each income stream as a separate parachute string. The more parachute strings you have, the safer it is to make a big change in life.
The problem 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 that part. 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.
I prefer to think of financial independence in terms of creating options. I prefer to think of financial independence as a way to move forward in life.
I think “pivot” better reflects that mission.
Pivot means to adapt or improve through modifications and adjustments.
That sounds so much more appealing to me.
With FIPE, financial independence is still the primary goal. But, the endgame is not to withdraw or retreat. The endgame is to adapt and improve how you spend your working hours.
FIPE = Financial Independence, Pivot Early.
Granted, the name “FIPE” is not as catchy as FIRE.
But, I think it actually better encapsulates the entire purpose of financial independence in the first place.
To explain, let’s look back at the modern day origin of FIRE for a minute.
Vicki Robin and Joe Dominguez are often credited for laying the groundwork for the modern day FIRE movement. Robin and Dominguez wrote an incredible book called Your Money or Your Life.
It’s one of my favorite personal finance books. You should definitely read it if financial independence is important to you.
In their book, Robin and Dominguez have a lot to say about the relationship between money, work, and time.
Guess what?
Most of us are doing it all wrong.
Most of us make the mistake of chasing money at the cost of our precious time. When you read Your Money or Your Life, you will start to value your time for what it’s really worth.
By making good choices about how to earn money- and as importantly what to do with that money- you can get the most out of your money and your life.
That’s what FIRE is really all about. It’s about choosing to use your working hours in a way that is more meaningful to you than clocking in-and-out as an employee each day.
It’s not about retiring from meaningful work. It’s about pivoting to work that is more meaningful to you.
FIRE proponents would likely agree that the goal is not to withdraw or retreat.
I think proponents of FIRE would actually agree with me that the end game is really not about withdrawing or retreating. The mission is always about moving forward, not backwards.
My belief is that people who are disciplined and skilled enough to reach financial independence in the first place are the type of people who don’t retreat or withdraw.
They may opt for periods of temporary retirement, as they should. But, I don’t think financially independent people are truly wired for full-time retirement.
That’s why you see so many people who have obtained financial independence continue to pursue income streams.
That might mean managing real estate investments, teaching others, or even starting a financial freedom blog.
So, technically speaking, most people who have obtained financial independence have not actually retired. They haven’t withdrawn or retreated. Instead, they have pivoted.
They are now spending their working hours doing other things. They may not be working full-time for an employer, but they’re still working.
They’ve achieved financial independence and have earned the right to pivot.
Financial Independence, Pivot Early.
Even FIRE leaders would likely agree that the end game is not to completely retire.
FIRE is not about retiring or quitting. It’s about pivoting to more meaningful life pursuits.
I don’t want to speak for Robin, but I think this is what she was getting at.
I just think the name FIRE doesn’t accurately portray the mission. Pivoting early seems more appropriate to me than retiring early.
We all have the same goals in mind: financial independence. And, I believe we have the same end game in mind: pivoting to more meaningful work.
That’s why I like FIPE instead of FIRE.
Are you looking to retire early or simply to pivot?
What is it that you’re aiming for by getting your personal finances in order? If you want to retire early, there’s nothing at all wrong with that. You may be at the point in your career and life where that makes sense.
Personally, I’m not looking to retire early. That’s why I like to view financial independence as a chance to pivot.
Pivoting doesn’t mean you have to switch jobs or change things up just for the sake of change. It just means that you have that option if you want it or need it.
By the way, I’m not alone in viewing financial independence as a chance to pivot instead of retire.
I’m in complete alignment with Trench. I like almost everything about FIRE, just not what the name implies.
With FIPE, the goal is not to retire. The goal is to give yourself the freedom to choose what to do next.
Whether you want to retire early or just pivot to a new chapter in your life, being good with money is key.
Do you like the name FIRE or FIPE?
At the end of the day, whether you like to view it as FIRE or FIPE, the mission is the same. We are all looking for the freedom to choose what to do next.
When striving for financial independence, the goal is to create options. Those options likely include pivoting to more meaningful work, rather than withdrawing or retreating.
Personally, I think the name FIPE better encapsulates that mission.
Do you agree?
What name resonates more with you on your financial freedom journey?
Are you interested in retiring early or pivoting early?
Financial freedom doesn’t happen overnight. I’ve been on my journey to financial freedom for more than a decade.
I’m not there yet.
Here’s a look at how my journey to financial freedom has progressed since I graduated law school in 2009.
My journey to financial freedom began in my late-20s and was focused on eliminating debt.
In my 20s, I needed to pay off credit card debt and student loan debt. All I knew about the journey to financial freedom back then was that it seemed very far away.
I started budgeting, which meant reigning in my spending on things I didn’t really care about.
I began to establish good money habits. It wasn’t easy, and I was far from perfect. That’s OK. The 80/20 rule reminds us that we don’t need to aim for perfection.
By the way, my life didn’t all of a sudden become boring and miserable when I became more money conscious. Quite the opposite, actually.
I became more confident in myself because I had a plan. I no longer felt like I was sliding backwards. With each paycheck, I moved one step closer to erasing my debt. That was a powerful feeling.
In my early-30s, my journey to financial freedom was about fueling my savings.
By the time I turned 30, I had paid off my credit card debt and my student loan debt. I’ll never forget the day I made my last student loan payment as my family and I were heading out to Colorado. A huge weight had been lifted from my shoulders.
I felt free. My journey to financial freedom was still in the early stages, but I was on my way. Most importantly, I still had good habits and a plan.
The money I had been allocating to student loan and credit card debt could now be put towards more fun goals and experiences.
Instead of aimlessly spending the thousands of dollars each month that had been going towards debt, I rolled that money directly into savings. Highest on my list was saving for an engagement ring.
Within a year, I had enough saved to purchase the ring. I thought being free from debt was strong motivation. Turns out that motivation was nothing compared to the desire to buy a ring for the woman you love.
As your career progresses and you earn more money, you will benefit from strong personal finance habits.
As my career progressed, like many of you, I started earning more money. When I earned more, I did my best to use that additional income as fuel for my goals.
I’m grateful I had previously learned strong personal finance habits on my journey to financial freedom when I earned relatively little.
For most of us, our usual career progression is the exact opposite of the typical lottery winner. Who hasn’t heard the stories about the lottery winners that hit it big and then quickly go broke?
These stories are unfortunately all too common. What starts out with so much elation usually ends in tragedy.
The normal downfall involves unrestrained spending on things like houses, cars, and extravagant nights out. It also involves the pressure to give money away to family, friends, and charities.
The challenge is the same for lottery winners and professional athletes. They come into a lot of money suddenly without any prior personal finance education. When this happens, that money disappears quickly.
What can we learn from lottery winners and professional athletes?
I think it’s safe to say that none of us are going to win the lottery or earn millions as a professional athlete. I hope I’m wrong about that!
But, we can still fall victim to the same set of challenges on the journey to financial freedom. It may not be a sudden rise and then an equally sudden drop-off. Our financial growth presents itself more slowly.
Over time, we may earn referrals/commissions, raises, and bonuses. These earnings certainly add up and can make a huge difference in our lives, if we have a plan. That’s a big “if” for most of us.
I didn’t have the full plan figured out in my 20s. Our goals change as life changes. There’s nothing wrong with that.
That said, because of the steps I took in my 20s to learn about personal finance, I was better prepared for the opportunities and challenges that arose in my 30s. I learned that when you create a solid foundation for yourself, you have options.
To me, life is all about giving yourself options. Nobody likes feeling stuck, including me.
In my mid-30s, my journey to financial freedom was about building wealth through real estate.
Besides saving for an engagement ring and a wedding, I was able to save 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.
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!
The Professor also introduced me to BiggerPockets. That was huge for me because I believe in the motto, “Trust but verify.”
Over the next week, I read everything I could and listened to podcasts every day. It didn’t take long before I was convinced that I wanted a 4-flat of my own.
Eight years later, I own three buildings and 10 apartments in that same Chicago neighborhood. I have a ski rental condo in Colorado.
Without that great talk with The Professor, I don’t think I would be where I am today on my journey to financial freedom.
We all need to position ourselves to benefit when luck comes our way.
I was fortunate to have learned from The Professor’s experience. We all need some luck on the journey to financial freedom. I’m convinced that we’ll all catch a break here or there. The question is what we do with that luck when it comes our way.
If I hadn’t taken the time to learn about personal finance in my 20s, I wouldn’t have been positioned to benefit from that conversation with The Professor.
That’s why I say the journey to financial freedom doesn’t happen over night. It’s about one building block at a time.
For any aspiring real estate investors out there, please take that message to heart. Before you can successfully invest in real estate, you have to invest in your own financial literacy.
I’ve learned firsthand that the same principles that apply to personal finances apply to managing a real estate portfolio. Each pursuit takes a plan that only works with discipline and patience.
In my late-30s, my journey to financial freedom was about paying off debt.
In my late-30s, my journey to financial freedom pivoted from acquiring properties to optimizing my portfolio. My wife and I decided we were ready to transition from growing our real estate portfolio to paying off our debt.
In a way, I’ve come full circle on my journey to financial freedom.
Reading Small and Mighty Real Estate Investorhelped us conclude that at this point in our lives, we have enough. Our portfolio generates enough income to help fuel our current goals. If we were to continue expanding, the headaches could end up outweighing the financial benefits.
In the short term, that mortgage debt pulls me further away from financial freedom.
If my plan works, that same debt will push me more rapidly to financial freedom.
Financial freedom through real estate has existed for decades, if not centuries.
By the way, I didn’t invent the plan of achieving financial freedom through real estate. That idea has existed for decades, if not centuries. I’d avoid anyone who tells you they pioneered this concept.
Years ago, I remember sharing my newfound passion for real estate with mom. She had this smile on her face as I excitedly shared this “new” phenomenon of investing in real estate to achieve financial freedom.
The next time I saw her, I realized her smile was actually more of a smirk.
It’s natural to want to jump to the finish line. I’m guilty of that, too. I think about achieving financial freedom every day and need to remind myself to take it one step at a time.
Even with all I’ve learned about personal finance, it can sometimes feel like I’m heading in the wrong direction.
Wherever you currently are on your journey to financial freedom, remember that it doesn’t happen over night. I need to constantly remind myself to stay the course.
Keep coming back to Think and Talk Money for daily reminders that financial freedom is within all of our grasps.
I had the happiest occasion to think about that question this past week.
My wife and I welcomed our third child, a little baby girl.
We were very fortunate and had a smooth delivery process.
Even so, when you’re in the delivery room, your mind runs wild. You just want everything to go well. It’s completely out of your hands by that point.
Things get really interesting when you’ve been at the hospital for a while and haven’t slept. There’s no telling where your mind will go.
No matter how much you tell yourself not to do it, you can’t help but think of all that can go wrong.
During these moments, I can assure you that one thing you’re not thinking about is money. If anything, you’re thinking that you would trade all the money you have for a healthy baby and a healthy mom.
When you finally hold your new baby, nothing else in the world matters. Everything around you goes quiet. The sense of relief is overwhelming and you cry.
It’s a beautiful thing.
In those first few moments, I told my baby girl that I love her. I promised that I will always protect her. Whatever she needs, I will be there.
If I want to keep that promise, I need to be good with money.
To be good with money, I need a powerful Money Why.
I wrote down that goal before I was even married or had kids.
Years later, my Money Why hasn’t changed. The only thing that’s changed is my Money Why has gotten stronger and stronger since then.
In 2017, my Money Why got stronger when I got married.
Then in 2020, my Money Why got stronger when my daughter was born.
Again in 2022, my Money Why got stronger when my son was born.
This week, my Money Why got stronger when my baby girl was born.
My Money Why has never been more clear. It doesn’t even matter if my brain is functioning at half speed right now on limited sleep.
My Money Why is my baby girl, my son, and my daughter. My Money Why is my wife.
Of course, I want to provide for my family financially.
But my Money Why is more than that.
I don’t want to just provide money, I want to provide time. And, I want to be present and share experiences.
Most of all, I want to be with them.
My overall goal in life is to spend as much time as possible with the people who are meaningful to me. To accomplish that goal, I need to be good with money.
If I’m good with my money, I can achieve financial freedom.
With financial freedom, I can choose how to spend my time. That means I can choose who to spend my time with.
My Money Why is not about being rich.
Saying that I want to be good with money is not the same thing as saying that I want to be rich. Funny enough, people that are good with money oftentimes feel rich regardless of what their net worth is.
But I’ve noticed on my path to financial freedom there were several times when I felt incredibly rich and money wasn’t the dominant reason.
I couldn’t agree more with Dogen. There’s no richer feeling than having just come home from the hospital with a healthy baby girl. That feeling has nothing to do with money.
Check out more from Dogen at his website financialsamurai.com. There’s a reason why he is one of the leading voices in the personal finance space.
Simply making a lot of money will not make you feel rich.
On the flip side, people that make a lot of money but are not good with money often feel like they’re struggling to get by. As CNBC explained after talking with financial psychologists:
Whether you’re aiming to save more cash or boost your overall earnings, it’s important to ask yourself what you hope to achieve by obtaining more money, Chaffin says. Otherwise, if you don’t change your internal money beliefs, you may still feel anxious about money even if you hit millionaire status.
The takeaway is that it is pointless to make money without stopping to think why you want that money and what you’re going to do with it.
Money is nothing but a tool that you can manipulate to get what you truly want out of life. The thing is, you have to actually think about what you want if you are going to use that tool effectively.
Don’t wait for a major life event to start thinking about money.
You don’t have to wait until you have a baby to start thinking about what money can do for you. In fact, if you wait for a major life event like that, it’s going to be a lot harder than if you start thinking now.
Ask yourself:
“What is my Money Why?”
Whatever comes to mind, write it down.
Maybe you want to retire early. Maybe you’re just looking for a life pivot, as Scott Trench, CEO and President of BiggerPockets wrote about recently and has regularly discussed on the BiggerPockets Money podcast.
I personally agree with Trench, and I like almost everything about FIRE, which stands for Financially Independent Retire Early. It’s just that I know that retiring early is not for me.
I prefer to think of it as FIPE:
Financially Independent Pivot Early
With FIPE, the goal is not to retire. The goal is to give yourself the freedom to choose what to do next.
Whether you want to retire early or just pivot to a new chapter in your life, being good with money is key.
Besides, I’ve never seen the point in working endless hours to make money, while spending hardly any time seriously thinking about how to keep that money.
What’s your Money Why?
My Money Why gets clearer by the day. It has never been more clear than it is right now after bringing home a little baby girl.
What is your Money Why?
Has your Money Why changed over time?
How does your Money Why impact your relationship with money?
They’re a weight that we carry around long before we even make the first repayment. Sometimes that weight feels so heavy, it’s hard to imagine it ever going away.
And as much as we wish we could, we can’t ignore our student loans.
One way or the other, we have to get rid of them.
And when we do get rid of them for good, there might not be a better personal finance feeling in the world. Personally, I’ll never forget the day I made my last payment and shared the news with my future wife and family.
To help you have that same feeling of accomplishment, here are my top 10 student loan tips for lawyers and professionals.
Top 10 Student Loan Tips for Lawyers and Professionals
Locate all your loans.
Sign up for automatic payments.
Do not miss a payment.
Consider using Debt Snowball or Debt Avalanche.
Make an extra monthly payment.
Create a BAT that generates fuel for your student loans.
Make more money and use that money for your loans.
Take a tax deduction and use your tax refund for your loans.
Consider a loan consolidation.
Look for ongoing scholarship opportunities.
1. Locate all your loans.
As a first step, be sure that you are aware of all of your loans. Most people end up needing both federal loans and private loans, which are not tracked by the same loan servicers.
Additionally, you may have taken out different types of loans at different stages of your education. It’s not uncommon to forget about some of those loans.
Before you can implement a thoughtful strategy to pay back your loans, you need to ensure that all of your loans are accounted for.
The best place to locate all of your loans is on your credit report. The next best option is to ask your school’s financial aid office.
A credit report is a document that tracks your history of repayment and the current status of any loans you’ve taken out.
You are entitled to receive a free copy of your credit report from each of the three main credit reporting agencies every year. To do so, simply visit annualcreditreport.com.
For federal loans, you can also check online at studentaid.gov. But, your private loans won’t be tracked by the federal government at studentaid.gov.
Besides checking your credit report, you can access all your private loan information from your loan servicer.
Once you’ve identified all your loans, you can implement a strategy to pay them off efficiently.
2. Sign up for automatic payments.
By signing up for auto pay, you can save .25% interest on your federal loans. Many private loan companies also offer a .25% discount for using auto pay.
Over time, those savings will add up. And, there’s really no downside to you.
In fact, you should be using automatic payments even if your loan servicer does not offer a discount.
When it comes to paying back loans or achieving any other financial goal, automating your money is a very good idea. In The Automatic Millionaire, David Bach thoughtfully explains how the single step of automating your finances can help you achieve all of your financial goals.
You can learn more about Bach’s philosophy on his website.
I personally implement many of Bach’s strategies in my own life. I used to automate my student loans payments. Now, I automate my mortgage payments.
You know that expression, “Act now, apologize later”?
That absolutely does NOT apply to loan payments.
No matter how responsible or well-intentioned you are, sometimes life happens. Whether it’s technically your fault or not, a missed loan payment is a big problem.
It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.
Because the consequences of a missed payment are so severe, this is another reason why setting up auto payments is such a good idea.
If you know ahead of time that you won’t be able to make a payment, it is imperative that you notify your loan servicer ahead of time. Your loan servicer may be able to work with you and figure out a solution before major consequences set in.
4. Consider using Debt Snowball or Debt Avalanche to pay off your student loans.
When you apply the Debt Snowball strategy, the idea is to focus on the loan with the smallest balance first, regardless of interest rate.
Once you have paid off the first loan in full, you move to the loan with the next smallest balance, again regardless of interest rate. The money you had been paying to the first loan can now be rolled into the second loan.
When you apply the Debt Avalanche strategy, the idea is to prioritize the loan with the highest interest rate, regardless of the balance.
Once you’ve paid off the loan with the highest interest rate, you move to the loan with the next highest interest rate. Just as before, the money you had been paying to the first loan can now be applied to the second loan.
Either approach works perfectly for paying off multiple student loan balances. Regardless of which method you choose, always pay the minimum required amount on all loans every month.
5. Make an extra monthly payment for massive savings.
You may be surprised how big of an impact even a small additional payment each month can have on your loans.
Let’s look at an example.
Let’s say you owe $100,000 in student loans and currently pay back $1,250 per month with an 8% interest rate.
Using calculator.net, you learn that at this pace, it will take you 9 years and 7 months to pay off your loans. You’ll pay back a total of $143,377.94.
Now, let’s imagine you are able to pay back an additional $100 per month.
Look what happens:
You can eliminate your loans an entire year sooner and save $5,040.13 in interest payments. Just with an extra $100 per month!
What about if you are able to pay back an extra $250 per month?
This is when I start to get excited.
Check this out:
For just $250 per month, you can knock off 2 years and 2 months of loan repayments and save $10,684.35 in interest!
Think about how good it will feel to get 2 years and 2 months of your life back without loan payments.
How are you supposed to come up with an extra $100, $250, or more per month?
I’m glad you asked.
6. Create a Budget After Thinking that generates fuel for your student loans.
If you want to pay off your student loans faster, you really only have two options.
The first option is to create a Budget After Thinking that prioritizes loan repayment. One of the key purposes of budgeting is to generate fuel for your future goals, including eliminating student loan debt.
Instead of letting your hard-earned dollars disappear, put them to good use. Even $100 a month can make a big difference, as we just saw.
If you’re having a hard time generating additional fuel for your student loans, check out my 10 Tips to Win the Budget Game.
So, the first option to pay off your loans faster is to create a budget and spend less money elsewhere.
What’s the second option?
7. Make more money and put those extra earnings directly to your loans.
If you’re not going to cut spending in favor of student loan repayment, then your only other option is to make more money.
That might mean getting a valuable side hustle. Or, it might mean earning a raise or a bonus at your primary job.
Whatever the case may be, as you make more money, focus on improving your savings rate.
Your savings rate is simply the amount of money you save each month divided by the amount of money you make.
Even though it’s called “savings rate,” there’s no reason why you can’t include debt repayment in your calculations. Whether you are adding money to a savings account or eliminating debt, your net worth improves.
It all counts in my book.
The point is that when you start to earn more money, put that money to good use.
Instead of shopping at more expensive stores or eating at fancier restaurants, keep your spending habits the same. Put those higher earnings towards your important life goals, like eliminating student loan debt.
8. Take a tax deduction and use your tax refund for your loans.
The IRS permits borrowers, up to certain income limits, to take a federal tax deduction up to $2,500 per year for student loan interest payments. That means that you can reduce your taxable income by up to $2,500 per year based on the interest you paid that year.
The actual amount of money you’ll save with this tax deduction depends on variables like your tax bracket. Check with your accountant or tax professional for specifics.
Regardless, as we’ve seen above, even a small amount of extra money can go a long way if used for additional student loan debt payments.
In the same vein, what if you made it a goal to apply your entire tax refund to your student loan debt?
Let’s return briefly to our example above.
This time, let’s assume that each year, you receive a tax refund of $1,700. Instead of wasting that $1,700 annually on things you don’t care about, you decide to put that money directly towards your student loans.
Look what happens when you apply that $1,700 tax refund to your student loans each year, without making any additional payments whatsoever:
With just that one decision to use your annual tax refund for student loan payments, you knock off 1 year and 4 months of payments and save $6,099.26!
That seems like a great use of money that you’ll never miss anyways.
9. Consider a loan consolidation.
Consolidating your various loans into a single loan can help make your life easier and save you money.
Your life should get easier when you only have to track and pay one loan back each month. There’s also a much smaller chance that you forget to make a payment or lose track of a loan altogether.
Besides the convenience, when you consolidate, you should receive an overall lower interest rate. That means long-term savings.
Before you consider a loan consolidation, be sure to do your homework. One major consideration is that you will lose whatever federal loan benefits you currently have if you consolidate, such as the possibility for loan forgiveness.
10. If you’re still in school, look for ongoing scholarship opportunities.
This is something that didn’t occur to me until my final year of law school. It took me that long to realize that schools regularly offer scholarships, stipends, and grants to current students, not just prospective students.
During my third year of law school, I applied for a scholarship and was awarded $2,000. I didn’t think of it at the time, but looking back, I could have used that $2,000 to prepay my student loan interest.
That would have accelerated my progress towards eliminating my loans while I was still in school.
This is a good time to point out that personal finance requires consistent attention. You don’t have to think and talk about money every day. Not even I want to do that.
But, you do have to intentionally make your personal finances a regular part of your life.
Let’s revisit our example once more.
Sorry, I can’t help myself.
What if you combined some of the 10 tips we just talked about?
Let’s say you decide to make an extra $250 monthly payment, contribute your $1,700 tax refund annually, and make a one-time payment of $2,000 for a scholarship you earned while finishing up school.
With just three relatively painless decisions, you can knock off 3 years and 1 month of student loan payments! And, you’ll save $15,481.76!
Think about what you could do with an extra 3 years and 1 month of your life without student loan payments.
You can now use that $1,500 per month you had been using for student loans on other goals. Not to mention what you could do with your annual tax refund.
On top of that, think about what you could do with that $15,481.76 you saved in interest payments.
Decisions like these are how financial freedom happens.
That’s powerful stuff.
What are your favorite student loan repayment strategies?
To recap my top 10 student loan tips for lawyers and professions:
Locate all your loans.
Sign up for automatic payments.
Do not miss a payment.
Consider using Debt Snowball or Debt Avalanche.
Make an extra monthly payment.
Create a BAT that generates fuel for your student loans.
Make more money and use that money for your loans.
Take a tax deduction and use your tax refund for your loans.
A reader reached out late last week and asked, “What do you do when the markets are in free fall?”
It’s a question that really captures the intersection between money and emotions.
I’m not an investment advisor, but I’m happy to share what I’m currently doing as the markets drop. Your personal situation may be different than mine so be sure to check with your investment advisor.
Before we jump in, here’s a recap from Yahoo! Finance about how significant the drop was last week:
US stocks cratered on Friday with the Dow Jones Industrial Average (^DJI) plunging more than 2,200 points after China stoked trade-war fears and Fed Chair Jerome Powell warned of higher inflation and slower growth stemming from tariffs.
The Dow pulled back 5.5% to enter into correction territory. Meanwhile, the S&P 500 (^GSPC) sank nearly 6%, as the broad-based benchmark capped its worst week since 2020. The tech-heavy Nasdaq Composite (^IXIC) dropped 5.8% to close in bear market territory.
Read on to see how I’m handling the market drop, how The Simple Path to Wealth helped shape my personal investing strategy, and how Die with Zero changed my perspective on how much to save for retirement.
Let’s dive in.
So, what am I doing with my portfolio right now while markets are falling?
Despite how bad it seems, this is not a difficult question for me to answer.
I’m not doing anything.
I invest in the stock market to help achieve my long-term goals. My two main long-term goals are to save for college and to save for retirement.
Each objective is so far away that time is on my side.
My oldest child is five-years-old. I have 13-14 years until she even begins college. We make regular contributions to a 529 college savings plan to pay for her education. We fully anticipate that the market is going to go up and down over these next 13-14 years.
As for retirement, I’ve still got decades in front of me. Same as what we just talked about with saving for college, I fully expect the market is going to go up and down many times before I retire.
Make no mistake, I don’t enjoy seeing my portfolio drop so suddenly.
Like everyone else, I don’t enjoy seeing my portfolio drop suddenly.
It’s not fun to read the headlines right now. My brain seems to jump to the worst case scenario. Maybe you do the same thing. It’s nice to have someone to talk to about it. Misery loves company, right?
This is one of the reasons why I only look at my portfolio once per month when I track my net worth.
To remind myself to hold steady during the down times, I think of a study that examined what would happen if an investor missed the 10 best days for the market in each decade since 1930.
Looking at data going back to 1930, the firm found that if an investor missed the S&P 500′s 10 best days each decade, the total return would stand at 28%. If, on the other hand, the investor held steady through the ups and downs, the return would have been 17,715%.
These results illustrate how risky it would be for me to try to time the market. The last thing I want to do is miss the upswing. I have no idea when it’s coming.
But, time is on my side.
I’m going to do my best to be in the market when that upswing eventually comes.
And, I am confident that upswing will come. It may not be until years from now. That works for me and my investment horizon.
One other mental hack that’s helping me right now:
I’m telling myself that the market is on sale right now. How so? I can buy the exact same stocks today for less money than they would have cost even a few days ago. I do love a good sale.
In the end, no matter how bad things seem right now, I plan to continue making regular contributions to each of my investment accounts.
Since I’m investing for the long run, I’ll let the market do its thing while I’m off doing my own things.
Disclaimer: Your situation may be different. I am not an investment advisor. Do your homework and make the best decisions for your personal situation.
What is my personal investing strategy?
My personal investing strategy is largely based off of J.L. Collins’ exceptional book The Simple Path to Wealth. If you want a complete and easy to understand guide on all things investing, check out The Simple Path to Wealth.
If nothing else, it’s crucial to educate yourself so you can make informed decisions, especially in times of economic uncertainty like we’re in right now.
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.
Why index funds?
The simplest way to answer that one is to direct you to the single greatest investor of our lifetimes, if not ever: Warren Buffett.
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.”
To sum it all up, my wife and I are not active traders. We don’t seek out the newest, hottest stocks.
We’re pretty boring, actually.
We simply make regular contributions to our various investment accounts and let the markets take care of the rest.
As an example, for my daughter’s 529 plan, we chose a passive investment option that’s a mix of stock index funds and bond index funds.
Our portfolio automatically rebalances over time based on my daughter’s projected first year of college. Essentially, the closer we get to her first year in school, the more conservative our portfolio becomes.
We chose a similar option for our son’s 529 plan.
One other note for context: Keep in mind that my wife and I are real estate investors. We own five properties and 11 total rental units. Our real estate investments comprise a major part of our overall net worth.
How much money do I put towards each of your financial goals?
Between saving for emergencies, saving for college, and saving for retirement, there are a lot of options. In addition, you may have other short term goals, like paying for a wedding or a house. Or, you may want to invest in real estate.
So, how do you determine how much to allocate to each goal?
I went through a similar exercise with my retirement savings after reading Die with Zero by Bill Perkins.
As crazy as it sounds, are you saving too much for retirement?
In Die with Zero, Perkins suggests that many of us are saving too much for retirement at the expense of using that money to live our best lives now.
It’s one of the most compelling personal finance books I’ve read in a long time, and I highly recommend it. You can also learn more about Perkins and his journey on his socials.
Perkins is not suggesting that saving for retirement isn’t important. He’s saying that the hard data shows that most of us are over-saving.
When I read Die with Zero, I used an online calculator to estimate my projected retirement savings. As Perkins would have expected, at our then savings rate, my wife and I risked over-saving for retirement.
With that realization, I made some adjustments and am now paying down HELOC debt at a faster rate.
How much should you save for retirement?
There’s no way to fairly answer this question. Spend enough time on the internet, and you’ll get many different answers. There are just too many variables in play, like what kind of retirement you want and when you want to retire.
Perkins points out in Die with Zero that most of the advice out there encourages people to save too much money. You might agree or you might not.
I encourage you to read Die with Zero and make that determination for yourself.
At the end of the day, whether it’s saving for retirement or other major life goals, the most important thing is that you are consistently generating money fuel for your life.
Don’t stress yourself out by worrying about the perfect amount to save towards each goal.
Are you talking about your money mindset these days?
It’s never been more important to talk to your friends and family about your money mindset. You don’t have to talk numbers to help each other during uncertain times.
Are you talking to your people about your money mindset?
What types of conversations are you having to help get through these times of uncertainty?
Would you recommend any books or articles that have helped you in the past?
My five-year-old has already decided that she’s not going to college.
She doesn’t want to sleep there, she says. Instead, her plan is to move in with her aunt.
At least that’s one kid I don’t have to worry about when it comes to paying for college.
In case your five-year-old hasn’t already decided her future, read on to learn about 529 educational savings plans, one of the best ways to pay for college.
My students are already worried about paying for college for their unborn children.
Whenever I teach personal finance to law students, we take some time to at the beginning of class to discuss what each of us would do with financial freedom.
This is always my favorite part of class.
Over the years, I’ve had students who want to travel the world, start businesses, pursue hobbies, and take care of aging parents.
I’ll never forget the student who wants to coach high school football after working as a lawyer. Or, the student who simply wants the time to exercise every day. As she put it, “look good, feel good.”
Of all the goals I’ve heard, there is one that comes up more than any other: paying for their children’s education.
A lot of times, I hear this goal from students who don’t even have kids yet. I think that shows how important education is for many people. It also shows how worrisome it is to think about paying for college.
What’s troubling is that my students typically have their own student loans to pay back. And, before they’ve even started their careers, they’re thinking about paying for the education of their unborn children.
That’s intense. But, understandable.
Some students share that they want to pay for their children’s college because they benefitted from their parents paying for college. These students were grateful for the opportunities their parents gave them.
For other students, they want to pay for their children’s college because their parents did not pay for their college. They want to help their children avoid student loan debt as they begin their careers.
For most people, saving for college is a top priority.
According to a recent study by Fidelity, 74% of parents say they are currently saving for college.
77% of parents think that the value of a college education is worth the cost.
At a time when there is a lot of uncertainty surrounding student loans, it’s never been more important to have a plan to pay for your kid’s education.
One of the best ways to do that is with a 529 college savings plan.
In today’s post, we’ll discuss the major advantages of 529 plans. We’ll also learn how you can estimate the cost of college for your child so you can figure out how much you should be saving today.
Be warned, the numbers are scary.
What is a 529 college savings plan?
529 college savings plans are state-sponsored, tax-advantaged investment accounts. The name stems from Section 529 of the Internal Revenue Code.
While there are certainly other ways to save for college, 529 plans are hard to beat.
The reason 529 plans are such a great way to save for college is because you receive triple tax benefits:
Most states offer tax breaks on contributions to its residents for participating in the in-state plan. For example, as Illinois residents, my wife and I can deduct up to $20,000 in contributions to the Illinois-sponsored 529 plan from our state income each year.
Your investment earnings grow tax-deferred, meaning your investments will benefit from tax-free compound interest. That means your savings will grow faster without being hindered by taxes.
Investment earnings are 100% free from both federal and state taxes when used for eligible education expenses. Eligible education expenses include things like tuition, room and board, books, computers and other standard costs associated with college.
An investment opportunity with triple tax benefits like this is almost unheard of.
How do 529 plans work?
In basic terms, 529 plans are investment vehicles designed to grow your contributions and make paying for college easier. When you invest in a 529 plan, you are generally investing in some combination of stocks and bonds.
That means there is risk involved, just like with any other investment.
Once you open your 529 account, you will choose how to invest your contributions. In this sense, 529 plans are similar to a 401(k) plan offered by your employer.
Like with your 401(k) at work, a 529 plan will typically provide you different investment choices within the plan. You can choose how aggressive or conservative you want to be with your investments.
The investment options will vary depending on which state’s 529 plan you choose.
Every state offers a 529 plan.
Every state offers a 529 plan. You don’t have to be a resident of that state to use its plan. You also don’t have to use your 529 savings for a school located within that state.
Regardless of what plan you choose, the federal tax incentive remains the same. Money invested in 529 plans grows tax free. That means no federal taxes on your 529 earnings as long as the money is used for qualified educational expenses.
While you also won’t have to pay state tax on earnings (same as federal), there are some additional state tax implications to be aware of.
These state tax benefits are a bit more complicated because they vary state-to-state.
Remember, there is no federal tax benefit when you make your original contributions. But, most states do offer its residents a tax break on their original contributions for investing in-state.
Morningstar has a detailed breakdown of which states offer additional tax benefits to its own residents.
If your state offers tax benefits to invest in-state, that’s usually a good reason to choose your in-state plan.
Besides the state tax benefits, keep in mind that not all 529 plans are created equal. 529 plans may offer different investment options or charge different fees. States may also provide different level of oversight, which may be important to protect your investments.
You should always do your homework before choosing a plan to find one that matches your goals.
I’ve found Morningstar’s rankings and analysis of each state’s plan to be the most helpful tool. According to Morningstar’s most recent rankings, the top 529 plans are offered by:
Alaska
Illinois
Massachusetts
Pennsylvania
Utah
To recap, when choosing which 529 plan to participate in, pay attention to what investment options are available within that plan. Also, look to see if you will qualify for additional state tax benefits.
How much can I contribute to a 529 plan?
Besides choosing the type of investments in your 529 plan, you can also choose how and when to contribute.
Some people prefer automatic monthly contributions. Others prefer to contribute sporadically throughout the year, like when they receive a bonus at work.
Unlike with most retirement plans, there are no yearly contribution limits for 529 plans. Instead, each state sets lifetime contribution limits per beneficiary, typically ranging from $235,000 to $550,000.
This is a good time to point out that you can have a separate account for each of your kids. This allows you to save more money overall sine the contribution limits apply separately to each kid.
It’s also a good idea to have separate accounts when you have different investment horizons based on the ages of your kids.
For a complete list of the contribution limits by state, click here.
By the way, if those limits sound incredibly high to you, you may be in for a shock when it comes time to pay for college.
Keep reading to see what the projected costs of attending college are for a current kindergarten student.
What happens if my kid does not go to college or I have money left over?
If you have money left over in your 529 plan, you have some options. You can use that money for one of your other kids, without penalty. You can save it for a grandchild.
As of 2024, you can roll extra 529 funds into a Roth IRA for the beneficiary, with some limitations. This was a terrific development for families worried about having too much money saved for college.
If none of the available options work for you, rest assured that your money will always still be your money. You will have to pay a penalty and some taxes. Any unused earnings are subject to a 10% federal tax penalty plus income tax.
How much should I be saving in my 529 college savings account?
This is the ultimate question, right?
While nobody can say for certain how much college will cost or how your investments will perform, we can make reasonable estimates to help form your strategy using an online calculator.
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.
For example, nobody can predict what your exact investment return rate will be. That said, you still need to plug a number into the calculator.
What number should you use for investment return rate?
Bankrate.com and NerdWallet each suggest using an investment return rate of 10% annually (before inflation) based on historical stock market performance.
10% seems like a reasonable number to use, keeping in mind that we’re just looking for an estimate to help us decide how much to save for college. Your actual returns may be lower.
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.
One last thing: it’s never a bad idea to run through different investment scenarios to get a more complete picture. Try playing around with what the numbers look like if your investments only return 8% per year. Or, see what happens if college costs increase by 6% per year.
With these assumptions in mind, you can start to get an idea of how much you should be saving for college today.
Be warned, the dollar amount will probably scare you.
Let’s look at an example using a current kindergarten student.
Illinois’ Bright Start 529 calculator estimates that the cost of this kindergarten student attending the University of Illinois Urbana-Champaign 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.
Does that sound like a lot of money?
Want to really be scared?
What if your kindergarten student is interested in private school for college? Maybe your child has his heart set on Northwestern University?
Bright Start 529 estimates the cost of Northwestern University for your kindergarten student will be $691,942. That means if you have no current savings, you should be contributing $28,217 per year.
Yikes.
And that’s only for one kid.
How are you supposed to save that much money for college?
If these numbers sound scary to you, what can you do about it?
I have some thoughts:
First, you need to spend some time thinking and talking about why it’s important to you to be good with money. Maybe the reason is as simple as paying for your kids’ college. Whatever your money motivations are, write them down. This is what I did with my Tiara Goals for Financial Freedom.
With the right motivation in mind, you then need to make a Budget After Thinking. The overall purpose of your budget is to generate fuel for your future goals, including paying for college.
Next, you need to stick to that budget by tracking two simple numbers. Making a budget does you no good if you aren’t sticking to it.
Monitor your savings rate and aim for steady improvement over time, even if you’re only able to save a small amount to begin with.
While you start to build your savings for college, avoid the three big causes for why many of us fall into debt, which can cancel out all your progress.
Along the way, talk to your people. Remember the cardinal rule of Think and Talk Money: talking about money is not taboo. You are not alone in trying to save for college or trying to live a financially responsible life. Talking to your people will help you stay on track when times seem tough.
The most important thing is that you take responsibility for your own money life.
Nobody else can do this for you.
The good news is that embracing these tips will help you beyond just paying for college. These are the exact strategies that will lead you to a life of financial freedom, the ultimate goal for many of us.
It’s not supposed to be easy. If it were easy, everybody we do it.
By educating yourself on 529 plans and talking to your people about money, you are way ahead of the curve.
Do you have a plan to save for college?
Have you started saving for college?
Are you currently using a 529 college savings plan?
How do you motivate yourself to make regular contributions in light of other financial goals?
I don’t have any better idea than you do about what may happen in the student loan landscape.
No matter what happens, the way I see it, you have two options .
The first option is to do nothing, get angry, and blame everyone else.
The second option is to take ownership, get prepared, and educate yourself about the student loan system so you’re ready for whatever comes next.
If you’ve chosen the second option, you’re in the right place. That means you’re determined to not let outside factors you can’t control hinder your progress towards financial freedom.
In this post, we’ll cover the basics about federal and private student loans so you can begin to make informed decisions to most efficiently eliminate your student loan debt.
Whether you are finishing up school or currently paying off loans, this is a good place to start. No matter how the student loan landscape changes, it’s a fair bet that these basic concepts will remain in place.
In the end, paying off student loan debt is really not that different from paying off any other form of debt. However before we start playing the game of conquering student loan debt, we need to understand some key ground rules.
Let’s dive in.
Student loan debt is a major obstacle to reaching financial freedom.
Student loan debt is one of the major obstacles for people striving for financial freedom. That makes sense given that more than 42 million people in the United States currently have student loan debt.
It’s not just about the number of people who have student loan debt. It’s the dollar amount of those loan balances. In my opinion, I don’t see how someone can be truly financially free when burdened by student loan debt.
The average person with a graduate degree owes up to $102,790 in federal student loan debt.
54.0% of all graduate school students have federal student loan debt.
55.2% of people with master’s degrees have federal student loan debt.
74.8% of people with professional doctorates have federal student loan debt.
76.2% of doctors have student loan debt.
It’s because so many of us rely on student loans to pay for school that there is no shortage of information available online. The problem is there’s so much information, it’s hard to know where to start.
Let me help you get started.
Federal loans are better than private loans.
The first thing to know about student loans is that there are two entirely different types: federal loans and private loans.
Federal loans are funded by the United States government. You can access the main federal student loan website at studentaid.gov.
Private loans are funded by lenders, like banks. Some of the most popular private student loan companies are SoFi, College Ave, and Sallie Mae.
When you hear about student loans in the news, you’re hearing about changes to the federal loan system. There may be some side effects for the private loan system, but the federal system is getting all the attention right now.
There’s no real dispute that federal loans have long been a better option for borrowers than private loans. Federal loans almost always offer the best rates and terms. Even the private loan companies admit as much.
The reason people have both federal and private loans is because federal loan amounts are capped. Once you’ve taken out all the federal loans you are eligible for, private loans become necessary to fill whatever funding gap remains.
With tuition costs rising for college and grad school, it’s likely you’ll leave school with both federal and private loans.
Understanding the available options and differences for each type of loan will help you eliminate your student loan debt as efficiently as possible.
What to Know about Federal Student Loans
Even with a changing landscape, below are the key aspects to keep in mind regarding federal loans.
With this background in mind, you’ll be better equipped to make adjustments to your student loan payoff strategy should that time come.
There are 3 main types of federal student loans.
There are three main types of federal student loans: Direct Subsidized Loans, Direct Unsubsidized Loans, and Direct PLUS Loans.
Direct Subsidized Loans offer the best rates and terms and are designed for undergraduate students with financial need.
The main advantage of subsidized loans is that the federal government pays the interest for the borrower for a certain period of time, like when the borrower is still in school. That could be major savings.
Direct Unsubsidized Loans are available for undergraduate and graduate students and are not restricted to students with financial need. However, the borrower is responsible for all the interest on the loan.
Your school determines which type of loan you are eligible for. Keep in mind there is cap to the amount you can borrow for each type of loan. We’ll discuss the caps in a moment.
Your credit score does not factor into Direct Subsidized or Unsubsidized Loans.
Unlike with private loans, Direct loans do not depend on your credit score. This is a key advantage of federal loans for people who have no credit history or poor credit history.
Direct PLUS Loans are available for parents and graduate students.
Direct PLUS Loans are for eligible parents and graduate and professional students.
The other main differences with PLUS loans relate to the amount you can borrow and the interest rate you’ll pay, as seen below.
Also, with PLUS loans, the borrower’s credit history is a factor considered during the application process. These loans are not available to people with poor credit.
Federal Loans are capped depending on the loan type and education level.
The amount you can borrow in federal loans depends on the loan type and education level (undergraduate or graduate/professional).
As an undergraduate, you can borrow up to $12,500 in Direct federal student loans each academic year.
For PLUS loans, you can borrow up to the cost of attendance for your school minus any other financial assistance received.
With these caps in mind (besides PLUS loans), you can see how federal loans alone are usually insufficient to cover the full costs of higher education.
Federal loans offer the best interest rates and lowest fees.
As mentioned above, federal loans have long offered the best interest rates and lowest fees.
Rates are always subject to change. For illustration purposes, here are the current interest rates for federal loans:
Loan Type
Level
Interest Rate
Direct Subsidized and Unsubsidized
Undergraduate
6.53%
Direct Unsubsidized
Graduate/Professional
8.08%
Direct PLUS
Parents or Graduate/Professional
9.08%
In addition to interest, most federal loans also include loan fees. These fees are taken out of the loan at the time the loan is first disbursed. That means the amount you’re borrowing and responsible for paying back is more than the amount you actually receive.
As you can see, even within federal loans, the interest rate and fees charged vary depending on the type of loan and level of education.
The federal government contracts with loan servicers to manage your loans.
The federal government will assign your loan to a loan servicer to handle billing and other services. When you need information or have questions about your federal loans, you’ll need to contact your loan servicer.
The federal government currently works with the following loan servicers:
Keep your loan servicer’s contact information close by, especially these days.
Your first federal loan payment is typically due six months after leaving school.
With federal loans, you will usually have a six month grace period after you leave school before your first loan payment is due.
Not all federal loans have a grace period, and interest usually will accrue during the grace period. You are allowed to pay this accrued interest before you enter repayment.
The federal government offers a number of loan repayment plans, for now.
The federal government offers a number of loan repayment plans.
It’s anyone’s guess if these repayment plans will continue to exist and who may be impacted.
For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.
So, what is a loan repayment plan?
Generally speaking, a standard repayment plan means paying your loans back in equal monthly payments spread over ten years.
In addition to the standard repayment plans, there are a number of plans currently available to reduce your monthly payment and extend your repayment term. These plans are typically based off of income level.
The idea behind most of these repayment plans is to help you pay back your loans while still affording your other monthly expenses.
Your loan servicer will work with you to determine the best repayment plan for your situation.
With federal loans, there should be no prepayment penalty if you accelerate your loan payments on your way to financial freedom.
One important note: regardless of the repayment plan you choose, you are still responsible to pay back the entire loan. If you choose a plan that offers lower monthly payments spread over a longer time period, you will end up paying more in total interest.
Loan Deferment, Forbearance, Forgiveness and Discharge
With federal loans, you typically have better options when you are struggling to repay your loans. Note that just because you may have more options does not mean you’ll be let off the hook.
Loan forgiveness may be available to people who work in eligible public service jobs who make loan payments for ten years.
Again, this may be all in flux.
For up-to-date information on the available repayment plans, please visit studentaid.gov or contact your loan servicer.
What to Know about Private Student Loans.
With a basic understanding of federal loans as context, it’s not too difficult to understand how private loans work.
The key here is that when it comes to private loans, there are more variables to consider. Lenders may have different rates, loan terms, and repayment schedules.
Be aware that private loans likely will not offer loan forgiveness and may involve additional fees and potential penalties.
The best thing you can do is to compare the various options for private student loans. A good place to start is with three of the most common private lenders:
Each of these lenders provides detailed information on its websites. Even if you don’t choose any of these lenders, you can still do your homework on their websites.
Besides just the interest rate on a potential loan, pay attention to other important factors like:
Loan fees
Repayment options
When the first loan payment is due
Prepayment penalties
Consolidation options and fees
Quality of service and responsiveness
In the end, you’ll likely find that most private loan lenders offer comparable rates and terms. They are competing with each other for your business, after all.
Where are you in your student loan journey?
Ultimately, only you are responsible for your loans. You can blame everyone else for the changing landscape or you can educate yourself and make a plan.
Whether you are finishing up school or currently paying off loans, this post is intended to provide student loan basics that should hold true no matter how the student landscape changes.
Now that you understand the basic ground rules, you can work on a plan to pay off your loans as efficiently as possible on your way to financial freedom.
Where are you in your student loan journey?
Do you know anyone who would benefit from taking about student loan basics?
Debt from student loans and financial freedom go hand-in-hand for most professionals. Maybe a better way to put it is that student loans can be a major obstacle on your path to financial freedom.
Student loans and financial freedom go hand-in-hand.
Whether you have student loan debt from college or graduate school, it’s important to have a plan to pay that debt off.
All debt acts as a roadblock to financial freedom. Student loans are no different.
Of course, the more education you’ve received, the more student loans you likely have.
When considering student loans and financial freedom, look no further than these recent stats provided by the Education Data Initiative:
The average person with a graduate degree owes up to $102,790 in federal student loan debt.
54.0% of all graduate school students have federal student loan debt.
55.2% of people with master’s degrees have federal student loan debt.
74.8% of people with professional doctorates have federal student loan debt.
76.2% of doctors have student loan debt.
This is why it’s especially important for professionals to realize the connection between student loans and financial freedom.
Hold on before you tune out because you don’t have any student loan debt.
The journey towards financial freedom is often a shared journey for many of us.
This data shows that even if you don’t personally have any student loan debt, the odds are you are going to marry someone who does. Or, you’re the parent, or will someday be the parent, of someone who has student loans.
That’s why we all need to learn about student loans and financial freedom. You may soon find yourself in a relationship where you’ll want these student loan strategies.
If nothing else, your prior experiences with student loans can help someone else if you’re just willing to talk about them.
I’ll never forget the day I made my last student loan payment.
My family was heading out to Colorado around Christmas time for some snowboarding and skiing. Don’t worry, I didn’t break a wrist that trip.
My goal that year had been to finish paying off my student loans entirely. However, I can’t take credit for wanting to pay off my loans that year.
That credit goes to my wife. She was the first person who helped me appreciate the interconnection between student loans and financial freedom.
Here’s what happened.
About 11-12 months before that trip to Colorado, my (future) wife and I talked about how we wanted to start our marriage debt-free. We were thinking about buying a home and starting a family. Student loan debt did not fit into this picture.
She saw how focused I was in creating a Budget After Thinking and how important it was for me to stick with it.
My wife also experienced firsthand how much better I felt once I had a plan to pay off my debt. She wasn’t just an observer, either. She was an active participant.
So, when I had finally paid off all of my credit card debt, it was time to focus all that financial energy on my student loan debt.
This may sound odd, but I was excited to move on to a new challenge. Not that paying off debt is ever easy. But, with my student loans, I knew it was going to be easier than paying off my credit card debt.
That’s because I had already learned and experienced the hardest part of paying off debt with my credit card experience. I had already shifted my money mindset.
Money mindset is so important to student loans and financial freedom.
Once your money mindset is in the right place, you can make informed and intentional choices about debt. It doesn’t matter if you’re paying off credit cards, student loans, or even HELOC debt.
When you’re honest and dedicated to fostering a healthy money mindset, you’re better able to establish habits like budgeting and saving. That’s how you create fuel for your Later Money goals, like eliminating debt.
Personally, my money mindset was in a much different place by the time I prioritized paying off student loan debt compared to paying off credit card debt.
With my credit card debt, it took waking up one day and feeling ashamed for how irresponsible I was with my spending before I committed to paying it off. I felt down and discouraged.
With my student loans, I wasn’t starting from a feeling of failure. It was quite the opposite, actually. I had a much better attitude because I had proven to myself that I could pay off debt. I had experienced how good that felt.
So, when my wife and I talked about eliminating my student loan debt before we got married, that was just one final incentive.
My wife would say that I’m a quietly competitive person. When she initiated that talk about paying off my student loans before we got married, it was game on for me.
I didn’t need any extra motivation, but I sure felt extra motivated after that talk.
I prioritized paying off my student loans the rest of that year.
For the next 11-12 months, I made it my priority to eliminate my student loan debt. I had been making the required payments each month for years, but eliminating my student loans always took a back seat to my other goals. Now, it was time to prioritize eliminating my student loans.
Using the Debt Snowball method, I used whatever excess money I had each month to pay off the remaining balance on one loan at a time.
This was before we owned any real estate, but I had begun my side hustle as a law school professor. Whenever I got a paycheck from the law school, I immediately put it towards my student loans.
When I earned a raise that year, I put the whole raise towards my student loans. I did the same thing with irregular earnings, like from commissions, bonuses and even my tax refund.
As our Colorado trip was approaching, I knew that the finish line was in sight. I waited to tell my future wife just how close I was until after I had made the final payment. I’ve always liked surprising her.
I remember telling her I just made the last payment on the day before we left for the trip. She was thrilled, and surprised, at how quickly I accomplished the goal.
I thanked her for motivating me.
The next day in Colorado, I shared the news with my parents that I had pay off my student loans. They were even happier than my wife and I were. All my siblings were there with us. We had a toast and celebrated. It was a night I’ll never forget.
It’s natural to worry about paying back student loan debt.
When I teach personal finance for lawyers, student loan debt is always one of the most important topics. It’s natural to worry about paying back such a large sum of money as you are beginning your career.
Even if I didn’t realize before, I now fully appreciate the relationship between student loans and financial freedom.
My hope is that by thinking and talking even a little bit about your student loans, you won’t have to worry. You’ll have a plan to pay back your loans in the most efficient way possible on your way to financial freedom.
In our initial series on student loans, we’ll learn how to:
Find your loan balance, set up payments, and other important basics when you’re just getting started.
Choose a repayment plan that works best for your personal situation.
Strategize to pay off student loan debt within the context of your overall life goals.
Navigate the ever-changing landscape of student loans.
Then, you’ll have your own reason to celebrate with your loved ones just like I did in Colorado.
Have you thought about student loans and financial freedom?
Where are you currently with your student loans? Just starting out, nearing completion, or somewhere in the middle?
Are you the partner or parent of someone with student loans? Have you discussed a plan for paying those loans off?
Let us know so we can learn from each other’s experiences in the comments below.
If you would have asked me this a couple years ago, the answer would have been “100% yes.”
I’ve long been a big fan of using credit cards to earn rewards points and to help track my spending. As long as you pay your credit card bills on-time and in-full every month, credit card rewards can be quite valuable.
The best vacations I’ve ever had were paid for using points instead of cash.
My wife and I have taken some amazing vacations that we would have never gone on if we had to pay in cash.
We used points to fly first class to Florence for our honeymoon. We’ve used points to stay at luxury hotels in Paris, Barcelona, and Santorini that normally charge more than a thousand dollars a night.
When my wife and I were still dating, we went to New York for a wedding. We got out there two nights early, and I used points to book us a room at the Waldorf Astoria. This was back in my real life, really lost boy days when I didn’t have any spare cash for something like this.
My wife and I had a great time at the Waldorf before heading out to Long Island for the wedding.
I may have forgotten to tell my wife that in Long Island, we’d be sharing a room with two (turned out to be three) of my buddies. I didn’t have any points left for this hotel. Oops.
She was a good sport. Not even the surprise ice storm from the groom in the middle of the night bothered her. She was a keeper.
I could go on and on. The point is there was a long period of time where all of our vacations were paid for using points instead of cash.
Using points also helped me stay on budget and build my net worth.
That meant our net worth grew in the background while we were out having these amazing experiences.
I also have long been a fan of using credit cards to help me stay on budget. With credit cards, I can quickly track my spending online during the month to see if I’m on pace for a good month.
If I notice that I’ve overspent, I can slow down my spending to get back on track.
Between the rewards points and the ability to track my spending, I still am a big fan of using credit cards for most everyday purchases.
When used responsibly, meaning paying your credit card bill in full and on-time every month, credit cards can be part of a healthy financial life.
That said, nowadays, I’ve started using cash more frequently.
I’ve started using cash more often these days.
I still use credit cards more than cash, but I’m starting to use cash more often than I used to.
There are a couple main reasons for this.
I use cash for the convenience for smaller transactions.
I now use cash regularly for smaller or quicker transactions, like going to the farmer’s market, grabbing ice cream for the kids, or paying for taxis.
Yes, I still take taxis. I work as a mesothelioma attorney in downtown Chicago near the courthouse. Taxis are plentiful and a lot of times quicker and cheaper than ride share companies.
And, there are ATM’s on just about every corner near my office in Chicago, so it’s not inconvenient to keep cash on hand.
For these types of transactions, I value the convenience of paying with cash more than the small amount of credit card points I would earn.
I also like to pay cash to help out these types of small businesses because they seem to generally prefer being paid in cash. I leave whatever change I’m owed as a tip.
Also, I’m no longer worried about precisely tracking my cash spending in my Budget After Thinking.
Instead, I simply account for a few hundred dollars of spending using cash each month. I generally know what types of things I’m spending cash on, so I don’t worry about tracking each expenditure specifically.
Besides convenience, there’s another reason I use cash more frequently now.
Besides convenience, I’ve started to use cash regularly for another reason.
It’s not that the rewards have changed very much. Or, that I no longer like tracking my spending.
It’s for a different, and somewhat disappointing, reason:
More and more service providers, retailers, and restaurants are charging fees to use credit cards. These fees can be as high as 4% of the purchase price.
These additional fees are sometimes referred to as “surcharges” or “processing fees.”
Be warned, sometimes these fees are cloaked as “discounts for cash payments.” Don’t be fooled. This is just a sneaky way to say you will be penalized for using a credit card.
Why do businesses charge processing fees?
For a little bit of context, credit card companies make money by charging businesses a “merchant fee” or “interchange free” whenever customers pay with a credit card.
Most businesses pay these merchant fees. That’s because there are plenty of incentives for businesses to accept credit cards.
For one, many customers prefer to pay with credit cards, like me. Businesses typically don’t want to lose out on these customers who prefer to pay with credit cards.
For another, businesses are well aware of the fact that people tend to spend more money when using credit cards instead of cash. Obviously, it’s good for business when people spend more.
There are certainly other incentives, as well. The point is that businesses have long paid these merchant fees in exchange for benefits provided by credit card companies.
In recent years, more and more businesses have decided to pass these fees onto customers.
Businesses, especially smaller businesses, commonly point to the past few years of surging inflation for why they need to pass these processing fees onto customers.
Have you also noticed these fees popping up seemingly everywhere these days?
As a consumer, whether we like it or not, these processing fees seem to be sticking around.
So, what can we do about it?
We can choose to use cash instead of credit, or we can choose to not spend our money at that business.
Let’s look at an example to help you make that decision for yourself.
Who really cares about a small processing fee anyways?
A processing fee of 4% may or may not sound like a lot to you.
Let’s look at an example to put some real numbers on it.
Let’s assume you’re going to buy a new TV that costs $1,000.00 (all taxes included) from a reputable store. A 4% processing fee on the purchase of a $1,000.00 TV means adding $40 to the price of that TV.
That TV now costs you $1,040.00 with the processing fee.
That’s a $40 penalty simply for using a credit card instead of cash. That’s a penalty that the next customer paying in cash doesn’t have to pay for the exact same TV.
Keep in mind this is a $40 penalty charged on just this one purchase. Consider all the other purchases you make with a credit card and what those total penalties could add up to.
We’re assuming you’re shopping at a reputable store, so you shouldn’t have to worry about purchase protection.
So, that really leaves only one potential benefit to using a credit card for this purchase.
What about the points you can earn?
Let’s play that out so you can decide for yourself.
Aren’t points worth more than whatever the processing fee is?
Let’s continue our same example of purchasing the TV for $1,000.
Including the 4% fee, the TV costs $1,040.00.
Let’s assume you buy this TV using the Chase Freedom Unlimited, which is the actual card I would use if I were making this purchase.
The Chase Freedom Unlimited offers 1.5 points per dollar spent. That means this TV purchase of $1,040.00 would earn you 1,560 points (1040 x 1.5 =1,560).
Next, let’s look at my favorite website for valuing rewards points, The Points Guy. Currently, The Points Guy values each Chase Ultimate Reward point at 2.05 cents.
So, 1,560 points, valued at 2.05 cents per point, is worth $31.98 ((1,560 x 2.05)/100=31.98).
Now, we can decide if paying the 4% service fee to earn points is worth it.
In this example, by choosing to use your credit card with the $40 processing fee, you’ll earn $31.98 worth of points.
In other words, even accounting for the points you’ll earn, this transaction still costs you an extra $8.02.
Does that sound like a good deal to you?
Personally, I would rather keep the $40 in my bank account instead of earning $31.98 worth of points.
To me, this is not even a close call.
It doesn’t make a lot of sense to trade in a higher amount of cash for a lesser amount of points. Not only are you technically losing money, cash is more flexible than credit card points. You can use cash everywhere.
I don’t think it’s a stretch to say you’d be hard pressed to find anyone who would take $31.98 worth of points instead of $40 in cash.
What if the processing fee was lower?
Even if the processing fee was lower, say 3%, my decision wouldn’t change.
At a 3% fee, the TV would cost $1,030 and you would earn 1,545 points valued at $31.67.
In this scenario, it’s true that the points are worth $1.67 more than the processing fee.
I’d still rather have the cash. I value the flexibility that $30 in cash provides me more than a comparable value in points.
Admittedly, it’s a closer call when the processing fee is 3%. I won’t argue with you if you’d rather go strictly by the math and have the points in this scenario.
Money is emotional, after all, like we saw when choosing to pay down debt using the Debt Snowball method.
I went through this exact process when paying my property taxes recently.
Recently, I went through this exact thought process when paying my property taxes. I had the option to use a credit card and pay a 2.1% convenience fee.
I chose to pay cash, even though the points I would have earned were worth $170 more than the convenience fee.
The math indicated I should have taken the points. Still, I didn’t like the idea of paying another 2.1% on top of my already sky-high property taxes.
Even though I lost out on valuable points, money decisions are emotional. It felt better to not pay the extra 2.1% and to keep that cash in the bank.
Setting aside the math and the value of credit card points, there’s another reason I have started using cash more frequently these days because of processing fees.
These processing fees really bother me on principle.
You may disagree, but I don’t think it’s right for businesses to pass this fee onto customers when businesses do benefit by accepting credit cards.
I especially don’t think it’s fair when businesses spring this fee on a customer when he is standing at the register about to pay.
Maybe it’s just me, but these fees annoy me so much that I won’t go back to a business that passes these fees onto customers.
If it’s a business that I simply can’t live without, and there are very few businesses that reach this level, I’ll pay cash instead of using credit.
I’m not insensitive to the fact that certain businesses are struggling with inflation. If a business is having a hard time staying profitable without charging a 4% fee, I would prefer that it raises its prices by 4% instead of surprising me at the cash register with this extra fee.
At least then, I can make an informed decision ahead of time about whether I want to eat at that restaurant or purchase that item before it’s time to pay.
I know this is a polarizing debate. There are business owners who I’m sure would vehemently disagree with my thoughts on the matter. That’s OK.
Businesses are of course free to choose how to run their businesses. As a consumer, I am free to choose to avoid certain businesses.
Have you noticed this processing fees more often lately?
Where do you come out on paying a processing fee to use a credit card?
Credit cards make it very easy to track these two numbers.
Here’s exactly how I use credit cards to track my spending.
When I get my monthly statement for each credit card, the first thing I do I add the amount and due date to my Notes app.
I’ve been doing this for years now, which means I have a clear understanding of my family’s usual spending habits.
I can then quickly assess whether it was a good spending month. For example, if I normally spend $4,000 per month on my card, and this month I spent $5,000, I’ll know very quickly that something is off.
Sometimes, it’s obvious why I overspent. Maybe it was something like buying airplane tickets for a family vacation. If that’s the case, I don’t need to study my credit card statement too closely because I already know why my spending was more than usual.
Other times, it’s not so obvious. When I don’t immediately understand why my spending was higher than normal, I take a closer look at my statement.
This same process also helps me track that month’s savings transfers to make sure I maintain a strong savings rate.
Why I also track the payment due date in Notes.
The reason I write the payment due date is to make sure I never miss a payment. This is the most important rule of responsible credit card use.
If you miss even one payment on a single credit card, that missed payment will appear on your credit report. Your credit score will also drop.
As a landlord, I play close attention to any potential tenant’s credit history and score. I am not willing to risk entering in a financial relationship with someone who has a history of missed payments.
We recently received an application from someone who has missed 8 of her last 25 payments on her auto loan. That was a major red flag.
I automate some, but not all, of my monthly payments.
Even though my wife and I only use two credit cards for our personal spending, we have business credit cards for our real estate properties.
We also have mortgages and HELOCs that need to get paid at various times each month. I use the Notes function to remind me when these payments are due.
For each credit account, I have automatic payments set up to pay the minimum required amount each month. I then pay the full balance each month manually.
That’s because we have various sources of income that come in sporadically throughout the month. It’s simpler for me to pay certain bills manually instead of automatically.
When you have multiple income streams, you have Parachute Money. Currently, our Parachute Money includes:
Using the Notes function helps me make the required payments each month after these income streams hit my checking account.
What other benefits do credit cards offer?
Credit cards offer a variety of other benefits to entice customers. Besides tracking your spending, two of my favorite perks are purchase protection and credit score monitoring.
Purchase Protection and Fraudulent Charges
Purchase protection is so important in today’s world. The last thing any of us needs is for our personal finances to get wrecked by scam purchases or fraudulent charges.
Let’s say you buy something with Zelle, debit card, or cash. There are very little, if any, protections to get your money back if that transaction needs to be cancelled.
Credit cards, on the other hand, typically offer the best purchase protection available. If you’ve been scammed or deceived in any way, your best bet at fixing that issue is to work with your credit card company.
Also, credit card companies are generally very proactive and helpful in addressing fraudulent charges. If you do encounter any fraudulent charges, your credit card company will work with you to fix the problem.
While credit card companies are pretty good these days at spotting fraudulent charges, I like to double check my online account to protect myself. To make sure I have not been targeted, I take about 30 seconds to look at my credit card transactions each week.
Credit Score Monitoring
Most credit card companies today offer free credit score monitoring through one of the major credit agencies, like Experian. You can see your credit score right in your online account.
Your credit score will automatically update, usually once per month. You can see how your score changes from month to month and what factors currently influence your score.
How can I see all the benefits my credit card offers?
Because there are so many credit card options on the market, the best thing to do is look up the card you have or are thinking about applying for.
I prefer to visit websites like thepointsguy.com for thorough breakdowns and even valuations on each card’s offerings. This makes it easy to compare credit cards from different banks.
You can also visit the credit card company’s website directly to learn the full extent of the benefits offered by each card.
In today’s post, we’ll discuss 10 credit card tips for lawyers and professionals so you can benefit from the perks of credit cards without suffering from the penalties.
I’ll also share what two credit cards I carry in my wallet for all of my everyday spending.
I’m a big fan of earning credit card points on everyday spending and turning those points into once-in-a-lifetime vacations.
My wife and I have traveled all over the world together using credit card points. Using points, we’ve stayed at some incredible hotels like the Mandarin Oriental in Lake Como and the Park Hyatt in Sydney.
The key is to recognize that credit cards are a privilege, like any other form of credit. If you abuse the privilege, you’ll face severe personal finance consequences.
With that underlying principle in mind, here are ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
1. Only charge what you can afford to pay off.
While it may seem obvious to only charge what you can afford to pay off, many of us have trouble following this primary rule of responsible credit card use.
Let’s look at some scary stats about credit card use to solidify this point:
48% of credit card holders carry a debt balance, an increase of 9% since 2021.
53% of people have been in credit card debt for more than a year.
From 2023 to 2024, credit card balances on average increased 3.5% to $6,730.
Credit card balances increased by $45 billion from the previous quarter and reached $1.21 trillion at the end of December 2024.
2. Avoid overspending because you’re using credit instead of cash.
Making a purchase with a credit card instead of cash makes it seem like we’re not spending real money.
We have all fallen victim to this tendency to overspend because of how easy it is to swipe a credit card.
Whether it’s the daily Starbucks habit, running up a bar tab, or buying another new toy for your kid, it’s a lot less painful in that moment to use a credit card instead of cash.
If you’re honest with yourself and know that you tend to overspend when using a credit card, try leaving your credit card at home. Bring some cash with you instead.
The simple act of needing to pay with cash instead of credit is oftentimes enough to stop you from spending on that thing you don’t really want anyways.
3. Do not treat your credit card like an emergency savings account.
This may be the single most problematic area we’ll discuss in my credit card tips for lawyers and professionals.
33% of Americans report they have more credit card debt than emergency savings.
None of us are immune from these types of unexpected expenses.
Be sure to establish an emergency savings account so you don’t end up relying on your credit card when the unexpected happens.
These unexpected expenses can be substantial and result in monthly credit card balances that accrue large amounts of interest.
4. Understand how credit card interest works.
If you’re going to use credit cards as part of your everyday life, you should understand the basics on how interest is charged.
This may be the most overlooked of my credit card tips for lawyers and professionals.
Credit card interest is typically expressed as an annual percentage rate, or APR.
If you carry a balance on your card, the credit card company charges interest by multiplying your average daily balance by your daily interest rate. You will be charged this interest until your balance is paid off in full.
Credit card interest rates are typically variable, meaning they can change over time.
In the abstract, it can be difficult to fully appreciate how penalizing credit card interest is on our finances.
Let’s look at an example to better understand the consequences of carrying a balance.
Let’s say you just moved to a new apartment and purchased a $1,400 TV using a credit card. You don’t have enough money saved up for the full purchase, so you decide to pay off $100 each month. Your credit card charges 23% interest.
At that interest rate, it will take you 17 months to pay for that TV. You will end up paying a total of $1,645, which includes $245 in interest.
The $245 in interest equals 15% of the original price of the TV. That means you paid 15% more than the TV actually cost.
If that doesn’t catch your attention, don’t forget this is just the interest on one purchase after moving to a new apartment.
What if you want to buy a new sofa to go with your TV? How about a coffee table and a rug? Floor lamp? End table?
You can see how a 15% penalty on each of these purchases can start to add up quickly.
5. Never miss a credit card payment.
Write this rule down in stone: never miss a credit card payment.
If you don’t remember any of the other credit card tips for lawyers and professionals, remember this one.
It may seem unfair, but even a single missed payment can severely impact your credit history and credit score.
Because the consequences of a missed payment are so severe, it’s a good idea to set up your account for automatic payments.
You have options when setting up automatic payments. Ideally, you can pay your full balance automatically each month.
If that won’t work for your situation, you can set up automatic payments for the minimum required amount to stay in compliance with your account terms.
By paying at least the minimum amount required on-time each month, you will not be penalized with a missed payment.
What is the minimum required payment?
Credit card companies typically only require customers to make a minimum payment towards their balance each month. The minimum payment is generally 2% to 4% of your balance, or a predetermined minimum fee of around $35.
It may sound enticing to only pay the minimum. However, you will be charged interest on that remaining balance. That interest compounds and will be a major drag on your finances.
Let’s look at another example to see what happens when you only make the minimum required payment.
Let’s say you have a credit card balance of $2,000. Your minimum required payment will likely be between $40 and $80 to stay in compliance with your account terms.
In this example, assume the minimum required payment is $40. If you make the minimum payment of $40 out of your total balance of $2,000, that means your remaining balance is $1,960.
On the next billing cycle, you will be charged interest on that remaining balance of $1,960. At 23% interest, you will be charged $37.39, which gets added to your total balance.
So, on the next billing cycle, your total balance will be $1,997.39.
Let that sink in.
Even though you paid $40 last month, your balance only decreased by $2.61. Ouch!
Note: this example is for illustration purposes only and may not be precisely how your credit card company calculates interest.
By the way, credit card companies want you to only pay the minimum each month. That’s how they make so much money.
How much money do credit card companies make in interest and fees?
Beyond interest, credit card companies profit by charging fees, such as late fees and balance transfer fees.
For these credit card tips for lawyers and professionals, I want to focus on the annual fees tied to rewards credit cards. These fees can cost hundreds of dollars annually and cancel out the value of any points you earn.
For example, if you have a credit card that charges an annual fee of $500, and you only earn $400 worth of points each year, that’s a losing proposition.
You’d likely be better off using a credit card that does not charge an annual fee, even if that means losing out on some points.
For that reason, it’s important to do your homework before applying for a new card.
So, how can you determine if you’re getting enough value out of your card to justify the annual fee?
That leads us to our next tip.
7. Learn how much points are actually worth.
This is not an easy thing to do. Luckily, there are some great websites that are dedicated to credit card rewards that have done these calculations for you.
I like The Points Guy for determining the value of credit card points. While it’s not an exact science, The Points Guy calculates the value of each credit card company’s points and miles every month.
To give you an idea, The Points Guy currently values Chase Ultimate Rewards points at 2.05 cents/point and American Express Membership Rewards at 2 cents/point.
With that information, you can then determine if a certain credit card is worth having in your wallet.
For example, let’s say a particular Chase card you have charges an annual fee of $500 per year. When you look at your total spending from the previous year, you see that you earned 20,000 points using that Chase card.
Using The Points Guy valuation of 2.05 cents/point, that means you earned $410 worth of points. That’s $90 less than what you paid as an annual fee to have the card. That’s obviously not a good tradeoff.
Yes, credit cards come with other benefits that may add value to you. These benefits are oftentimes related to travel. If you travel frequently, these benefits may be worth it. If you don’t travel often, these benefits may not offer much value to you.
Keep in mind there are plenty of credit cards available that do not charge an annual fee and still offer points.
The takeaway is that you should regularly evaluate your spending habits and credit card reward programs to ensure you are still getting value from that card.
8. Use points for travel instead of cash back.
Many credit cards offer various options to redeem points. The easiest redemption option is to convert your points into cash that then gets applied to your balance.
While cash back is the easiest redemption option, it is typically the least valuable. You’ll get far more value by redeeming your points for travel rewards.
Credit card companies like Chase and American Express have partnerships with airlines, hotels and other travel providers. You can transfer your credit card points to these travel programs to maximize the value of those points.
If you’re reading a blog on credit card tips for lawyers and professionals, I’m guessing travel is a part of your life. Whether for leisure, business, or necessity, there should be plenty of opportunities to use your points for travel.
To figure out the best redemption options, it takes a little bit of effort. There are endless options and entire websites dedicated to point redemption strategies.
Before you get overwhelmed, I’d suggest first talking to your friends and family to see if any of them have already investigated the best redemption option for your personal situation.
Did you know that talking about money, and credit card points, is not taboo?
9. Be strategic about what, and how many, credit cards you have.
There was a time in my life when I had ten different credit cards because I wanted to maximize the points I earned on every purchase.
I had airline branded cards, hotel branded cards, and general travel rewards cards. I had credit cards with Chase, American Express, and CitiBank.
My wallet was thicker than a Harry Potter book.
I did earn a lot of points. But, it was so stressful.
Keeping track of what card to use for every single purchase was complicated. Making sure I paid off each card every month was even harder. In the end, it wasn’t worth it.
In these credit card tips for lawyers and professionals, I recommend you keep things simple.
We still earn plenty of points and our finances are much simpler.
One other suggestion: if you’re in a relationship and share finances, I suggest you align your credit card strategies. Most major credit card companies allow you to combine points with a household member.
You can more quickly accumulate points by focusing on a single rewards program, instead of spreading out those points among various programs.
As crazy as it sounds, you may be tempted to spend money you otherwise wouldn’t because you want to earn more points.
It’s possible to become so obsessed with collecting points that you forget about the strong personal finance habits you’ve worked so hard to establish.
It can be easier to justify careless spending when we trick ourselves into thinking that spending will eventually lead to a vacation. For example, if you have a credit card that offers bonus points at restaurants, you may be tempted to spend more money when you eat out.
Or, you may be tempted to pick up the tab for your friends even though that spending doesn’t align with your budget.
The temptation to earn points can overwhelm your plans to stay on budget. This logic applies to any type of spending, not just dining out and bar tabs.
Use your credit cards to spend within your Budget After Thinking, not as an excuse to justify blowing your budget.
To recap, here are my ten credit card tips for lawyers and professionals:
10 Credit Card Tips for Lawyers and Professionals
Only charge what you can afford to pay off.
Avoid overspending because you’re using credit instead of cash.
Do not treat your credit card like an emergency savings account.
Understand how credit card interest works.
Never miss a credit card payment.
Know the fees associated with your account.
Learn how much points are actually worth.
Use points for travel instead of cash back.
Be strategic about what, and how many, credit cards you have.
Don’t spend money just to earn points.
Let us know your best credit card tips for lawyers and professionals in the comments below!
Each year, they analyze data from 140 countries and publish their findings in an effort to give everyone the knowledge to create more happiness for themselves and others.
Please imagine a ladder with steps numbered from 0 at the bottom to 10 at the top. The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you. On which step of the ladder would you say you personally feel you stand at this time?
WHR explains that this “life evaluation” question empowers people to make their own judgments about what matters most.
As part of its analysis, WHR uses economic modeling to explain countries’ average life evaluation scores. They look at six variables, and one of them jump out at me:
“Freedom to make life choices.”
What countries would you guess scored the highest on the 2025 rankings?
The top five countries in the happiness rankings are:
Finland
Denmark
Iceland
Sweden
Netherlands
Each of these nations has ranked near the top for a long time.
Where is the United States on the happiness chart?
The United States fell to number 24, its lowest happiness ranking ever.
The United States’ highest ranking was 11th place way back in 2011.
I’m not totally surprised that the United States’ ranking is as low as it’s ever been.
We’ve discussed some theories that may help explain this drop:
8 out of 10 of us are worried we may lose our jobs this year.
Nearly half of us don’t use our hard-earned paid time off (PTO) and choose to work more days than we are asked to.
I wasn’t surprised to see the United States rank 24th in the global happiness rankings, but I was shocked by the sub-ranking for this specific question:
Are you satisfied or dissatisfied with your freedom to choose what you do with your life?
The United States ranked 115th out of 147 countries in response to the freedom question!
When we are financially free, we can choose to live life on our own terms. To me, that sounds a lot like what the WHR freedom question is trying to answer.
When you have financial freedom, you can make important decisions based on what truly matters. When you don’t have financial freedom, you risk making unsatisfactory decisions for money reasons.
We can choose to spend more time with the people who are meaningful to us.
We can choose to use our skills for work that is meaningful to us.
Most of us grow up thinking that life only revolves around getting an education and then getting a job. We don’t allow ourselves to believe that financial freedom is possible for us.
This was exactly how I felt before I wrote down my Tiara Goals one day on the beach in 2017.
My goal with Think and Talk Money is to help us all realize that financial independence is within our reach. If we can think and talk about our money choices even a little bit every week, we can make sure our money life remains in balance with the rest of our life.
By practicing strong personal finance habits, each of us can feel more satisfied with our freedom to choose what to do with our lives.
How would you rank yourself on the freedom question?
Are you satisfied with your freedom to choose what you do with your life?
What are your core values?
Have you ever written down your core values?
Do you know what you’re striving for?
Successful businesses look at these questions regularly. I find it helpful to learn how successful businesses operate so I can apply similar principles to my own life.
For example, there’s a great business book called Traction by Gino Wickman. In the book, Wickman encourages businesses to focus on vision, mission, and values.
It seems like a pretty good idea for all of us to think about vision, mission, and values as they apply to our own lives.
For example, if you’re one of the nearly half of Americans not taking your PTO, are you making that choice based on your core values?
It’s possible that you are. Perhaps you’re being strategic and have formulated a plan to benefit from all those extra hours at the office.
Or, it’s possible that you’ve never really stopped to think about why you’re working so much. You’ve never paused to articulate to yourself what you want out of life.
In Traction, Wickman makes a compelling argument why businesses should not skip this crucial step.
We all should take the same step in our personal lives. In 2017, I wrote down my core values, what I call my Tiara Goals.
Looking at the big picture, my Tiara Goals have helped me visualize what I truly want out of life.
In the short term, my Tiara Goals help guide me through difficult decisions. As long as I’m clear with myself about what I want in the long run, I can make daily decisions to get my closer to those goals.
Millennials want more kids but can’t afford them.
According to a recent report from Business Insider, Millennials want more kids but can’t afford them.
This makes me sad.
The study points to rising costs, as well as the reality that Millennials are saddled with large amounts of student loan debt.
Combined, it makes sense that Millennials are worried about money.
If you want to start a family, or grow your family, what better motivation could there be to spend a little bit of time each week thinking and talking about money.
If this is your reality, or you know someone in this position, establishing strong personal finance habits is crucial.
Each week at Think and Talk Money, we focus on developing these strong personal finance habits.
Have you ever wondered how successful real estate investors seem to acquire properties so quickly? The answer is usually related to “OPM”, or Other People’s Money. In today’s post, we’ll discuss how I’ve used a common form of OPM, a Home Equity Line of Credit or HELOC to buy investment property.
The best part is that you can use and repeat this strategy to acquire multiple properties. On three separate occasions, my wife and I successfully used a HELOC to buy investment property.
Besides acquiring properties, as a real estate investor, you can also use a HELOC to update a property. My wife and I have done both. We’ve used HELOCs to help with the initial downpayment to acquire properties. We’ve also used HELOCs to improve properties after we’ve purchased them to increase its value.
Read on to learn what a HELOC is and how to use a HELOC to buy investment property.
What is a HELOC?
A Home Equity Line of Credit (HELOC) allows you to borrow money, in the form of a loan, against the equity in your home. Equity is the value of your home less what you owe on a mortgage.
Think of a HELOC as a second mortgage on your property that works like a credit card. That means you will be charged interest when you use your HELOC funds.
Just like with a primary mortgage, when you open a HELOC, the bank is protected by the equity in your home.
Just like a credit card, you can choose when and how to use a HELOC. And, you can use your HELOC over and over again, as long as you pay down the balance. Use it, pay it off, use it again. This is what my wife and I have done.
Of course, this is one of the best parts about HELOCs. Whether you want to use a HELOC to buy an investment property, or for any other purpose, you can tap the funds repeatedly and don’t get charged any interest until you use them.
This point is worth repeating. You can open a HELOC and not use it right away. You won’t be charged interest while you wait for an opportunity to present itself.
That opportunity might be using your HELOC to buy investment property.
Or, it might mean using your HELOC to renovate your home or buy a car. This is what my wife and I did recently. When we bought a new car last year, we decided to use our HELOC funds instead of taking out a new auto loan.
Keep in mind that when you decide to use your HELOC, you will be charged interest until you pay it back, just like a credit card. This is a major consideration to keep in mind if you’re thinking about using a HELOC to buy an investment property.
To recap, a HELOC is really just a form of credit card, available to you for a set period of time, secured by the equity in your home.
You can use those HELOC funds for any purpose. You can choose to use your HELOC to buy investment property, renovate your home, buy a car, or for pretty much any other purpose.
What to know about paying off a HELOC.
If this all sounds too good to be true, don’t forget that you do have to pay off your HELOC, with interest. Just like any other debt, whether it’s Good Debt or Bad Debt, a HELOC needs to be paid off.
HELOCs are generally broken out into two phases, the “draw period” and the “repayment period.”
The first phase is known as the borrowing period, or draw period. You can continue to use your HELOC funds for the duration of the draw period. Most HELOCs have a draw period of 10 years.
During the draw period, your loan balance will accrue interest. Generally, you are required to make minimum payments during the draw period.
These payments are usually referred to as “interest only” payments. This means you must pay the interest accrued during the previous month, but you don’t have to pay down the principle owed.
At the close of the draw period, the repayment period begins. During the repayment period, you can no longer borrow from your HELOC.
The repayment period typically lasts 10 or 20 years. Your lender will set a schedule for monthly payments to pay off the balance in full, similar to a mortgage.
Four advantages to using a HELOC to buy investment property.
Here are the four main reasons why I’ve used a HELOC to buy investment property. These same advantages apply to any other major purchase.
1. You can use a HELOC as you would use cash, including for a downpayment.
Once your HELOC is open, you can use the funds as you would cash. All you need to do is link your HELOC account to your primary checking account. You can make transfers into your checking account, as needed, up to your full HELOC credit limit.
With a HELOC, once the transfer hits your checking account, you can spend that money just as you would any other money.
This is a huge advantage if you want to use a HELOC to buy investment property.
That’s because lenders heavily scrutinize where you are getting the funds you plan to use to close on a property. HELOC funds are almost always allowed to be used for a downpayment.
On the other hand, cash advances from credit cards are typically not allowed for a downpayment on a conventional loans.
2. HELOCs charge lower interest rates.
The interest rate charged on HELOCs will typically be lower than the interest rate charged by credit cards and other personal loans.
Interest rates on HELOCs are similar to prevailing mortgage rates, but typically charge about 1-2% more. This is to compensate the HELOC lender for the added risk of being the second mortgage on a property.
According to Bankrate, here are the current average interest rates:
As you can see, if you need to borrow money for any reason, using a HELOC usually gives you the best rate. This is a major reason why people generally use HELOCs.
It’s also the primary reason why I have used a HELOC to buy investment property.
Keep in mind that HELOCs generally charge a variable interest rate that may change monthly depending on market conditions outside your control. This is again to protect the HELOC lender, and is a factor to consider before you use your HELOC funds.
In fact, this is one of the key risks with using HELOCs. You may apply for a HELOC when interest rates are low, but that can change. You may be faced with a significantly higher rate when you pay off the balance.
From a real estate investor’s perspective, a higher interest rate may end up eating into all of your cashflow. Before using a HELOC to buy investment property, make sure the cashflow on the property can cover the higher loan payments.
3. You only pay interest on HELOCs during the draw period.
As discussed above, you typically only have to pay the interest on a HELOC during the draw period. That means your monthly payment is lower. As long as you make the minimum payment, the overall balance will not grow month to month.
Then, during the repayment period, you have 10 to 20 years to pay off the balance. This lengthy period helps spread out the balance over time, which keeps the required payment lower each month. This long payoff period is extremely beneficial when paying off larger purchases, such as a home renovation.
This is also another key reason why a real estate investor would use a HELOC to buy investment property.
Spreading out the payments over the long term, and only paying interest during the draw period, means more monthly cashflow. Some real estate investors think differently, but to me, cashflow is king.
4. You may have access to a larger sum with a HELOC.
Because a HELOC is secured by the equity in your home, it’s likely you will be eligible for a larger sum than a typical credit card or other personal loan.
While credit cards also allow cash advances, they are typically capped at a relatively low amount and come with higher interest rates.
A larger available balance comes in handy when you want to use a HELOC to buy investment property.
For conventional loans, you’ll typically need 20-25% of the purchase price as a downpayment. That is a lot of money to come up with on your own, even if you are great at fueling your savings.
The same is true for funding any other major purchase. For example, just the other day, I spoke to a friend who opened up 12 different credit cards to launch his software business.
If he had access to a HELOC, he would not have needed 12 separate credit accounts. The HELOC would have provided him enough funding.
How I’ve used HELOCs to scale my real estate portfolio.
Using HELOCs can be an effective way to scale your real estate portfolio.
As mentioned above, you can use your HELOC for a downpayment on another investment property.
This is one of the ways my wife and I scaled our real estate portfolio. We primarily invest in an area of Chicago where properties can get expensive. The same can be said about our vacation rental in Colorado.
Coming up with a full downpayment in these markets on our own would take years of savings. We’ve made the choice to take on additional debt and added risk to scale more quickly.
We purchased our first investment property in 2018. After making some improvements and paying down the mortgage, we applied for a HELOC in 2020. We then used those HELOC funds to help with the downpayment for our Colorado ski rental in 2021.
After a couple years of unexpected appreciation on our ski rental, we took out a HELOC on that property in 2022.
We then used that HELOC to help purchase a third rental property in Chicago in 2022 and our primary home in 2024.
As you can see, we’ve used our equity gains in our earlier properties to take out HELOCs to help acquire additional properties.
Along the way, we have worked on paying down the balances of each of those HELOCs. This way, we reduced our debt and increased our net worth. We can also now repeat the process and again use a HELOC to buy investment property.
Besides a downpayment, real estate investors can use HELOC funds to make improvements to their properties.
Real estate investors also use HELOC funds for improvements to their properties. These improvements can lead to equity gains through appreciation and also more monthly cashflow.
We’ve used HELOCs in this way on multiple occasions. For example, we used our HELOC to install washers and dryers into three of our apartments.
We then paid off the HELOC balance with the increased rental income generated by those three improved apartments.
Don’t ignore the biggest risk of using a HELOC to buy investment property.
With all the advantages of HELOCs, there is one major risk that cannot be ignored. This single risk is so important that is should outweigh all of the advantages for most people.
In his bestselling book, The Total Money Makeover, Ramsey walks you through how to build wealth without relying on debt.
If you decide to tap your HELOC funds, remember that the loan is tied to the equity in your home. If you fail to comply with the loan terms, your home is at stake.
That’s a huge risk.
Before you consider using a HELOC, be sure to have a plan in place for paying back the loan. This is where your Budget After Thinking can really help.
I would not use a HELOC as a beginner investor.
While there are upsides to using HELOCs, it is a potentially risky strategy that I would not feel comfortable with as a beginner investor.
I say that for good reason.
When you hear HELOC, you should immediately think about debt. For many of us, debt is problematic and leads to negative emotions.
While I’ve used HELOCs to scale my real estate portfolio, my primary money goal this year is to pay down these HELOCs. I’m tired of having those debt balances hanging over my head.
If you have proven to yourself that you can responsibly handle debt, using a HELOC may be a worthwhile strategy.
If you have satisfied all of the above, you can then make an informed decision about using debt to scale your real estate portfolio.
How do you apply for a HELOC?
Applying for a HELOC is just like applying for a mortgage. The bank will review your finances and determine if it will lend you money against the equity in your home.
If you’ve ever applied for a mortgage, you know this is not a fun process.
The key to qualifying for a HELOC is that your home equity needs to have grown in value, either by paying down your primary mortgage or through appreciation.
Let’s look at an example of using a HELOC to buy investment property.
Note, you’ll never have to do this math yourself. This is for illustration purposes in case you want to estimate the amount you may be eligible for before you start the application process.
For easy math, we’ll make some assumptions in this example. Always confer with your mortgage broker or lender for precise calculations.
In this example, let’s say you bought a home five years ago for $500,000.
You put 20% down ($100,000) when you bought the home, so your original mortgage was for $400,000. This means your equity in the home when you bought it was $100,000.
For the past five years, you’ve paid down the principle on your mortgage every month. For easy math, let’s assume your remaining mortgage is now $350,000. Because you paid down $50,000 of the mortgage, your equity has increased by $50,000.
Not only have you been paying down the mortgage for five years, your home has also appreciated in value and is now worth $600,000. That’s another $100,000 in equity you now have in your home.
Add it all up and you started with $100,000 in equity (your original downpayment) and now have $250,000 in equity.
This is because you have paid the mortgage down every month and your home has appreciated in value.
In this scenario, you may be eligible for a HELOC to buy an investment property.
How do lenders calculate the amount of your HELOC?
Each bank may have different standards for qualification and how much they will lend you. Generally, banks will use a metric called Loan-to-value ratio to calculate the amount of your HELOC.
What is Loan-to-value ratio?
Loan-to-value ratio is a complicated name for an easy math formula:
LTVratio = Mortgage amount / Property value.
In our scenario, your current mortgage amount is $350,000. Your property value is $600,000.
So, your LTVratio is .5833 ($350,000 / $600,000). In terms of percentage, that’s approximately 58%.
A typical HELOC lender will allow you to borrow up to a combined LTVratio of 70%.
That means your existing mortgage plus the HELOC can only add up to 70% of the value of your home.
The bank does this to protect itself by requiring you to maintain 30% equity in your home.
To carry out our example, using a combined LTVratio of 70%, you may be eligible for a HELOC of $70,000:
Value of home = $600,000.
First mortgage = $350,000 (approx. 58%)
HELOC = $70,000 (approx. 12% of value of home)
Combined mortgage + HELOC= $420,000 (70% of home’s value).
Remaining equity in home = $180,000 (30% of home’s value).
Again, you don’t need to do this math yourself, but it’s helpful if you want to understand what size HELOC you may be eligible for before starting the process with lenders.
Have you used a HELOC to buy investment property?
Using a HELOC to buy investment property can be an effective strategy. My wife and I have effectively used this strategy multiple times.
Before you decide to use a HELOC, be sure to understand the risks associated with taking on additional debt.
Have you used a HELOC to buy investment property before?
What about using a HELOC for any other purpose?
Tell us about your experience in the comments below.
Your credit history will touch almost every important financial transaction you enter into today. I don’t just mean credit cards and loans.
If you apply for a job, need insurance, or want to rent an apartment, those companies are going to review your credit report and credit score.
So, even if you don’t intend to take out loans, your credit history and credit score are still important.
But, obsessing over your credit score is counter productive.
Has obsessing over any number ever served you well, anyways?
GPA…
Weight…
Social Media Followers…
Yes, these things may be important to you. But, obsessing over the number itself is not how they improve. The habits behind the number are more important.
If you want to improve your GPA, you need to study more.
To lose weight, you need to practice healthy living.
For more social media followers, you need to create better content.
The same logic applies to credit scores.
If you want a good credit score, the best thing to do is to practice strong personal finance habits that we routinely discuss in the blog.
Obsessing over your credit score number is a waste of mental energy.
With this backdrop in mind, we can discuss credit scores.
What is a credit score?
As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.
Credit also refers to a person’s trustworthiness or history of repayment.
We then learned that a credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.
Your credit report will typically include:
Personal information (name, social security number, current and former addresses)
Credit accounts (current and historical accounts, including credit cards and any other loans)
Collection items (missed payments, loans sent to collections)
Public records (liens, foreclosures, bankruptcies)
Inquiries (when you apply for a new loan)
Now, we’ll talk about credit scores.
A credit score is a three-digit number calculated based on your credit history that represents your present day creditworthiness.
Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.
We each have multiple credit scores depending on the scoring service. While there are many others, the two main scoring services are FICO and VantageScore.
Keep in mind that your score may vary depending on the type of loan you are applying for. For example, an auto lender looks at different factors than a mortgage lender.
FICO and VantageScore each assign a score ranging between 300-850.
For both services, if you’re around 800, you’re doing very well. If you drop below 650, you’ve got some work to do.
Before we look at the factors that go into your credit score, I can’t emphasize this next point enough:
Don’t obsess over your credit score.
You certainly want to pay attention to dramatic changes in your score so you can understand where you need to make adjustments. That said, you should not be concerned with slight movement in either direction.
For example, FICO considers a score between 800 and 850 as “Exceptional.” Once you’re in that range, it makes no difference whether your score is 804 or 837. You may notice slight variation from month to month. That’s normal and perfectly fine.
Instead of worrying about fluctuations in your score, spend your time and energy on more important financial wellness strategies, like writing down your Tiara Goals.
What factors go into your credit score?
Regardless of the scoring service, your credit score generally consists of these factors:
Payment history
Current unpaid debt
The types of loan accounts
Length of credit history
New credit inquiries
Amount of available credit being used
Collections, foreclosures or bankruptcies
Of course, not each factor counts equally. For example, FICO weighs each factor like this:
Payment history: 35%
Amounts owed (credit utilization rate): 30%
Length of credit history: 15%
Credit mix: 10%
New credit: 10%
VantageScore does not assign percentages to each factor, but does define the importance of each factor like this:
Payment history: Extremely influential
Total credit usage: Highly influential
Credit mix and experience: Highly influential
New accounts opened: Moderately influential
Balance and available credit: Less influential
In comparing the two main scoring methods, we can see that both methods generally look at the same factors. They both also place the highest emphasis on payment history and place less emphasis on new accounts opened.
Here’s all you need to know about each factor.
There’s no reason to overcomplicate what each factor means.
Here’s all you need to know:
Payment history reflects whether you consistently make on-time payments.
Amounts owed, credit utilization rate, and total credit usage refer to how much of your available revolving credit you are currently using.
Revolving credit mostly refers to credit cards, but could also include loans like a line of credit.
For example, if you have a credit card with a monthly limit of $1,000, and you are currently charging $300 per month on that card, your credit utilization rate is 30%.
To maximize your credit score, aim for using 30% or less of your available credit. This ratio applies to each individual account and to your total account balances.
Length of credit history refers to how long various accounts have been open.
The longer the accounts have been open, the better your score will be.
Credit mix looks at what types of loans you have open.
Generally, lenders prefer to see a variety of loans, like credit cards, auto loans, and mortgages.
New credit refers to how many loans you’ve applied for recently.
Applying for too many loans in a short period can negatively impact your score since you may seem desperate for loans to fund your lifestyle.
What factors are not considered in your credit score?
Credit scores do not take into account personal information like race, gender, age, or marital status.
Credit scores also do not consider income or employment history.
Keep in mind that while personal information or employment history is not a factor in your credit score, it certainly will be considered as part of your application by lenders.
For example, mortgage lenders and landlords will want to confirm your history of steady employment and income before entering into a financial relationship with you.
Don’t get caught up in precisely how your score is calculated.
FICO and VantageScore provide the above information as general guidance. However, each of our credit scores is determined on a unique set of circumstances that changes over time.
While these factors are generally considered for everyone, specifically how each factor is weighed varies for each of us.
Your credit report and FICO Scores evolve frequently. Because of this, it’s not possible to measure the exact impact of a single factor in how your FICO Score is calculated without looking at your entire report. Even the levels of importance shown in the FICO Scores chart above are for the general population and may be different for different credit profiles.
Like we mentioned before, it’s important to not get hung up on the different methodologies that each scoring service uses. For the most part, your score won’t vary significantly from one service to another.
The key point is to pay attention to the general factors that impact your score but understand that your score is always changing. Don’t waste your energy trying to decipher how much weight is given to each factor.
How to check your credit score.
These days, it’s easier than ever to monitor your credit score.
Most major banks offer free credit scores to their customers.
You can also sign up for credit monitoring, including credit scores, with the major credit bureaus, Equifax, Experian, and TransUnion. Note that only some services are provided free of charge.
Of course, there are also no shortage of apps and websites providing similar services, sometimes free and sometimes for a price.
If you’d like additional guidance on how to obtain your credit score, please reach out on the socials or by replying to our weekly newsletter.
What should I do instead of obsessing over my credit score?
Instead of obsessing over your credit score, focus on the strong financial habits we discuss regularly in the blog.
You should not have to worry about your credit score if you:
When you can make these habits part of your regular life, your credit score will automatically rise along the way.
Look at credit scores from a potential lender’s point of view.
I hope this goes without saying, but lenders are in the business of making money. They make money by gauging risk. The lower an applicant’s credit score, the more the lender’s risk increases.
When the lender’s risk increases, it may decide to not lend you money. Or, it may choose to lend you money and charge you a higher interest rate to compensate for that higher risk.
The same logic applies when other entities besides lenders are reviewing your credit score.
For example, an employer may check your credit score to determine your level of trustworthiness before offering you a job.
A landlord may check your credit score before agreeing to rent you an apartment to confirm whether you are likely to make the required payment each month.
Always remember why credit scores are used in the first place.
If nothing else, remember why credit scores are used in the first place:
Credit scores are used to measure how risky it would be for someone else to enter into a financial relationship with you.
In other words, can you be trusted with money.
If you have a history of not making on-time payments, or not paying loans back, that indicates you are not responsible with money.
When you are using up most of your current credit and carrying high balances, that demonstrates that you have a hard time limiting your spending.
If you are constantly applying for new credit, it shows that you may be dependent on credit to fund your life.
In any of these scenarios, the risk of entering into a financial relationship with you increases.
Credit scores are especially important before big purchases.
If you have a big purchase coming up, like buying a home or a car, it’s important to have your credit score in a good spot before applying. This is because your credit score will impact the interest rate you are offered.
For a big purchase, even slight variations in the interest rate can make a huge difference.
Because it’s normal for your credit score to change frequently, it is worth waiting to apply for that loan until after you’ve improved your score.
The best ways to improve your score in the short term are to pay off debt and avoid applying for new credit.
By paying off debt, you’ll improve your payment history and your credit utilization rate, two of the most important factors in your score regardless of scoring method.
The best thing you can do to avoid the costly consequences of a poor credit score is to implement the personal finance fundamentals we routinely discuss in the blog.
Have you ever needlessly obsessed over your credit score?
Let us know what that felt like in the comments below.
We need to replace a 20 year-old wood fence at our home that’s one strong storm away from falling over. In these past few weeks, I’ve learned more about fences that I care to admit.
On the bright side, shopping for a fence has led me to think about and practice many of the personal finance habits we talk about in the blog.
Let me walk you through my thought process to help you whenever you have a big expenditure in front of you.
In the world of privacy fences, there seem to be three primary choices available: wood, vinyl, and composite. I won’t bore you with all the details. The key points to consider for our conversation are:
Wood is the cheapest, but requires the most upkeep and will eventually need to be replaced.
Vinyl (plastic) comes with a lifetime warranty, requires little-to-no upkeep, but is 30-40% more expensive than wood.
Composite is the most durable, looks incredible, requires no upkeep whatsoever, has soundproofing ability, is made from recycled materials, comes with a 25-year warranty, but is nearly 3x more expensive than wood.
We’ve ruled out wood after doing our research and determining that we’ve got too much going on to worry about annual fence upkeep.
So, that leaves vinyl and composite. From our research, both would be good options. However, there’s really no doubt that composite is the best overall option, if you can stomach the cost.
Talk to your people about expensive purchases.
This is a big financial decision, so of course, I’ve been talking to my people for weeks about what they would do.
I’ve gotten three common responses that go something like this:
“You’re planning to live in this home for the long run, make the investment in the best fence possible and never worry about it again.”
“How much do you really care about a fence? I’ve never even noticed my fence. Think of what other projects you could spend that money on.”
“Dude, leave me alone. I don’t want to talk about your fence.”
As you can see, talking to your people does not mean that you’re off the hook for making the decision yourself. You will likely get a wide spectrum of advice.
However, you’ll gain invaluable perspective to consider so you can make the best decision for your personal situation.
Expensive purchases test your personal finance habits.
Whenever you have a big purchase ahead of you, many of the strong personal finance habits you’ve been working to establish will be tested. You’ll be asking yourself questions like:
My wife and I have considered all these questions as we’ve talked through the options.
As of this moment, we’re leaning towards the composite fence so we never have to think about fencing again.
To help defray the cost, we’re considering a financing option that offers 0% interest for 18 months.
Important side note: if you ever choose to go with an attractive financing option, always read the fine print first.
The lender is hoping you fail to pay off the purchase within the 0% interest period so you’re forced to pay insanely high interest on the remaining balance. The financing option we’re looking at jumps from 0% interest to 26% interest if we fail to pay off the loan in 18 months. That’s a serious penalty.
Financing aside, we’ve also concluded that other projects will have to wait for a while so we don’t crush our money goals for the year.
We’ll make our final decision this weekend.
What would you do?
Leave a comment below to help my wife and I decide.
Sharing Think and Talk Money with Others.
Over the past couple days, I’ve heard from several readers who have shared Think and Talk Money with people they care about.
One reader told me that he shared the blog with his 25 year-old son. The reader was very appreciative because he’s experienced how important personal finance is.
He knows his son will only benefit in the long run if he implements strong money habits at the beginning of his career.
Another reader shared the blog with a friend who is now tracking her spending for three months. This is the first time she has ever tracked her spending to learn where her money is going each month.
She is using her phone and a simple spreadsheet to track her expenses. She reports that even though it’s only been a month, she’s learning things about her money choices she never knew before.
I love reader stories like this because they reflect one of our core philosophies at Think and Talk Money:
It doesn’t matter if you’re talking about paying for a fence or starting a budget. We all could use help when it comes to making good, consistent money decisions.
Your friends are likely going through the same money challenges.
Since writing about my challenges with credit card debt at the beginning of my career, I’ve had some great talks with friends I knew back then.
Multiple friends have shared with me that they were dealing with the same credit card debt issues at the same time that I was.
None of us ever knew it at the time. We were hanging out with each other every weekend, spending money we didn’t have. The joke of it all is that we were likely encouraging each other’s poor habits.
Learning that I was in the same position as my friends all these years later does make me feel at least a little bit better about the mistakes I made back then. But, that’s not the important takeaway.
The big takeaway for me is that if my friends and I were dealing with the same money challenges back then, we’re probably dealing with similar money challenges today.
It might not be credit card debt from our social lives, but it might be something like saving for college or paying for a home. Maybe it’s what we should do when the stock market slumps.
Just like we mentioned above, my friends and I will only benefit from having these kinds of money talks.
Instead of just talking about mistakes we made in the past, we can talk about how to get it right as we move forward.
I spoke to this debt collector after breaking my wrist snowboarding.
For the second time in a year.
Let me explain.
About six months earlier, my friends and I took a road trip to go snowboarding in Wisconsin. I had never been to this location before and wanted to explore the entire ski area. After a few loops on the main run, I found my way to the terrain park.
My plan was to scout out the terrain park and report back to my friends. I must have forgotten the plan as I approached a jump that I had no business approaching. That turned out to be a mistake.
Heading towards the jump, I had too much speed and, for lack of a better word, panicked. My friend reported afterwards that as soon as I jumped, my body and snowboard turned parallel to the ground like I was lying in bed.
After all these years, It almost seems peaceful to picture myself lazily flying through the air on a beautiful, blue sky, sunny day.
Almost.
To state the obvious, this was not a good position to be in since I needed my feet and snowboard to hit the ground first and land safely.
I ended up landing on my backside with my hand and wrist hitting the ground first. The unpleasant result was a trip to the emergency room and a broken wrist.
My reputation for having fragile wrists was secured.
OK, back to the debt collector.
A few weeks after returning to Chicago, I received a bill in the mail from the emergency room for approximately $200.
I didn’t understand why I was receiving a bill since I had insurance and provided that information to the emergency room. I figured it must have been a mistake to send me a bill, and that my insurance company would pay for it.
So, I crumbled up the bill and threw it in the trash.
Before you shake your head, remember that I was still in school and on my parents’ insurance. This was my first interaction with a medical provider where the bills came to me instead of them.
I didn’t know at the time that even with insurance, I could potentially be responsible for some portion of the bill.
For the next few months, I continued to receive bills from the emergency room. And, I continued to throw these bills straight in the trash.
At some point, I received a new type of letter in the mail. This one caught my attention. It was from a collections agency.
The letter said something to the effect of, “Call us immediately to dispute or pay this medical bill before we are forced to take action against you.”
The scare tactic worked.
I picked up the phone and had a surprisingly nice conversation with the debt collector. The debt collector explained how the collections process works and the potential impact failing to pay would have on my credit report.
Credit report?
Never heard of that before.Don’t think I have one.
After hanging up the phone, I did some research and realized the debt collector wasn’t scamming me.
I certainly did have a credit history, as reflected in my credit report, that I needed to be mindful of.
I wrote a check to pay the bill the next day.
This is how a broken wrist and a debt collector first taught me about credit reports.
What is a credit report?
As we learned in our post on using credit the right way, credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest.
Credit also refers to a person’s trustworthiness or history of repayment.
A credit report is a document that tracks that history of repayment, as well as the current status of any loans you’ve taken out.
Your credit report will typically include:
Personal information (name, social security number, current and former addresses)
Credit accounts (current and historical accounts, including credit cards and any other loans)
Collection items (missed payments, loans sent to collections)
Public records (liens, foreclosures, bankruptcies)
Inquiries (when you apply for a new loan)
Every time you open a loan, like a credit card, auto loan, or mortgage, it will appear on your credit report. Likewise, whenever you make a payment or miss a payment, that information will be reflected on your credit report.
When someone has “good credit,” it means they have a reliable history of repayment. When someone has “bad credit,” it means they have not previously demonstrated a reliable history of repayment.
Remember this key point: your credit report represents a complete picture of your interactions with credit over an extended period of time. Your credit report will include information about you going back years and years.
This means that the information reflected on the report will follow you for the long term. Any negative information on your credit report will typically stay on your credit report for 7-10 years, depending on the credit reporting agency.
If you haven’t obtained your credit report recently, I highly encourage you to do so.
Regularly checking your credit report is the best way to make sure that nobody has fraudulently opened any accounts using your social security number. It’s also the best way to monitor all the loans you are currently responsible for.
Believe it or not, it’s not uncommon for people to forget about loans they have previously opened.
Did you ever go to a Cubs game in college and sign up for a credit card just to receive a free XXL white t-shirt with a blue W on it?
No?
Uhh… me neither.
How about signing up for a new credit card while making a purchase at your favorite store to save a whopping 10% that day?
You may never end up using these credit cards and completely forget that you opened them. They’ll still appear on your credit report, and you are still responsible for those credit cards.
Is a credit report different from a credit score?
Yes, credit reports and credit scores are different.
We’ll soon discuss credit scores in detail. For now, understand that a credit score is a number calculated based on your credit history that represents your present day creditworthiness.
Your credit score captures a moment in time. That means it will change over time, sometimes quickly and dramatically.
Unlike a credit score, your credit report does not change quickly. Like we mentioned earlier, any negative information on your credit report will typically stay on your credit report for 7-10 years.
Why does my credit report matter?
We typically rely on our ability to borrow money to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase.
In these scenarios, lenders will “pull your credit” or do a “credit check” before agreeing to give you a loan.
If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.
On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money.
Or, a lender may agree to give you a loan and charge you a higher interest rate to compensate for the increased risk. This could end up costing you lots of money.
Poor credit history can lead to lost opportunities.
Besides just financial consequences, a poor credit history can also lead to lost opportunities.
As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. Most major rental property search websites, like Zillow and Apartments.com, offer credit checks as part of the standard application process. My wife and I require a minimum credit score for all potential tenants.
It makes sense why a landlord would pull an applicant’s credit. When you rent an apartment, you are signing a contract (a lease) to pay a predetermined about in exchange for a place to live.
Landlords rely on those rent payments to pay for the property’s mortgage and upkeep. These rent payments can also directly impact the landlord’s livelihood.
It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.
Just as a landlord is sizing up your ability to pay the rent each month, other lenders, like a car dealership or mortgage lender, are sizing up the likelihood you can repay its loan.
Don’t ignore your credit history.
Have you checked your credit report this year?
My wife and I check our reports at least once per year to make sure there are no red flags.
Fortunately, I realized my mistake with the debt collector before that red flag ended up on my credit report.
If I hadn’t, I would have seen that negative mark on my credit report for 7-10 years. This would have severely impacted my ability to qualify for mortgages and grow my real estate portfolio.
I’m glad I learned that lesson about credit reports.
I’m also glad that I haven’t been back to a terrain park since law school.
I’ll give you an example. This weekend, we hosted a birthday party for my five-year-old daughter. She wanted a rainbow unicorn theme.
When asked what she wanted for a present, she would unhelpfully respond, “No clue.”
OK, great.
Fortunately, the local toy store was stocked with rainbow unicorn items: puzzles, books, stuffed animals, craft kits, etc. The kids at school must be on the same page with their interest in rainbow unicorns this year.
The rainbow unicorn party went well. We started with pizza, decorated cupcakes, and had a unicorn egg hunt.
The highlight of the party?
The birthday cake.
We ordered a rainbow unicorn cake from one of the most popular bakeries in Chicago, Sweet Mandy B’s. The next time you’re in Chicago, do yourself a favor and pop in for a cupcake or cookie.
After singing “Happy Birthday,” I started cutting pieces of cake for the kids. A few jumbo pieces of cake later, one of our guests came to my rescue and showed me how to cut smaller, kid-appropriate pieces.
It’s a good thing she did because with the way I was cutting the cake, we were going to run out before all the adults got a piece. And that would have been a bad thing.
See, this cake was incredible. I’m not always a cake guy (unless it’s ice cream cake), but this one was special.
Vanilla confetti cake with buttercream frosting. It had the perfect balance of cake and filling. Sweet, but not too sweet. Soft and also firm.
It wasn’t just me. I never saw a cake disappear so fast. Usually, we end up with so much cake leftover that I’m sneaking bites every time I open the fridge for the next week. Not this time. Sadly.
By the end of the party, we had barely a single piece left (which was devoured within 24 hours).
There is a bright side to finishing the cake, though.
If I had an unlimited supply of this cake, I’m not sure I could stop myself from eating it. The temptation would be too strong to sneak back to the fridge all day long, fork in hand. One little bite at a time.
It’ll be fine.
What does birthday cake have to do with personal finance?
You know where this is going.
Eating a wonderful cake at a birthday party is a good thing.
Eating cake every day for the next week, no matter how good it is, would be a bad thing.
You see? Something can be good and bad at the same time.
And that leads us to our next major topic in the blog: the responsible use of credit.
What is credit?
Credit refers to an agreement to borrow money with the obligation to repay that money later, usually with interest. In this context, think of “credit” as another way of saying “debt.” When you use credit, you’re taking on debt.
Credit also refers to a person’s trustworthiness or history of repayment. When someone has “good credit,” it means they have a reliable history of repayment.
It’s important to always remember that credit and debt go hand-in-hand. That’s why before we discuss how credit can help us, we learned scary stats about debt. We discussed three big reasons why we’re in debt. And, in a preview to our conversation on credit, we learned the difference between Good Debt and Bad Debt.
We typically rely on credit for big purchases.
We typically rely on our ability to borrow money, or our credit, to make our biggest purchases in life. When you take out a mortgage or finance a car purchase, you are relying on your ability to borrow money to make that purchase. That ability to borrow money is known as credit.
If you have a history of responsibly borrowing money and paying it back on time, a lender is more likely to lend you money.
On the other hand, if you have a history of falling behind on payments, a lender may choose to not lend you money. Or, a lender may charge you higher interest rates to compensate for their increased risk.
This could end up costing you lots of money.
Poor credit will cost you more than just money.
Besides just financial consequences, a poor credit history can also lead to lost opportunities.
As an example, it’s common practice for landlords to check an applicant’s credit history before renting them an apartment. It should be no surprise that landlords are hesitant to rent apartments to people who have a poor track record of paying for things.
These reasons, and other reasons we’ll soon discuss, illustrate why it’s so important to responsibly use credit.
In our initial series on credit, we’ll discuss:
The basics of credit reports and credit scores and why they each matter.
How the responsible use of credit cards can fit into our personal finances.
What you need to know to maximize the benefits of credit card reward programs.
How to use other forms of credit, like a Home Equity Line of Credit (HELOC), to accelerate your progress towards financial freedom.
By understanding what credit is and how your credit history is tracked, you’ll gain the confidence to use credit responsibly as part of a healthy financial life.
I am in favor of the responsible use of credit.
As I previewed in our discussion on Good Debt, I’m in favor of people responsibly using credit as part of a healthy financial life.
That applies to our every day choices, like using credit cards to track our spending. It also applies to other forms of credit, like Home Equity Lines of Credit (HELOCs), to acquire assets. We’ll discuss these and other benefits of responsibly using credit in our upcoming posts.
The important caveat, however, is that like the Sweet Mandy B’s birthday cake, we have to know when a good thing can become a bad thing.
If we abuse the privilege of credit, the consequences can be severe. I abused the privilege of credit cards at the beginning of my career, and it took years to dig out of the hole.
By understanding how credit works and how your credit is tracked, I hope you can avoid falling into a similar mess.
I want you to happily enjoy the cake without the potential negative consequences.
